Moldova is a landlocked country - with only an imprecisely defined 500 to 900 meter frontage on the Danube – situated between Romania and Ukraine. Moldova is a "gateway" between the former Soviet Union countries and the West: trade-wise, language-wise, culturally. Its transport and even telecommunication sectors can (and should) be considered as a "Hub" for the region. The country will become increasingly important as a future border between the EU and Eastern Europe once Romania joins the EU. The Pan European Corridor IX (Moscow-Kiev-Bucharest) crosses Moldova from East to West, traversing the capital city Chisinau. Moldova is a net importer of transport services. The country's economy relies heavily on trade, which has accounted for over 95% of GDP in the most recent years.

The resolution on the Transnistrian region, which declared independence in 1994 but has not been recognized by any country, left Moldova separated de facto into two parts. Although Transnistria covers only 12% of Moldova's territory, the region is of high economic importance for the country and straddles the major land routes to Russia and other strategically important export markets.

The first pillar of both the Government's Interim Poverty Reduction Strategy and the Bank's Country Assistance Strategy is sustainable economic growth. This will require a sound and solid transport infrastructure, and efficient, reliable transportation services. Moldova's well developed transport sector (albeit with institutional and physical deterioration problems) consists of 10,531 km of roads (excluding municipal, agricultural and forestry roads), 1,318 km of railroad (about 100 km electrified), and four airports, one of which is up to international standards.

The importance of transport stems from several reasons, including: (i) Moldova is a small country of about 4.3 million inhabitants, with very low labor costs, for which international trade is essential to economic growth as shown by the very large share of trade in GDP; (ii) Moldova's economy is largely based on agriculture and agro-industry. It is therefore highly dependent on a well functioning transport industry and a solid transport infrastructure, to enable farmers' access to markets; (iii) much of Moldova's trade is with Russia and Ukraine (but gradually expanding to Southeast and Western Europe) and its exports are mostly agricultural/food and vegetable products which are sensitive to the cost of transport; this is an issue given the country's landlocked position that requires mostly road or rail transport which are more expensive than maritime or river transport; (iv) numerous small settlements are remotely located, and people are more dependent on transport to access either their jobs or social and administrative services (hospitals, schools, city-halls), which makes transport demand high; and (v) except for road transport services and some civil aviation, the sector is dominated by State-owned enterprises; restructuring and creation of a competitive environment in railways and urban transport and improvements in transport investments and infrastructure management are necessary to increase efficiency and free up the scarce State budget resources.

Moldova's extensive transport infrastructure is seriously deteriorated. Road and rail transport are the two most important modes of transport. In the freight area, the modal split over the last six years has largely remained of about 72% and 28% for road and rail, respectively. Both road and rail freight traffic decreased as a result of the economic decline in Moldova during the last decade. Passenger traffic shows a similar decline, thought less acute, with road transport playing a leading role (80%), and constantly increasing to the detriment of railway transportation.

The road and road transport sub-sector. Since 1995, 100% of the road freight transport industry has been privatized and 80% of the road passenger transport is in private hands. Freight transport is organized under the International Association of Road Hauliers of Moldova (AITA), established in 1992, which currently unites some 160 members with a total fleet of more than 4300 vehicles. However, road transport operators still face severe constraints – apart from the sharp decrease of transported goods – due to: (i) the limited number of permits made available for transiting neighboring countries; (ii) the impossibility to obtain permits for triangular routes (origin and destination in foreign countries); (iii) the complex and costly procedures for access to the road transport market, with licenses that have to be renewed annually; (iv) unwarranted licensing requirements for national transport, trailers and semi trailers; and (v) the inadequate road infrastructure. Trade and transport suffer from corrupt practices of Customs and other border agencies and lack of modern and transparent border procedures. These have started to be addressed as part of the Bank financed Trade and Transport Facilitation Project in Southeast Europe, currently under implementation.

The country's road network is seriously deteriorated and long overdue for rehabilitation. About 78% of the national roads and 88% of the local roads have reached the end of their economic life and are technically outdated. If repairs are not carried out soon, even the main highways will get worse, causing far greater difficulties for traffic, and requiring reconstruction that will cost several times more than timely resurfacing. Road financing is a serious problem. The contribution of road users does not cover the cost of rehabilitating and maintaining the road network. Excise taxes paid on vehicle import, vehicle registration and fuel consumption is a fraction (less than 10%) of what is actually needed. The lack of cost recovery in Moldova's road sector is a serious issue, which the Government must address in the near future. The Road State Administration continues to be a department in the Ministry of Transport and Communications and is currently responsible for the administration, maintenance, and design of the public road network. A "second generation" road fund legislation was submitted to the Parliament in 2002, but has not yet been acted on.

Urban transport is of particular importance in the capital city of Chisinau, which accounts for almost 1/3 of the country's population – including the suburbs - and 2/3 of the Government's tax revenue. Public transportation continues to be a drain on the municipal budget. Reforms in the sector have been long over-due, including (i) restructuring/downsizing and the financial adjustment of the public transport company, (ii) phasing out of all fare privileges, and (iii) establishing ways to involve the private sector in the provision of urban public transport services.

WB ongoing and future activities. The Bank's involvement in Moldova's transport sector has been limited until recently. Implementation of one operation has started. The Trade and Transport Facilitation in Southeast Europe (TTFSE) Credit aimed at modernizing Customs and improving performance of border agencies, while removing non-tariff barriers to trade and international road transport, became effective in December 2003. In addition, the Bank has carried-out a Transport Sector Review update with an emphasis on the road sector, at the request of the Government. The Bank's transport staff is active in the dialogue with the country for the preparation of the new Economic Growth and Poverty Reduction Strategy Paper, and the Bank's Country Assistance Strategy which will define the assistance priorities for the next 3-5 years.