Public Disclosure Copy The World Bank Implementation Status & Results Report Economic Recovery Development Policy Loan (P172597) Economic Recovery Development Policy Loan (P172597) EUROPE AND CENTRAL ASIA | Ukraine | Macroeconomics, Trade and Investment Global Practice | IBRD/IDA | Development Policy Lending | FY 2020 | Seq No: 1 | ARCHIVED on 05-Nov-2021 | ISR48912 | Implementing Agencies: Ministry of Finance, Ministry of Finance Key Dates Key Project Dates Bank Approval Date: 26-Jun-2020 Effectiveness Date: 25-Jun-2021 Original Closing Date: 30-Jun-2021 Revised Closing Date: 30-Jun-2021 pdoTable Project Development Objectives Program Development Objective (from Program Document) The proposed program development objectives are to: (i) foster de-monopolization and anti-corruption institutions; (ii) strengthen land and credit markets; and (iii) bolster the social safety net. Has the Project Development Objective been changed since Board Approval of the Project Objective? No Overall Ratings Name Previous Rating Current Rating Progress towards achievement of PDO -- Moderately Satisfactory Overall Implementation Progress (IP) -- Moderately Satisfactory Overall Risk Rating -- Substantial Implementation Status and Key Decisions The first DPL (DPL-1), for US$ 350 million, was approved by the World Bank’s Board of Executive Directors in June 2020 in recognition of passage of landmark agricultural land reforms (albeit with complementary land-related legislation still pending), as well historic unbundling of the gas sector and further progress on banking and anti-corruption reforms. However, it was declared effective only in June 2021. The delay was necessary to allow authorities to adequately address a Constitutional Court decision that affected the fulfillment of the key anti-corruption prior action in DPL-1. In 2020 the reform progress slowed with the Government pivoting towards COVID-19 relief for households and firms. However, as a nascent recovery has taken hold, progress was made during 2021 on policy and institutional reforms, including: opening of land markets and adoption of land safeguard legislation; initiation of long-awaited judicial reforms; and passage of legislation strengthening the institutional independence of the National Anti-Corruption Bureau (NABU, a key anti-corruption agency). With Ukraine facing significant environmental and climate change challenges (related to vulnerability to both physical impacts of climate change, and mitigation potential given its carbon intensive economy) that impose an additional burden on growth and health, the Government also affirmed its commitment to the European Green Deal and updated its Nationally Determined Contribution (NDC) in 2021. Risks Systematic Operations Risk-rating Tool 11/5/2021 Page 1 of 7 Public Disclosure Copy The World Bank Implementation Status & Results Report Economic Recovery Development Policy Loan (P172597) Risk Category Rating at Approval Previous Rating Current Rating Political and Governance Substantial -- Substantial Macroeconomic Substantial -- Substantial Sector Strategies and Policies Substantial -- Substantial Technical Design of Project or Program Moderate -- Moderate Institutional Capacity for Implementation and Substantial -- Substantial Sustainability Fiduciary Moderate -- Moderate Environment and Social Moderate -- Substantial Stakeholders Moderate -- Moderate Other -- -- -- Overall Substantial -- Substantial Results Results Indicators PILLAR 1: FOSTER DEMONOPOLIZATION AND ANTICORRUPTION INSTITUTIONS IN01061849 ►The share of gas transit revenues flowing in a transparent manner from Naftogaz to the new independent Gas TSO, based on the tariff set by the NEURC (Percentage, Custom) Baseline Actual (Previous) Actual (Current) End Target Value 0.00 -- 60.00 100.00 Date 31-Dec-2019 -- 03-Nov-2021 31-Dec-2021 Ownership unbundling of gas transmission from Naftogaz and certification of the new Transmission System Operator (TSO) are critical for the liberalization of the gas market in line with the EU Association Agreement and the 2015 Gas Market Law. This measure supported the increase in the share of gas transit revenues flowing in a transparent manner from Naftogaz to the new independent Gas TSO, based on the tariff set by the NEURC. Unbundling of NAK Naftogaz and establishment of certified GTSO took place on January 1, 2020. Following this, revenues for transit of Russian gas through Ukraine have been collected by GTSO in accordance with the new Gas Transit Agreement with Gazprom signed on December 30, 2019. Comments: Notwithstanding the repayment of transit revenues to Naftogaz in October (to cover the costs of higher priced gas imports during an unprecedented global energy price shock), the flow of transit revenues to GTSO was transparent in 2020 and 2021. While no subsequent prior actions were considered in DPL-2, the target for the results indicator has been shifted to 2022.The World Bank remains closely engaged with the government through advisory and technical assistance support to address pending challenges in the gas sector. IN01061854 ►Number of concession projects signed with private investment mobilized through project financing by lenders (Number, Custom) Baseline Actual (Previous) Actual (Current) End Target 11/5/2021 Page 2 of 7 Public Disclosure Copy The World Bank Implementation Status & Results Report Economic Recovery Development Policy Loan (P172597) Value 0.00 -- 2.00 2.00 Date 31-Dec-2019 -- 03-Nov-2021 31-Dec-2021 The new Law on Concessions establishes a framework based on international best practice to attract private investment in infrastructure and is in compliance with EU standards and regulations pertaining to concessions. Key enhancements of the new Law include: (i) a transparent procedure for selection of the concessionaire on a competitive basis; (ii) clear ownership control; (iii) provisions to enable bankability such as compensation in case of early termination, step-in rights, and direct agreement between project lenders, concessionaires, and grantors; (iv) simplified procedures for licenses and permits and for allocating land plots; (v) the possibility of dispute resolution by international commercial or investment Comments: arbitration; and (vi) a clear mechanism for monitoring fulfillment of the concession agreement. In addition, the new Law on Concessions is aligned with the PPP Law, including provisions for rigorous economic appraisal of project proposals. The Law on Concessions was adopted on October 3, 2019 and two pilot port concession projects were signed in February and August 2020 with initial private investment participation. These PPP contracts were awarded for upgrading and modernizing Kherson and Olvia ports located on the Dnipro delta and Dnipro-Bug river estuaries respectively. IN01061850 ►Number of full verifications of high-risk declarations selected using prioritization criteria, assigned automatically to staff, and implemented using an improved methodology (Number, Custom) Baseline Actual (Previous) Actual (Current) End Target Value 0.00 -- 902.00 1,000.00 Date 31-Dec-2019 -- 01-Oct-2021 31-Dec-2021 Since 2014-2015, in response to popular demand, a set of key anti-corruption institutions were established, including the National Agency for Corruption Prevention (NACP, responsible for asset declarations), the National Anti-Corruption Bureau (NABU, with investigative functions), and the Special Anti-Corruption Prosecutor Office (SAPO). Strengthening the governance of the asset declaration system, restoring liability for illicit enrichment, and providing a civil forfeiture remedy are important to address key weaknesses that have emerged in the new anti-corruption architecture established after 2014. The law to strengthen the governance of NACP with a decisive role for international experts in the selection process of a single director, was approved and enacted in October 2019. This was expected to strengthen and depoliticize the management of the NACP, with the new NACP head appointed in January 2020. The NACP legislation also provides for true risk-based and non-discretionary electronic verification process. Under a revised verification regulation agreed in late April 2020, prioritization criteria adopted in May 2020, and changes to the risk indicators underpinning the e-verification system, NACP was able to strengthen the verification process with stronger automatic risk analysis, an increased role for cross- checking information in all declarations and random assignment of high risk declarations for full Comments: verification by NACP staff. Carrying out a significant number of detailed verifications of asset declarations based on a more risk-sensitive approach with reduced discretion should help increase accountability and bolster investor’s confidence in Ukraine’s nascent efforts to establish a level playing field. Since the law has been adopted, NACP fully verified 335 high-risk asset declarations in q2-q4 2020 and 567 declarations in q1-q3 2021 bringing the total number to 902. However, in October 2020, several parts of Law #140-IX, related to the legal foundation for key pillars of the asset declaration and verification regime, were found unconstitutional by the Constitutional Court (CC). Ukrainian authorities passed legislation in December 2020 (Law #1079-IX) and Law 1576 in June 2021 to restore the verification process of asset declarations, key powers of the NACP and other fundamental parts of the legal framework on asset declaration. Given the challenges faced by the asset declaration system due to the CC decision as well as the older institutional challenges that NACP experienced before 2019, it is important to further strengthen the oversight structures to ensure that NACP remains on track to deliver on its objectives. PILLAR 2: STRENGTHEN LAND AND CREDIT MARKETS IN01061921 11/5/2021 Page 3 of 7 Public Disclosure Copy The World Bank Implementation Status & Results Report Economic Recovery Development Policy Loan (P172597) ►Area of agricultural land previously under moratorium transacted by eligible individuals (Hectare(Ha), Custom) Baseline Actual (Previous) Actual (Current) End Target Value 0.00 -- 58,582.00 100,000.00 Date 31-Dec-2019 -- 03-Oct-2021 31-Dec-2021 The land turnover law (LTO) approved by Rada with a market opening date of July 1, 2021 is an important first step toward establishing a transparent and efficient agricultural land market. The approved law lifts the 20-year old moratorium on agricultural land sales and allows purchases by individuals up to 100 hectares from July 1, 2021 and purchases by legal entities from 2024. The right to buy agricultural land would initially be limited to Ukrainian citizens. With polls showing opposition to foreign purchases of agricultural land at 70-80 percent, the approved law also temporarily excludes foreigners until a referendum on the issue is held. Going forward, to increase the impact of the reform, it will be important to explore the possibility of expanding participation and competition in the market by bringing forward the participation of legal entities, relaxing restrictions on the size of land purchases, and enabling the sale of state land. Importantly, the LTO allows for the use of land as collateral, with banks able to assume ownership of land with the requirement to sell it within two years. This is an important provision for Comments: unlocking credit to the agricultural sector. However, further complementary legislation is necessary to safeguard the transparency and efficiency of the land market, to prevent monopolization, and reduce systemic corruption in state land management and land governance. The proposed DPL-2 operation supports two critical safeguard legislations adopted in 2021 as prior actions. These included the Land Law #2194, which is an important supplementary law as it focuses on improving transparency and efficiency in land transactions through enabling detailed recording of land transactions, enabling decentralized management through the transfer of ownership and administration of state land to local governments and increasing transparency and simplifying procedures, and Land Law #2195 which regulates local state land use, and mandates electronic auctions for state land sales. IN01061919 ►Loans to small farmers issued backed by Partial Credit Guarantee (PCG) facility (Yes/No, Custom) Baseline Actual (Previous) Actual (Current) End Target Value No -- Yes Yes Date 31-Dec-2019 -- 04-Nov-2021 31-Dec-2021 Access to financing for small, credit-constrained farmers through sustainable and effective financing instruments will allow them to effectively participate in the land market. Small farmers in Ukraine (i.e. those cultivating less than 500 hectares) are significantly credit constrained because banks consider them high risk. With no performance data on loans to this cohort, perceived risk is higher than actual risk. To address this market failure, a partial credit guarantee (PCG) facility can help reduce credit risk and enable lending to small farmers. This measure has been envisaged as a trigger for DPL-2. The Draft Law #3205-2 on the establishment of the Partial Credit Guarantee (PCG) Fund in Agriculture (in the form of a non-bank financial institution with the participation of the state, under the supervision of the National Bank of Ukraine) was adopted on November 4, 2021 and is supported by the DPL-2 as a prior action. The Law supports the land purchase by small farmers, regulates the legal framework for establishment of a PCG Fund with a sound independent governance framework. Comments: The effective establishment of the new Partial Credit Guarantee Fund will require a budget allocation provision for its capital in the 2022 Budget Law, which will be voted in November-December 2021. After enactment of the needed legislation, fully operationalizing the Fund is expected to take at least nine months, including registering, capitalizing and licensing the Fund as well as passing internal bylaws, selecting Supervisory Board and top management, staffing it, and signing framework agreements with participating financial institutions. In this period, the authorities have committed to provide a bridge guarantee instrument to support small farmers until the third quarter of 2022 and for this the state portfolio guarantee instrument for SMEs will be used. The relevant Cabinet of Ministers resolution was already adopted in July 2021, however the list of participating financial institutions is yet pending approval by the Cabinet of Ministers, to make the instrument operational. IN01061969 11/5/2021 Page 4 of 7 Public Disclosure Copy The World Bank Implementation Status & Results Report Economic Recovery Development Policy Loan (P172597) ►Gross Pre-2020 NPL Portfolio of State-Owned Banks (Text, Custom) Baseline Actual (Previous) Actual (Current) End Target Value UAH 397 billion -- UAH 288 billion Under UAH 300 billion Date 31-Dec-2019 -- 01-Sep-2021 31-Dec-2021 Resolving non-performing loans and strengthening governance of state-owned banks in Ukraine is critical to improve the efficiency of credit allocation and increase credit to the private sector, particularly in the context of the COVID-19 crisis. The priority was to establish an enabling framework for NPL resolution in SOBs. The authorities took initial steps toward this objective, including strengthening creditor rights, issuing regulations on the tax treatment of write-offs, and approving a new Insolvency Code. A major challenge in restructuring and sale of NPLs has been that legislation on criminal penalties for misappropriation of state funds leads to a high risk for SOB supervisory boards and management when Comments: the recoveries on NPLs are below the outstanding principal. SOBs are thus reluctant to take difficult decisions on haircuts when restructuring and selling NPLs below book value. In order to address this challenge, a Cabinet Resolution has been approved in April 2020 enabling SOBs to make use of all conventional NPL resolution tools, including those involving haircuts on principle, without threat of prosecution. In addition, NBU prudential regulations were approved in February and April 2020 to facilitate write-offs of fully provisioned NPLs. IN01061977 ►NBU and NSSMC adopt action plan on reshuffling supervisory regimes for insurance, credit unions, pension funds, and other NBFIs (Yes/No, Custom) Baseline Actual (Previous) Actual (Current) End Target Value No -- Yes Yes Date 31-Dec-2019 -- 03-Nov-2021 31-Dec-2021 Strengthening the supervision of non-banking financial institutions (NBFIs) is expected to address a major source of fraud and vulnerability in a rapidly growing part of the financial sector. The regulation of NBFIs, including insurance, pension funds, non-bank lenders, and credit unions is very weak, leading to significant fraud and money laundering, especially in the insurance industry. This is impeding the NBFI sector from playing a productive role in supporting economic growth and is also a vulnerability for the economy. The financial sector regulation was fragmented between three regulators with the NBFI regulator being the weakest, non-functional, lacking both independence and capacity, while being tasked with “supervising” about 2200 institutions. The solution was to abolish the NBFI regulator and split its functions between the Comments: National Bank of Ukraine and the National Commission for Securities and Stock Market (NCSSM), which were two institutions with much more credibility and capacity. This was accomplished by the approved Law # 79-IX also referred to as the “Split Law”. NBU and NSSMC also adopted action plan on reshuffling supervisory regimes for insurance, credit unions, pension funds, and other NBFIs. This would help significantly improve supervision and confidence in the non-banking financial sector in Ukraine. It would also help the development of a more diverse set of financial assets, which is important to establish the pre-conditions for Ukraine’s aspirations promote the development of individual retirement accounts, and thus longer-term savings and investment opportunities. PILLAR 3: BOLSTER SOCIAL SAFETY NET IN01061978 ►Pension benefits increase in line with the indexation formula within the first half of each calendar year, allowing adequate support for pensioners, of which at least 65 percent are women (Yes/No, Custom) Baseline Actual (Previous) Actual (Current) End Target Value No -- Yes Yes 11/5/2021 Page 5 of 7 Public Disclosure Copy The World Bank Implementation Status & Results Report Economic Recovery Development Policy Loan (P172597) Date 31-Dec-2019 -- 03-Nov-2021 31-Dec-2021 Indexation of pensions is a key tool for preserving the real incomes of the elderly. Prior to the Pension Reform adopted in 2017, no clear rules of indexation existed for existing pensioners. One of the key features of the pension reform law approved in 2017 was the introduction of systematic rules for annual indexation of the pension benefit, to safeguard the income of pensioners in real terms, including during downtowns. However, the law provided flexibility on the date of the statutory pension indexation each year, thus undermining the predictability of the pension benefit each year and resulted in some volatility of purchasing power. In response to the COVID-19 pandemic, the Government has brought forward the date of pension indexation in 2020, which has introduced greater predictability in pension benefits for the year. The initial budget allocation for pensions in 2020 would have allowed for the indexation this year to only kick in toward the end of the calendar year. The Cabinet Resolution # 251, adopted on April 1, 2020, stipulated an 11 percent increase in the pension benefit for most beneficiaries, applying to the pension benefits starting from May 1, 2020. Supported by DPL-1, indexation rules have been consistently applied between 2020 and 2021; however existing legislation allows flexibility on the date of statutory pension indexation each year undermining the predictability of pension benefits and contributing to risks of volatility in purchasing power. Pension top- ups have also proliferated undermining predictability of pension benefits and of the associated fiscal costs, Comments: with those in the 75-80 age-group also receiving top-ups, and proposals to extend one-off benefits permanently and to expand them to people with disabilities. A September 2020 Cabinet of Ministers of Ukraine resolution provided for an increase in compensation payments for those aged 75 and over, and 80 years and older through the indexation of pensions. The Government has taken steps to enhance the predictability on the date of pension indexation by embedding it in legislation. In particular, from 2022 it is envisaged to establish the annual indexation of pensions no later than March 1. The Budget Declaration for 2022-2024, which was adopted by Parliament in July 2021, encapsulates the provision under which the indexation of pensions will be carried out for all categories of retirees without exception. In addition, Draft Law # 4668 to improve predictability and sustainability of pension benefits through timely indexation and clear rules for supplementary benefits for those over age 80 was adopted in the first reading on September 9, 2021, with a second reading due soon. Data on Financial Performance Disbursements (by loan) Project Loan/Credit/TF Status Currency Original Revised Cancelled Disbursed Undisbursed % Disbursed P172597 IBRD-91380 Closed USD 350.00 350.00 0.00 350.00 0.00 100% Key Dates (by loan) Project Loan/Credit/TF Status Approval Date Signing Date Effectiveness Date Orig. Closing Date Rev. Closing Date P172597 IBRD-91380 Closed 26-Jun-2020 25-Jun-2021 25-Jun-2021 30-Jun-2021 30-Jun-2021 Tranches 11/5/2021 Page 6 of 7 Public Disclosure Copy The World Bank Implementation Status & Results Report Economic Recovery Development Policy Loan (P172597) Restructuring History There has been no restructuring to date. Related Project(s) P177931-Second Economic Recovery Development Policy Loan 11/5/2021 Page 7 of 7