Report No. 45329-UA Ukraine Country Assistance Evaluation September 10, 2008 Country Evaluation and Regional Relations Independent Evaluation Group Document of the World Bank At the beginning of the 1990s, Ukraine was considered to have excellent prospects for economic growth. Instead, it endured one of the world’s worst contractions inthe 1990s, with GDP declining by about 60 percent, and poverty increasing to 30 percent. Ukraine’s economic perform- ance improved substantially after 1999 with stabilization, better management of public finances, and structural reforms. Between fiscal 1999 and fiscal 2006 the W o r l d Bank approved $2.3 billion inloans to Ukraine, much of it aimed at institutional reforms. But those reforms came slowly and implementation of the Bank’s program was impeded by political uncertainties. Investment lending was a major weakness of the program, though adjustment lending did better. The Bank’s high-quality analytic work was a major strength and helped improve the understanding of the requirements for a mar- ket economy. One focus of the Bank strategy was economic g r o w t h and integration o f Ukraine into the w o r l d economy. During the period, GDP growth averaged 6.5 percent per year; progress was made in building a culture of payments, fiscal discipline, financial sector deepening, and im- proving the legal and regulatory framework. The financial viability o f the energy sector im- proved, and Ukraine moved toward meeting WTO criteria for accession. A second focus involved restructuring the public sector, and achieving improved transpar- ency and accountability. Results in t h i s area were mixed. Municipal service delivery improved in some cities, but little progress was made in reforming public administration and improving the efficiency o f the public sector. The Bank supported the introduction of modern budget insti- tutions and practices, and tax reform. On the third p o i n t of focus, poverty reduction and human development, poverty incidence declined in line with growth in per capita GDP, and social assistance programs were simplified. In education, primary school enrollments rose, but those in secondary school declined. Health outcome indicators were mixed. Child and infant mortality were reduced, and life expectancy declined slightly, but the tuberculosis and AIDS epidemics worsened. Future Bank strategy should strive for greater selectivity, centered o n public financial manage- ment, private sector development, energy and social protection, with continuing attention to govern- ance and institutional development. Ineconomic and sector work, it would be desirable focus o n private sector development and infrastructure. Inlending, investment project designs need to be simplified to match implementation capacity. Shifting development policy lending to more nar- rowly focused, single-tranche operations may encourage deeper policy and institutional reforms. i Contents FOREWORD ................................................................................................................ I PREFACE ................................................................................................................. VI1 UKRAINE: SUMMARY OF BANK PROGRAM OUTCOME RATINGS ........... IX EVALUATION SUMMARY......................................................................................... XI MANAGEMENT ACTION RECORD ........................................................................ XV CHAIRPERSON'S SUMMARY .............................................................................. XVll 1. BACKGROUND............................................................................................ 1 2. THE WORLD BANK PROGRAM IN UKRAINE........................................... 7 Strategy ..................................................................................................................... 7 Assessment of the Strategy .................................................................................... 9 Lending Program.................................................................................................... IO Efficiency of Lending ............................................................................................. 14 Nonlending Assistance .......................................................................................... 17 Partnerships............................................................................................................ 19 3. ACHIEVING SUSTAINABLE ECONOMIC GROWTH AND INTEGRATION INTO THE WORLD ECONOMY.................................................................. 21 Supporting Macroeconomic and Financial Sustainability.................................. 21 Bank Strategy ...................... ...............21 Outcomes ............................ ...............22 Assessing the Bank's Contri ...............23 Financial and Private Sector Development.......................................................... 24 ...............24 ...............26 Energy Sector ......................................................................................................... 29 Bank Strategy ...................... Outcomes ............................ Sustainable Environment ........................................................................ ........................................................................... Assessing the Bank's Contribution .................................................................. iii Integration into the World Economy ................................................................... -34 ............................................................. 34 ............................................................. 35 Assessing the Banks Contribution ..................................................... Summary................................................................................................................. 36 4. PUBLIC SECTOR RESTRUCTURING. IMPROVED TRANSPARENCY. AND ACCOUNTABILITY............................................................................ 39 Governance. Transparency. and Accountability ................................................ 40 Bank Strategy ............... .......................... 40 Outcomes ............................................................. 40 Assessing ............................................................. 44 Public Financial Management ............................... ............................................... i 44 ............................................................. 44 ...................................................... ...................................................... Summary................................................................................................................. 48 5. POVERTY REDUCTION. SOCIAL DEVELOPMENT. AND REDUCTION OF REGIONAL IMBALANCES.................................... 49 Poverty Reduction. Social Protection. Safety Nets ............................................ 49 .............................................................................. 49 ............................................................. 50 Assessing the Bank's Contribution ............................................................. 52 Education................................................................................................................ 53 ............................................................. 53 Outcomes ................. ............................................................. 53 Assessing the Bank's ........................................................... 54 Health ...................................................................................................................... 54 ............................................................. 54 ............................................................. 55 Assessing the Banks Contribution ............................................................. 55 ...................................................... 57 ............................................................. 57 ............................................................. 57 ............................................................. 58 Summary.............................................................. ................................................... 59 6. CONCLUSIONS. LESSONS. AND RECOMMENDATIONS........... 63 Overall Assessment ............................................................................................... 63 Institutional Development Impact ........................................................................ 64 Risk to Development Outcome ............................................................................. 64 Bank Performance ................................................................................................. 65 Main Findings ......................................................................................................... 66 On Strategy and Objectives ........................................................................................... 66 iv On Sector Outcomes ...................................................................................................... 67 On Instruments ............................................................................................................... 68 Recommendations ................................................................................................. 69 BIBLIOGRAPHY ....................................................................................................... 95 Boxes Box I . Recommendationsof the Previous CAE ................................................ 6 Box 2. Country Assistance Strategy in Ukraine ................................................. 7 Box 3 . IFC Operations in Ukraine.................................................................... 16 Box 4 . Privatization Ukrainian Style: The Case of Kryvorizhstal...................... 42 Box 5. The People's Voice Project .................................................................. 43 Tables Table 1. Economic and Social Indicators for ECA Countries ............................... 5 Table 2 . IBRDIIDA Expected Base Case and Actual Commitments, FY99-FY06 (US$ millions) ................................................................... 10 Table 3 . Composition of Bank Lending .............................................................. 11 Table 4 . IEG Project Ratings, FY99-FY06 ......................................................... 14 Table 5 . Average Lending Cost and Time, FY99-FY06 (per project) .................14 Table 6 . Selected Macroeconomic Indicators .................................................... 22 Table 7 . Selected Banking Sector Indicators .. ............................. 25 Table 8. Doing Business (2006) ......................................................................... 27 Table 9 . Indicators of the Business Environment....... Table 10. Energy Sector Outcomes ..................................................................... 30 Table 11. Environment Outcomes......................... ......................................... 34 Table 12. Trade Indicators ................................................................................... 35 Table 13. Pillar 1: Summary Outcome Rating ...................................................... 37 Table 14. Governance Indicators (in percent) ..................................................... -40 Table 15. Indicators of Corruption (in percent)....... ........................................ 41 Table 16. Public Expenditure and Revenue (% of GDP)...................................... 46 Table 17. Pillar 2: Summary Outcome Rating ...................................................... 48 Table 18. Poverty Rates....................................................................................... 50 Table 19. Poverty Reduction in ECA Region (percent of population below $4.33 poverty line) ..................................................................... 51 Table 20 . Education Indicators............................................................................. 54 Table 21. Health Indicators .................................................................................. 55 Table 22. Agriculture and Regional Development Outcomes............................... 58 Table 23. Pillar 3: Summary Outcome Rating ...................................................... 60 Table 24 . Overall Outcome Rating ....................................................................... 64 V Figures Figure 1. Growth Rates. 1990-2005 (annual percentage) ..................................... 3 Figure 2. IBRDADA Lending to Ukraine. FY93-FYO6........................................... 11 Figure 3. Cost of Dropped Projects, FY99-FYO6 (% of total budget) ..................15 Figure 4 . Disbursement Ratios, FY99-FYO6 (in percent) ..................................... 15 Figure 5 . Incidence of Family Benefits................................................................. 52 Figure 6 . Incidence of Poverty-Targeted Transfers ............................................. 52 Appendices APPENDIX A: STATISTICAL SUPPLEMENT .......................................................... 71 APPENDIX B: GUIDE TO IEGWB’S COUNTRY ASSISTANCE EVALUATION METHODOLOGY ...................................................... 85 APPENDIX C: LIST OF PEOPLE MET ..................................................................... 89 Attachments ATTACHMENT 1: COMMENTS FROM THE GOVERNMENT................................. 97 vi Preface T h i s Country Assistance E v a l u a t i o n (CAE) p r o v i d e s a n i n d e p e n d e n t assessment of World Bank assistance to U k r a i n e during the p e r i o d fiscal 1999 to fiscal 2006. T h e CAE examines whether: (a) the objec- tives of Bank assistance w e r e relevant; (b) t h e Bank's assistance pro- g r a m w a s effectively designed and consistent with i t s objectives; a n d (c) the Bank's p r o g r a m achieved i t s objectives a n d h a d a substantial i m p a c t on t h e country's development during this p e r i o d . E x a m i n i n g these questions a l l o w s t h e CAE to d r a w lessons and recommenda- tions for f u t u r e B a n k assistance. A p p e n d i x B describes t h e methodo- l o g i c a l approach. T h e e v a l u a t i o n i s based on a r e v i e w of World Bank documents and on i n t e r v i e w s with senior government officials, representatives of t h e p r i v a t e sector and c i v i l society, n o n g o v e r n m e n t a l organizations, m e m b e r s of t h e donor community, Bank and IMF staff a t headquar- ters a n d i n Ukraine. A l i s t of those i n t e r v i e w e d i s i n A p p e n d i x C. An I n d e p e n d e n t E v a l u a t i o n Group (IEG) m i s s i o n v i s i t e d U k r a i n e during M a y a n d June 2006. T h e M a n a g e m e n t A c t i o n Record i s a p p e n d e d to t h e E v a l u a t i o n Sum- m a r y . C o m m e n t s from the Bank's r e g i o n a l management h a v e b e e n incorporated i n the report. T h e r e p o r t w a s also sent to the U k r a i n i a n authorities w h o s e comments are reflected i n the r e p o r t and attached in A t t a c h m e n t 1. This CAE w a s w r i t t e n by I s m a i l A r s l a n (Task Manager, IEGCR) with contributions by Jayme Porto Carreiro, S i m o n C o m m a n d e r (London Business School), Norman Hicks, Aylin Isik-Dikmelik, M a n u e l Penal- ver-Quesada (Consultants). JohnJohnson (IEGCR) a n d James Parks (LCSPR) w e r e the peer reviewers. A g n e s Santos (IEGCR) p r o v i d e d administrative assistance. W i l l i a m Hurlbut e d i t e d t h e report. T h e r e p o r t includes a s u m m a r y of a p a r a l l e l Country I m p a c t R e v i e w (CIR) by t h e I n d e p e n d e n t E v a l u a t i o n Group of the I n t e r n a t i o n a l Fi- nance C o o p e r a t i o n (Box 3), p r e p a r e d by A n n a Zabelina. vii Ukraine: Summary of Bank Program Outcome Ratings ACHIEVEMENT OF ASSOCIATED CAS BANK PROGRAM OUTCOME BANK STRATEGIC GOALSa OUTCOMES OR RESULTS RATING$ First Pillar: Sustainable Economic Growth Substantial growth has been achieved, following Satisfactory and Integration into the World Economy years of recession. Significant progress has been made with the WTO accession process. Macroeconomic and Financial Macroeconomic stability was restored. Fiscal and Satisfactory Sustainability financial discipline improved. Public debt-GDP ratio was reduced. Improved Financial Sector and Business Progress has been made in tightening prudential Moderately Satisfactory Environment regulations. Savings Bank has been restructured. Business regulations have been simplified. Financially Viable Energy Sector Financial discipline has improved with tariff Satisfactory collections over 95 percent for electricity and gas. An additional 50 mines have been closed. Sustainable Environment Progress has been made, particularly in Moderately Satisfactory implementing the Kyoto Protocol and better environmental policies. Gradual Integration into the World Important actions have been taken in the area of Satisfactory Economy lowering tariffs, modernizing customs, and improving standards. Second Pillar: Public Sector Reform Transparency and accountability has improved in Moderately Satisfactory cities where the People’s Voice Program is active. Significant progress has been made in improving public financial management. Improved Transparency and The incidence of bribery has been reduced. Moderately Satisfactory Accountability Broad governance indicators point to significant improvements. Improving Public Financial Management Modern budgetary institutions and practices have Moderately Satisfactory been established. simplified tax regime has been introduced. Third Pillar: Poverty Reduction, Poverty rate has declined in line with growth, but Moderately Unsatisfactory Comprehensive and Harmonized Human there has been little improvement in social Development indicators and regional income disparities. Poverty Reduction and Social Protection The number of social assistance programs has Moderately Satisfactory been reduced and streamlined. Share of social assistance transfers received by the lower- income groups has increased. Comprehensive and Harmonized Human Indicators related to TBIAIDS, life expectancy Moderately Unsatisfactory Development and school enrollments have worsened. Reduction of Regional Imbalances No progress in reducing the disparities between Moderately Unsatisfactory regions, and no viable strategy for rural or reaional develoDment. OVERALL I MODERATELY SATISFACTORY a. The goals of Bank assistance m a y be distinct from the client country’s o w n development objectives. For Ukraine, most goals of Bank assistance were fully aligned with, but were a subset of, the government’s ob- jectives. b. The Bank program outcome rating and sub-ratings assess the extent to which the Bank program helped achieve the results targeted in the relevant strategy document(s). This is of course distinct f r o m assessing the quality of Bank’s or the client country’s performance. ix Evaluation Summary Ukraine: Country Assistance Evaluation At the b e p n i n g o f the 1990s, Ukraine was considered to have excellent prospects for economic growth. Instead, it endured one o f the world’s worst contractions during the 199Os, with GDP declining by about 60 percent, and poverty increasing to 30 percent o f the population. Ukraine’s economic performance im- proved substantially after 1999 with stabilization, better management o f public finances, and structural re- forms. T h e economy enjoyed seven consecutive years o f growth between 2000 and 2006. Between fiscal 1999 and fiscal 2006, the period covered by t h i s evaluation, progress was made toward most o f the relevant objectives of B a n k assistance albeit with some shortcomings in several important areas. T h e B a n k approved $2.3 bihon in loans, less than one-half of the lending level that it h a d proposed to extend during the period, mainly due to slow progress o n reforms a n d program implementation. T h e Bank also produced high- quality analytical work, w h i c h was widely appreciated and helped improve the understanding o f the require- ments f o r a market economy. E c o n o m i c growth averaged 6.5 percent per year between 1999 a n d 2006, the banking sector was strengthened, and Ukraine m o v e d closer to meeting WTO criteria f o r accession. Achievements in public sector restructuring, transparency, and accountability were m o r e uneven. Social indica- tors also displayed a mixed picture, with some improvement i n primary education and infant a n d c h i l d mortal- i t y rates but deterioration in secondary school enrollment and the AIDS and TB epidemics. This evaluation recommends that future B a n k strategy in Ukraine should strive for greater selectivity, centered on public financial management, private sector development, energy, and social protection, with a cross- cutting focus on governance and institutional development. In economic and sector work, it would b e desir- able t o focus on private sector development and infrastructure. In lending, the design o f investment projects needs to b e simplified t o match implementation capacity and needs to b e aligned with the government’s priori- ties. With regard to development policy lending, a s h i f t to m o r e narrowly focused, single-tranche operations w o u l d hkely encourage deeper policy and institutional reforms. U kraine, with a population o f almost many social services was shifted from large state 50 million, i s strategically located at a enterprises to local governments that o f t e n lacked crossroads between east and west. I t has resources to continue providingt h e m at the same a good endowment o f human a n d natural re- level. As a result, many health and education indi- sources and at the b e p n i n g o f the 1990s it was cators worsened during the 1990s, including a widely considered to have excellent prospects for growing H I V V / A I D S epidemic and a resurgence o f economic growth. Instead, it endured one of the tuberculosis p). world’s worst contractions during the decade end- ing in 1999, with GDP declining cumulatively by In 1998, the Russia crisis, combined with about 60 percent. Ukraine’s mounting public sector debt, l e d to a financial and external debt crisis. However, the T h e lost decade o f the 1990s took i t s toll on pov- subsequent rapid recovery of Russia soon pro- erty and social conditions. T h e incidence o f pov- vided renewed demand f o r Ukraine’s exports, and erty increased considerably, to 30 percent o f the the crisis also provided a needed impetus for eco- populationin 1999. A fifth o f the population was n o m i c reforms that h a d been faltering. Following working part-time or was on administrative leave the presidential elections o f late 1999, a m o r e re- and formal unemployment rose to 11 percent of formist government gave high priority to the economically active population. Provision o f xi SUMMARY EVALUATION n establishing fiscal discipline and accountability i High and sustained economic growth helped to the public sector. reduce poverty, w h i c h declined from m o r e than 30 percent in 2000 to 1 4 percent in 2004. T h e re- Ukraine’s economic performance i m p r o v e d sub- duction o f poverty has been faster in Ukraine than stantially after 1999. T h e economy experienced in many neighboring countries. robust growth between 2000 and 2004. T h e re- newed growth cut across sectors and was relatively T h e Bank‘s assistance to Ukraine between fiscal broad-based, with the industrial sector growing 1992 and fiscal 1998 was previously evaluated in m o s t strongly. In 2004, Ukraine achieved the the 2000 Country Assistance Evaluation (CAE) highest growth rate i n E u r o p e (12.1 percent). T h i s and the program outcomes rated as unsatifactoty. spectacular performance was due to i m p r o v e d macroeconomic policies and management, a highly T h i s C A E covers the Bank‘s assistance to Ukraine favorable external environment, and a revival of during the period from fiscal 1999 to fiscal 2006. the country’s traditional industrial base. I F C assistance i s evaluated separately in a Country I m p a c t Review (CIR) covering fiscal 1993 to fiscal Ukraine’s political landscape was dramatically 2006. changed by the presidential election o f 2004 and the subsequent events that l e d to a repeat election Bank Assistance (and became known as the “Orange Revolution”). T h e former reformist Prime Minister (of 1999- During the CAE period, B a n k assistance to 2000) Viktor Yushchenko emerged as the winner Ukraine was guided b y two Country Assistance in the repeat election, and was inaugurated as Strategies (CASs), i n 2000 and 2003. Their consis- president o n January 23,2005. T h e n e w admini- tent themes were: ( i ) achieving sustainable eco- stration announced that accession to membership nomic growth and integration into the world o f the European Union (Eu> was Ukraine’s top economy; (ii) restructuring the public sector and priority. achieving i m p r o v e d transparency and accountabil- ity; and ( iii) poverty reduction, comprehensive Several events i n 2005 led t o a slowdown in GDP h u m a n development, and reduction of regional growth to 2.6 percent and an increase in annual in- disparities. T h e CASs addressed key development flation to 13.5 percent. These included the tempo- constraints-institutional weaknesses and p o o r rary impacts of post-Orange Revolution policies, a governance-and were consistent with the gov- sharp slowdown i n export growth, reflecting an ap- ernment’s objectives. T h e Bank‘s program also preciating real exchange rate and slowing global included initiatives to strengthen the capacity of demand, an increase in energy prices, and a weaken- civil society to demand i m p r o v e d accountability ing of fiscal performance during 2004, prior to the and transparency of government at all levels. elections. Nevertheless, the B a n k consistently overestimated the government’s capacity and commitment to in- Economic activity rebounded strongly in 2006, stitutional reforms. with growth estimated at 7.1 percent, w h i c h dem- onstrates the considerable resilience o f Ukraine’s Between fiscal 1999 and 2006, the B a n k made economy. T h e negative impacts of higher gas commitments of $2.3 billion, o f w h i c h 60 percent prices on the economy were less than anticipated was adjustment lending, less than one-half the and pass-through of rising energy prices to con- CASs’ proposed lendmg levels. Program imple- sumers and producers helped i m p r o v e energy effi- mentation was slower than expected. T h e pace o f ciency-Ukraine has one o f the lowest levels o f r e f o r m slowed because o f political uncertainties, energy efficiency in the world. At the same time, w h i c h affected adjustment lending. Meanwhile, capital inflows, foreign direct investment (FDI) in preparation and implementation o f investment particular, were buoyant, reflecting i m p r o v e d per- projects encountered problems. Despite im- ceptions o f Ukraine as an investment location. provements i n p o r t f o l i o performance, the high Fiscal policy continued to support macroeconomic cost of preparation and low disbursement ratios of balance and the general budget deficit did not ex- investment operations, together with the large cost ceed 2.5 percent o f GDP. of dropped projects, were the major weaknesses of the B a n k program during the CAE period. xii SUMMARY EVALUATION T h e B a n k produced htgh-quality analytical work. V o i c e Project -a p i l o t project supported by the In the latter part o f the period, the focus shifted to Bank-was active. However, there has been little just-in-time policy notes, to help inform the n e w or no progress i n reforming the public administra- administration in 2005. Based on IEG interviews, tion a n d i n improving the efficiency o f the public the most widely appreciated role of the B a n k in sector. T h e B a n k supported the introduction o f Ukraine was i t s analytic work and policy dialogue, m o d e r n budgetary institutions and practices, as for helping to establish a widespread understand- w e l l as tax reform. T h e public procurement sys- ing of the requirements for a market economy, t e m has also been reformed, although recent back- and of the role of energy policies. T h e B a n k sliding puts progress i n t h i s area at risk. Overall, broadened the range of partners and stakeholders, the outcome of the second pillar i s rated as moder- and i m p r o v e d i t s dialogue with nongovernmental ate4 satisfactory. organizations (NGOs) and civil society. T h e Bank's dissemination efforts to build a wider con- For the third pillar,poveq reduction, comprehensive stituency for reforms were impressive throughout human development, and reduction o f regional imbalance, the period. the incidence of poverty has declined i n line with growth in per capita GDP, and social assistance Findings of the Evaluation programs have been simplified. Nevertheless, re- forms i n the pension system were undercut by U n d e r the f i r s t pillar, achieving sustainable economic large increases mandated by Parliament i n 2004 growth and integration into the world economy, Ukraine and 2005, doubling their cost. Subsidies for utili- experienced robust GDP growth, averagmg ties a n d housing were monetized and social assis- 6.5 percent per year, over the 1999-06 period. T h e tance was better targeted, although a sizeable por- country has made significant progress i n buildmg a tion of benefits s t i l l go to the richest 40 percent o f culture of payments and fiscal discipline: budget households. Social indicators also show a m i x e d deficits have been mostly contained-although the picture. In education, primary school enrollments fiscal balance deteriorated i n 2004 due to the elec- have risen, but secondary school enrollments have toral cycle. Substantial financial deepening has oc- declmed. Developments in health outcome indi- curred, and improvements have been made i n the cators are likewise mixed. C h i l d and infant mor- legal and regulatory framework, although r i s k s i n tality have improved, while life expectancy has de- the financial sector are s t i l l substantial. T h e clined slightly. T h e TB and AIDS epidemics have Bank-IFC collaboration on private sector devel- worsened: infection rates continued to rise in the opment was less than ideal. T h e financial viability period, particularly f o r TB. T h e Bank's flagship o f the energy sector has improved, with tariff col- operation i n health was the fiscal 2002 lections reaching over 95 percent. L i m i t e d pro- TB/HIV/AIDS project, suspended after four gress has been made in environmental sustainabil- years and only 2 percent o f the funds disbursed. ity, and environmental issues remain a major risk Gains i n land registration have been h t e d by the t o development, although some advances have failure to establish a unified land registry, despite been made in implementing the Kyoto Protocol. B a n k assistance, and no progress has been made i n There has been major progress-particularly to- reducing regional disparities. Based on these de- w a r d the e n d of the CAE period-in meeting velopments, the outcome of B a n k assistance under WTO criteria for accession. Barriers to cross- the third pdlar i s assessed as moderate4 unsatisfactory. border trade have been reduced and tariffs l o w - ered a n d simplified. Based on these results, the In s u m , there was progress toward most of the outcome o f B a n k assistance for the f i r s t pillar ob- relevant objectives o f B a n k assistance, albeit with jective i s assessed as satisfactory. shortcomings in several areas. On t h i s basis, the overall outcome of the Bank's assistance program is rated U n d e r the second pillar,public sector restmctuting, im- moderate4 satisfactory. The institutional development im- proved tranqareny, and accountability, achievements pact oSBank assistance is rated as modest. T h e quality have been uneven. Major caveats notwithstand- o f macroeconomic management improved, and ing, indicators on governance, corruption, a n d rule progress was made on the institutional framework of l a w exhibit a m i x e d picture. B a n k assistance in the financial sector. T h e tariff structure was supported initiatives t o increase the demand f r o m simplified and quantitative restrictions reduced; civil society f o r transparency and accountability, a n d budget management was improved. But there and there i s evidence that municipal service deliv- have also been setbacks, such as backsliding on n cities where the People's ery has i m p r o v e d i xiii EVALUATION SUMMARY procurement reforms, and, despite numerous In i t s n e x t CAS, the B a n k will need to take into technical studies and functional reviews, the account the middle-income status o f Ukraine. T h e n any major re- Bank's assistance did not result i future agenda for the B a n k will b e m o r e demand- form in public administration. driven than it was previously, but within those l i m i t s there i s m u c h latitude for B a n k assistance. R i s k are regarded as sign$catzt. T h e strong growth o f the recent past i s unlikely to b e sustained with- Recommendations out further improvement in the business environ- T h e findings o f t h i s C A E suggest three main rec- ment, w h i c h would encourage greater domestic ommendations: private investment a n d foreign direct investment. Larger investment i n turn requires sigruficant pro- Bank strategy should strive for greater selec- gress in areas such as contract enforcement, prop- tivity, focused on public financial manage- erty rights, and regulation. In trade, m o r e diversi- ment, private sector development, energy, and fication i s needed: Ukraine relies o n a limited social protection, subject to government in- range o f heavy industries f o r exports and these terest in and commitment to continued re- industries i n turn are energy-intensive a n d depend forms in these areas. Within these areas pri- on imports; t h u s they are susceptible to adverse ority should b e on governance and price shocks. In the public sector, fiscal sustain- institutional development. ability o f the pension system and problems with public procurement pose major risks. In addition, Economic and sector work. T h e Bank's as- public spending i s high, having increased steaddy sistance program should maintain an adequate since 1999, and i s crowding out private invest- level of well-focused, high-quality a n a l p c ment; i t s consumption orientation means that u r - work, as it did in the latter part of the C A E gently needed public investments are delayed, par- period. T h e B a n k should b e placing greater ticularly in the infrastructure sector. emphasis than i n the recent past on private sector development and infrastructure. In ad- T h e B a n k correctly identified the need for better dition, collaborations should encompass a governance and institutional development as key wider spectrum o f civil society than in the to Ukraine's development; the 2000 CAS in par- past, to include, for example, businesses and ticular made governance the central focus o f the NGOs. Finally, the B a n k should ensure m o r e Bank's assistance strategy. Public sector govern- systemic dissemination o f all economic and ance accounted for the largest p r o p o r t i o n of lend- sector work. ing and extensive analytic work undertaken. N e v - ertheless, greater selectivity might have helped to Lending. T h e most effective contribution o f strengthen achievements, which fell short o f ex- B a n k assistance has come f r o m adjustment pectations. Specific benchmarks i n privatization of lending, while most budgetary resources have electricity, land titling, and the transparency of p r i - been spent on problematic and relatively inef- vatization were n o t met. On the other hand, the fective investment lendmg. To i m p r o v e the package of multisectoral policy loans contributed results o f investment operations, a tighter to positive progress in many areas. T h e People's alignment i s needed between investment p r o - Voice Project has pioneered the involvement of jects and government priorities. In addition, n the execution and monitoring o f c i v i l society i the B a n k should simplify investment projects public programs at the local level. and reduce their scale to m a t c h implementa- tion capacity. In adjustment lending, the T h e Bank's assistance program has also played a B a n k should s h i f t to m o r e narrowly focused, s e c a n t role in addressing Ukraine's nonpayment single-tranche operations, w h i c h would pro- culture, in turn helping t o create conditions for the vide the opportunity for deeper policy and i n - recent macroeconomic stabdity and recovery. T h e stitutional reforms. institution was able to learn lessons f r o m the 1990s, particularly in the energy sector. T h e decentraliza- tion of the Country Management Unit (CMU) and the buildup of technical expertise i n the field were important factors contributing to the improvements Vinod Thomas Director-General in the outcomes o f Bank assistance. Evaluation xiv Management Action Record Major Monitorable IEG Recommendations Management Response Requiring a Response 0 Strategy. The Bank strategy should 0 The n e w country partnership strategy (CPS) will pro- strive for greater selectivity, focusing pose greater selectivity for Bank interventions, as part o n public financial management, pri- of a Bank Group (not Bank-only) engagement strategy. vate sector development, energy, and 0 Consistent with Ukraine’s middle income country (MIC) social protection, and within these ar- status, the focus areas of engagement will be determined eas, o n improving governance and in- following discussion with the government, and not by stitutional development. Bank management alone. The CPS will propose a more programmatic engage- ment, with programs representing a flexible m i x of pol- icy-based and investment lending, analytical and advi- sory assistance (AAA), and partnerships. The CPS will build o n the extensive w o r k already un- derway in governance and anticorruption, and will ar- ticulate specific additional cross-cutting initiatives. Economic and Sector Work. The Bank 0 AAA w o r k will be determined by agreement with the should be placing greater emphasis government, consistent with the overall CPS approach n the past o n private sector de- than i noted above. I t will include provision t o respond to velopment and infrastructure. borrower demand, and will be programmatic rather than sectoral in definition. Consistent with the increased emphasis o n infrastruc- ture noted in the 2005 CAS Progress Report, additional investment will be made in mfrastructure AAA. Investment Lending. A tighter alignment 0 Broader programs aligned with government priorities is needed between the investment pro- will drive the selection of investment projects. Invest- jects and the government priorities. In ment project delivery will be increasingly aligned with addition, the Bank should simpllfy in- Ukrainian institutional processes, while carefully man- vestment projects and reduce their scale aging associated fiduciary risks. Use of PIUs is declin- to match implementation capacity, and ing, and this will continue. ensure line ministries’ engagement i n project preparation, and also their more direct involvement in project implemen- tation, avoiding off-line Project Imple- mentation Units (PIUs). 0 Adjustment Lending. A shift f r o m The shift to more focused, single-tranche operations is broad, multisectoral adjustment loans already underway. The CPS will elaborate h o w this to loans that are more narrowly fo- shift will continue within the context of more pro- cused and disbursed in single tranche grammatic engagement that seeks to balance the need is appropriate for Ukraine, which for focus with the cross-sectoral nature of many of the w o u l d also provide the opportunity for reforms that remain. follow up and deeper policy and insti- tutional reforms. Chairperson’s Summary Committee on Development Effectiveness INFORMAL SUBCOMMITTEE’S REPORT:UKRAINE COUNTRY ASSISTANCE (CAE); EVALUATION UKRAINE COUNTRY IMPACT REVIEW(CIR), TOGETHER WITH THE DRAFT RESPONSE MANAGEMENT (MEETING OF OCTOBER 29,2007) 1 . On October 29,2007 t h e I n f o r m a l Subcommittee (SC)of t h e C o m m i t t e e on D e v e l o p m e n t Effectiveness (CODE) considered t h e U k r a i n e Country Assistance Evalua- tion (CAE) p r e p a r e d by IEG-WB and the U k r a i n e Country I m p a c t R e v i e w (CIR) pre- p a r e d by IEG-IFC together with t h e IFC D r a f t M a n a g e m e n t Response. 2. Summary of the Ukraine CAE. IEG-WB r e v i e w e d I B R D s c o u n t r y assistance to U k r a i n e from FY99 to FY06. During t h e CAE period, B a n k assistance to U k r a i n e w a s g u i d e d by two Country Assistance Strategies (CASs), i n 2000 and 2003. T h e i r consistent elements (pillars) were: ( i) achieving sustainable economic growth and i n t e g r a t i o n into t h e world economy; ( i i) restructuring t h e p u b l i c sector a n d achieving i m p r o v e d trans- parency and accountability; a n d ( iii) p o v e r t y reduction, comprehensive h u m a n devel- opment, and r e d u c t i o n of r e g i o n a l disparities. T h e C A S s addressed k e y d e v e l o p m e n t constraints - i n s t i t u t i o n a l weaknesses a n d poor governance - a n d w e r e consistent with t h e government’s objectives. 3. IEG-WB r a t e d the o v e r a l l outcome of t h e Bank’s assistance program as moderately satisfactory and i t s i n s t i t u t i o n a l development i m p a c t as modest. T h e Bank‘s s u p p o r t for sustainable economic growth w a s r a t e d satisfactory. IEG-WB n o t e d t h e good progress m a d e i nbuilding a c u l t u r e of payments, fiscal discipline, f i n a n c i a l sector deep- ening, and improving the l e g a l and r e g u l a t o r y f r a m e w o r k . T h e financial v i a b i l i t y of t h e energy sector i m p r o v e d . At t h e same time, l i m i t e d progress w a s m a d e i n t h e environ- m e n t a l sustainability, a n d e n v i r o n m e n t a l issues r e m a i n a m a j o r r i s k to development. T h e Bank’s assistance to t h e C A S second p i l l a r w a s r a t e d as moderately satisfactory, be- cause achievements i np u b l i c sector restructuring, improvingtransparency a n d account- a b i l i t y h a v e b e e n uneven. T h e Bank‘s s u p p o r t to p o v e r t y reduction, human develop- ment, and r e d u c t i o n of regional imbalances w a s r a t e d as moderately unsatisfactory. Despite decline i nt h e incidence of poverty, r e f o r m s i np e n s i o n system w e r e undercut, developments i n social indicators s h o w e d m i x e d picture, a n d no progress h a s b e e n made i n r e d u c i n g t h e regional disparities. IEG-WB r e c o m m e n d e d t h e following: (i) strive for greater selectivity; ( ii) m a i n t a i n a n adequate l e v e l of well-focused, high q u a l i t y analytic work; and ( i ii s)i m p l i f y investment l e n d i n g and m a k e it m o r e tightly a l i g n e d to government priorities, and s h i f t development p o l i c y l e n d i n g to m o r e n a r - rowly focused, single-tranche operations. xvii SUMMARY CHAIRPERSON'S 4. Management considered t h e CAE useful for preparing the new Country Partnership Strategy (CPS). Management concurred with IEG recommendations a n d n t h e new CPS w h i c h will be consis- stated that it will consider more specific responses i tent with Ukraine's middle-income country (MIC) status. T h e n e w CPS will propose a more programmatic engagement, with programs representing a flexible m i x of policy- based and investment lending, analytical a n d advisory services (AAA), and partner- ships. 5. Summary of the Ukraine CIR. IEG-IFC found that IFC's advisory-centric strategy was appropriate. IFC advisory operations i n Ukraine outperformed evaluated IFC advisory operations i n Europe and Central Asia (ECA) countries. I F C investment operations i n Ukraine performed better than evaluated investment operations i n the rest of ECA region and t h e average for IFC. IFC coordinated a number of advisory activities with IBRD, but the extent of the cooperation was relatively limited. IEG-IFC recom- mended that IFC: (i) focuses its strategies o n medium-term (3-5) year horizon priorities and follows a more systematic approach to idenwing investment opportunities; ( ii) co- ordinates with IBRD to ensure that b o t h institutions w o r k sequentially and/or in paral- l e l to address remaining privatization challenges among larger companies; a n d ( iirep- i) licates the strong design of its successful large advisory projects, promotes greater donor coordination and cohesion i n its areas of engagement, and exploits synergy models be- tween programmatic advisory and investment operations. 6. Draft Management Response (CIR). Management thanked IEG for its findings a n d recommendations and mentioned that they w o u l d be taken i n t o account i nt h e preparation of t h e n e w CPS. The Bank pointed out that the new CPS w o u l d reflect a spirit of partnership with Ukraine, and I E G s specific recommendations o n sectors and forms of intervention w o u l d be considered in t h i s way. IFC's engagement continues to be guided by t h e four-year CPSs prepared jointly with other W o r l d Bank Group (WBG) institutions. IFC is k e e n to pursue joint opportunities through joint WB/IFC Sub- National Department, including investments i npublic-private partnerships a n d support for a range of municipal services. The infrastructure sector remains a priority for IFC i n Ukraine where IFC will appreciate I B R D s policy advisory w o r k i n advance of privatiza- tion. IFC uses its experience with the successful demand-driven, multi-generational a n d multi-dimensional larger operations t o develop follow up advisory projects that focus on t h e next logical area of intervention. Donor coordination i s established and maintained at t h e project level. In addition, IFC i s the Lead Donor of the "Enterprise Support" work- ing group created as part of a n e w donor coordination initiative by the Ministry of Economy of Ukraine. 7. The Ukraine authorities provided written comments o n the CAE. T h e Represen- tative of the constituency that includes Ukraine overall supported the CAE a n d CIR re- sults. At t h e same time, she felt that the IEG-IFC report could have benefited f r o m its discussion with t h e Ukrainian authorities. IEG-IFC noted that i t is general practice n o t t o discuss the CIR with the Government, since the private sector i s t h e IFC's client. At the same time, t h e report will be presented i nJanuary 2008 in K i e v and discussed with the Government and other stakeholders. xviii SUMMARY CHAIRPERSON'S 8. M a i n Conclusions a n d N e x t Steps. T h e Subcommittee b r o a d l y agreed with t h e f i n d i n g s a n d recommendations of the CAE a n d CIR. M e m b e r s stressed the i m p o r t a n c e of consulting with authorities on IEG reports. In t h i s regard, t h e y f e l t t h a t t h e Bank s h o u l d assist t h e c o u n t r y i n addressing i t s n a t i o n a l p r i o r i t i e s and development needs. T h e i m p o r t a n c e of disseminating lessons l e a r n e d from t h e U k r a i n e case i nt h e context of t h e Bank's experiences with transition economies a n d engagement with IBRD countries w a s also cited. T h e Subcommittee discussion focused on issues related to t h e r o l e of Pro- ject I m p l e m e n t a t i o n U n i t s (PIUs), approaches to d e v e l o p m e n t p o l i c y l e n d i n g (DPL), con- tinuous involvement i nh e a l t h and education sectors, p r i v a t e sector development, and economic and sector work. Some members c o m m e n t e d on t h e n e e d to strengthen syner- gies within WBG and increase collaboration with o t h e r partners, p a r t i c u l a r l y t h e Euro- p e a n Bank for Reconstruction a n d D e v e l o p m e n t (EBRD). Questions w e r e raised on how M a n a g e m e n t w a s p l a n n i n g to integrate IEG f i n d i n g s and recommendations into t h e up- c o m i n g cps. T h e following p o i n t s w e r e raised: 9. Country Context a n d Bank/IFC Program. M e m b e r s emphasized t h e i m p o r t a n c e of t h e p e r m a n e n t dialogue with t h e U k r a i n i a n stakeholders and encouraged f u r t h e r WBG i n v o l v e m e n t i nbuilding t h e i n s t i t u t i o n a l capacity of t h e p u b l i c and p r i v a t e sectors. T h e y suggested t h a t t h e Bank a d a p t i t s s u p p o r t to Ukraine's p o l i t i c a l e n v i r o n m e n t a n d e v o l v i n g priorities, and stressed the n e e d for effective presence i nt h e country. In t h i s context, m e m b e r s sought m o r e i n f o r m a t i o n a b o u t resources a n d staff s k i l l m i x to ensure sustained effective policy dialogue with t h e G o v e r n m e n t a n d p r i v a t e sector. There w e r e questions on how t h e Bank and IFC f u r t h e r see the r e f o r m process in Ukraine, the asso- ciated r i s k s for f u t u r e C E , a n d t h e strategy to m i t i g a t e t h e risks. Speakers s u p p o r t e d fo- cus of IFC a d v i s o r y services on addressing t h e k e y business constraints for t h e p r i v a t e sector, a n d n o t e d t h a t the business climate i n U k r a i n e needs f u r t h e r i m p r o v e m e n t . 10. Development Policy Lending. Some m e m b e r s questioned t h e IEG-WB r e c o m m e n d a t i o n on u s i n g single-tranches development p o l i c y l e n d i n g for future. T h e y n n o t e d t h a t deeper i n s t i t u t i o n a l r e f o r m s take m o r e t i m e a n d s h o u l d b e s u p p o r t e d i stages. M a n a g e m e n t responded t h a t the p r o g r a m m a t i c a p p r o a c h h a d b e e n f o l l o w e d i n t h e design of d e v e l o p m e n t p o l i c y lending, and the f i r s t two p r o g r a m m a t i c adjustment loans h a d m u l t i p l e tranches. 11. Financial Sector. Some members w e r e u n d e r t h e i m p r e s s i o n t h a t IBRD w a s inactive i n t h e financial sector vis-a-vis IFC and IMF. M a n a g e m e n t n o t e d t h a t during t h e CAE period, t h e Bank w a s constantly i n v o l v e d i n r e f o r m i n g t h e financial sector of t h e U k r a i n e economy: two loans (for e x p o r t development and i m p r o v e d access to financial market) w e r e recently a p p r o v e d by the Board. The B a n k and t h e Fund h a v e c o m p l e t e d t h e Financial Sector Assessment P r o g r a m u p d a t e w h i c h h a s b e e n shared with t h e Gov- ernment. Inaddition, the Bank did a n extensive a d v i s o r y work i n t h e areas of non-bank financial institutions development and b a n k i n g supervision. A speaker also raised a question a b o u t p o t e n t i a l conflict of interest w h e n IFC engages i n a c o u n t r y as both a n advisor a n d a n investor. M a n a g e m e n t responded t h a t m o s t of IFC's a d v i s o r y projects i n U k r a i n e w e r e not specific to investment transactions and p r o v i d e d a p u b l i c good to all xix SUMMARY CHAIRPERSON'S investors. In addition, the Private Enterprise Partnership has a policy to identify any po- nthe projects before advisory services are launched. tential conflicts of interests i 12. H e a l t h a n d Education Sectors. Many members expressed their concerns about worsened indicators i n the health and education sectors a n d sought more information o n the reasons. They w o u l d like t o see more precise recommendations o n h o w t o im- prove t h e Bank's future w o r k i nthis regard, a member asked about t h e nthese areas. I reasons for the poor performance of the T B / H N / A I D S epidemic control project. Man- agement explained that the major problem behind the moderately unsatisfactory Bank's involvement i nt h e health and education sectors was uneven Government ownership of the reform agenda. 13. WBG Synergies a n d Cooperation with Other Partners. Most speakers reiterated the need of better WBG synergies, particularly the importance of closer cooperation be- n providing advisory services a n d m a k i n g investments. They also t w e e n IBRD a n d IFC i urged better collaboration between WBG and EBRD to avoid duplication of efforts. Management briefed members o n steps to increase collaboration with IFC, as well as with EU institutions (European Council, EBRD, and European Investment Bank) w h o h a d recently become the largest external providers of development finance t o Ukraine. 14. Project Implementation U n i t s (PIUs). Several members encouraged avoiding Project Implementation Units (PIUs) and noted that Management response t o this issue was passive. Management clarified that staff received mixed signals o n this agenda a n d have struggled t o balance concerns about corruption with established perceptions that PIU provide fiduciary comfort. 15. Lessons a n d Recommendations. Several speakers felt that t h e IEG report lan- n terms of recommendations and lessons learned. guage could have been more specific i They also sought more detailed assessment of general appropriateness of the Bank's strategy for Ukraine. A member asked a question about the reasons for slow reforms implementation. 16. Middle-Income Countries Agenda. Several members noted that problems identified by IEG in the CAE and CIR, e.g. over-optimism, lack of selectivity, WBG sup- ply-driven agenda, were common for other middle-income countries, particularly i n the E C A region. In this regard, they asked about ways of cross-fertilization between IEG evaluations for Ukraine and the recently completed IEG middle-income countries evaluation. IEG-WB noted that the latter report benefited f r o m the Ukraine C A E find- ings and included a box o n the contribution of Bank analytical w o r k to the country's in- tegration i n t o the w o r l d economy. Management explained that underestimation of the depth and duration of the transition recession i nCIS countries was related t o the Bank in common. However, the Bank adapted quickly and p a i d more attention to poverty issues using Poverty Assessments as one of the key AAA tools. The Bank also took i n t o account the political economy issues i n t h e projects design. Jiayi Zou, Chairperson xx 1. Background 1.1 T h i s Country Assistance E v a l u a t i o n (CAE) assesses t h e World Bank's assistance to U k r a i n e during t h e p e r i o d from fiscal 1999 to fis- c a l 2006. T h e Bank's assistance i n t h e earlier p e r i o d w a s covered by a p r e v i o u s CAE i n 2000.1 1.2 Ukraine, a nation of a l m o s t 50 million people, i s strategically located a t a crossroads b e t w e e n east and west. It has a good e n d o w - m e n t of human and n a t u r a l resources a n d w a s w i d e l y considered to h a v e excellent prospects a t t h e t i m e of independence, after t h e col- lapse of the Soviet Union. Instead, during t h e 1990s, t h e dislocations related to t h e d i s m a n t l i n g of t h e Soviet Union a n d i t s t r a d i n g block, together with poor domestic policies, l e d to large declines i n gross domestic p r o d u c t (GDP) a n d h y p e r i n f l a t i o n i n 1993 a n d 1994. O t h e r domestic factors i n c l u d e d t h e b u r d e n of an i n h e r i t e d energy-intensive a n d defense-oriented i n d u s t r i a l infrastructure t h a t w a s l a r g e l y iso- l a t e d from international markets. T h e output contraction lasted for n e a r l y 10 years, b e t w e e n 1991 and 1999, a n d GDP declined by a b o u t 60 percent. 1.3 Ukraine's economic decline w a s one of t h e deepest a n d long- est a m o n g a l l t r a n s i t i o n countries. T h e relatively successful t r a n s i t i o n countries - t h e Czech Republic, Estonia, H u n g a r y , Poland-q u i c k l y i n t r o d u c e d h a r d b u d g e t constraints on large p u b l i c enterprises and p r i v a t i z e d them. Ukraine, by contrast, p r o p p e d up these enterprises with direct subsidies, direct credits, a n d t a x concessions. T h e l a c k of structural r e f o r m s i n enterprise ownership, m a r k e t relations, t h e l e g a l and j u d i c i a l structure, a n d in t h e r o l e of government, l e d to c o n t i n u e d economic decline a n d to high b u d g e t deficits.* 1.4 T h e l o s t decade of t h e 1990s took i t s toll on p o v e r t y a n d social conditions. T h e incidence of p o v e r t y increased considerably, to 30 percent of the p o p u l a t i o n i n 1999. A fifth of t h e p o p u l a t i o n w a s working part-time or w a s on a d m i n i s t r a t i v e leave a n d f o r m a l u n e m - p l o y m e n t rose to 11 percent of t h e economically active population.3 P r o v i s i o n of m a n y social services (schools, hospitals, social welfare) w a s shifted from large state enterprises to l o c a l governments t h a t of- t e n lacked resources to continue t h e i r p r o v i s i o n at the same level. A s a result, m a n y h e a l t h and e d u c a t i o n indicators worsened during t h e 1990s, i n c l u d i n g a growing e p i d e m i c of H I V / A I D S , a n d a resurgence of tuberculosis (TB). 1 CHAPTER 1 BACKGROUND 1.5 n 1995 a n d h a d moderate I n i t i a l stabilization efforts started i success i n tackling the hyperinflation, but the lack of policy resolve in dealing with t h e structural reforms remained a major problem and pushed three successive International Monetary F u n d (IMF) pro- grams (in1995,1996, and 1997) off track.4 The l i m i t e d reforms of the mid-1990s did succeed, however, in slowing d o w n the economic de- cline and, by early 1998, there was even a small recovery i n output. But the recovery was short-lived. 1.6 In 1998, t h e Russia crisis, combined with Ukraine’s mounting public sector debt, l e d to a financial a n d external debt crisis. Output f e l l again in 1998 and 1999, but Russia’s recovery soon provided re- newed demand for Ukraine’s exports, and the crisis also provided a needed impetus for economic reforms that h a d been faltering. Inaddi- t i o n t o a substantial devaluation, the reforms focused initially o n t h e n reducing financial, public, a n d energy sectors, a n d w e r e also critical i the prevalence of barter payments and arrears. 1.7 Following the presidential elections of late 1999, a more re- formist government gave high priority to establishing payments and fiscal discipline, a n d t o accountability in the public sector. Budget preparation, execution, and auditing improved, and a l l extra- budgetary funds w e r e incorporated i n t o the state treasury accounts. Agricultural sector reforms included t h e dissolution of collective farms as legal entities, the distribution of land to new private owners, a n d t h e creation of rental markets. A simplified tax regime was intro- duced for small business a n d entrepreneurs. Subsidies t o loss-making firms were cut sigruficantly. 1.8 Ukraine’s economic performance improved substantially after 1999. The economy enjoyed seven consecutive years of g r o w t h be- tween 2000 and 2006 (see Figure l), during w h i c h GDP expanded by more than 60 percent. G r o w t h was due to improved macroeconomic policies a n d management, highly favorable external environment, and a revival of t h e country’s traditional industrial base. The devaluation of 1998-99, together with t h e revival of g r o w t h i n Russia a n d the w o r l d economy, increased demand for some of the traditional metal- based industries of Ukraine, which h a d ample spare capacity follow- ing the large declines i n production of the 1990s. Ukraine’s strong trade performance has made a major contribution t o recent economic recovery and growth acceleration i n the country. 1.9 Monetary policy gradually succeeded in reducing inflation. The introduction of a new currency, the hryvnia, in 1996 and its use as a n exchange rate anchor contributed t o stabilization. Inflation de- n 2003. The nlate 1990s t o 5 percent i clined f r o m three-digit levels i Ukrainian government and t h e central bank (National Bank o f Ukraine, or NBU) did n o t resort t o major credit expansion as a means 2 1 CHAPTER BACKGROUND of financing budget deficits o r p r o p p i n g up struggling banks. NBU credits to the government contracted sigruficantly between 1999 and 2002. The strong commitment to stabilization enabled the government to obtain several k e y foreign debt restructuring agreements during this period, thus restoring the solvency of the country. Public debt de- clined f r o m 67 percent of GDP in1999 t o 25 percent in 2004. Figure 1. Growth Rates, 1990-2005 (annual percentage) 1501 2004 2001 2006 2000 2 50 2005 ooi !2 -5 0 1 -100 - -15 0 - -25 0 1994 1 B GDP Growth (%) ~ Source: WB ECA regional tables, September 2006. 1.10 Ukraine's economic decline during the 1990s took place in a complex political environment, characterized by p o w e r struggles among the emerging political and economic groups, a n d between dif- ferent branches of government. Privatization of state-owned assets, i n c l u d i n g banks, industrial enterprises, u r b a n a n d r u r a l land, and trading monopolies, resulted in serious governance problems as w e l l as the emergence of an "oligarch" class often closely associated with political groups a n d i n d i v i d u a l members of the Rada (Parliament). The governance issues were b o t h a cause and an effect of the p o o r economic policy a n d performance in the 1990s. They were partially addressed by the reforms introduced after 1999, but they have re- mained a source o f problems. 1 .11 The p e r i o d u n d e r r e v i e w i s characterized by several govern- m e n t changes (even with continuity in a strong presidency until the 2004 elections) and frequent gridlock between the executive a n d Par- liament, w h i c h slowed progress in institutional reforms. This p e r i o d also saw continued concentration of economic p o w e r in the hands of several business groups who h a d benefited f r o m the acquisition o f state assets under p o o r governance conditions. 3 1 CHAPTER BACKGROUND 1.12 Ukraine’s political landscape was dramatically changed by the presidential election of 2004 and the subsequent events that l e d to a repeat election (and became known as the “Orange Revolution”). The former reformist Prime Minister (of 1999-2000) Viktor Yushchenko emerged as the winner i n the repeat election, and was inaugurated as president o n January 23,2005. The new administration announced that accession t o membership i n the European U n i o n (EU) was ’ Ukraine’s top priority. An ambitious program was announced t o de- liver sustained growth, improve t h e efficacy of the state institutions, fight corruption, advance social inclusion, and deepen Ukraine’s evo- l u t i o n into a modern democratic society. 1.13 The promise of a new beginning and of accelerated reforms, both economic and political, in the so-called ”Orange Agenda” was gradually dampened during 2005 and early 2006 because of political gridlock inside the Rada, and infighting within the parties in t h e Or- ange coalition following t h e March 2006 parliamentary elections. Formation of a n e w government took several months after the 2006 elections, leading t o a further slowdown in reforms. 1.14 As previously noted, t h e rapid GDP growth of 2000-2004 h a d a major positive impact o n poverty reduction (mainly urban), as well as o n the depth and strength of the financial sector and the housing sec- tor. Inthe most recent years this was associated with an increase in foreign direct investment (FDI), particularly in the banking sector (mainly through acquisitions) as well as in the steel sector (with t h e re-privatization of a large steel mill). 1.15 Even after t h e impressive output performance of the early 2000s, however, Ukraine’s per capita income remains below the Europe and Central Asia (ECA) average and below Belarus, Poland, Romania, Russia, and Turkey. Moreover, by 2005 it was s t i l l below its 1991 level. On t h e other hand, Ukraine’s social and poverty indicators are generally better than those of t h e comparator countries (see Table 1below). 1.16 Several events in 2005 l e d to a slowdown i nGDP growth to 2.5 percent and a n increase in annual inflation to 13.5 percent. These in- cluded a sharp slowdown i n export growth (reflecting an appreciating real exchange rate and slowing global demand, including for metals), an increase in energy prices (from Russia’s oil and natural gas), a weakening of the fiscal performance during 2004 (prior to the elec- tions), and post-Orange-Revolution reforms (which clamped d o w n o n tax loopholes, smuggling, and corruption). Reflecting a redistributionist shift infiscal policy, average public wages and pensions were raised by over 50 percent. 4 1 CHAPTER BACKGROUND Table 1. Economic and Social Indicators for ECA Countries Ukraine Belarus Poland Romania Russia Turkey ECA GDP per capita (current US$) (2005)a ~ 1,718.0 3,033.2 .....,....... ~ ~ 7,945.1 4,554.3 5,328.8 5,086.5 4,721.6 ......... GDP per capita (constant 2000 US$) (2005) 959.2 1,868.0 5,194.4 2,258.9 2,443.9 3,389.8 2,603.6 Poverty headcount ratio (YOof population) (200212003)b 22.2 21.4 27.2 62.0 41.4 59.3 Rural population (% of Total Population) (2005) 32.2 ~ 27.8 37.9 " 46.3 27.0 32.7 36.3 Electric Dower consumdion (kWh Der capita) (2003) 2,997.9 3,039.1 3,329.1 2,220.7 5,480.0 1,656.0 3,531.3 Unemployment,total (% of total labor force) (2003)c 9.1 .. 19.6 7.0 8.6 10.5 10.6 School enrollment, primary (gross YO)(2004) 94.8 101.2 98.9 106.5 122.9 93.3 103.6 School enrollment, . .. secondary (gross %) (2004) ~ " 92.9 93.5 ~ 96.7 ~ 85.1 ......... 79.2 92.9 . .......... . ." 90.5 .............. School enrollment, tertiary (gross %) (2004) 65.5 60.5 61.0 40.2 68.2 29.0 49.8 Source: WB internal database as of April 2007 except where indicated. a. From WB ECA regional tables, September 2006. b. From Ukraine Poverty Assessment: Poverty and hequality in a Growing Economy, December 2005, Table 1.3. c. For Russia and ECA 2002 data are the most recent. 1.17 Economic activity rebounded strongly i n2006, with GDP growth estimated a t 7.1 percent, w h i c h demonstrates the considerable resilience of Ukraine's economy. The negative impacts of h i g h e r gas prices on the economy were less t h a n anticipated a n d pass-through of r i s i n g energy prices to consumers a n d producers assisted i nimprov- ing energy efficiency-Ukraine has one of the l o w e s t levels of energy efficiency i nthe world. The current account switched from large sur- pluses to a s m a l l deficit. At the same time, capital inflows, FDI i n par- ticular, h a v e been buoyant, reflecting i m p r o v e d perceptions of U k r a i n e as an investment location. Fiscal p o l i c y continued to support macroeconomic balance a n d the general b u d g e t deficit w a s contained a t 2.5 percent of GDP. I n f l a t i o n s l o w e d to single digits. 1.18 O v e r v i e w of t h e Report. This r e p o r t evaluates the Bank's as- sistance to U k r a i n e during the p e r i o d from fiscal 1999 to fiscal 2006. Bank assistance to U k r a i n e between 1992 a n d 1998 w a s evaluated previously by IEG (see Box 1).Chapter 2 reviews the Bank's strategy a n d p r o g r a m during this period. Chapter 3,4, and 5 assess the extent to w h i c h the Bank p r o g r a m objectives h a v e b e e n achieved. Chapter 6 assesses the outcomes against overall objectives, i n c l u d i n g t h e sus- tainability o f results, and t h e institutional development i m p a c t of Bank assistance. This chapter also provides m a i n lessons and recom- mendations. 5 CHAPTER 1 BACKGROUND Box 1. Recommendationsof the Previous CAE The W o r l d Bank Group’s assistance to Ukraine between 1992 and 1998 was previously evaluated in the 2000 Country Assistance Evaluation. The CAE found that the country assistance strategy was relevant in terms of proposing a “graduated a p p r o a c h to providing Bank lending. That is, the Bank w o u l d lend only w h e n the government demonstrated willingness to reform and the capacity to use the funds provided. It noted that some progress h a d been made in privatization, trade, and price liberalization, but progress i n other areas h a d been limited. The C A E concluded that the Bank h a d often overes- timated the government’s implementation capacity and the speed with which the economy w o u l d respond to changes in the incentive structure a n d policy environment. The following lessons emerged f r o m the evaluation: ( ireforms ) might n o t realize their intended supply response because of counter-activities by vested interests; ( ithe i) essence of the reform agenda i n Ukraine is to change and re-orient the role of government and public ad- ministration in the economy; ( iii ) Bank should promote public education the about reform t o build social consensus; (iv) the Bank should broaden the range of partners and stakeholders involved i n cases n its activities; and (v) i of limited consensus for reform, lending should be targeted either toward the poorest groups or small demonstration projects. Source: IEG. 2000. Ukraine CAE, Report No. 21358. NOTES 1. Independent Evaluation Group. 2000. Ukraine: C o u n t y Assistance Evalua- tion. Washington, D.C.: The W o r l d Bank. Bank. 1999. Ukraine: Restoring Growth w i t h Equity - A Participatory 2. W o r l d Country Economic Memorandum. Washington, D.C.: The W o r l d Bank. World Bank. 2000. Country Assistance Strategy for Ukraine. Report N o . 3. 20723-UA. Washington, D.C.: The W o r l d Bank. 4.IMF. 2005. ”Ukraine: 2005 Article I V Consultation and Ex Post Assessment of Longer-Term Program Engagement -Staff Reports; Staff Supplement; and Public Information Notice o n the Executive Board Discussion.” IMF Country Report No. 05/415. Washington, D.C.: IMF. 6 2. The World Bank Program in Ukraine Strategy 2.1 F r o m fiscal 1999 to fiscal 2006, the W o r l d Bank’s assistance to Ukraine was guided principally by two CASs, in 2000 and 2003, as w e l l as C A S Progress Reports (CAS PR) i n 1998 (an internal Bank docu- ment), 1999, and 2005. W h i l e there was some variance over time, the dominant and consistent themes and objectives were: ( i) achieving sus- tainable economic growth and integration i n t o the w o r l d economy; ( ii) restructuring the public sector, and achieving i m p r o v e d transparency and accountability; and ( iii) poverty reduction, comprehensive h u m a n development, and reduction of regional imbalances. Inthe first half of the period under review, the Bank also identified the environment as a major area where assistance was needed, i n c l u d i n g industrial pollution, hazardous waste, air and water pollution, land erosion, and threats to biodiversity. Environment has been included in the overall growth agenda (see Box 2). Box 2. Country Assistance Strategy in Ukraine Pillar One: Achieving Sustainable Economic Growth and Integration into the World Economy (i)Consolidate macroeconomic stability and establish the conditions for long-term fiscal sustainability ( ii)Financial and private sector development ( iii) Develop a financially viable energy sector (iv) Support environmental sustainability (v) Gradual integration into the w o r l d economy Pillar Two: Restructuring of Public Sector, Improved Transparency, and Ac- countability ( i)Governance, transparency, and accountability (ii) Improved public financial management Pillar Three: Poverty Reduction, ComprehensiveHuman Development, and Reduction of Regional Imbalance (i) Poverty reduction, social protection and safety nets ( ii)Comprehensive human development (education and health) (iiD Reduction of regional imbalances 7 CHAPTER 2 THEWORLD BANKPROGRAM IN UKRAINE 2.2 The CAS documents reflect the conditions i n Ukraine during the different periods summarized i nt h e previous chapter, and t h e Bank’s adaptation of its assistance strategy to these changing condi- tions. Within the CAE period there were three sub-periods: The period f r o m 1999 until mid-2000, including the aftermath of t h e 1998 crisis and the emergence of new reform initiatives was covered by the two CAS Progress Reports in the late 1990s. The mid-2000 to late 2003 period was guided by the 2000 CAS. The period started with high expectations and an ambitious Bank program following t h e appointment of a reformist government l e d by Mr. Yushchenko. However, the expectations were not fully m e t and the actual Bank program was much smaller than an- ticipated. The third period, covering f r o m late 2003 to 2006, was charac- terized by rapid economic growth but more modest expectations for further economic reforms i nanticipation of the 2004 presidential elec- tions. Bank assistance i nthis period remained largely unchanged and the objectives were re-formulated in the 2003 CAS, with a less explicit emphasis o n governance. The Bank assistance program was further ad- justed in the progress report of mid-2005, at yet another point of high optimism i nthe aftermath of the ”Orange Revolution” and an ambi- tious government agenda. 2.3 The 2000 CAS: Focus on Governance. The Bank’s 2000 CAS was influenced by three major factors. For the first t i m e since the post-Soviet transition, Ukraine’s economic growth and macroeconomic performance had started to improve. Second, following his re-election in November 1999, President Kuchma indicated his commitment to economic reform by appointing a reform-minded p r i m e minister and cabinet, and by pro- ducing the Government Program of 2000. Thus, a review of the experi- ences of the previous CASs l e d the Bank to develop a new operational strategy to address past shortfalls in the Bank’s assistance program, in- cluding the l i m i t e d results of sector adjustment operations. The change incountry strategy and diagnosis of the program’s past shortcomings were supported by the findings of the Independent Evaluation Group (IEG) 2000 CAE. 2.4 The 2000 CAS aimed to tackle the governance and institution- buildingchallenges faced by Ukraine f r o m t h e demand side (civil so- ciety) and f r o m t h e supply side (government). The strategy also sought to move Ukraine closer t o European U n i o n standards, foster- ing environmentally sustainable development. This CAS adopted, as its ”flagship,” a series of programmatic lending operations (the pro- grammatic adjustment loan, or PAL, program) emphasizing t h e ”cross-cutting nature of the institutional and governance problems af- fecting Ukraine’s performance.” The framework for the PAL program h a d five thematic areas: ( i) financial discipline in public and private sectors, (ii)improvements in the regulatory framework for business, ( ii i) transparent definition and protection of property rights, 8 CHAPTER 2 THEWORLD BANKPROGRAM IN UKRAINE (iv) p u b l i c sector accountability a n d effectiveness, a n d (v) m i t i g a t i o n o f the social costs of transition a n d improvements in the delivery o f social services. The demand side of the p r o g r a m was ambitious, with a variety o f planned projects t o support c i v i l society’s d e m a n d f o r bet- ter government, and others t o strengthen land ownership. This com- p o n e n t also i n v o l v e d surveys a n d consultations to enhance the in- volvement and voice of l o w e r levels o f government, c i v i l society, a n d the private sector in the process of development. 2.5 The 2003 CAS: Reframing Governance in a Broader Context. The 2003 C A S h a d m o r e l i m i t e d ambitions, based o n m i x e d experi- ence with implementation o f the 2000 C A S a n d the expected slow- d o w n in reforms i n the p e r i o d preceding the presidential elections in 2004. Second, and m o r e importantly, governance and institutional h e l - opmenf were reframed in 2003 by a d o p t i n g the same objectives as those of the government program’s ”European Choice,” governance was put into a broader context along the lines of seven m a i n objectives i n the government’s program. In spite of the major change i npresenta- t i o n of C A S objectives, the choice o f instruments remained largely un- changed, p a r t l y d u e to slow progress in project preparation and im- plementation during the 2000 C A S period. Many projects planned f o r the earlier C A S p e r i o d h a d n o t y e t been a p p r o v e d a n d continued un- der preparation. M o r e importantly, the 2003 C A S chose t o m a i n t a i n the PAL p r o g r a m as the m a i n instrument for Bank assistance, com- plemented by investment projects. 2.6 The 2005 C A S Progress Report maintained the focus of the previous country assistance strategy. The Orange Revolution b r o u g h t in a n e w government, which re-emphasized the European Choice i n i t s p r o g r a m ”Meeting the People.’’ The government’s 2005 p r o g r a m focused o n i m p r o v i n g the public sector, the investment climate, a n d transparency. Accordingly, the Bank’s 2005 CAS Progress Report placed additional emphasis o n governance. Adjustment l e n d i n g has continued t o b e a t the center of Bank assistance strategy as a Devel- opment Policy L e n d i n g (DPL) program, and sigruficant changes were p l a n n e d t o investment l e n d i n g to respond t o the persistent portfolio implementation problem. Assessment of the Strategy 2.7 The Bank‘s country assistance strategies were relevant to the k e y development constraints facing Ukraine, notably institutional weaknesses and poor governance, and were consistent with the gov- ernment’s objectives. Given the importance of building effective institu- tions capable of supporting the needed economic reforms, the explicit attention to governance and institutional development in the 2000 CAS was of central relevance. The continued focus on governance and 9 2 CHAPTER THEWORLDBANKPROGRAM IN UKRAINE institutional development i n subsequent Bank strategies, albeit cast within a more general context of aspirations t o integrate more closely with Europe, remained relevant despite somewhat more indirect focus o n this theme. Also, while the CASs clearly stated the weaknesses in previous government performance in many areas, the Bank consis- tently overestimated the government's capacity and commitment to in- stitutional reforms in the ensuing period. This was notably the case for the pace of reform, the prospects for improved governance, and public administration reform. Finally, although each successive CAS and the 2005 Country Assistance Strategy Progress Report acknowledged con- tinuing problems with the preparation and implementation of invest- ment projects, there were n o changes inthe way this part of the pro- gram was planned and carried out. Lending Program 2.8 In general, lending scenarios in the Bank's strategies were op- timistic. During the review period, expected lending under t h e base cases was almost $5.4 billion. Actual commitments were m u c h lower (see Table 2). Inthe 2000 CAS, t h e expected base-case lending was $1.8 billion, but only one-third of this amount was committed. Pro- gram implementation was slower than expected, as t h e pace of reform slowed down, which affected adjustment lending, and problems were encountered with the development of investment projects. For the last three years of t h e review period, the expected lending in the 2003 CAS and 2005 Progress Report was $2.2 billion, but actual commitment was only $975 million. Table 2. IBRDADA Expected Base Case and Actual Commitments, FY99-FY06 (US$ millions) 98PR 99PA 2000CAS I 2003CAS I 05PR FY99 FYOO FYOl FY02 FY03 FY04 FY05 FY06 Total Expected lending 935.0 415.0 531.0 735.0 550.0 535.0 765.0 925.0 5,391.0 Actual lending 600.0 18.3 52.5 330.2 300.1 282.0 192.6 500.7 2,276.4 2.9 During the entire CAE period, the Bank financed 19 operations totaling $2.3 billion, including five adjustment loans amounting to $1.4 billion (or about 60 percent of commitments) and 14 investment operations accounting for $925 million or about 40 percent of com- mitments (see Figure 2). In terms of disbursements, adjustment loans accounted for about 80 percent of total disbursement and investment loans for only 20 percent. 10 CHAPTER 2 THEWORLD BANKPROGRAM IN UKRAINE Figure 2. IBRDllDA Lending to Ukraine, FY93-FYO6 1200 S 1993 I 94 1995 1996 1997 1998 1999 2ooo 2001 2002 2M)3 2004 2005 2006 I Source: WB internal database as of April 2007. 2.10 Sector Distribution. The sectoral allocation of l e n d i n g i nthe CAE p e r i o d w a s generally consistent with the proposed strategy (see Table 3). The largest share of l e n d i n g was allocated to p u b l i c sector governance (35 percent). This largely reflects the classification of the PAL program and DPL i nthis category, although they did cover several sectors. T h e financial sectors and private sector development w e r e also important, with shares of 20 percent and 15 percent i ntotal lending. M o s t of t h e ad- justment loans were primarily targeted a t achieving the objectives of the first and second pillars of the Bank's program. The dominance of the en- ergy sector declined in parallel with the shifting priorities of Bank strat- egy over the period. Sizeable resources were allocated to the rural sector. The Bank also allocated resources in the social protection and health Table 3. Composition of Bank Lending % of % of Total lending (US$ M) Fy93-98 Total lending FYg9-06 Total lending Economic policy ...................................................... ....... 570.0 26 32.0 1 .............................................................................................................................................................................................................. Education .......... 86.6 4 .. Eners>l.anFl.m!n!nI.!n!n . . .s 946.8 43 .............................................. 152.5 7 ... .............................................................................................................. ..... ............................................................................... ......Financial sector................................................................................. _. ............. ..................................... 450.0 20 and population ........................................................................................................................................................................ ................................................................................................................................................. Private sector development .............................................................................................. 310.0 .......... 14 .................................................. 15 ............... 335.0 Public sector governance ........................................................................................................ 43.4 .......................................................................... 2 791.3 35 .... .................................................................... Rural sector ................................................................................................. ....... ................................................................................................................................. ^ 332.0 15 195.1 9 Social protection ................................................................................................... 2.6 149.6 .......................................................................................................................................... 7 . Urbanlwater 17.0 1 24.3 1 Total commitments 2,221.8 100 2,276.4 100 Adjustment 1,410.0 63 1,351.3 _.................................................................................................................................................................................................................................................................* 59 .................. investment 811.8 37 925.1 41 Source: WB internal database as of April 2007. 11 2 CHAPTER THEWORLD BANKPROGRAM IN UKRAINE sectors to develop the institutional structures needed to set up a nation- wide system of targeted social assistance and to control the growth of TB and AIDS. Ineducation, the first Bank project was approved in 2005 for improving the quality of education, management, and resource utiliza- tion. 2.11 Adjustment Lending. A s noted earlier, the Bank relied heavily o n adjustment lending to achieve t h e m a i n objectives set out in t h e CAS documents. The broad policy and institutional r e f o r m agenda was supported through multiple adjustment loans. The Bank strategy in adjustment lending shifted f r o m t h e sector adjustment operations (such as the Financial Sector Structural Adjustment Loan a n d Second Enterprise Adjustment Development Loan) that were part o f the 1996 CAS program, to a series of multisector adjustment loans introduced in the 2000 and 2003 CASs (the Programmatic Adjustment Loans - PALSI and I1-and the Development Policy Loan- DPL I). 2.12 Although this was a smaller program than anticipated in the CASs, the five adjustment operations constitute t h e most successful component of t h e Bank’s lending program. The f i r s t two adjustment operations, the Second Enterprise Development Adjustment Loan (EDAL 11) and Financial Sector Adjustment Loan (FSAL), h a d been un- der preparation for some time w h e n the 1998 crisis generated an urgent need for financial support and a w i n d o w of opportunity for economic reforms. The government concluded a long-discussed Extended F u n d Facility (EFF) arrangement with the I M F shortly after the government responded to the crisis with a package of reform measures, which in- cluded a substantial devaluation, and E D A L I1 and FSAL were also ap- proved at the time as part of the package of international financial sup- port. The FSAL second and third tranches experienced delays and some shortcomings (which required a waiver and were later picked up n the benchmarks for PAL I), but overall, the financial sector was i strengthened during the CAE period more than anticipated by the FSAL. The objectives of E D A L I1were also achieved. 2.13 The PAL operations, under t h e 2000 CAS, were also success- ful, although there w e r e shortcomings o n the privatization of the elec- tricity sector, o n the transparency of the privatization process, and o n l a n d tenure reforms. PAL I took longer to implement than originally anticipated. The second tranche o f PAL I1experienced further delays related to the political turmoil a n d slowing d o w n of reforms (as w e l l as some backtracking) in t h e run-up to the 2004 elections a n d their af- termath, and was disbursed only after the new government took of- fice in 2005. Another adjustment operation (DPL I )was approved as a single-tranche operation in fiscal 2006, in l i e u of the originally in- tended PAL 1 11. It was based o n measures already implemented by the new government after taking office. 12 2 CHAPTER THEWORLD BANKPROGRAM IN UKRAINE 2.14 Investment Lending. In contrast to adjustment lending, the n U k r a i n e continues to face ma- Bank's investment l e n d i n g portfolio i jor challenges. The Bank's p r o g r a m emphasized investment opera- tions with a strong focus on institutional development to support ad- justment operations. T h e Bank stayed a w a y f r o m infrastructure since this was n o t a constraint t o growth, particularly i n the 1990s, but it did make social sectors a priority. 2.15 Investment lending was spread across several sectors, with the largest share allocated t o the r u r a l sector under the LandTitling and Cadastre Project. The flagship of the Bank's strategy i nthe health sector was the T B / H N - A I D S project to assist in dealing with r i s i n g incidence of A I D S and tuberculosis. The Bank also p r o v i d e d loans to i m p r o v e so- cial service delivery and social assistance (Social Investment Fund and Social Assistance System Modernization). A small technical assistance project (Treasury Systems) was prepared to establish a n automated fi- nancial and cash management system i nthe Treasury. In the energy sector, the Bank m o v e d to smaller investment operations f o l l o w i n g the failure of the Electricity M a r k e t Development Project. 2.16 Investment operations focusing o n institutional change experi- enced implementation difficulties and the country's complex public administration was p a r t l y responsible for these difficulties. The lack of a well-articulated public legal framework for finance management that was integrated i n t o the budget l a w for public investment p r o g r a m m i n g created further difficulties for project implementation. 2.17 Portfolio Perjfomzance. According to IEG evaluations, 96 percent of the projects, by value, that exited the portfolio between 1999 and 2006 h a d satisfactory outcomes, compared to 81 percent o f the projects i nthe ECA region and 80 percent i nthe Bank as a whole (see Table 4). This reflects m a i n l y satisfactory outcomes o f adjustment lend- ing. All seven adjustment loans, amounting to $1,970 million (or 86 per- cent of exited portfolio) were rated as "satisfactory" by IEG. By con- trast, o n l y 71 percent of the investment projects h a d satisfactory outcome rating, w e l l b e l o w the ECA region and Bank average, and this figure excludes the Sevastapol H e a t Supply project, w h i c h was can- celled a t the request o f the borrower before the l o a n became effective. 2.18 With respect to institutional development impact, 70 percent of the adjustment operations were considered t o have substantial in- stitutional development impact (59 percent for ECA; 54 percent Bankwide), a n d o n l y 32 percent o f investment projects were rated as substantial i n this dimension, w e l l b e l o w the ECA r e g i o n a n d Bank- w i d e averages. Sustainability was considered l i k e l y f o r 85 percent of adjustment operations (by value), similar t o the Region and Bank- wide, but f o r investment lending, the figure was o n l y 63 percent, m u c h l o w e r than the ECA region a n d Bankwide averages. 13 2 CHAPTER THEWORLD BANKPROGRAM IN UKRAINE Table 4. IEG Project Ratings, FY99-FY06 Total evaluated Outcome % lnstitutional development Sustainability ($M) satisfactory ($) impact % substantial ($) % likely ($) Ukraine 2.285 96 64 82 Adiustment 1.970 100 70 85 ......... Investment . 315 . 71 32 ......... 63 ....................... Poland .............................. 2,142 ....................... 95 66 90 .................................................................................................................................................. Romania 2.237 82 75 86 Russia 5.195 45 31 75 Turkey ..... " 5,673 92 66 91 ECA .... ...... _" ^ " -_ 25,223 ............. 81 59 86 World Bank 152.058 80 54 81 Source: WB internal database as of April 2007. 2.19 The current portfolio, consisting of 12 projects at the end of fis- cal 2006, showed 25 percent of projects at risk, w e l l above the regional and Bankwide averages. Although several projects are in the early stages of implementation, supervision reports reveal some basic de- signs and implementation problems as w e l l as substantial delays. Fol- lowing an investment portfolio review infiscal 2005, the region initi- ated a program of portfolio improvements, including temporary suspensions, restructuring, and early closing of projects that are not yet achieving expected development objectives. Efficiency of Lending 2.20 Projects take longer t o prepare in Ukraine compared to the ECA region and t h e Bank average. Elapsed time f r o m preparation of project concept document (PCD) to loan approval has averaged al- most twice that of t h e region and t h e Bank: in Ukraine i t was 28 months, ECA 16 months, and Bankwide 15 months (see Table 5). Lending completion cost was 55 percent higher than the Bank average and 40 percent higher than t h e ECA region (see Table 5). Inaddition, many lending operations were halted at various stages of preparation by the Bank or droppedby the gov- Table 5. Average Lending Cost and e r n m e n t during negotiations. Dur- Time, FY99-FYO6 (per project) ing the period f r o m fiscal 1999 to Lending completion cost IS'OOOl fiscal 2006, a total of 22 projects Ukraine 532 have been dropped i n Ukraine at a ECA 372 cost of almost three times the Bankwide and ECA region averages Bankwide 347 (see Figure 3). There was also a pro- Lag between PCD and board IMonthl ject cancelled after Board approval Ukraine 28 without any disbursement.' ECA 16 Bankwide 15 2.21 Furthermore, projects are slow to disburse. The average dis- Source: WB internal database as of April 2007. bursement ratio for the overall 14 CHAPTER 2 THEWORLD BANKPROGRAM IN UKRAINE portfolio during t h e CAE Figure 3. Cost of Dropped Projects, period was only 7.6 per- FY99mFYO6 (% of total budget) cent (see Figure 4). This ratio is very l o w com- pared to t h e ECA re- 8 gion's average of 7 18.6 percent and the 6 5 Bankwide average of 4 21.1 percent for the same 3 period. It is w o r t h men- 2 tioning that infrastruc- 1 0 t u r e projects in Ukraine Ukraine ECA Bankwide have disbursed at Bank averages. In2004, t h e Source: WB internal database as of April 2007. disbursement ratio for investment projects was only 3.3 percent, the average rate 33 2 was 18 percent. 35 30 2.22 Theportb 25 l i o review con- 20 ducted by the re- 15 gion in fiscal 2005 10 found that some of the difficulties en- 0 countered by in- Ukraine Belarus Poland Romania Russia Turkey ECA Bankwide 15 CHAPTER 2 THEWORLD BANKPROGRAM IN UKRAINE 2.23 T h e Bank d e v o t e d a total of $11.9 million to l e n d i n g and s u p e r v i s i o n in t h e U k r a i n e program from fiscal 1999 to fiscal 2006 (plus another $2.7 million in d r o p p e d projects). Of that amount, m o r e than 76 percent w a s spent on i n v e s t m e n t projects (and n e a r l y 81 per- cent i n c l u d i n g d r o p p e d projects) w h i l e less than 24 p e r c e n t w a s spent on adjustment l e n d i n g (only 20 percent w h e n d r o p p e d projects are in- cluded). S p e n d i n g 80 percent of t h e l e n d i n g and s u p e r v i s i o n b u d g e t on projects that generated some 20 percent of disbursements and pos- s i b l y a smaller share of t h e achievements w a s o n e of t h e major w e a k - nesses of t h e Bank's p r o g r a m in U k r a i n e during t h e CAE p e r i o d . Overall, i n v e s t m e n t l e n d i n g in p a r t i c u l a r h a s not b e e n efficient. 2.24 T h e I n t e r n a t i o n a l Finance Cooperation's (IFC) strategy and p r o g r a m i s assessed in Box 3. Box 3. IFC Operations in Ukraine IFC's strategy, i t s context, content, a n d relevance. Ukraine's pre-eminent private sector development needs were to create a private sector as s u c h and to improve the business climate. IFC's strategic response consisted of a con- centrated initial thrust in the area of advisory operations, focusing o n priva- tization advisory assignments and post-privatization support and proceed- ing to engage in policy dialogue to improve the regulatory framework and the protection of property rights as a precondition for increased investment activity. As a consequence of the economic and political uncertainty, IFC's strategies h a d a relatively short-term outlook. IFC's pursuit of its strategy. IFC's ongoing operations and immediate priori- n the area of advisory work were accurately reflected i ties i n the country assis- tance strategies and duly followed up on. As the small-scale, mass, and unfin- ished construction site privatization agenda was being completed, IFC proceeded to address other rising priorities that pertained to fostering the e m e r p g small and medium enterprise (SME) sector, assisting newly privat- ized enterprises inimproving corporate governance, promoting W a g e s be- tween agricultural suppliers (most of them SMEs) and larger agribusiness en- terprises, improving the business enabling environment, and deepening nFY94- financial markets. Meanwhile, despite s i p f i c a n t promotional efforts i 97, the expected increase in IFC's investment activity did n o t materialize until FY0405 when country conditions h a d sufficiently improved, partly due in turn to IFC's advisory interventions. The performance of IFC investment operations. Despite Ukraine's promi- nent share in IFC's current committed portfolio (Ukraine being among IFC's top 10 portfolio exposures at the end of FY06), only 11o u t of a total of 28 committed investment projects have attained operating maturity enabling full evaluation. The performance of these evaluated projects is better than of those in the rest of ECA region and the rest of IFC, with a n improvement be- tween early projects approved i nFY94-98 and the more recent projects ap- proved in FY2000 onwards. An analysis of the risk profiles of IFC's Ukraine Continued9 99 16 CHAPTER 2 THEWORLD BANKPROGRAM IN UKRAINE Box 3 (continued) commitments shows that o f the risk factors within its control, IFC took justi- fied risks in terms of sector distribution but mitigated the sponsor, project type, and financial structure risks by prudent in-country selection and sound structuring. Moreover, a comparison of FY05-06 commitments to earlier pro- jects shows that the risk concentration for recent projects has improved, pro- viding a n encouraging indication of likely future performance. The performance o f IFC advisory operations in Ukraine. An analysis of IFC's advisory operations shows that IFC was generally able to successfully leverage its resources, mobihzing a total of $55 million in donor funding for 43 operations. Despite being one of a large number of implementing agencies channeling only about 1percent of total donor funding flows to Ukraine, IFC was able both to achieve sustainable results in the majority of the projects implemented (68 percent by number and 71 percent by value) and to build a solid reputation and brand recognition early on. This was especially true for larger and longer advisory assignments due to their strategic relevance; the use of a comprehensive approach (encompassing different levels and types of engagement f r o m policy dialog at the central government level to demon- stration projects at the individual company level, and incorporating substan- tial elements of public education and dissemination); and the sequential "evolutionary" nature of these assignments where subsequent ones build o n the momentum generated by preceding ones. However, lack of government commitment to reform and lack of strategic alignment and tactical co- ordination between donors have h i t e d project impact in a few cases. More- over, smaller assignments lacking the comprehensive framework of the longer and broader programs were only viable insomuch as they addressed a specific need and/or request of an otherwise committed and proactive client. Recommendations f o r future strategy. Going forward, IFC needs to focus its strategies o n medium-term (3-5 year horizon) priorities and follow a more systematic approach to identrfying investment opportunities; w o r k sequen- tially with IBRD to address remaining privatization challenges among larger companies, as w e l l as in infrastructure and municipal utilities; and replicate the strong design of its successful large advisory projects, promote greater donor coordination and cohesion i n its areas of engagement, and exploit synergy models between programmatic advisory and investment operations. Note: IEG-IFC's Ukraine Country Impact Review was prepared concurrent with t h i s CAE. However, since there was n o previous evaluation conducted o n IFC operations in Ukraine, the CIR covers the entire period of IFC's engagement starting from FY93 for advisory operations and FY94 for investment operations. Where appropriate, the analysis is separated into FY93-98 and FY99-06 subsets to parallel the timeline o f CAE analysis. Source: IEG-LFC. Nonlending Assistance 2.25 AnaZyticaZ Work. During the r e v i e w p e r i o d t h e Bank p r o d u c e d high-quality analytical work, although the v o l u m e w a s moderate. T h e studies focused on k e y issues such as trade policy, the financial sector, 17 2 CHAPTER THEWORLD BANKPROGRAM IN UKRAINE labor markets, pension reform, regional development, sustainable growth, and budget process. I n2005, the focus shifted t o just-in-time policy notes, to help inform the new administration. The analytical work had strong input f r o m local Ukrainian Bank staff and consultants and was relevant to the discussion of policy and lending at that time. The Bank made substantial efforts to communicate the findings to a wide audience, helping to build a broader constituency for reforms. 2.26 The main reports inthe period, especially the assessment o n fi- nancial accountability, study o n the financial sector, and assessment re- view o n procurement i n2001; public investment and expenditure re- views, fiscal study, and regional study i n2002; country economic memorandum (CEM) and trade policy study i n2004; and the study o n pension reform i n2005 provided t h e analytic underpinning to help gain the support of public officials for the macroeconomic and public sector reforms. Moreover, the social sectors received considerable atten- tion, with major reports o n poverty (Poverty Assessment i n2005), safety nets (Social Safety Nets and Poverty i n2001), agriculture (Agri- cultural Potential in2004), and employment (Jobs Study i n2005). There were also informal reports o n intergovernmental finance and education policy, and informal technical assistance for a joint health sector strat- egy study. Energy sector issues were addressed by a series of policy naddition to two substantive reports o n electricity and gas sub- notes, i sectors that provided support i nthe preparation of loans i n the sector. 2.27 A Q ~ ~ a l iAssurance ty Group (QAG) review was conducted for 10 of the analytical and advisory assistance (AAA) tasks out of the 18 completed i nfiscal 2001 to 2003. One of the tasks was rated highly sat- isfactory, and the remainingnine were rated satisfactory overall. I naddi- tion, internal quality, strategic relevance, and likely impact of the tasks were rated satisfactory overall. The dialogue and dissemination efforts also were rated satisfactory, and the review lauded the Bank for its work increating ownership and involving the community for change. 2.28 Several policy areas could have received greater attention. They include measurement of t h e extent of competition i nthe econ- omy (and hence better understanding the prevailing structures of ownership and control), more emphasis o n understanding the im- pediments to better corporate governance (including banking and nonbanking financial institutions), more understanding (empirical and analytic) of the size and role of the informal or shadow economy and its dynamics, in-depth studies for creating environmentally sus- tainable strategy, analytical framework to promote better business environment for private sector development, and more focus o n health and education. The Bank should have done more o n dissemination. 18 2 CHAPTER THEWORLD BANKPROGRAM IN UKRAINE Partnerships 2.29 The World Bank established partnerships with civil society, European Institutions, other international financial institutions, and bi- lateral donors in Ukraine over the CAE period. Inparticular, there was consistent attention to building links to civil society through engage- ment with nongovernmental organizations (NGOs). This both recog- n i z e d the importance of wider engagement and supported the demand for better governance and reform among the population and pressure groups. This effort grew with the government’s inconsistent willing- ness to engage in policy dialogue and with the increasing perception that changing the structure and behavior of the public sector was key to a sustained program of reform. However, while the Bank made a con- sistent attempt to engage with NGOs, it i s n o t clear h o w deep this en- gagement ultimately proved to be. Interms of geographical coverage, it seems that much of the engagement was i nKiev, the capital, and that relatively l i t t l e occurred elsewhere. There appears to have been little engagement with groups or organizations in the east of the country, in particular, where opposition to reform-as w e l l as the existence of powerful entrenched business interests -was particularly strong. 2.30 The World Bank collaborated well with other international fi- nancial institutions, particularly the IMF. The Bank and I M F proceeded generally i n a coordinated fashion, but the t w o institutions’ roles changed over time. Overlapping conditionality was used for key re- forms, such as conducting an audit of the state energy company, com- pleting audits of large banks, and selling gas through cash auctions, and the combined leverage helped to achieve some progress in these areas. W h e n the Bank program stalled i n 1998, the IMF stepped up its efforts to promote structural reforms. The Bank team was able to steer I M F programs toward priority structural reforms and provide the technical backup to support their design. The Bank’s work o n public expenditure management, tax administration, energy pricing, and agri- cultural subsidies was reflected in the structural benchmarks for the I M F program. A shift in responsibilities for structural reforms back t o the Bank occurred in 2000. 2.31 An I M F evaluation of its o w n programs in Ukraine noted that it h a d a complex relationship with the government, with very mixed re- sults. The last I M F disbursement occurred i n2001. I M F h a d a precau- tionary standby agreement in 2004, but it was closed without any re- view due to disagreement o n t h e fiscal stance and issue of exchange rate flexibility. W h i l e the Fund h a d n o formal program relationship, the Bank approved two adjustment loans in 2003 and 2005. But the Bank sought the IMF’s views o n both occasions, through assessment letters. By 2005 the I M F h a d n o active lending program with Ukraine. Nevertheless, there was good collaboration between the World Bank and the I M F over this period, particularly o n macroeconomic policy. 19 CHAPTER2 THEWORLD BANKPROGRAM IN UKRAINE The Bank’s decision to maintain a more active engagement with Ukraine during the turbulent period after the elections of 2004 was npromoting policy dialogue and maintaining, or increasing, helpful i the Bank‘s intellectual influence at a time w h e n the government h a d limited dialogue with the IMF. 2.32 T h e W o r l d Bank also collaborated closely with European Insti- tutions and the European Bank for Reconstruction and Development (EBRD) during t h e CAE period. The Bank’s assistance program was aligned with the EU-Ukraine Action Plan, and the Bank and the Euro- pean Commission collaborated closely o n assisting Ukraine i n plan- ning and implementing policy and institutional reforms. T h e EBRDs m a i n contribution has been the funding o f projects in b o t h public and private sectors, including some equity investments. The EBRD fo- cused initially o n the energy sector a n d established t h e Energy Sector Task Force (ESTF) with the Ukraine authorities. The ESTF became one of the m a i n channels for EBRD to engage i n policy dialogue with the authorities to reform the energy sector. In2000, EBRD started t o focus o n strengthening t h e financial sector and supporting the needs of small and medium enterprises (SMEs); promoting t h e commercializa- t i o n and structural reform of public utilities; i m p r o v i n g energy effi- ciency and supporting the transition of t h e enterprise sector, espe- cially agribusiness. The EBRD recently started to finance priority projects i n t h e public sector, including transport, energy, safety, and modernization measures at the two nuclear reactors, a n d municipal infrastructure sectors i n 2004. The W o r l d Bank and EBRD also jointly financed t h e Business Environment and Enterprise Performance Sur- vey (BEEPS) i n Ukraine. 2.33 T h e Canadian International Development Agency (CIDA) has n implementing t h e People’s b e e n an important partner to t h e Bank i Voice Project (PVP), while the U.K. Department for International De- velopment (DFID) has provided support o n public administration re- f o r m program management. The U.S. Agency for International Devel- opment (USAID) and Technical Assistance to the Commonwealth of Independent States (TACIS) have been actively w o r k i n g with the Bank o n c i v i l service reform and energy sector. The Swedish Interna- tional Agency (SIDA) provided support o n efficiency reviews i n the government. ~~ ~ ~ NOTES 1Sevastapol Heat Supply ImprovementProject. . 2. World Bank. 2005. Ukraine: Investment Lending Review. 20 3. Achieving Sustainable Economic Growth and Integration into the World Economy 3.1 T h e k e y objectives of t h e f i r s t p i l l a r of t h e Bank assistance strategy - a c h i e v i n g sustainable growth and i n t e g r a t i o n into t h e world e c o n o m y - w e r e to (i) consolidate macroeconomic stability and establish t h e conditions for l o n g - t e r m fiscal sustainability, ( iii) mprove t h e business e n v i r o n m e n t and strengthen t h e financial sector, ( iii ) de- v e l o p a financially viable energy sector and i m p r o v e infrastructure, (iv) s u p p o r t e n v i r o n m e n t a l sustainability, a n d (v) ensure g r a d u a l in- tegration into the world economy. 3.2 A l a r g e share of B a n k activities i nt h e p e r i o d u n d e r r e v i e w s u p p o r t e d these intermediate objectives. Bank l e n d i n g i n s u p p o r t of the f i r s t p i l l a r of the strategy i n c l u d e d f i v e adjustment loans (EDAL 1 , 1 FSAL, PAL I , PAL 1 , and DPL) and f i v e technical assistance (TA) 1 loans. A d j u s t m e n t loans focused, a m o n g other objectives, on macro- economic stability, r e d u c t i o n of t h e fiscal deficit, b a n k i n g sector re- form, a n d privatization. T h e TA loans focused on capacity building a n d i n s t i t u t i o n a l strengthening. T h e Bank also c o m p l e t e d a n u m b e r of highly relevant economic a n d sector studies focusing on growth, the financial sector, agriculture, a n d trade policy. Policy recommenda- tions w e r e incorporated into subsequent l e n d i n g operations, a point a c k n o w l e d g e d by g o v e r n m e n t officials. Supporting Macroeconomic and Financial Sustainability BANKSTRATEGY 3.3 T h e consolidation of macroeconomic stability, p a r t i c u l a r l y i n terms of r e d u c i n g fiscal imbalances, w a s a m a j o r priority i n t h e Bank's c o u n t r y assistance strategies. I m p r o v e m e n t s w e r e to b e m a d e through reductions in expenditure, i m p r o v e d revenue collection, a n d greater fiscal and financial discipline, p a r t i c u l a r l y through closing down t h e flow a n d stock of arrears i n t h e en- n the e c o n o m y and p a r t i c u l a r l y i e r g y sector. T h e benchmarks i n this area, incorporated into PAL Iand PAL 1 1 , i n c l u d e d (i) e l i m i n a t i o n of b u d g e t a r y offsets, ( ii e d u c t i o n of r) b u d g e t a n d tax arrears, ( iii ) increasing t h e p a y m e n t s in cash, of gas 21 CHAPTER 3 ACHIEVING SUSTAINABLE ECONOMIC AND lNTEGRATlON INTO THE WORLD ECONOMY GROWTH a n d electricity customers, a n d (iv) i m p r o v e d p a y m e n t discipline in the energy sector through satisfactory debt resolution. OUTCOMES 3.4 There was good progress increating a stable macroeconomic en- vironment, w h i c h reflected a s l o w d o w n ininflation to single digits, fiscal discipline, and m o r e stable exchange and interest rates. Improvements i n payments discipline and the restriction of arrears h a d generally positive and sigruficant implications for economic activity. Between 1999 and 2006, the Ukrainianeconomy experienced robust growth, with the an- nual g r o w t h rate averaging over 6.5 percent. G r o w t h acceleration cut across sectors and was relatively broad-based with the industry sector growing most strongly. On the demand side, there was a sharp increase inprivate consumption but this was also accompanied by some g r o w t h ininvestment over the period. Even so, consumption remained the main driver of growth, particularly i n2005 w h e n substantial increases i nwage and pension were granted (see Table 6). Table 6. Selected Macroeconomic Indicators 1999 2000 2001 2002 2003 2004 2005 2006 Real GDP ...................... ” growth (YO) .... -0.2 5.9 9.2 5.2 9.6 12.1 2.6 7.1 .”............................................................................................................................................................................................ Inflation (%) ........................................................................................ 22.7 28.2 12.0 0.8 5.2 9.0 13.5 9.1 ................................................................................................................................................................. Fiscal balance (YOof GDPp 44, ....................................................................................................................................... 2. -3.3 . .. ,3g .o ..... ‘33,5 -1.4 0.2 ......47:5”””””’47347545~l.. -1.9 . ,..32:0 -0.9 -4.4 -2.7 -1.3 ^ External debt (% of GDP)b ................................................................................................................................................................................................................................................................ Public debt .......................................... (YOof GDP)a 66.7 47.0 38.6 35.7 30.0 ............................................................................................................................... 25.1 19.1 15.3 ................................................... Gross domestic investment (% of GDP) 17.5 19.8 21.8 20.2 20.1 ................................................................................................................................................................................................................................................................K 19.2 22.2 23.5 Current account balance (YOof GDP) ..................................................................................................................... 4.9 4.7 3.7 7.5 5.8 10.5 3.1 -1.5 ........................................................................................................................................................ Foreign exchange reserves (US$ billion) 1.1 1.5 3.1 4.4 6.9 ................................................................................................................................................................................................................................................................9 9.5 19.4 22.3 GDP (Current US$ billions) 31.6 31.3 38.0 42.4 50.1 65.1 81.9 106.1 Source: NBU, IMF, World Bank (WB ECA regional tables, September 2006 except where indicated). a. From Ukraine: Creating Fiscal Space for Growth: A Public Finance Review, 2006, Table 1. b. A change in methodology in 2003 to fully account for private debt, all maturities. 3.5 After a decade of economic decline, the breakthrough t o eco- n Ukraine has been achieved with p r u d e n t fiscal policy nomic g r o w t h i and structural reforms in public finance, the financial sector, and en- ergy. Accomplishments i n stabilization policy and the i m p o s i t i o n of greater financial discipline o n many different fronts have been particu- larly important. The structural reforms were k e y i nreducing the preva- lence of barter payments and arrears. Addressing Ukraine’s nonpay- ment culture in turn helped foster m o r e efficient allocation of resources and the beginnings of a w o r k i n g financial system. Inshort, output i n Ukraine has grown r a p i d l y since 2000, o w i n g mostly to p r u d e n t fiscal policy, structural reforms, and greater efficiency rather than to n e w in- vestment. To a large extent the economy has grown u s i n g existing ca- pacity, thus reducing the marginal capital-output ratio. Gross capital formation has recovered, but improvement was limited. 22 CHAPTER 3 SUSTAINABLE ECONOMIC ACHIEVING AND INTEGRATION INTO THE WORLD ECONOMY GROWTH Investment/GDP ratio w e n t up f r o m 19.7 percent i n2000 to n2005, w h i c h is w e l l b e l o w the EU8 average of 25 percent. 21.8 percent i 3.6 Another important factor i nUkrainian g r o w t h over this p e r i o d was the favorable external environment that l e d to robust export growth. H e l p e d by an undervaluation of the exchange rate - f o l l o w i n g the devaluation and the Russian crisis of 1998 -Ukrainian exports proved to b e highly cost and price competitive. The long transforma- tional recessions of the 1990s h a d also l e f t sigmficant spare capacity while growth i n demand f o r Ukraine’s products f r o m her neighbors- such as Russia - as w e l l as from other countries h a d a strong positive impact o n exports, particularly metals. The terms of trade for Ukraine also improved, as metal price increases accelerated, although m o r e re- cently, starting i n2005, metal prices increases have slowed. 3.7 Inflation dropped b e l o w double digits f r o m 2002-04 before rising again i n2005 reflecting the expansionary fiscal policy during the run-up to the presidential elections i nlate 2004. This was f o l l o w e d by fiscal tightening i n2005, w h e n an increase inrevenues following the elimination of m o s t tax exemptions (and the windfall revenue f r o m the re-privatization of a steel mill) helped to reduce the budget deficit to 2 percent of GDP. Sustainability of the reduction i ninflation will de- p e n d o n fiscal management and external factors, such as a p e n d i n g natural gas agreement with Russia and Turkmenistan. Ukraine has im- ported natural gas f r o m Russia at prices lower than those p a i d by Western Europe since independence i n1992. This preferential treat- ment (which has continued even after the price increase i n early 2006) was due to b o t h political considerations and t o Ukraine’s importance as a transit route f o r Russian exports o f natural gas. THE BANK’S ASSESSING CONTRIBUTION 3.8 The Bank’s overall advice o n the conduct of macroeconomic policy (fiscal and financial discipline, reduction of budget and tax ar- eas, abolishment of m u t u a l offsets and barters, revenues collected o n l y incash, and cash collections for gas and electricity over 90 percent of invoices) was sound, consistent, and remained v a l i d over the review period. Overall, the CEMs, and the PAL and DPL programs helped to improve policy formulation and create a m o r e systematic approach t o its implementation i nUkraine. Economic and sector w o r k (ESW) dur- ing the entire review p e r i o d has been of g o o d quality and has influ- enced government policy. 3.9 Implementation o f the PAL p r o g r a m was complex and ex- tremely demanding for the government because i t i n v o l v e d a multi- sectoral p r o g r a m and an untested mechanism of disbursing the l o a n o n l y after progress i noutcomes was realized. I t was demanding politi- cally; the reforms ran counter to the interest of some strong power 23 CHAPTER 3 ACHIEVING SUSTAINABLE ECONOMIC GROWTHAND INTEGRATION INTO THE WORLD ECONOMY groups. However, the program was feasible because the borrower viewed these challenges as fundamental t o the success of its medium to long-term program, and proved capable of implementing it with com- mitment. Inaddition, it h a d a positive institutional development im- pact by forcing the creation of committees with participation f r o m dif- ferent ministries to address the cross-cutting nature of the program. Financial and Private Sector Development FINANCIAL SECTOR Bank Strategy 3.10 The Bank’s financial sector assistance strategy h a d three m a i n components: setting up a n adequate legal basis for the development of the financial sector, strengthening the institutional structure (central bank, state banks, and other banks); and providing additional resources to priority sectors (export and rural). The Bank supported the financial sector through lending, analytical work, and financial policy dialogue. 3.11 Lending consisted of FSAL with follow-up u n d e r the PAL pro- gram because of slower-than-anticipated reform implementation, an ongoing Export Development project with an institutional develop- ment component for Eximbank, and a line of credit to private exporters. T w o more loans were approved toward the end of the C A E period: the Second Export Development (EDP) and Access to Financial Services projects. The former is a follow-up to t h e first EDP with the same agenda. The latter will provide medium to long-term loans to r u r a l small enterprises through eligible commercial banks. 3.12 The Bank’s financial sector w o r k was of high quality. Yet it consistently underestimated the speed and depth of financial sector recovery. The first Bank financial sector report (Ukraine: Risks and Transition: A Review offhe Financial Sector, i n1995), discussed i n detail the weaknesses of the sector and outlined a strategy for addressing these weaknesses w h i c h provided the analytical underpinnings for the next FSAL. The evolution o f Ukraine’s financial sector i n t h e dec- ade following the Bank’s 1995 report has been analyzed i n several subsequent studies, including another comprehensive financial sector report (Ukraine: The Financial Secfor and the Economy - The New Policy Agenda) by the Bank i n2001, a joint Bank-IMF FSAP i n 2003, and a Bank report o n t h e nonbanking financial sector in 2006. Outcomes 3.13 Financial sector recovery was much faster and deeper than an- nthe Bank’s analytical w o r k and strategy documents. Between ticipated i 1999 and 2005 the total credit-to-GDP ratio jumped f r o m 9 percent to 24 3 CHAPTER ACHIEVING AND INTEGRATION INTO THE WORLD ECONOMY GROWTH SUSTAINABLE ECONOMIC nearly 36 percent, and long-term credit as a share of nongovernment credit rose sharply to over 50 percent, suggesting that the banking sys- t e m was n o t only providing more intermediation but allocating more re- sources to the real economy. Credit growth averaged 42 percent per year between 2000 and 2004; this increased the credit-to-GDP ratio f r o m 12 percent of GDP at end-2000 to 36 percent of GDP at end-June 2005. The main sources of the financial deepening were: ( i) fast economic the recovery, which helped improve portfolios, but also (ii) the increased competition i nthe banking sector due to successful privatization of state banks 1 and entry of foreign banks, and ( iii) the improved legal and regu- latory framework. 3.14 The legal framework for financial sector was improved during t h e review period. First, a new l a w o n the central bank (NBU) was drafted and approved by t h e Parliament i n 1999. Second, the banking l a w was amended in2000. These new laws w e r e sound a n d broadly consistent with international banking practices. These laws have been supplemented by a large number of other laws, presidential decrees, N B U directives, and other normative provisions, resulting i n a com- prehensively regulated financial system. The supervisory role a n d ca- pacity of t h e N B U also improved substantially during the period. 3.15 A major positive stimulus in the commercial banking sector toward the end of the CAE period has been the entry of foreign banks in the Ukrainian markets, mainly through acquisitions. By introduc- ing superior banking technology, the foreign banks have acted as a stimulus to local banks to improve their performance. Table 7. Selected Banking Sector Indicators (in percent) 2000 2001 2002 2003 2004 2005 Deoosit GDP ratio 11.4 12.8 16.9 23.4 24.1 32.1 CreditlGDP ......................................... ratio ................ 12.4 14.5 19.4 26.6 ...................................... 27.1 35.6 Credit growth (year over year) ............................................................................................................. 61.3 40.5 47.3 60.8 .................................. 31.2 3oo : ...................... 61.5 NonDerformino Ioans*/total loans - ................................................................................................................ 29.6 24.6 2119 28.3 ............................................................................................................................................................................................ 23.1 Liquid assetsltotal assets .......................................................................................... 20.8 15.3 13.5 15.3 16.7 ................................................................................................................................................................................................................... 16.4 _...................................................... Customer ..... depositslloans 59.1 .......87.6 ........ 87.6 87.1 89.2 91.2 .................................................................................................................... Return on assets^.............. ........................................................... ................................. -0.1 1.2 1.2 1.o ......................................................... 1.1 1.3 Return on eauitv . , -0.5 7.5 8.0 7.6 8.4 10.4 Source: PPAR-Ukraine (2007) and IMF Statistics. * Including substandard, doubtful, and loss 3.16 Inspite of substantial improvements, financial sector govern- ance remains mixed. Privatization and e n t r y of foreign banks have improved governance substantially, but lack of transparency about bank ownership2, about overlapping investments among financial sector companies (such as banks and insurance companies) and be- t w e e n banks and industrial groups continue t o create substantial fi- duciary risks. Also, the t w o publicly owned banks are at risk in spite 25 CHAPTER3 ACHIEVINGSUSTAINABLE ECONOMIC AND INTEGRATION INTO THE WORLD ECONOMY GROWTH of improvements in their profitability. The banks' exposure t o credit r i s k has also increased, exacerbated by the r a p i d g r o w t h in credit t h r o u g h 2005. The n u m b e r o f v e r y small ("pocket") banks remains sigruficant, although the evidence suggests that by 2005 the level o f connected l e n d i n g was declining. A n e w positive development, but also risky, i s the fast growth of the h o u s i n g finance sector. Inmany countries financial crises have started, o r have been precipitated, by this sector after a h o u s i n g "bubble" burst: in Ukraine, a s l o w d o w n in the overheated h o u s i n g m a r k e t c o u l d have a similar effect i f the sector continues to grow a t recent rates. Assessing the Bank's Contribution 3.17 Inthe IEG interviews, government officials and private sector participants expressed their v i e w that the participation of the Bank was crucial t o the successful r e f o r m of NBU, and in strengthening the legal, regulatory, and supervisory framework in particular. The Bank also p l a y e d a n i m p o r t a n t r o l e in restructuring the state banks. Bank strategy w a s appropriate and, w h i l e it evolved over t i m e t o respond to n e w developments, it remained essentially the same throughout the r e v i e w period. 3.18 Through i t s policy-based l e n d i n g the Bank supported i m p o r - tant legislative and regulatory reforms in the financial sector. The liq- u i d a t i o n of Bank U k r a i n e was an i m p o r t a n t first step i nb a n k restruc- turing. F S A L also contained a n u m b e r of measures f o r addressing the structure of the b a n k i n g sector, i n c l u d i n g licensing arrangements for banks, as w e l l as establishing a system o f deposit insurance. Support t o the central bank u n d e r PAL I1contributed t o i m p r o v i n g the q u a l i t y o f the regulatory regime. 3.19 F S A L objectives regarding the restructuring o f the Savings Bank t u r n e d o u t to b e overly ambitious and c o u l d n o t b e completed in the t i m e a l l o w e d u n d e r t h i s loan, a n d the v e r y same objectives w e r e again p u r s u e d during the PAL program. By late 2005, u n d e r the DPL program, the Savings Bank became profitable and well-managed. This p a v e d the w a y for the institution's l o a n portfolio to b e g i n in- creasing again w h i l e r e m a i n i n g u n d e r close N B U oversight. ENVIRONMENT BUSINESS Bank Strategy 3.20 Bank assistance strategy supported Ukraine's effort t o create a level p l a y i n g f i e l d and reduce the transactions costs f o r business. The strategy a i m e d t o i m p r o v e the business climate, r e f o r m tax a n d trade regimes, a n d strengthen the regulatory framework a n d p r o p e r t y rights. 26 CHAPTER3 SUSTAINABLE ECONOMIC ACHIEVING AND INTEGRATION INTO THE WORLD ECONOMY GROWTH 3.21 T h e Bank maintained an active p o l i c y dialogue in t h e context of adjustment loans (EDAL 1 1, PAL program, a n d DPL) and also fi- nanced a Private Sector Development L o a n in 2002. Although there w a s no sector work dedicated to the business environment, the CEM r e v i e w e d the core governance issues in the corporate sector. T h e trade s t u d y a n d the financial sector reports covered different aspects of the business climate. Also, the Bank’s ”Doing Business Surveys” a n d BEEPS, conducted in cooperation with EBRD, p r o v i d e d insights into barriers that firms perceived as constraints and the changes i n those constraints over time. Outcomes 3.22 International comparisons indicate (see Table 8 and 9) t h a t by 2005-06, the costs in t i m e a n d m o n e y of starting a business, obtaining licenses, registering property, a n d enforcing contracts in U k r a i n e are generally inl i n e with or better than the ECA averages. However, compared with advanced m a r k e t economies such as Poland, Roma- nia, and Turkey, U k r a i n e has considerable progress to make. Table 8. Doing Business, 2006 Ukraine ECA Belarus Poland Romania Russia Turkey Starting a Business Number of procedures 10 9 16 10 5 7 8 Time (days) 33 32 69 31 11 28 9 Cost (YOof income per capita) 9 14 26 21 4 3 27 Dealing with Licenses Number of procedures 18 21 18 25 17 22 32 Time (days) 242 243 354 322 242 531 232 Registering Property Number of procedures 1 0 6 7 6 8 6 8 Time (days) 93 102 231 197 150 52 9 Trading Across Borders Documentsforexport(number) 6 7 7 6 4 8 9 Time for export (days) 33 29 33 19 14 39 20 Documents for import (number) 10 10 7 7 4 8 13 Time for import (days) 46 37 36 26 14 38 25 Enforcing Contracts Number of procedures 28 32 28 41 43 31 34 Time (days) 183 409 225 980 335 178 420 Ease of doing business rank 128 77 129 75 49 96 91 Source: Doing Business, World Bank as of April 2007. 3.23 The BEEPS data also p r o v i d e a clearer indicator of how the business environment has changed over time. Table 9 shows that be- t w e e n 1999 and 2005 there w e r e sigruficant improvements in the business environment as perceived by a large sample of U k r a i n i a n firms, with the largest improvements registered i ntaxation and infra- structure. By 2005 the U k r a i n i a n scores s h o w the business environ- m e n t to b e only slightly worse t h a n for the C o m m o n w e a l t h of Inde- pendent States (CIS) countries as a whole. 27 CHAPTER 3 ACHIEVING GROWTH SUSTAINABLE ECONOMIC AND INTEGRATION INTO THE WORLD ECONOMY Table 9. Indicators of the Business Environment Ukraine CIS Countries 7999 2002 2005 7999 2002 2005 Business regulation 2.57 2.52 2.15 2.34 2.30 2.12 Labor regulation 1.81 1.76 1.73 1.63 1.48 1.58 Taxation 3.64 2.77 2.65 3.32 2.71 2.56 Institutions and property rights 2.32 2.22 1.97 2.32 1.92 1.84 Infrastructure 2.21 1.56 1.62 2.09 1.54 1.55 Finance 2.82 2.53 2.54 2.59 2.42 2.31 Macroeconomic environment 3.42 2.98 2.78 3.30 2.76 2.40 Notes: Weighted averages reported of responses by firms assessing how problematic factors were for the operation and growth of their business. l=no obstacle; 4=major obstacle. Assessing the Bank's Contribution 3.24 By m a k i n g t h e business e n v i r o n m e n t a feature of i t s l e n d i n g a n d associated conditionality, t h e Bank w a s able to exert some influ- ence t h a t c o n t r i b u t e d to i m p r o v e m e n t s in t h e i n v e s t m e n t climate. For example, t h e B a n k supported, u n d e r EDAL 1 1, the r e m o v a l of price a n d trade controls; p r i v a t i z a t i o n of 9,500 medium-size enterprises; i m p l e m e n t a t i o n of i n t e r n a t i o n a l accounting and a u d i t i n g standards throughout t h e enterprise sector; setting up of a n effective and mod- e r n b a n k r u p t c y process; a n d s i m p l i f i c a t i o n of licensing, registration, a n d inspections. Although data on p r i v a t i z a t i o n of s m a l l a n d me- dium-size enterprises i s scant, it appears t h a t the governance of t h i s process w a s better t h a n the large enterprises. T h e PAL p r o g r a m con- t r i b u t e d to t h e s i m p l i f i c a t i o n of business registration procedures a n d to t h e establishment of l e g a l procedures for telecommunications pri- vatization. A communications regulator w a s established in 2005 within the context of t h e DPL p r o g r a m . 3.25 T h e Private Sector D e v e l o p m e n t (ED) project i n 2002 w a s in- t e n d e d to p r o v i d e a d v i s o r y services to i m p r o v e management, profit- ability, a n d p r o d u c t i v i t y of p r i v a t e and p r i v a t i z e d enterprises. It w a s also designed to p r o v i d e assistance to oblast (provincial) administra- tions, to i m p r o v e t h e l o c a l business e n v i r o n m e n t a n d reduce the ad- m i n i s t r a t i v e costs of doing business. But t h e project had l i m i t e d gov- e r n m e n t ownership, w a s l a r g e l y "supply-driven" by t h e Bank based on similar projects in other t r a n s i t i o n economies and, d u e to an ex- t r e m e l y long p r e p a r a t i o n period, it l o s t i t s relevance since the p r i v a t e sector w a s already growing r a p i d l y and t h e kind of management t r a i n i n g to b e s u p p o r t e d by t h e project w a s not needed. T h i s i s one example w h e r e expected complementarities b e t w e e n adjustment and i n v e s t m e n t operations in t h e same area did not materialize, w h i c h t h e 2000 CAE h a d i d e n t i f i e d as a m a i n weakness of the Bank's program. Inaddition, IFC developed a l a r g e and successful grant-based 28 CHAPTER 3 SUSTAINABLE ECONOMIC ACHIEVING GROWTH AND lNTEGRATlON INTO THE WORLD ECONOMY technical assistance function i nUkraine, w h i c h made m o s t compo- nents o f the project redundant. The PSD project was cancelled i n early 2006, by w h i c h time only 7 percent of the committed f u n d s h a d been disbursed.3 Energy Sector 3.26 Ukraine's progress in energy sector r e f o r m started with the re- structuring and corporatization of the oil, coal, gas, a n d p o w e r sectors n 1994. Ukraine unbundled i t s p o w e r sector, introduced elements of i competition i n the wholesale electricity m a r k e t and the coal market, a n d liberalized the o i l market. It also established the N a t i o n a l Energy Regulatory Commission, w h i c h has been steadily building i t s capacity a n d has opened the energy sector to private investors. Some early progress was made i nthe coal sector -50 uneconomic mines (out o f 280) were closed a n d their social impacts mitigated. However, as i n other sectors, poor governance, political interference, and i n particular the culture of nonpayment slowed down the r e f o r m process. At the beginning o f the CAE period, the m a i n challenges facing the energy sector were: (i) poor financial sustainability, ( ii) inadequate sector in- frastructure maintenance a n d lack o f investments, ( iii) p o o r govern- ance of energy companies, a n d (iv) high inefficiency of energy use by consumers and utilities. BANKSTRATEGY 3.27 The Bank's strategy sought to support the government to im- p r o v e the financial sustainability of the energy sector, to continue the privatization of p o w e r distribution and closing o f uneconomic mines, a n d t o rehabilitate hydropower plants and c i t y heating systems. The structural adjustment operations (PALSI and 1 1, and DPL I )focused o n i m p r o v e d financial discipline, i m p r o v e d tariff collection, better governance, and privatization of distribution, w h i l e investment pro- jects focused o n operational and energy-saving aspects i n p o w e r gen- eration and district heating systems. The Bank also carried out exten- sive analytical work, including reviews of energy sector r e f o r m options, electricity, mining, and gas markets. OUTCOMES 3.28 Reform advanced i na l l energy subsectors: power, gas, coal, and district heating. But progress has been uneven; a great deal remains t o be done, including governance issues i nthe gas sector, and reforms have slowed. Table 10 summarizes the m a i n outcomes for fiscal 1999 t o 2006. Despite tariff increases (over the past f i v e years a 48 percent in- crease inaverage electricity prices and a 25 percent increase i n gas prices to household consumers), most tariffs are s t i l l b e l o w economic costs -a m o v i n g target d u e to increases i nthe price of i m p o r t e d fuels. 29 CHAPTER3 ACHIEVINGSUSTAINABLE ECONOMIC AND INTEGRATION INTO THE WORLD ECONOMY GROWTH NERC, the energy regulator w h o should b e i ncharge of setting tariffs, does n o t have the financial and administrative independence t o per- f o r m its duties and i s subject to interference by government bodies o n internal matters (such as salary levels) and o n external matters such as the review of i t s decisions by individual ministries. Table 10. Energy Sector Outcomes Baseline Objectivellndicator Outcome Comments 1999 2005 1. Improved financial viability of the energy sector as measured by a) Full payments in cash 8? a ' 98% A major achievement b) Tariff sets close to cost recovery Tariffs adjusted Coal (Hlton) 104 216 significantly Gas (HI1OOm3) 185 23 1 and are close to cost Electricity (HlMwh) 134 198 recovery c) Resolution of the stock of old No feasible Debt Progress has debts solution restructuring been made law enacted 2. Privatization of electricity distribution Power sector 13 distribution Progress has fully controlled and one been made by the public generator sector 3. Closure of inefficient mines 100 in 30-35 in More than 50 oDeration operation mines closed 4. Maintenance of energy infrastructure Poor Bank projects Progress has in city heating and hydro sectors maintenance implemented been made successfully Source: IEG CAE mission. Power 3.29 Substantial progress i n the electricity sector has been made through improvements i n tariff collections, cash payments and clearer property rights, p a r t i a l privatization of distribution, and i m p r o v e d regulation. M a j o r progress has been achieved in i m p r o v e d financial discipline, a precondition for the sector's fiscal viability. Collection o f nboth state-owned and payments f r o m consumers has i m p r o v e d i private distribution companies. 3.30 Six p r o v i n c i a l distribution p o w e r companies (Oblenergos) w e r e privatized a t the beginning of the CAE period, a n d others were expected t o (under the PAL program) but w e r e not. Privatization y i e l d e d positive results. Private distributors were able to achieve higher collection rates t h a n state-owned distributors, a n d they are 30 3 CHAPTER SUSTAINABLE ECONOMIC ACHIEVING AND INTEGRATION INTO THE WORLD ECONOMY GROWTH p a y i n g in full f o r electricity purchased f r o m the market, whereas state-owned distributors are not. M o s t privatized distributors im- p r o v e d operating margins and profits. Practically n o n e of the state- o w n e d distribution companies have been able to r e p o r t profits. For- eign-owned distribution companies have started to repay debts that existed before privatization a n d t o generate internal cash to invest in maintenance of the networks a n d in improvement of the quality of service. Privatization is also bringing a n i m p r o v e m e n t in service qual- ity standards and has raised awareness in the government a n d a m o n g customers about the need t o i m p r o v e the quality o f service. Coal 3.31 The economic importance of the coal sector, and i t s d i f f i c u l t financial situation, together with the social implications of i t s restruc- turing, l e d to early Bank support with one pilot investment project and one sector adjustment operation (approved before the CAE pe- r i o d but implemented i n the early p e r i o d of the CAE). The three mines covered in the pilot project were efficiently closed, with care taken t o fully implement the environmental protection measures. During the implementation of the sector adjustment operation m o r e than 70 coal mines w e r e closed through the e n d of 2000. B o t h projects were highly successful i n achieving the p r i m a r y social objective of p r o v i d i n g a short-term safety n e t by ensuring that workers received the full benefits to w h i c h they were entitled. The projects w e r e rea- sonably successful i nh e l p i n g the authorities to i m p r o v e the efficiency of the m i n e closure process. 3.32 The Bank has estimated that a substantial p o r t i o n o f the exist- ing coal p r o d u c t i o n (perhaps o n the order of 80 percent) i s economi- cally viable, but a p o r t i o n i s clearly uneconomic. Elements of this as- sessment are echoed in the government’s v i e w that o f the 165 state- o w n e d mines in operation, some 30 t o 35 are n o w hopelessly loss- m a k i n g and candidates f o r closure. The Bank h a d intended to con- tinue support for m i n e closures but the government reversed i t s pol- i c y of m i n e closures and extended budgetary support t o the mines. However, the dialogue has continued through analytic work. Rehabilitation of Hydropower and District Heating Systems 3.33 T w o Bank projects financed rehabilitation o f h y d r o p o w e r plants a n d addressed serious p o w e r system reliability problems re- sulting f r o m the separation of the U k r a i n i a n p o w e r system from the Russian system. A s p a r t o f the rehabilitation of existing infrastructure program, with the a i m of increasing heating efficiency, two Bank p r o - jects financed the K i e v District H e a t i n g Project and K i e v Public Build- ings Energy Efficiency Project. 31 CHAPTER3 ACHIEVINGSUSTAINABLE ECONOMIC AND INTEGRATION INTO THE WORLD ECONOMY GROWTH THE BANK’S ASSESSING CONTRIBUTION 3.34 The Bank used i t s instruments appropriately, scaling d o w n investments i n the energy sector f r o m the level o f earlier years, and increasing sector w o r k . There was a shift t o analytical work a n d to ad- justment loans with conditions l i n k e d o n progress i nthe sector’s fi- nancial sustainability. Small investment loans conditioned t o the pro- gress of sector r e f o r m completed the program. Only $152 m i l l i o n (in three loans) was approved between 1999 and 2006 compared t o n the previous CAE period. These investment operations $740 m i l l i o n i focused on reducing operating costs, increasing collections, improv- ing service, institution building, a n d energy efficiency. The choice of policy dialogue, AAA, and adjustment l e n d i n g as m a i n instruments t o support sector r e f o r m w a s appropriate and prudent, m a k i n g the energy sector a m o d e l of w h a t c o u l d have been done ( a n d can b e done in the future) i n other sectors. 3.35 The Bank h a d learned the lessons f r o m the earlier failure o f the Electricity M a r k e t Development Project (FY97), w h i c h overlooked the severity o f the sector’s financial crisis and t r i e d t o p r o m o t e the devel- opment of a competitive electricity market before p r o p e r l y addressing the financial issues. In an economy that was barter-based, with sala- ries a n d pensions in arrears, a n d where the government w a s n o t ap- propriately addressing the p r o b l e m of nonpayment, the attempt to in- troduce a competitive p o w e r market was premature. 3.36 The Bank‘s energy assistance strategy was s o u n d i n the cur- n spite o f the fact that the privatization achieve- r e n t C A E period, i ments f e l l short of w h a t w a s expected u n d e r the PAL p r o g r a m (and required a waiver o n the second tranche release o f PAL 11). Energy tariff adjustments and increases i nbilling and collection p r o m o t e d by sector r e f o r m have h a d a substantial i m p a c t o n energy efficiency. The experience of other countries suggests that these measures c o u l d re- duce consumption by up t o 30 percent. Sustainable Environment BANKSTRATEGY 3.37 Environmental issues i nUkraine include industrial pollution, hazardous waste, air and water pollution, land erosion, and threats to biodiversity. Despite a decrease i n some forms of p o l l u t i o n after 1991, resulting f r o m the economic slowdown, the country continues t o face serious environmental problems. Ukraine’s large industrial and energy sectors, developed under a system of distorted price signals, are the source of serious p o l l u t i o n problems. The emphasis of the past o n pro- duction targets, rather than o n efficient use of resources, has also put pressure o n agricultural lands and other natural resources. 32 CHAPTER 3 SUSTAINABLE ECONOMIC ACHIEVING AND INTEGRATION INTO THE WORLD ECONOMY GROWTH 3.38 T h e Bank’s assistance strategies a i m e d at: ( i) h e l p i n g to develop the legal and institutional f r a m e w o r k for environmental regulation, ( ii) capacity building of the M i n i s t r y of the E n v i r o n m e n t and related agencies, and (5) i m p l e m e n t i n g large environmental investment pro- jects i nthe cleanup of air. T h e 2003 C A S h a d specific proposals to im- p l e m e n t the recommendations of the Bank’s E n v i r o n m e n t a l Public Ex- penditure Review, n a m e l y ( i link ) environmental priorities to specific environmental goals and link expenditures to priorities, ( ii ) enhance ef- fectiveness of environmental spending (increase transparency, intro- duce international expenditure standards), ( iii) sustain p u b l i c levels of environmental expenditures and reduce discretion i nallocating funds, and (iv) increase the efficiency of mobilizingfinances for environmental protection, i n c l u d i n g t h e increase of pollution charges. T h e 2005 C A S Progress Report i n t r o d u c e d the agenda of the Kyoto Protocol to ad- dress environmental issues and its potential to profit from funding ar- rangements. 3.39 T h e Bank’s program p r o v i d e d support to environmental man- agement u n d e r one adjustment operation (PAL 1 1) and three G l o b a l E n v i r o n m e n t Facility (GEF)-funded TA grant operations (Ozone De- p l e t i n g Substance Phase Out, Azov Black Sea Corridor Biodiversity, Biodiversity Capacity Building 11). There w e r e also two grant facilities n2005 and 2006. T h e Bank p r o d u c e d three pieces of environmental i sector work, i n c l u d i n g an E n v i r o n m e n t a l Public Expenditure Review, w h i c h provides guidance on p o l i c y options for better environmental management, for strengthening the revenue base, and for linking b u d g e t planning to environmental results. OUTCOMES 3.40 Progress has b e e n mixed, a n d a large agenda remains (see Table 11). There w a s no progress on r e d u c i n g water pollution. Eco- n o m i c growth l e d to some increase i n energy use a n d C02 emissions, but energy intensity a n d COn emissions p e r unit of GDP h a v e de- creased by a p p r o x i m a t e l y 35 percent since 1999. T o t a l waste genera- tion p e r unit of GDP h a s also decreased. A c c o r d i n g to t h e m o s t recent u p d a t e on the M i l l e n n i u m D e v e l o p m e n t Goals (MDGs), a i r emissions from stationary sources decreased 1.4 times from 1995 to 2002. Al- though pollution from stationary sources started to increase i n 2003 by a b o u t 1percent p e r annum, this f i g u r e i s sigruficantly l o w e r than i n d u s t r i a l output growth rate, i n d i c a t i n g t h a t e n v i r o n m e n t a l man- agement techniques h a v e b e e n effective. Policy changes include: es- tablishment of inflation-adjusted standard fees for n a t u r a l resource c o n s u m p t i o n and pollution, monitoring of emission levels i n 54 cities a n d 13 i n d u s t r i a l locations, and monitoring of carcinogens and ozone layer conditions i n areas of concern. R e g a r d i n g the Kyoto Protocol agenda, the efforts l e d to t h e s i g n i n g of the f i r s t Emission R e d u c t i o n Purchase Agreement i nU k r a i n e . 33 CHAPTER3 ACHIEVINGSUSTAINABLE ECONOMIC AND INTEGRATION INTO THE WORLD ECONOMY GROWTH Table 11, Environment Outcomes Baseline Outcome Indicator Comment 1999 2004 Water a Sanitarylchemical (in % below norms) 17.2 21.4 Pollution has worsened Sanitarylbacteriological (in YO below 14.2 19.2 Pollution has worsened norms) Airb COz kglUS$ of GDP 5.6 3.9 Energy intensity and COz emissions have decreased per unit of GDP SOz atmospheric emissions (1,000 ton) 750 790 Pollution has worsened NOx atmospheric emissions (1,000 ton) 250 200 Modest improvement Dust atrnosDheric emissions (1,000 ton) 425 400 Modest imDrovement Waste Hazardous rnln ton 88.5 62.9 Substantial decrease in the production of toxic waste Source: IEG CAE mission. a. Baseline values are from 2000. b. Baseline values are from 1998. THE BANK’S ASSESSING CONTRIBUTION 3.41 Inspite of limited lending assistance i nt h i s area, the Bank has contributed t o improved energy efficiency i n Ukraine and t o reduced environmental impacts f r o m energy transformation a n d use. T h e Pub- lic Environmental Expenditure Review was of good quality and h a d a n impact o n environmental policies through its link t o the PAL pro- gram. Following the policy recommendations f r o m this report, t h e PAL program required t h e introduction of inflation-adjusted fees for pollution. As a result, the pollution fines were increased by 80 percent in 2003 and another 250 percent i n 2004. The increased fines n o t only contributed to t h e internalization of environmental costs, but also helped raise funds that finance environmental expenditures. Progress has been made i n implementing the Kyoto Protocol i n Ukraine. The successful Ozone Depleting Substance Phase-Out Project was another positive contribution. Integration into the World Economy BANKSTRATEGY 3.42 n2003, the government gave high priority to joining the Starting i World Trade Organization (WTO) and the CAS supported Ukraine’s ef- forts inthis area. The ultimate objective was t o help the country to diver- slfy its trade and align domestic product standards with EU practices. Modernization of customs administration and reduction of tariffs were also part of the program objectives. The overall objective was to advance harmonization with EU institutional norms. The adjustment loans (PALS 34 3 CHAPTER SUSTAINABLE ECONOMIC ACHIEVING AND INTEGRATION INTO THE WORLD ECONOMY GROWTH and DPL) helped develop regulatory institutions and certification stan- dards. The Trade Study (2005) identified areas where Ukraine could benefit from a more transparent and competitive trade regime, and use the WTO accession process to advance market institutions. OUTCOMES 3.43 M a j o r steps have been taken t o w a r d Ukraine’s integration i n t o the world economy. There has been steady progress i n the reduction of average tariff a n d nontariff barriers since the peak o f protection a r o u n d 1999 (see Table 12). Substantial steps were also taken to en- sure harmonization with WTO requirements for accession. By 2006 negotiations f o r WTO accession h a d advanced with bilateral negotia- tions with most of the member countries completed as w e l l as the enabling legislation passed by the Parliament. B o t h the European Un- i o n and the U n i t e d States accorded U k r a i n e the status o f a m a r k e t economy i n 2005. Trade diversification and FDI i n f l o w s increased. These were a l l notable achievements. Table 12. Trade Indicators Baseline Outcome 1999 200405 Tariff (simple average MFN) a 8.7 4.9 Max tariff (applied ad valorem) a 100.0 30.0 Imports (% of GDP) 37.5 44.3 Exports (Yo of GDP) 36.7 46.0 Exports (% total exports) to Russia 20.7 20.0 to EU 28.4 28.4 to ROW 50.9 52.0 FDI (US$ millions) 489 4,622 FDI [share of GDP) 1 1.5 5.9 Source: IMF Direction of Trade Statistics Yearbook, 2006 except where indicated. a. WB World Integrated Trade Solution (WtTS):Baseline 1997, outcome 2006. b. From WB ECA regional tables, September 2006. 3.44 Ukraine’s strong trade performance was a major contributing factor t o the recent economic recovery and acceleration of growth, al- t h o u g h there are risks o f external shocks, l i n k e d to the prices of k e y tradables, principally metals and energy. As Ukraine’s economy i s highly dependent o n international trade, a s u d d e n sharp t u r n a r o u n d o f m e t a l prices (or demand) that have recently been w e l l above his- torical averages c o u l d trigger a sharp decline in the current account balance, resulting in the need t o reduce domestic absorption and causing a temporary decline i n growth. On the i m p o r t side, n a t u r a l gas i s a relatively i m p o r t a n t energy source in Ukraine. Russia raised gas prices sigruficantly in 2006 with the clear prospect of further price increases. The i m p a c t of the gas price increase would l o w e r output g r o w t h and increase i n f l a t i o n t h r o u g h a variety of channels. 35 CHAPTER3 ACHIEVINGSUSTAINABLE ECONOMIC AND INTEGRATION INTO THE WORLD ECONOMY GROWTH Nevertheless, developments i n 2006 also revealed the considerable resilience of Ukraine’s economy (see Chapter 1,para 1.17). 3.45 Between 1999 and 2006 cumulative F D I inflows amounted to over $18 billion, about 40 percent of which came i n 2005 (much of that accounted for by t w o transactions, the reprivatization of Kry- vorizhstal and the sale of the mining firm Krasnodonugal). These magnitudes are s t i l l small relative to other transition countries, how- ever - F D I inflows per capita i n 2005 were less than 15 percent of t h e Czech Republic’s F D I i n that year and barely 35 percent of the Central and East European average. 3.46 Finally, while Ukrainian metal exporters have been highly successful i n gaining access to both the Chinese and EU markets, CIS markets continue to b e quite important, accounting for around a quar- ter of total exports and over half of imports.,The country continues t o lag behind other transition economies i n t h e degree of trade restruc- turing. Countries such as Poland have far higher diversity i n export structure, greater complementarities with non-CIS markets, and higher degrees of intra-industry trade. Both the composition of ex- ports and their direction point to a continuing need for greater diver- sification, along with quality upgrading. THE BANK’S ASSESSING CONTRIBUTION 3.47 The m a i n contribution of the Bank was through analytical work, using ESW to strengthen t h e arguments for W T O accession and trade liberalization. The Bank strategy was successful in helping con- vince important constituents i n the country and government to pur- sue W T O accession actively. This involved sigruficant changes to the trade regime and complementary areas, such as intellectual property rights. Simplification of the tariff structure and the movement away f r o m quantitative and other restrictions represents a major advance that was strongly counseled and supported by t h e Bank. T h e WTO accession process was accelerated -but n o t completed -in 2005 with t h e advent of the new government. Summary 3.48 The Bank’s assistance strategy was effective inhelping Ukraine adopt a moderately prudent fiscal and monetary stance. Budget deficits were mostly contained- although there was a deterioration of fiscal balance in2004 due to the electoral cycle. The Bank’s adjustment loans were helpful in supporting the government’s pursuit of a stable mac- roeconomic environment. Financial sector recovery was m u c h faster than anticipated. N o t only has there been growth i nfinancial deepen- ing-the credit-to-GDP ratio increased by over two-and-a-half times between 2000 and 2005 -but there have also been improvements i nthe 36 CHAPTER 3 SUSTAINABLE ECONOMIC ACHIEVING AND INTEGRATION INTO THE WORLD ECONOMY GROWTH stability of the banking system, i nthe legal and regulatory framework, and i n state bank restructuring. However, financial sector risks are s t i l l substantial. T h e World Bank w a s able to exert some influence t h a t con- nthe business environment. There w a s sub- tributed to i m p r o v e m e n t s i stantial progress i nimproving the financial v i a b i l i t y of t h e energy sec- tor. There w a s l i m i t e d progress i nenvironmental sustainability and environmental issues in U k r a i n e r e m a i n a major risk to development i n the country. M a j o r progress w a s achieved-particularly t o w a r d t h e e n d of the CAE p e r i o d -i nm e e t i n g WTO criteria for accession. M a j o r steps have been t a k e n to l o w e r barriers to cross-border trade and to l o w e r and simphfy tariffs. Based on these results, t h e outcome of Bank assis- tance in sustainable growth and integration into the world economy objective i s assessed as satisfactory (see Table 13). Table 13. Pillar 1: Summary Outcome Rating Objectives Outcomes Sustainable economic growth and integration into the world Satisfactory economy Supporting macroeconomic and financial sustainability Satisfactory Improved financial sector and business environment Moderately satisfactory Financially viable energy sector Satisfactory Sustainable environment Moderately satisfactory Gradual integration into the world economy Satisfactory 1. Thereare currently two publicly owned banks in Ukraine: the State Savings NOTES Bank of Ukraine and the State Export and Import Bank of Ukraine. Both are n o w open joint stock companies. 2. TheGovernment notes that to ensure the disclosure of information about real bank owners, a n e w regulatory l a w h a d been drafted and was submitted to Parliament o n December 14,2006. 3. The Government notes that support to private sector development through investment lending did n o t occur because of systemic mistakes at the launch- ing of the Private Sector Development Project, which caused problems for its implementation. Material progress in cutting administrative costs in the con- duct of business was made due to the fulfillment of the conditionalities the World Bank h a d stipulated during the dialog concerning adjustment lending. 37 4. Public Sector Restructuring, Improved Transparency, and Accou ntabi Iity 4.1 At the outset of the CAE period, the structure o f Ukraine's p u b l i c administration remained highly centralized a n d bureaucratic, with a central apparatus o f controls and clearances over the activities of ministries a n d other central and local agencies, largely based o n orders f r o m the presidential administration. The c i v i l service was or- ganized a r o u n d privilege a n d rank, rather than professionalism a n d merit, a n d distinctions between political a n d official roles and func- tions were blurred. Inaddition, p u b l i c finances were m a r k e d by large variations in spending and revenues, poor fiscal discipline, a n d huge amounts of discretion in the allocation of p u b l i c resources. There was also chronic lack of transparency at a l l levels of the fiscal system, with large off-budget transactions o r quasi-fiscal operations. 4.2 The second p i l l a r of the Bank's strategy gave high p r i o r i t y t o i m p r o v i n g the quality of the public sector and raising the level of transparency and accountability. This i n c l u d e d supporting p u b l i c administration and c i v i l service reforms, better budgetary manage- m e n t (such as changes i nTreasury a n d i n accounting and a u d i t i n g rules), tax policy a n d tax administration reform, and reduction of sub- sidies. With regard to transparency and accountability, the Bank's p r o g r a m also supported c i v i l society's demand f o r better government a n d social services provision. 4.3 Bank l e n d i n g in support of p u b l i c sector reforms i n c l u d e d three adjustment loans (PAL I ,PAL 1 1, a n d DPL) a n d two TA loans (Treasury Systems and State Tax Service Modernization project). The adjustment loans focused, a m o n g other objectives, o n public admini- stration, public expenditure management, public procurement, tax policy and administration reform, privatization, and c i v i l service re- form. TA loans focused o n Treasury cash management and institu- tional strengthening t o i m p r o v e tax administration. 4.4 Key analytical reports i n c l u d e d the 2002 Public Expenditure a n d Institutional Review (PER), CEMs, the financial accountability a n d procurement assessment reports in 2001, a n d a Public Finance Review (2006). These reports p r o v i d e d p o l i c y recommendations that were incorporated in subsequent l e n d i n g operations. 39 CHAPTER 4 IMPROVEDTRANSPARENCY, PUBLIC SECTOR RESTRUCTURING, AND ACCOUNTABILITY Governance, Transparency, and Accountability BANKSTRATEGY 4.5 The Bank's assistance strategy gave p r i o r i t y t o i m p r o v i n g the quality of p u b l i c administration and to raising the level of transpar- ency and accountability of the p u b l i c sector as p a r t o f the "supply side" of governance, a n d also sought t o i n v o l v e c i v i l society as p a r t of building d e m a n d for better institutions a n d governance (the "two legs" o f the 2000 CAS). The government p r o g r a m of 2003 o n w h i c h the 2003 C A S i s based also proposed p u b l i c administration reforms t o transform the large a n d inefficient p u b l i c sector governance into a smaller, m o r e efficient bureaucracy. The m a i n assistance instruments in advancing the g o o d governance, transparency, a n d accountability agenda were the PAL and DPL programs, PVP, and ESW. OUTCOMES 4.6 The World Bank Institute's indicators of governance s h o w a m i x e d picture of changes, with u p s and d o w n s over the period, but in m o s t areas, except voice and accountability and political stability, the i n d e x as of 2005 i s w e l l above the 1998 level (see Table 14). There have been sigruficant improvements i n government effectiveness and regu- l a t o r y quality. Although there were clearly improvements in the con- trol of corruption and the r u l e of law, these mostly came a t the e n d of the r e v i e w p e r i o d (in2005) with the change in government. Table 14. Governance Indicators (in percent) 1998 2000 2002 2003 2004 2005 Voice and accountability 43 34 28 32 32 40 Political stabilitylno violence 32 25 42 41 36 32 Government effectiveness 12 21 23 34 33 40 Regulatory quality 17 11 26 27 35 47 Rule of law 21 24 22 23 23 35 Control of corruption 11 13 14 17 16 35 Source: World Bank Institute. 4.7 The EBRD a n d W o r l d Bank BEEPS indicators also suggest a m i x e d picture, as can b e seen in Table 15. By 2005 about 23 percent of firms s t i l l considered corruption a major obstacle t o their business, a slight change f r o m 1999. Further, m o s t respondents still considered the judicial and l a w enforcement system to b e neither fair n o r impar- t i a l and m o s t believed the system t o b e corrupt, as w e l l as s l o w in re- s o l v i n g business disputes. On the positive side, estimates of the bribe tax as a share of annual sales declined f r o m 2.2 percent in 2002 t o 1.5 percent in 2005 (inthe E C A r e g i o n the average declined from 1.5 percent to about 1percent of annual sales). The t i m e tax- or share o f t i m e spent by senior management with p u b l i c officials - also 40 4 CHAPTER IMPROVED TRANSPARENCY, PUBLIC SECTOR RESTRUCTURING, AND ACCOUNTABILITY declined f r o m 11.2 percent i n2002 t o 9.1 percent in 2005. In other CIS countries, decline of the average bribe tax was slightly lower at 1.4 percent of annual sales and the time tax was also lower at 6.1 per- cent. The frequency of bribery was 27.5 percent for Ukrainian firms slightly higher than the CIS average. In summary, the BEEPS data n "petty corruption" during the CAE suggests a s i g d i c a n t decline i period. With respect to "grand corruption, the surveys also show a clear decline, particularly f r o m t h e heights of 1999. By 2005 roughly 3.7 percent of firms believed that private payments t o parliamentari- ans or public officials h a d a major or decisive impact o n their busi- ness. This was slightly higher than the CIS average but notably lower than either in 2002 or, most particularly, in 1999 i n Ukraine. Ukraine CIS Countries 1999 2002 2005 7999 2002 2005 Bribe frequency 39.1 34.9 27.5 34.7 31.9 26.9 Bribe tax (in percentage of sales) nla 2.2 1.5 nla 2.0 1.4 Time tax (in percentage of sales) nla 11.2 9.1 nla 8.2 6.1 Impact of private payments to legislators 43.7 4.7 3.5 30.2 3.0 3.1 Impact of private payments to government officials 36.9 5.2 3.7 26.4 3.4 3.2 Corruption as obstacle 24.2 27.8 22.6 29.8 19.5 17.3 4.8 In privatization, the main outstanding issues at the beginning of the CAE period related to the group of larger state-owned firms that had n o t been privatized or, more commonly, h a d been partially sold. The phenomenon of partial divestiture l e f t a critical ambiguity in terms of ownership and control that led to private interests combining after 2000 to dilute the remaining state share or, in some cases, strip or de- capitalize the assets of the partially privatized firms. The Bank advo- cated the complete and open divestiture of the state's remaining inter- ests in some larger firms, with an explicit strategy for the privatization of remaining state assets i ncases where there was n o clear case for con- tinued public interest or ownership. This advice was mostly n o t heeded by the Ukrainian government. As part of the PAL program, a Privatiza- tion Advisory Group (PAG) was established in 2001 to improve the transparency of privatization, but its impact was limited. 4.9 The rash of privatizations during t h e last years of the Kuchma administration that ended in 2004 was associated with allegations of corruption and cronyism as powerful interest groups associated with t h e administration allegedly enriched themselves and continued t o structure the rules of the game for t h e i r benefit. These allegations were followed by a prolonged political debate through much of 2005 centered o n whether to reverse most of these earlier privatizations or 41 CHAPTER 4 IMPROVED TRANSPARENCY, PUBLIC SECTOR RESTRUCTURING, AND ACCOUNTABILITY only o v e r t u r n a select f e w . Int h e event, t h e latter r o u t e w a s taken. T h i s r e s u l t e d in t h e transparent r e p r i v a t i z a t i o n of t h e K r y v o r i z h s t a l steelworks by t h e Ukrainian State P r o p e r t y Fund in 2005 (see Box 4 ). Box 4. Privatization Ukrainian Style: The Case of Kryvorizhstal The sale of Kryvorizhstal was the largest, most controversial privatization ef- n Ukraine’s history. Inmid-2004, the 93 percent stake i fort i nthe giant ferrous metallurgy firm was initially sold to the Investment Metallurgy Union, a con- sortium of two domestic financial and industrial groups (Interpipe and System Capital Management) for UAH 4.26 billion (approximately $0.8 billion). The qualification requirements for bidders, quality of privatization procedures, and n the tender. a short tender duration a l l pointed to built-in unfairness i Inearly 2005, the steelworks were renationalized and in November 2005 the Ukrainian State Property Fund (SPF) successfully resold the same shares (93 percent stake) for $4.8 billion. This amount was equivalent to nearly 6 percent of Ukrainian GDP. After repayments, net revenue to the govern- ment f r o m the sale amounted to 5 percent of GDP. The stake was pur- chased-at a televised auction- by M i t t a l Steel Germany GmbH. The sale was an explicit and high-profile reversal of a corrupt privatization of one of the country’s major economic assets to the outgoing president’s political cro- nies. Further, the process was transparent. Yet, unfortunately, Kryvorizstal’s sale has proved to be the only major achievement of the government since January 2005 i n the area of privatization. Interestingly, the majority of depu- n the Rada were opposed to the resale of Kryvorizhstal, a n indication of ties i the scale of opposition to other potential privatizations. Combined with the major internal divisions on this issue in the government, it ensured that the record of further, transparent privatization remained very limited during 2005. Source: Trade Study (2005) and IEG mission. The “Demand” for Better Governance 4.10 The Bank’s assistance strategy also p r o v i d e d s u p p o r t to initia- tives that increased the d e m a n d for transparency and accountability. G i v e n the Ukrainian government‘s often ambiguous attitude and the c o n t i n u i n g p o w e r of vested interests, m u c h of t h e emphasis w a s placed on trylng to p r o m o t e m o r e local d e m a n d for transparency and account- ability. This w a s addressed through s u p p o r t to local think tanks and NGOs, as also through direct i n v o l v e m e n t ina project -known as the People’s Voice -f u n d e d by the Canadian government and m a n a g e d through a trust fund (see Box 5). The aim of the latter w a s to h e l p NGOs in several municipalities better monitor the delivery of p u b l i c services. Initially, the project operated in four municipalities, expanding to six at a later stage. The project initself had little policy content but a i m e d to raise local d e m a n d for accountability and h e l p i nprovidingmechanisms for channeling that demand. 42 4 CHAPTER IMPROVED TRANSPARENCY, PUBLIC SECTOR RESTRUCTURING, AND ACCOUNTABILITY Box 5. The People’s Voice Project Through the People’s Voice Project (PVP) i n 1999, the Bank initiated a three- year pilot program aimed at building integrity at the municipal level through strengthening the voice of citizen groups demanding better governance and services, and by facilitating more responsive public organizations. The project was funded by the Canadian International Development Agency (CIDA), and implemented through the local partner, the International Center for Policy Studies (ICE), along with the support of local partners. The PVP was started as a pilot project to enhance the quality of governance in four cities by monitoring the delivery of local services, supporting municipal policy ini- tiatives, promoting NGO capacity building, and facilitating public involvement in decision making. The main goal of the project was to promote citizen’s engage- ment in buildingan effective and responsible government, and ensure public par- ticipation in policy making. Cities were selected based o n the strength of local NGO and business partners, openness and relevant experience of local authorities, and their willingness to cooperate and contribute to the project. One of the main achievements of the project is that it promoted more public access to municipal de- cision making i nthe pilot cities. While many donors inUkraine focus o n either re- form of public administration or civil society development, the PVP concentrated in both areas and thus was quite distinct. B y developing numerous participation mechanisms and providing appropriate TA, the PVP played the role of catalyst in initiating policy reforms at the local government level. The PVP entered its second phase in November 2003, when it was scaled up to s i x new cities financed primarily by CIDA. It is managed by the World Bank i nasso- ciation with a number of local partners, including PADCO (Planningand Devel- opment Collaborative International) and the I C E . The second stage of PVP will be completed by June 2007. The core components of the second phase are citizen en- gagement and N G O development, municipal capacity building and improvement of services, and monitoring and research of municipalissues. Source: IEG mission. 4.11 A n evaluation of the PVP and the CAE mission interviews confirmed that the first phase of the PVP has h a d s i m c a n t i m p a c t in the pilot sites (Ivano-Frankivsk, Ternopil, Chuguiv, and Kupyansk)in mobilizingthe local public, inestablishing NGO coordination, and in improving communication and information flow between local admini- strations and citizens. The evaluation revealed specific impacts i n c l u d i n g i m p r o v e d attitudes of m u n i c i p a l officials toward N G O s and citizen in- volvement; continuation of initiatives regarding c o m m u n a l housing, education, utility p a y m e n t centers, and transportation; implementation of some n e w projects, soliciting citizen feedback and input through pub- lic hearings, consultations, and plans for further surveys from munici- palities; and an increase intransparency of local government decision making as evidenced by b u d g e t hearings and p u b l i c hearings.? Project activities supported efforts i nprivatization of local c o m d h o u s i n g units, improving service delivery i nh o u s i n g management, increasing 43 4 CHAPTER hlPROVED TRANSPARENCY, PUBLIC SECTOR RESTRUCTURING, AND ACCOUNTABILITY public access to local transportation shuttle services, and i m p r o v i n g school policies and programs at the local level. The project has h a d con- siderable impact i ni m p r o v i n g quality of these services i npilot cities.* THE BANK’S ASSESSING CONTRIBUTION 4.12 The Bank rightly diagnosed both the importance of i m p r o v i n g the quality of governance a n d the ambivalence, at best, o f the pre- 2005 government, t o w a r d t h i s objective. The effort in the CAE years was thus placed o n supporting the d e m a n d and s u p p l y o f govern- ance. On the d e m a n d side, the Bank focused o n h e l p i n g t o build con- sensus f o r r e f o r m a n d for raising the d e m a n d for better governance, particularly for the delivery of p u b l i c services. W h i l e the direct, posi- tive consequences o f this project w e r e limited, the support o f such ini- tiatives, coupled t o a n extensive p r o g r a m o f ESW, helped n u r t u r e a w i d e r culture o f e n q u i r y and, ultimately, d e m a n d for i m p r o v e d gov- ernance. Bank support to the NGO sector and to citizens was l i m i t e d in its direct impact, but by choosing strategically i m p o r t a n t areas i n w h i c h t o act and to propagate debate a n d discussion, the Bank ap- pears t o have p l a y e d a positive role. T h r o u g h a persistent emphasis o n transparency and accountability, the Bank was able to stimulate local initiatives and to b e a leading voice a m o n g the international fi- nancial institutions (IFIs) a n d other bilateral donor agencies. W h i l e difficult to quantify, these initiatives p r o v i d e d a p a r t i a l measure of re- straint a n d checks o n the behavior o f U k r a i n i a n politicians, parlia- mentarians, and other vested interests. 4.13 Efforts f o r b r o a d reforms in p u b l i c administration a n d c i v i l service did n o t materialize. A p u b l i c administration r e f o r m loan was dropped i n 2000 after three years of preparation along the lines o f IEG’s recommendations not t o use adjustment l e n d i n g f o r c i v i l service reforms.3 The objective of increasing ”transparency of privatization’’ has n o t been achieved i n spite of the f o r m a l compliance with the p r o - cedures established a n d m o n i t o r e d by the privatization advisory g r o u p (PAG) u n d e r the PAL program. The reprivatization of the Kry- vorizhstal steel mill for a price f i v e times higher t h a n the one obtained in the original sale in 2004 indicates serious governance problems in early privatization operations, particularly of large enterprises. This re-privatization s h o u l d b e seen as a s i g n that the emphasis on trans- parency w o n the day. There i s now evidence that public scrutiny o f privatization i s enhancing transparency. Public Financial Management BANKSTRATEGY 4.14 I m p r o v i n g the quality of p u b l i c financial management was a consistent element i n the W o r l d Bank’s engagement with Ukraine 44 4 CHAPTER IMPROVED TRANSPARENCY, PUBLIC SECTOR RESTRUCTURING, AND ACCOUNTABILITY after 1999. Emphasis was put on i m p r o v i n g the transparency of the budget process, i n c l u d i n g intergovernmental levels, i m p r o v e d use of public resources, rationalization o f the tax system a n d i t s administra- tion, i n c l u d i n g specific attention to the l i m i t a t i o n o f discretionary tax exemptions and other preferential treatment, such as subsidies. 4.15 Bank lending i nsupport of public finance management reforms included three adjustment loans (PAL I ,PAL 1 1 , and DPL) and two TA loans (Treasury Systems and State Tax Service Modernization project). The W o r l d Bank conducted its first review of the public procurement system o f Ukraine i n2001. The review recognized the considerable achievements of the government but also enumerated a series of chal- lenges -the need for m o r e development of the legislative framework, greater institutional capacity, and compatibility with n o r m s of interna- tional good practice. The review recommended important reforms, in- cluding regulations with clear, transparent rules; the use of standard bidding documents; strengthening o f institutional and organizational resources; expanded responsibility for the Public Procurement Office (the oversight and support body i nthe M i n i s t r y of Economy), and in- creased capacity among procuring entities. OUTCOMES 4.16 During the CAE period, the Bank p r o g r a m supported sigrufi- cant r e f o r m o f the U k r a i n i a n public financial management system t o i m p r o v e budget operations. M o d e r n budgetary institutions a n d prac- tices (treasury, budget code) were established. The U k r a i n i a n gov- ernment that came t o office i n 1999 gave high p r i o r i t y t o establishing financial discipline and accountability i n the budgetary sphere and i n contractual relations. This included: ( i) creation and enforcement the of cash o n l y r u l e for state budgetary operations from 2000; ( ii) the elimination of pension and public sector arrears, a n d the vast reduc- t i o n of other budgetary arrears; ( iii) introductionof a n e w budget the code i m p r o v i n g overall standards for b u d g e t preparation, execution, a n d the financial accountability of government administrations and Parliament ( w h i c h required measures to h a r d e n intrabudgetary trans- fers); and (iv) full operation o f an automated, i n t e r i m financial man- agement information system a n d treasury, focused o n core functions o f Treasury a n d the treasury single account. With the introduction of these reforms, the approved b u d g e t i s now a f a i r l y reliable g u i d e t o government fiscal policy. There i s a f a i r l y high degree of comprehen- siveness and transparency i n central government public finances. 4.17 Fiscal discipline, measured by deficit outcomes, was broadly maintained (see Table 16). Primary surpluses and strong g r o w t h have helped reduce the debt-to-GDP ratio from 61 percent of GDP in1999 t o an estimated 18.7 percent at end-2005. Tax revenues have become the backbone of fiscal adjustment, w h i c h was needed t o sustain economic 45 4 CHAPTER PUBLIC SECTOR RESTRUCTURING, AND ACCOUNTABILITY IMPROVED TRANSPARENCY, recovery. The increased stability that emerged i n2000 relied on narrowing the consolidated government deficit. A l t h o u g h this fiscal con- solidation was due partly to expenditure restraint as a consequence of hard financing constraints (inthe aftermath of the 1998 crisis), risingtax revenues played a k e y role to support it: consolidated government tax collections rose by almost 3 percent of GDP between 2000 and 2003 (see Table 16). In2004, the fiscal loosening was d r i v e n not o n l y by an increase inspending but also by a revenue loss caused by the introduction of a n e w tax regime, which included a flat personal income tax and by lower- ing the enterprise p r o f i t tax rate from 30 percent t o 25 percent. I n2005, a supplementary budget reduced a large number of tax preferences i nthe profit tax and value-added tax (VAT), including free economic zones. These measures have produced buoyant tax revenues, helping offset ris- ing outlays o n public wages and pensions granted i n2004-05, and containing the fiscal deficit. Table 16. Public Expenditure and Revenue (% of GDP) 1999 2000 2001 2002 2003 2004 2005 Public Expenditures 34.1 34.7 35.1 35.5 36.8 39.4 44.0 Current expenditures 32.1 32.4 31.5 32.9 32.4 33.0 39.9 Capital spending 2.0 2.1 3.0 3.1 4.3 6.0 4.3 Public Revenues 30.8 33.3 33.2 35.7 35.9 35.0 41.3 Tax revenue 30.2 28.2 27.9 30.3 30.6 29.2 35.0 Indirect taxes 9.7 8.6 8.7 9.9 8.8 8.6 12.3 Direct taxes 20.5 19.6 19.2 20.4 21.8 20.6 22.7 Non-tax revenues 0.6 5.1 5.3 5.4 5.3 5.8 6.3 Fiscal balance -3.3 -1.4 -1.9 0.2 -0.9 -4.4 -2.7 Source: Ministry of Finance, Treasury, World Bank, and IMF. 4.18 Public expenditures in Ukraine have g r o w n steadily since 1999, reaching 44 percent o f GDP i n2005, d r i v e n by hikes i n recurrent spending. Pension payments g r e w from 9.3 percent o f GDP i n 2003 t o 15.3 percent by 2005, w h i l e in parallel the pension system w e n t f r o m a small surplus i n 2003 to a 3 percent deficit in 2005. But capital spend- ing has remained l o w during m o s t of the r e v i e w period. Moreover, reported capital spending i s inflated by misclassified subsidies, w h i c h c r o w d out expenditures f o r infrastructure a n d equipment. 4.19 There were also i n i t i a l improvements in p u b l i c procurement, but these are now at r i s k because of backtracking since 2005. Ukraine began i t s concerted effort t o d r a f t comprehensive p u b l i c procurement legislation in late 1990. The Bank, together with EU (TACIS program) a n d USAID, p r o v i d e d assistance f o r the preparation o f the country's legislative framework for p u b l i c procurement. These efforts culmi- nated in February 2000 with the enactment of Ukraine's first "Public 46 4 CHAPTER IMPROVED TRANSPARENCY, PUBLIC SECTOR RESTRUCTURING, AND ACCOUNTABILITY Procurement Law,” which contains many elements of a sound procurement regime, including: ( i) a decentralized procurement sys- tem, under which ministries, public agencies, and state enterprises at different levels of public administration -central, oblast (district), city, and local-undertake their o w n procurement; ( ii) appropriate and in- ternationally accepted procurement methods for goods, works, and services; ( iii) competitive procurement procedures at national and in- ternational levels; (iv) transparency in public procurement, achieved through open access to information o n bidding opportunities; and (v) monitoring and enforcement of l a w through the creation of a na- tional Public Procurement Office i nthe Ministry of Economy. 4.20 Positive developments and improvements in t h e public procurement system continued with the implementation of many country procurement assessment recommendations through amend- ments to the public procurement l a w between 2001 a n d 2005. T h e number and total economic value of competitive tenders has steadily increased. In2002, fewer than 50 percent of tenders were awarded o n a competitive basis. This increased to 70 percent by 2005. The percent- age of sole-source contracts was reduced f r o m 24 percent to 15 percent during t h e same period. 4.21 However, this progress is n o w at risk because of recent amendments to the Procurement Law. The Parliament has approved (and has overruled presidential veto) three amendments to the public procurement l a w - the first one i nNovember 2004, the second inJune 2005, and t h e third i n December 2005. These amendments diluted and n that fragmented t h e oversight and support functions of the state i area. An NGO has n o w effectively assumed control over public procurement, creating a potential source of corruption. THE BANK’S ASSESSING CONTRIBUTION 4.22 Bank assistance, particularly the PAL program was instrumental for the introduction of modern budgetary practices inUkraine. Within the context of PAL I ,a formula-based intergovernmental transfer system was introduced and a single Treasury account covering all the oblasts became fully operational by the end of 2001. PAL I1and DPL contrib- uted to the reduction of tax exemptions. The Treasury Systems Project assisted inthe introduction of a working Treasury cash management system. The State Tax Service Modernization Program Project (2003) had a slow implementation start and lost more than a year due to the delays inprocurement. The project was restructured i n2005. The Public Expenditure and Institutional Review (2002) and C E M (2004) under- pinned the adjustment loans by creating a basis for policy reform and sustainability of the changes. 47 CHAPTER 4 IMPROVED TRANSPARENCY, PUBLIC SECTOR RESTRUCTURING, AND ACCOUNTABILITY Summary 4.23 Progress toward the Bank’s objective of helping t o restructure the public sector, improve transparency and accountability has been mixed. There have been some positive developments i n terms of re- duced corruption. By contrast, large privatization proceeded slowly and mostly o n a nontransparent basis. The Bank actively supported c i v i l society actors in t h e execution and monitoring public programs at the local level. A number of evaluations showed that c i v i l society projects supported by the Bank, t h e PVP in particular, were w e l l de- signed, properly targeted, a n d inclusive. The evaluations also con- cluded that these efforts have supported institutional innovations, models for public dialogue, a n d are seen as triggers for c i v i l society mobilization. Attempts to improve t h e quality of the public admini- stration did n o t make m u c h progress. 4.24 Regarding the public financial management reform, introduc- t i o n of a new budget code a n d modern budgetary practices were achieved i n t h e C A E period. There w e r e also important tax policy changes, including the elimination of most tax exemptions, introduc- t i o n of a flat personnel income tax, a n d simplification of the small tax payer system. There were also major administrative changes includ- ing the integration of the State Treasury i n t o t h e Ministry o f Finance, and t h e subordination of tax and customs organizations to the Minis- try of Finance. Some positive developments a n d improvements in the public procurement system continued with the implementation of many country procurement assessment recommendations through amendments to the public procurement l a w b e t w e e n 2001 a n d 2005, but this progress is currently at risk. Overall, the outcome o f this ob- jective i s rated as moderateZy satisfactory (see Table 17). Table 17. Pillar 2: Summary Outcome Rating Objectives Outcomes Restructuring of public sector, better governance, transparency and accountability Moderately satisfactory Better governance, transparency and accountability Moderately satisfactory Improved public financial management Moderately satisfactory NOTES 1 Voice Project -Ukraine (2003) by .Empowerment Case Studies: People’s Bhatnagar, Dewan, Kanungo and Torres. Ukraine: Better Governance in Ukraine through Public Participation-The 2. People’s Voice Project (2004) by Tom Monastyrski. IEG. 1999. Civil Service Reform: A Review of World Bank Assistance. 3. World Bank. 48 5. Poverty Reduction, Social Development, and Reduction of Regional Imbalances 5.1 The Country Assistance Strategies (CASs) i n2000 and 2003 increased the attention to p o v e r t y and social issues. T h e goals of t h e nparticu- CASs i n c l u d e d r e d u c i n g p o v e r t y overall, and r u r a l p o v e r t y i lar, improvingsocial indicators i nh e a l t h and education, and r e d u c i n g regional disparities. T h e CASs emphasized actions t h a t would i m p r o v e the targeting of social programs, r e f o r m the pension system, and de- v e l o p long-term plans for r e f o r m i nh e a l t h and education. Bank l e n d i n g insupport of the third p i l l a r w a s m u c h less than envisaged i nt h e CASs, mainly d u e to several d r o p p e d projects. Of 1 1projects i d e n t i f i e d inthe two CASs related to t h e third p i l l a r objectives, only f i v e w e r e ap- proved, and two of those i n2005. Of the approved projects, several ei- ther disbursed s l o w l y or not a t all, and two are presently i n suspension. Adjustment l e n d i n g (particularly PAL I ) also supported social sector objectives, but those objectives w e r e never seen as the central focus of the operations. Principal items i nthe adjustment operations i n c l u d e d the development of sector plans for h e a l t h and education. 5.2 The Bank also engaged i n a l i m i t e d p r o g r a m of ESW, particularly i nthe first h a l f of the r e v i e w period, t h a t m a y h a v e h a d greater i m p a c t than the lending. It i n c l u d e d reports on social assistance, pensions, regional development, agricultural development, a p o v e r t y assessment, and a jobs study. Inaddition, it contributed to a joint s t u d y (with the government and other donors) on the development of a h e a l t h strategy, and an i n f o r m a l n o t e on education reform. Poverty Reduction, Social Protection, Safety Nets BANKSTRATEGY 5.3 Poverty r e d u c t i o n w a s a major objective of the Bank’s strategy throughout the period, a n d w a s also a cross-cutting theme a m o n g t h e three pillars of t h e strategy. T h e 2000 CAE p o i n t e d out the failure of Bank assistance to d e a l with p o v e r t y and social sectors i np r e v i o u s years. Subsequent CASs took steps to increase ESW and l e n d i n g i n these areas. T h e Bank’s strategy focused on several issues i nhuman development, agriculture, and social protection i n c l u d i n g i m p r o v e d 49 CHAPTER 5 SOCIAL DEVELOPMENT, POVERTY REDUCTION, OF REGIONAL AND REDUCTION IMBALANCES targeting and cashing o u t of in-kind subsidies. For pensions, the strategy focused on the gradual introduction of a three-pillar system, the elimination of pension arrears, and restoring financial soundness t o the pension fund account. 5.4 The Bank carried out a substantial ESW p r o g r a m focusing on safety n e t issues, issuing reports in 2001 and 2004.1 Inaddition, safety net issues were a major p a r t of the 2005 Poverty Assessment. These re- ports concentrated on the p r o g r a m of subsidies and family assistance, but did not analyze the financial problems of the pension system. The latter issue was analyzed in-depth in the 2006 Public Finance Review. 5.5 Social assistance a n d pension issues w e r e p a r t of the PAL/DPL series of operations. The Bank financed a Social Investment Fund (SIF) project in 2001. The project provides funding for small in- frastructure projects in local communities, to i m p r o v e social service delivery, and for innovative community-based social care services as a n alternative t o residential care. A m o r e recent project in 2005 (Social Assistance System Modernization) provides funding t o support im- provements in implementation capacity a t the local level t o h e l p bet- ter target benefit p r o g r a m t o p o o r households. OUTCOMES 5.6 Poverty. Poverty declined sigruficantly between 1999 a n d 2003, largely as a result of the reforms, w h i c h l e d t o economic stability a n d eventually the recovery of the economy a n d higher incomes. Af- ter i n i t i a l years o f persistent levels of p o v e r t y a r o u n d 30 percent, the p o p u l a t i o n b e l o w the poverty l i n e by 20042 w a s less than 1 4 percent (see Table 18). W h i l e poverty in urban areas declined faster i n the years preceding 2004, r a p i d growth in agriculture value a d d e d (19 percent) l e d t o a sharp d r o p i n r u r a l p o v e r t y f r o m 28.4 percent in 2003 t o 17 percent, a 39 percent decline i n one year. Table 18. Poverty Rates 1999 2000 2001 2002 2003 2004 Total poverty rate 30.3 31.5 31.7 25.5 19.5 14.0 Rural poverty rate 31.9 34.9 37.5 33.0 28.4 17.0 Source: World Bank Poverty Assessment, 2005 and 2006. 5.7 Poverty reduction in U k r a i n e was faster than in comparable countries. U s i n g p o v e r t y lines that are comparable across countries, poverty incidence in Ukraine i s a m o n g the l o w e s t of the region, m u c h l o w e r t h a n Poland, Romania, a n d Russia. Aside f r o m Belarus, p o v e r t y has fallen faster in Ukraine t h a n comparator countries (see Table 19). Likewise, income distribution has remained relatively equitable, with 50 CHAPTER5 SOCIAL DEVELOPMENT, POVERTY REDUCTION, OF REGIONAL AND REDUCTION IMBALANCES a gini coefficient o f average 30 percent. Inequality measures are better n the ECA region. 3 than f o r m o s t o f the countries i Table 19. Poverty Reduction in ECA Region (percent of population below $4.33 poverty line) 1998-99 2002-03 Ukraine 29.4 22.2 Belarus 48.4 21.4 Poland 23.2 27.2 Romania 62.5 62.0 Russia 46.4 41.4 Source: World Bank Poverty Assessment, 2005. 5.8 Pensions and Subsidies. The government cleared the pension arrears in 2000 and adopted n e w legislation leading to a m o d e r n three-pillar pension system i n 2003. I t also introduced other reforms in the pension parameters designed t o m a i n t a i n the system’s fiscal soundness. However, subsequent parliamentary decisions i n 2004 and 2005 substantially increased the minimumpension and a d d e d a m o r e generous f o r m u l a for the calculation of benefits. As a result, pension benefits rose from 8.5 percent o f GDP in 2003 t o 10 percent in 2004 t o a n estimated 16 percent i n 2005.4 Pensions i n 2004 w e r e three times n real terms.5 As a result, the level o f 1999, representing a d o u b l i n g i the pension fund has m o v e d f r o m a surplus into a deficit and i s cur- r e n t l y operating a t a n unsustainable level. 5.9 Subsidies, in contrast, have been reduced by increases i nthe price of subsidized goods, budget cuts, and changes i n eligibility. In 2000, subsidies for f u e l a n d natural gas were ”cashed out” and p a i d by local governments directly. N e w income criteria were applied t o the housing subsidy starting i n2001 t o i m p r o v e targeting and eliminate households that did n o t need the subsidy. Nevertheless, the poorest quintile of the population s t i l l received less than 8 percent of a l l subsi- n2003, w h i l e the t o p two quintiles receive m o r e than 61 percent of dies i benefits. Occupational privileges were suspended under the 2000 and 2001 state budgets, but were reinstated by Parliament in 2002. 5.10 The p o v e r t y targeting of b o t h the f a m i l y benefit and the pov- erty benefit have also i m p r o v e d since 1999 (see Figure 5 a n d Figure 6). Nevertheless, 1 8 percent of the f a m i l y benefit and 15 percent of the poverty benefit go t o the richest 40 percent (in2003) a surprisingly high figure considering that these are supposedly targeted t o the poor.6 Overall, the impact o f these reforms o n the incomes of the p o o r has been mixed, a n d their contribution t o p o v e r t y reduction have been less sigruficant than that of the economic recovery, although im- portant f o r some groups (especially the elderly). Fiscal sustainability, a n d i m p r o v e d targeting r e m a i n important objectives for the future. 51 CHAPTER5 POVERN REDUCTION, AND REDUCTION SOCIAL DEVELOPMENT, OF REGIONAL IMBALANCES Figure 5. Incidence of Family Benefits Figure 6. Incidence of Poverty-Targeted Transfers 50 .- 5 35 -” 45 $ 40 E 30 D z 35 ! . a 25 2 30 m d 20 Z 25 p 15 g - 20 - 5 e 10 .- E 15 IO 5 5 r 5 8 0 0 Poorest 2 3 4 Richest Poorest 2 3 4 Richest 1999 mzoo3 0 1999 m2003 Source: World Bank Estimates based on Household Budget Source: World Bank Estimates based on HBS, Ukraine Poverty Survey (HBS), Ukraine Poverty Assessment, 2005. Assessment, 2005. THE BANK’S ASSESSING CONTRIBUTION 5.11 Although the overall outcomes w e r e mixed, the Bank’s contribu- nthis area w e r e substantial. PAL I tions i supported reforms that based pension calculations on actual contributions, b e g a n the transfer of pen- sion determination to the Pension Fund from the obhsts, and began de- velopment of a u n i f i e d social insurance database. Interms of social assis- tance, it u n i f i e d eligibility criteria and methodology for targeting social assistance, and expanded territorial centers and outreach services. Fur- ther reforms w e r e carried out with the PAL I1program, i n c l u d i n g pas- sage of l a w s on mandatory pension insurance and non-state pensions, and improvements in the database for insured persons. T h e n u m b e r of social benefit programs w a s reduced with i m p r o v e d focus on the m o s t vulnerable, and energy subsidies were transformed into cash payments. 5.12 The SIF, nominally a social protection project, is not related to so- cial assistance and pensions, but to the financing of community-based small-scale infrastructure in the social sectors, p l u s some social services. Bank staff h a v e been able to overcome bureaucratic hurdles and keep the SIF on track. The project i s moderately successful, although the rate of implementation i s far b e l o w w h a t h a d been expected. T h e project experi- enced sigruficant delays d u e to changes inproject management; with the SIF h a v i n g four executive directors since inception, three inthe past 18 months. A s of December 2005 only 27 percent of the loan h a d been disbursed, providingsupport for 467 c o m m u n i t y projects. 5.13 Bank s u p p o r t for social protection benefited from a firm foun- d a t i o n of analytic work. I n t r o d u c t i o n o f reforms in t h e PALS,and con- tinuity of p o l i c y dialogue eventually p r o v i d e d t h e e n v i r o n m e n t for pro- ject l e n d i n g for social assistance. M a j o r pension r e f o r m i s s t i l l u n d e r discussion, and t h e Bank i s w i s e to m o v e s l o w l y in this area p e n d i n g a 52 5 CHAPTER POVERTY REDUCTION, SOCIAL DEVELOPMENT, AND OF REGIONAL REDUCTION IMBALANCES clarification of the government program. A project for pension administration i s under preparation. Education BANK STRATEGY 5.14 Before 1999, the Bank h a d experienced several failed attempts to advance reforms and develop an education project. Government ob- jectives focused on project finance for schools, rather than sector re- form. Since 2000, the Bank proceeded cautiously in this area, given the resistance t o overall reforms and the failures experienced by other pro- jects in the social sectors. Education played a m i n o r p a r t in policy- based lending (through support for a n education sector strategy as part of PAL I ) and the first education project i nUkraine was o n l y approved in 2005. This adaptable p r o g r a m loan (APL), the Equal Access t o Qual- ity Education Project, focuses o n three b r o a d objectives7: i m p r o v i n g the quality of education t h r o u g h ensuring the professional development of teachers and streamlining the educational process; increasing access to nmanagement and education in r u r a l areas, and i m p r o v i n g efficiency i resource use. Little use has been made of ESW in this sector. OUTCOMES 5.15 Overall, progress inmeeting the challenges in education has been slow at best. While primary enrollment has risen, enrollment at the lower secondary level has declined (see Table 20). The system does n o t seem t o have adjusted to the changing student age structure, and the average student-teacher ratio has declined t o a generous 11.7:l. Programs, curric- ula, teaching practices, and aids are n o t yet appropriate to the needs o f building civil society and a knowledge economy. There is no system of national evaluation, educational facilities suffer f r o m years of forgone maintenance and neglect, and the tertiary education system suffers f r o m poor quality and fragmentation.8 Inthe w o r d s of the CAS progress re- port, ”Despite some progress, inequity inaccess t o education, eroding quality and relevance of education and inefficient use of financial re- sources ineducation remain problems.”9 5.16 The government and political leadership appear committed to i m p r o v i n g education. In 2001, the government approved a national strategy for the sector, the National Doctrine for Development of Edu- cation in Ukraine in the 21st Century, w h i c h redefined long-term pri- orities for education r e f o r m and i m p r o v e d service delivery f r o m pre- school through tertiary education. This has been further developed in subsequent documents, such as the Strategy for Economic and Social Development of Ukraine: 2004-2015 (2003), and the government’s m o r e recent Meeting the People (2005) w h i c h calls for improvements in social service provision. Political changes i nthe past s i x years, however, 53 CHAPTER 5 AND REDUCTION SOCIAL DEVELOPMENT, POVERTY REDUCTION, OF REGIONAL IMBALANCES nministers and d e p u t y ministers, h a v e i n c l u d i n g several changes i l i m i t e d the continuity and i m p a c t of r e f o r m implementation. Table 20. Education Indicators Baseline 2000 Outcome 2004 Education expenditures (YOof GDP) 3.7 6.4a Expenditures per student (% of per capita GNP): Primary 7.6 10.4 Secondary 11.2 15.7 Tertiary 36.4 27.1 Preschool enrollment rate 40.0 49.0 Net primary enrollment rate 81 .o 86.0 Net secondary enrollment rate 89.0 84.0 Gender ratio (girls to boys) 99.5 98.5 # o f students at higher education institutions (000's) 431 573 #of students at vocational schools (000's) 267 277 Source: WB World Development Indicators, Country Profile, or Data Profile. PElR (2006). a. Data from 2005. THE BANK'S ASSESSING CONTRIBUTION 5.17 A s n o t e d above, PAL I supported the n a t i o n a l education strat- egy and t h e dialogue on education reform, but the steps supported w e r e l i m i t e d to the development of plans rather than sigruficant p o l i c y actions. It i s surprising t h a t nothing w a s i n c l u d e d i nt h e DPL, as this c o u l d h a v e supported the p r o g r a m u n d e r the first education project and indicated to the government t h e importance the Bank assigned to the sector. It i s too early to t e l l if t h e E q u a l Access project will be free of the many problems t h a t h a v e p l a g u e d other projects in Ukraine. Except for the i n f o r m a l p o l i c y note, ESW does not seem to h a v e been u s e d to any great extent t o p r o m o t e t h e p o l i c y dialogue. L i t t l e progress has been m a d e so far on moving on several outstanding major issues. Health BANKSTRATEGY 5.18 T h e B a n k strategy i n t h e h e a l t h sector w a s to h e l p the gov- e r n m e n t i m p r o v e efficiency and raise q u a l i t y in t h e sector, with a p a r - ticular focus on the H I V I A I D S p r o b l e m . W h i l e U k r a i n e has an exten- sive h e a l t h system with w e l l - t r a i n e d staff, t h e system p r o v e d financially d i f f i c u l t to m a i n t a i n during t h e crisis years, a n d q u a l i t y has deteriorated. T h e h e a l t h sector w a s patterned after t h e Soviet model, with h e a v y emphasis on hospitals and i n s t i t u t i o n a l care. An a d d i t i o n a l p r o b l e m f a c i n g U k r a i n e h a s b e e n the r i s i n g l e v e l of H I V I A I D S . A I D S spread r a p i d l y i n a l l of the n e w l y independent states after 1995, p r i n c i p a l l y a m o n g drug users. I n f e c t i o n rates rose from practically zero in 1995 to 0.6 percent in 1999. Of e q u a l concern 54 CHAPTER5 SOCIAL DEVELOPMENT, POVERTY REDUCTION, OF REGIONAL AND REDUCTION lMBALANCES was the rapid rise of tuberculosis, related in part to t h e spread of AIDS. Infection rates for TB doubled b e t w e e n 1990 and 1999. 5.19 The flagship of the Bank’s strategy in t h e health sector was the TB/HIV/AIDS project, which was approved in November 2002. Some health issues were also dealt with in t h e PALSand DPL. The govern- ment prepared a health sector reform strategy (under PAL I ) and adopted an AIDS prevention program for 2001-03. PAL I1contained additional actions in the health sector, including preparation of a fi- nancial and economic analysis of the draft health insurance law, and regional plans were developed for t h e optimization of the rural health network in three oblasts. Detailed implementation plans for t h e TB and AIDS strategies were developed. These included a pilot imple- mentation of the directly-observed treatment, short-course (DOTS) program for TB, and an improvement in primary health care through the establishment of new family medical centers. OUTCOMES 5.20 Health outcome indicators show a mixed picture. W h i l e child and infant mortality have improved over the review period, l i f e expec- tancy has declined slightly overall, especially for males. This reflects a variety of factors, including a weakening of the health system, rising unemployment and stress, and a rise i n alcohol abuse (see Table 21). AIDS infection rates continued to rise in the period, reaching 1.3 percent of the population in 2004.10 Likewise, TB infection rates con- n 1998 to 81 per 100,000 in 2004. tinued to rise, from 55 per 100,000 i While the government adopted a national health strategy i n2005, as well as HIV/AIDS and TB strategies, implementation has been weak. Table 21. Health Indicators Baseline 1998 Outcome 2004 Public health expenditures (YOof GDP) 2.90 3.50 Health expenditures (% of total consolidated budget expenditures) 10.90 12.00 infant mortality rate 11,000 12.80 9.50 Under 5 mortality rate / I ,000 3.10 2.60 Incidence of tuberculosis / I 00,000 of people 54.60 81.20 Prevalence of HIV (% adult population) 0.59 1.26 Life expectancy 68.30 68.20 Source: Ukraine. Expenditure data from the Government of Ukraine, Joint Health Sector Strategy Report, 2005; HIV data from UNAIDS, Kiev. THE BANK’S ASSESSING CONTRIBUTION 5.21 The TB/HIV/AIDS project was designed to support the new national strategies for TB and AIDS, through the provision of technical 55 CHAPTER 5 SOCIAL DEVELOPMENT, POVERTY REDUCTION, OF REGIONAL AND REDUCTION IMBALANCES and institutional support, training and capacity building, procurement of drugs and other materials, and a p r o g r a m of education and informa- tion. Infact, the project has not been successful and was suspended i n April 2006, with 98 percent of the funds undisbursed. 5.22 Problems included the large number of vested interests i nthe country, w h o saw the project as a threat to the established system (in- cluding doctors, hospital administrators, pharmaceutical manufacturers, and government officials) and frequent changes in project management (and i nthe Bank team). The basic strategy for implementing the TB strat- egy, the W o r l d Health Organization (WHO) standard D O T S approach, appears t o have conflicted with Ukraine’s standard m o d e l of institution- alized service delivery (that is, hospital care). It was viewed as an ap- proach for poor counbies, not suited to an advanced country such as the Ukraine. Final agreement o n the use of the strategy was not achieved un- til 2005, three years after implementation was t o have begun. 5.23 Procurement issues were also a major factor in the project’s poor performance. The government objected t o procurement of drugs under international competitive bidding (ICB), perhaps because i t wished t o protect its o w n drug industry. In addition, the government received large amounts o f grant funds f r o m the Global Fund (although this operation was also suspended in 2005). The government was not able t o coordinate effectively the assistance received from multiple do- nors. The Bank-sponsored Project Implementation Unit (PIU) did not w o r k effectively, and was not integrated into the M i n i s t r y of Health. Disagreements also arose between the Bank and the government over the use of NGOs for implementation and over the handling of pro- curement. Measures to correct these problems p r o v e d ineffective i n ac- celerating disbursements and i m p r o v i n g implementation. G i v e n these problems, the Bank suspended the project in April 2006, and has also decided to d r o p a proposed health sector r e f o r m project. 5.24 Bank goals for the sector were clearly optimistic, g i v e n the situation and Bank overestimation of the government’s capacity to un- dertake reforms and execute projects. W h i l e some i n f o r m a l TA was given to the government, and the Bank contributed to a joint sector re- view, little use was made o f formal ESW to promote policy dialogue. G i v e n the heavy bureaucracy and confused leadership in the sector, the Bank was probably wise t o proceed slowly. Starting the H I V / A I D S project was ill-advised, given the circumstances and was probably rushed in order to show that the Bank was doing something about AIDS. Clearly the DOTS strategy should have been adopted before the project h a d begun. Likewise, the use of a large PIU of consultants paid by the project and separate f r o m the M i n i s t r y of H e a l t h staff meant there was little r o o m for permanent capacity building, and a potential for conflict. These problems could have been foreseen, as they have also 56 5 CHAPTER POVERTY REDUCTION, OF REGIONAL AND REDUCTION SOCIAL DEVELOPMENT, IMBALANCES plagued many other projects i nUkraine that preceded the TB/HIV/ AIDS project.11 Agriculture and Regional Development BANKSTRATEGY 5.25 The Bank’s strategy for agriculture and rural development fo- cused o n the need t o eliminate t h e government-dominated supply chain, restructure Soviet-type farms, and eliminate trade barriers. The Bank, working with other donors, provided support for the develop- ment of an agricultural policy capacity in the f o r m of a n Agricultural Policy Analysis Unit as part of the Presidential Commission for Agrarian Policy. T h e unit contributed to the drafting and review of important legislation, dealing with WTO accession issues, a n d t h e production of reports o n agricultural and policy research. This Institu- tional Development Fund (IDF) grant-fundedactivity was identified as ”best practice” by a QAG review of agricultural T A and i n a n ECA regional review of T A and sector work.12 5.26 As part of the PAL program, the government agreed t o pass a decree o n reforming ownership of agricultural land, issue l a n d certifi- cates, and eliminate state monopolies covering 90 percent of agricul- tural inputs and outputs. PAL I1 listed as milestones t h e enactment of a l a w for a unified system of registration of land titles and t h e issu- ance of 3.4 million land titles. A Land Titling and Cadastre Develop- ment Project was approved i n 2003.13 5.27 n income was initially seen as a Reducing regional disparities i key objective, particularly in the 2003 CAS. Early efforts focused o n developing a stable and transparent system of intergovernmental fi- nance as a way of reducing t h e gap between rich and poor regions, and promoting regional development. An informal note o n intergov- ernmental finance was prepared in 2000, and a larger report o n re- gional development in 2OO2,’4 as part of t h e continuing dialogue be- t w e e n the Bank and the government o n these issues. OUTCOMES 5.28 After a major decline during the 1990s, agricultural output ex- panded after 2000, with a setback in 2003 due to b a d weather. Govern- ment actions to reduce price distortions and interference in agricultural markets, and the distribution of land to the private sector help explain the agricultural recovery. Nevertheless, production levels in 2004 were only 75 percent of the 1990 levels.15 Poverty in rural areas rose to a peak of 38 percent in 2001 and t h e n dropped to 17 percent by 2004. 57 CHAPTER 5 SOCIAL DEVELOPMENT, POVERTY REDUCTION, OF REGIONAL AND REDUCTION IMBALANCES 5.29 The government's focus in r u r a l areas was o n the distribution of land titles and the break-up o f the state a n d collective farms. W h i l e collective farms were p r i v a t i z e d in the 1990s, the issuance of state deeds t o demarcated parcels o f land only began in 2000, along with the legalization o f the land rental market. A s of M a r c h 2006, a n esti- mated 6 m i l l i o n land titles h a d been issued in exchange f o r land shares, and 35 percent of l a n d i s h e l d by the poorest 40 percent o f households (see Table 22). M o s t of the n e w l y acquired l a n d was leased out, particularly by the poorer households, a n d became an im- portant source of income a n d gave m o r e entrepreneurial farmers an opportunity to expand their operations.'6 The result w a s a major im- provement in the incentives for farmers to operate efficiently, a n d production increased as a result. Table 22. Agriculture and Regional Development Outcomes Baseline 1999 Outcome 2003 Poverty rate, rural 31.9 17.0a Agricultural production (1999=100) 100 114 Total land held by rural households ('000 hectares) 2,210 16,830 Percent land owned by poorest 40 percent 33 35 Ratio of GDP per person in richest oblast to poorest oblast 3.70 6.09 a In2004 Source: IEG mission findings 2006. THE BANK'S ASSESSING CONTRIBUTION 5.30 M o s t of the Bank's attention focused on the l a n d titling issue a n d the r u r a l finance project h a d been in the l e n d i n g p r o g r a m since the 1999 C A S Progress Report. After a v e r y l o n g preparation period, it was presented to the B o a r d as p a r t of the Access t o Financial Services project in June 2006. No progress was m a d e o n the development o f a r u r a l development strategy as foreseen in the 2003 CAS. Implementa- t i o n of the land titling project has faced serious obstacles, and o n l y about $5 million17 o f the $163 m i l l i o n l o a n has been disbursed. W h i l e the government m a d e substantial progress in issuance of title docu- ments and mapping, it w a s able to do t h i s with i t s o w n and other do- n o r resources. A major p o r t i o n of the project was to assist in the es- tablishment of the cadastre a n d registration systems, but this has been blocked because o f bureaucratic in-fighting over i t s control. The rea- sons for the failure o f the land titling project are similar to other past project mistakes -there w a s n o consensus o f support within the gov- ernment f o r the project, and the Bank appraised and approved it be- fore a k e y decree was put in place. 5.31 On the p l u s side, pressure in PAL Ito eliminate monopolies in agriculture seems to have been effective in reducing government 58 5 CHAPTER POVERTY REDUCTION, OF REGIONAL AND REDUCTION SOCIAL DEVELOPMENT, lMBALANCES interventions, w h i l e the Agricultural Policy Analysis Unit has made useful contributions i np r o m o t i n g reforms and reducing backtracking. After d o i n g away with directed credit to agriculture i n2000, the market made available more resources to finance increasing agricultural pro- duction. This i s a n outstanding example of market response. The Bank advised the government against creating a specialized financial institu- t i o n for the r u r a l sector. Rather, the Bank supported passage of the se- cured transactions law, w h i c h facilitated further financing for agricul- ture u s i n g collateral. The experience of other countries shows this t o b e the correct approach and it i s already beginning t o work i n Ukraine. 5.32 The l i m i t e d data available suggest that regional imbalances have worsened over time. The ratio of per capita income between Kyiv (the richest oblast) and the poorest oblast w e n t from 3.7 i n1999 to 6.1 i n 2003 (see Table 22). The poverty assessment in 2005 notes that poverty nlarge cities than i fell m o r e i nr u r a l areas, with poverty i n small towns faring somewhere i nbetween. However, the 2006 poverty assessment indicates that rural poverty declined sharply f r o m 28.4 percent i n2003 to 17 percent i n2004, a big decline of 39 percent injust one year. 5.33 Interms of regional development, w h a t started off as a major thrust seems t o have fallen by the wayside. Aside f r o m the change in the interregional allocation formula, little was accomplished i n either the production o f a viable r u r a l development strategy or a strategy for m o r e balanced regional development. L i m i t e d available indicators show that regional disparities have increased. Summary 5.34 The third p i l l a r outcomes are rated moderately unsatisfactory (see Table 23). In terms of p o v e r t y reduction, there have been sigrufi- cant achievements as a result of r a p i d economic growth. Ineducation, some l i m i t e d reforms have been agreed, but the m a i n objectives of the assistance p r o g r a m have n o t been achieved. I nhealth, there has been n o agreement o n reform, a n d the Bank’s o n l y project intervention i n H I V / A I D S has n o t been implemented and i s currently in suspension. In social protection, some progress has been made in i m p r o v i n g pen- sion administration and targeting of subsidies, but some of t h i s pro- gress has been reversed by recent actions of the Parliament and the courts. Recent increases i n pension benefits, for instance, m a k e the system financially unsustainable. A SIF has been moderately success- ful. Inagriculture and r u r a l development, no progress has been m a d e in reducing regional disparities. Gains i n land registration have been l i m i t e d by failure to establish a land registry despite Bank project assistance. 59 CHAPTER 5 SOCIAL DEVELOPMENT, AND REDUCTION POVERTY REDUCTION, OF REGIONAL IMBALANCES Table 23. Pillar 3: Summary Outcome Rating Objectives Outcomes Poverty reduction, human development and Moderately unsatisfactory reduction of regional imbalances Social protection and social safety nets Moderately satisfactory Education Moderately satisfactory Health Unsatisfactory Reduction of regional differences Moderately unsatisfactory 1,W o r l d Bank. 2001. Ukraine: Safety Nets and Poverty and 2004 “Ukraine: NOTES I m p r o v i n g Safety Nets and Labor Market Policies to Reduce Poverty and Vulnerability.” 2, The government notes that, according to the national relative poverty crite- r i o n (equal to 75 percent of median income adjusted for family composition), the poverty numbers for the 2001-2005 period are as follows: I 2001 I 2002 I 2003 1 2004 1 2005 I General poverty level 27.2 27.2 26.6 27.3 27.1 W o r l d Bank. 2005. Ukraine: Poverty Assessment - Poverty and Inequality in 3. See a Growing Economy. p. 7. W o r l d Bank. 2005. “Pension Reform i 4. n Ukraine: Remedies to Recent Fiscal and Structural Challenges.” Bank. 2005. Ukraine: Poverty Assessment - Poverty and Inequality i n a 5. W o r l d Growing Economy. 6. Ibid., p. 48: 7. For detailed project objectives see W o r l d Bank. 2005. “Ukraine: Equal Ac- cess to Quality Education in Ukraine Project - Project Appraisal Document (PAD)”, Report N o . 32175-UA. B,Ibid., p. 1. 9,World Bank. 2005. Country Assistance Strategy Progress Report for Ukraine for 2004-2007. Annex B9. 10. W H O / U N A I D S Kyiv (May 2006) estimated the rate in 2005 at 1.46 percent. 11.Similar problems were noted in the portfolio review by Susanne Mueller in 2002. She concluded, however, that the then n e w T B / H I V / A I D S project was structured to avoid these problems. See Susanne Mueller. 2002. “A Strategy and Guidelines for the Assessment and Minimization of Political Risk in n Ukraine.” W o r l d Bank, Country Director’s Office, W o r l d Bank Lending i ECCll. 12. Implementation Completion Memo, IDF Grant for Agricultural Policy Ca- pacity Building Grant #27425 (August 2004). 13. W o r l d Bank. 2003. Ukraine: Rural L a n d Titling and Cadastre Develop- ment Project - PAD, Report N o . 25920-UA. Bank. 2002. Ukraine: Moving Fomard on Regional Development b 14, W o r l d Regional Policy. 60 5 CHAPTER SOCIAL DEVELOPMENT, POVERTY REDUCTION, OF REGIONAL AND REDUCTION IMBALANCES 2004. Achiming Ukraine’s Agricultural Potential, Figure E.2 15. W o r l d Bank. gives data up to 2002, which has been extended using production figures in Table 1.5. 16. Poverty Assessment, pp. 35,41, Rural L a n d Titling PAD, p. 4. 1’ . As of end of fiscal 2006 (June 30,2006). 61 6. Conclusions, Lessons, and Recommendations Overall Assessment 6.1 T h e CAE s h o w s t h a t Bank‘s assistance strategy w a s highly relevant. Many of t h e targets set i n t h e CASs w e r e achieved, though with shortcomings i n several areas, and the efficiency of i n v e s t m e n t l e n d i n g w a s low. Therefore, t h e o v e r a l l outcome of t h e B a n k assis- tance p r o g r a m is r a t e d moderately satisfactory (see Table 24). 6.2 T h e assessment in Chapter 3 shows t h a t the Bank’s assistance h e l p e d achieve substantial outcomes i n its f i r s t pillar, sustainable eco- n o m i c growth a n d i n t e g r a t i o n into t h e world economy. U k r a i n e h a s achieved s t r o n g growth after years of recession, and a p r u d e n t fiscal p o l i c y has r e d u c e d t h e l e v e l of p u b l i c indebtedness. Growth in t h e fi- nancial sector has b e e n r a p i d a n d sustained, business regulations h a v e b e e n simplified, a l t h o u g h m u c h m o r e progress i s required. Fi- nancial discipline has i m p r o v e d in t h e energy sector with t a r i f f collec- tions reaching over 95 percent. U k r a i n e has m a d e sigruficant progress with the WTO accession, a l t h o u g h t h e process i s y e t to b e completed. Progress has been l i m i t e d on e n v i r o n m e n t a l issues. T h e o u t c o m e of t h e f i r s t p i l l a r i s r a t e d satisfactory. 6.3 T h e outcome on t h e second pillar, r e s t r u c t u r i n g t h e p u b l i c sec- tor a n d i m p r o v e d transparency and accountability (Chapter 4), i s r a t e d moderately satisfactory. B a n k assistance, p a r t i c u l a r l y through ad- j u s t m e n t lending, h e l p e d establish m o d e r n b u d g e t a r y i n s t i t u t i o n s and practices, as w e l l as m a i n t a i n fiscal discipline. Control of c o r r u p t i o n has improved, but it remains a problem. M u n i c i p a l service d e l i v e r y has i m p r o v e d i ncities w h e r e t h e People’s Voice Project w a s active. However, there has b e e n l i t t l e or no progress i nr e f o r m i n g t h e p u b l i c a d m i n i s t r a t i o n and in improving t h e efficiency of t h e p u b l i c sector. 6.4 T h e outcome of Bank assistance in support of the third pillar, p o v e r t y reduction, h a r m o n i z e d human development, and r e d u c t i o n of regional imbalances (Chapter 5), is r a t e d moderafely unsatisfactory. Al- though p o v e r t y incidence has declined as p e r capita GDP and con- s u m p t i o n have grown, and social assistance programs h a v e b e e n sim- plified, there has b e e n l i t t l e i m p r o v e m e n t in social indicators. There has also been no progress in r e d u c i n g t h e disparities between regions. In education, p r i m a r y school enrollments have risen, but secondary 63 CHAPTER 6 AND RECOMMENDATIONS CONCLUSIONS, LESSONS, school enrollments h a v e declined. H e a l t h outcome indicators s h o w a m i x e d picture. Child and infant m o r t a l i t y h a v e improved, w h i l e l i f e expectancy has declined slightly. T h e TB and AIDS epidemics h a v e worsened: infection rates c o n t i n u e d to rise in t h e period, particularly for TB. Table 24. Overall Outcome Rating Objectives Outcomes Overall Moderately satisfactory Sustainable economic growth and integration into the Satisfactory world economy Restructuring public sector and improved transparency Moderately satisfactory and accountability Poverty reduction and harmonized human development Moderately unsatisfactory Institutional Development Impact 6.5 T h e B a n k p r o v i d e d extensive TA a n d policy recommendations to s u p p o r t i n s t i t u t i o n a l d e v e l o p m e n t in U k r a i n e throughout t h e CAE period. T h e q u a l i t y of macroeconomic management has i m p r o v e d over t h e period, albeit from a relatively low base. T h e p r i n c i p a l achievements in t h e financial sector w e r e t h e establishment of a n e w l e g a l framework, changes to t h e w a y i nw h i c h t h e central bank regu- l a t e d and supervised the financial system, and i m p r o v e m e n t s in t h e management and l e n d i n g b e h a v i o r of t h e r e m a i n i n g state-owned banks. There w a s m a j o r progress - p a r t i c u l a r l y t o w a r d t h e e n d of t h e r e v i e w p e r i o d in m e e t i n g WTO criteria for accession. S i m p l i f i c a t i o n of t h e tariff structure a n d the m o v e m e n t a w a y from quantitative a n d other restrictions represents a m a j o r advance. There w e r e also a num- b e r of i n s t i t u t i o n a l i m p r o v e m e n t s in t h e p u b l i c sector, i n c l u d i n g a n advanced b u d g e t c o d i n g a n d Treasury cash management system. In t h e area of p u b l i c administration, despite n u m e r o u s technical studies a n d f u n c t i o n a l reviews, t h e Bank’s assistance did not r e s u l t i n any m a j o r reform. T h e p u b l i c a d m i n i s t r a t i o n c o n t i n u e d to b e overstaffed, m o s t l y underpaid, a n d poorly managed. There w a s some expansion of NGO capacity not only with t h e design and conduct of p u b l i c pol- i c y but also t h e monitoring of p u b l i c services. Overall, t h e institutional development i m p a c t i s r a t e d modest. Risk to Development Outcome 6.6 Risks are considered significant. T h e growth acceleration from 2000 to 2006 i s u n l i k e l y to b e sustainable without further i m p r o v e m e n t in the business environment, w h i c h would encourage greater domestic p r i v a t e and foreign direct investment. These require sigruficant 64 CHAPTER 6 CONCLUSIONS, LESSONS, AND RECOMMENDATIONS progress i n areas such as contract enforcement, property rights, and regulation. Intrade, m o r e diversification i s needed: U k r a i n e relies on a l i m i t e d range of heavy industries for exports, such as iron and steel and chemical, and these industries i nturn are energy-intensive and depend on imports; thus they are susceptible to major adverse price shocks. 6.7 Inthe p u b l i c sector there are four types of risk. T h e first i s fis- cal sustainability of the pension system a n d problems with p u b l i c procurement (see Chapter 4). T h e second i s that p u b l i c spending i s high (at 45 percent of GDP) and has b e e n increasing steadily since 1999, w h i c h i s c r o w d i n g out p r i v a t e investment. T h e consumption orientation of public expenditures means that u r g e n t l y needed p u b l i c investments are delayed particularly i n the infrastructure sector. T h e third r i s k i s that the combination of low deficits and strong GDP growth has reduced explicit p u b l i c d e b t to about 1 9 percent of GDP i n 2005 from over 60 percent in 1999. However, contingent liabilities re- m a i n high a t some 40 percent of GDP i n 2005, largely reflecting loan guarantees to state enterprises and l o s t savings. Finally, Naftogaz, the state-owned monopoly that controls Ukraine's gas sector, i s finan- cially vulnerable -a n d highly exposed to international gas price fluc- tuations. Estimates suggest t h a t Naftogaz 's quasi-fiscal deficits might b e sigruficant. 6.8 In the financial sector, with r e a l credit growth of about 40 per- cent annually since 2001, Ukraine's domestic credit boom has b e e n one of the fastest a m o n g transition economies. At the same time, f i r m s a n d banks have continued to borrow heavily abroad. As a result, overall corporate debt exceeded 50 percent of GDP by the e n d of 2006. H o u s e h o l d sector debt, also m o s t l y in foreign currency, swelled i n the past two years. These developments h a v e created sigruficant indirect foreign-exchange r i s k for the banking system. I naddition, there re- m a i n a sigruficant n u m b e r of under-capitalized banks i nU k r a i n e w h e r e connected l e n d i n g i s s t i l l important and overall governance i s inadequate. Bank Performance 6.9 Assessing the Bank's performance differs from assessing t h e outcomes of the assistance program. Bank performance i s an input to the process, a n d thus distinct from outcomes, w h i c h are influenced by a variety of factors. T h e assessment of Bank performance involves looking a t issues such as t h e relevance of the strategy; consistency of the actual assistance to the p l a n n e d assistance; p r o g r a m and project designs; efficiency of lending; q u a l i t y of n o n l e n d i n g assistance and linkages with lending; and effectiveness of partnerships. 65 CHAPTER 6 CONCLUSIONS, AND RECOMMENDATIONS LESSONS, 6.10 Overall, Bank performance was good during the p e r i o d o f evaluation. T h e strategy that e v o l v e d i n the early 2000s w a s under- p i n n e d by good-quality ESW, consistent with t h e government’s agenda, the country’s development needs, a n d the Bank’s own com- parative advantages. The i n s t i t u t i o n w a s able to l e a r n lessons from t h e 1990s, particularly i n the energy sector. T h e decentralization of the Country Management Unit (CMU) and the buildup of technical ex- pertise i nthe f i e l d were important factors contributing to the im- provement i n outcomes. 6.11 Analytical work w a s of good q u a l i t y a n d w a s u s e f u l for sup- porting adjustment operations, providing u s e f u l advice to the gov- ernment, w h i c h h e l p e d i nthe p o l i c y dialogue. Based on IEG inter- v i e w s with officials a n d members of c i v i l society, IEG found that the m o s t w i d e l y appreciated r o l e of the Bank’s assistance p r o g r a m i n U k r a i n e w a s i t s ESW. A n u m b e r of those interviewed, i n c l u d i n g for- m e r finance ministers, stressed t h e positive i m p a c t of the continuous p o l i c y dialogue in establishing m o r e widespread understanding of t h e requirements for a m a r k e t economy, a n d of the f u n c t i o n i n g a n d interaction of energy policies. T h e Bank h a d also contributed i nfacili- t a t i n g p o l i c y dialogue a m o n g government agencies. T h e Bank broad- ened the range of partners a n d stakeholders, a n d i m p r o v e d i t s dia- logue with N G O s and c i v i l society. 6.12 The efficiency of the Bank’s l e n d i n g p r o g r a m w a s uneven, however, a n d w a s particularly problematic for the investment lend- ing. With the relatively high cost of d r o p p e d projects and cancella- tions, investment l e n d i n g w a s not cost effective. It accounted for m o r e than 80 percent of total l e n d i n g costs a n d less than 20 percent of dis- bursements, and h a d generally poorer results. Main Findings ON STRATEGY AND OBJECTIVES 6.13 A focus on overall governance i s needed to guide and prioritize specific contributions from each sector, project, and thematic interven- tion. The Bank identified the n e e d for governance improvements and institutional development as the central challenge facing U k r a i n e throughout the CAE period, but only the 2000 C A S m a d e governance an explicit central focus of the Bank’s assistance strategy: in the n e x t C A S the lack of a central urufyingprinciple detracted from the ultimate objectives. At the same time, Bank assistance correctly identified throughout the CAE p e r i o d the priority components of governance for the purposes of specific interventions (from electricity arrears to trans- parency i nprivatization, to p u b l i c procurement and financial manage- ment). T h e challenge for the f u t u r e will b e to continue emphasizing 66 6 CHAPTER AND RECOMMENDATIONS CONCLUSIONS, LESSONS, governance across the economy w h i l e focusing on specific priority areas that are susceptible to change. 6.14 The Bank h a d a very b r o a d agenda throughout the period, particularly after the 2003 CAS, because it sought to cover all aspects of the government agenda. Greater selectivity might have helped to im- prove outcomes. 6.15 T h e Bank’s consistent overestimation of t h e government’s nboth l o w e r l e n d i n g pro- capacity or c o m m i t m e n t to r e f o r m resulted i g r a m (adjustment a n d investment) than anticipated, a n d achieve- ments t h a t f e l l short of expectations a n d specific benchmarks. Exam- ples i n c l u d e privatization of the electricity sector, l a n d titling, and the transparency of privatization. ON SECTOR OUTCOMES 6.16 T h e Bank p r o g r a m contributed to the consolidation of macro- economic stabilization, w h i c h l e d to economic recovery, high growth, a n d p o v e r t y reduction. The package of f i v e adjustment loans has con- t r i b u t e d sigruficantly to s o l v i n g the p r o b l e m of fiscal imbalances a n d excessive financial arrears, a n d high debt. I n f l a t i o n was reduced to single digits. A f t e r scoring some gains in macroeconomic stability, economic performance and p o v e r t y indicators started to improve. In 2004,14 percent of the p o p u l a t i o n w a s living b e l o w the p o v e r t y l i n e compared to 30 percent in 1999. T h e Bank program’s central objec- tives of p o v e r t y alleviation a n d growth cannot b e achieved without macroeconomic stability. 6.17 Public sector r e f o r m i s a critical element of a governance- focused strategy. T h e Bank was right to put m o s t of i t s l e n d i n g and k n o w l e d g e resources to support improvements i n the public sector a n d p u b l i c financial management, and the efforts p a i d off in spite of lower-than-anticipated progress. T h e r e f o r m of the p u b l i c administra- tion s h o u l d b e seen as work i n progress within t h e broader context of the n e e d to reduce the size of the U k r a i n i a n state. At present, the gov- ernment system i s not only inefficient but greatly over-dimensioned. The Peoples Voice Project has pioneered the i n v o l v e m e n t of c i v i l soci- ety in the execution and monitoring of p u b l i c p r o g r a m a t the local level. W h i l e the direct, positive consequences of this project, particu- l a r l y a t the national level, were limited, the fact remains that support of such initiatives -coupled with a n extensive p r o g r a m of ESW - h e l p e d to n u r t u r e a w i d e r culture of e n q u i r y and, ultimately, d e m a n d for i m p r o v e d governance. 6.18 As in other transition economies improvements in Ukraine’s private sector business climate d e p e n d on overall governance im- provements as m u c h as on i m p r o v e d regulations for the sector. Legal 67 CHAPTER 6 AND RECOMMENDATIONS CONCLUSIONS, LESSONS, a n d r e g u l a t o r y i m p r o v e m e n t s w e r e modest, and t h e q u a l i t y of business e n v i r o n m e n t did not i m p r o v e sufficiently to generate sub- stantial domestic p r i v a t e i n v e s t m e n t a n d FDI. 6.19 B a n k contributions w e r e h i g h e r i n sectors w h e r e adjustment a n d i n v e s t m e n t l e n d i n g r e i n f o r c e d each other’s impacts. This w a s par- n the electricity sector, but t h e Bank did not achieve t i c u l a r l y t h e case i this i n several other sectors, s u c h as education and health. ON INSTRUMENTS 6.20 Both sectoral and cross-cutting multisectoral adjustment lend- ing c a n b e successful w h e n t h e c o u n t r y conditions are right, t h e ana- l y t i c a l u n d e r p i n n i n g s are sound, and t h e i r l i n k s to t h e o v e r a l l strategy are clear. T h i s w a s the case for both sectoral (EDAL I1a n d FSAL) a n d multisectoral (PAL p r o g r a m a n d DPL) adjustment operations. 6.21 On t h e o t h e r hand, o v e r l y w i d e coverage m a y l e a d to r e d u c e d attention i n some important areas. T h e PAL p r o g r a m w a s right to i d e n t i f y and focus on several cross-cutting aspects of p u b l i c sector performance w h i c h shared some c o r n o n roots, i n c l u d i n g enterprise arrears, poor collections i n t h e electricity sector, tax a n d p e n s i o n ar- rears, a n d other aspects of p u b l i c financial management. At t h e same time, however, m a k i n g t h e PAL p r o g r a m t h e vehicle for s u p p o r t i n g policy reformi n many other areas; this l e d to r e d u c e d a t t e n t i o n to re- forms i nh e a l t h and education, l a n d titling, a n d the environment, w h i c h would h a v e benefited from a m o r e focused a p p r o a c h through sector adjustment or i n v e s t m e n t operations. 6.22 T h e p r i n c i p a l focus of investment operations i nt h e U k r a i n e p r o g r a m w a s i n s t i t u t i o n a l development, rather t h a n resource transfer, w h i c h w a s only a n i m p o r t a n t objective i n the electricity sector a n d l a n d titling projects. Y e t t h e design and p r e p a r a t i o n of many invest- m e n t projects o w e d m o r e to t h e Bank’s s u p p l y - d r i v e n b e h a v i o r t h a n to s u p p o r t i n g a g o v e r n m e n t p r o g r a m t h a t i n c l u d e d these projects. T h i s caused delays i np r e p a r a t i o n and i m p l e m e n t a t i o n a n d resulted in underachievement of objectives. 6.23 T h e B a n k r e l i e d on project i m p l e m e n t a t i o n u n i t s (PIUs) out- side of the r e g u l a r g o v e r n m e n t structure, w h i c h r u n s counter to t h e i n s t i t u t i o n a l d e v e l o p m e n t objectives. PIUs are o f t e n j u s t i f i e d as a trade-off arrangement t h a t ensures efficient project i m p l e m e n t a t i o n a t t h e cost of some r e d u c t i o n i n capacity building objectives. Yet, t h e PIU’s separation from the r e g u l a r g o v e r n m e n t l i n e departments c a n also i m p e d e both i m p l e m e n t a t i o n and capacity building.1 6.24 In i t s n e x t CAS, t h e Bank will n e e d to take into account t h e m i d d l e - i n c o m e status of Ukraine. T h e f u t u r e agenda for t h e B a n k will 68 CHAPTER 6 AND RECOMMENDATIONS CONCLUSIONS, LESSONS, b e m o r e d e m a n d - d r i v e n than i t w a s previously, but within those l i m i t s there is m u c h l a t i t u d e for B a n k assistance. Recommendations 6.25 T h e CAE f i n d i n g s point to three m a i n recommendations: (i) Bank strategy s h o u l d strive for greater selectivity, focused on p u b l i c financial management, p r i v a t e sector development, en- ergy, a n d social protection. Within these areas t h e p r o g r a m s h o u l d g i v e priority to the themes of governance and institu- t i o n a l development, a l l subject to government interest in and nthese areas. c o m m i t m e n t to c o n t i n u e d r e f o r m s i (a) Inpublic financial management, t h e Bank s h o u l d focus on improving t h e q u a l i t y of p u b l i c financial management institutions i n c l u d i n g tax a d m i n i s t r a t i o n (VAT a d m i n i - stration in particular), p u b l i c procurement, and t h e capi- t a l b u d g e t i n g process. T h e Bank s h o u l d build on i t s re- cent analytic work and, to t h e extent practical, operate i n partnership with other donors. (b) T h e B a n k s h o u l d increase i t s focus on private sector de- velopment by: (a) r e i n v i g o r a t i n g t h e p r i v a t i z a t i o n proc- ess, i n c l u d i n g t h e r e m a i n i n g state banks; (b) s u p p o r t i n g competitiveness a n d trade diversification; a n d (c) ensur- ing i m p r o v e d corporate governance and business envi- ronment, i n c l u d i n g through t h e a d o p t i o n of a Corporate Governance C o d e and s i m p l i f i c a t i o n of licensing. (c) In mmgy sector reforms, t h e Bank s h o u l d focus on (a) f u r t h e r improving t h e sector’s financial sustainability by h e l p i n g in t h e i m p l e m e n t a t i o n of t h e l a w on settle- m e n t s of debts; (b) improvingefficiency of energy use; (c) re-activating t h e p r i v a t i z a t i o n p r o g r a m i n electricity distribution; and (d) upgrading the energy infrastructure. (d) I n social protection, there are three priority areas. First, n t h e p e n s i o n system s h o u l d b e addressed. the crisis i Second, targeting of f a m i l y benefits and other social as- n sistance s h o u l d b e f u r t h e r improved, with r e d u c t i o n i special privileges for non-poor groups. Third, a strategy needs to b e developed to address t h e p r o b l e m of r e g i o n a l disparities a n d r u r a l p o v e r t y . (ii) Economic and Sector Work. T h e Bank’s assistance program s h o u l d m a i n t a i n an adequate l e v e l of well-focused, high quality analytic work as it did i nt h e latter p a r t of the CAE period. This analytic work s h o u l d b e carried out collaboratively, building 69 6 CHAPTER AND RECOMMENDATIONS CONCLUSIONS, LESSONS, systematically o n the model developed for the Public Finance Review and Health Sector Strategy, so that it can generate genu- ine ownership b o t h within the government and donor c o r n u - nity. The Bank should be placing greater emphasis than in the recent past o n private sector development and infrastructure. In addition, collaborations should encompass a wider spectrum of nthe past, to include, for example, business c i v i l society than i and NGOs. Finally, the Bank should ensure more systemic dis- semination of a l l economic and sector work. (iii)Lending (a) Project Lending. The most effective contributions of Bank assistance have come f r o m adjustment lending, while most budgetary resources have been spent o n problem- atic and relatively ineffective investment lending. To im- prove t h e results of investment operations, a tighter alignment i s needed between the investment projects and the government’s priorities. Inaddition, the Bank should simplify investment projects and reduce their scale to match implementation capacity. A better capital budget- ing system (drawing o n the recent Public Financial Man- agement and Public Finance Review reports) w o u l d help as well. Finally, the Bank should ensure the engagement of line ministries in project preparation, as w e l l as their more direct involvement i n project implementation, avoiding off-line PIUs. This will help to increase the ca- pacity building impact of investment projects. (b) Adjustment Lending. Inthe context of reduced need for balance of payments support f r o m the Bank, a shift f r o m broad, multisectoral adjustment loans to loans that are more narrowly focused and disbursed in a single tranche is appropriate for Ukraine; this w o u l d also provide the opportunity for f o l l o w up a n d deeper policy and institutional reforms. NOTES 1.The government proposes that the establishment of PIUs should be assessed o n a case-by-case basis, depending o n the specific objectives and management features. The government also states that for efficient perform- ance of institutional development projects, i t is essential for the PIUs to be part of executive branch bodies. 70 Appendix A: Statistical Supplement Appendix Table AI. Ukraine At A Glance Appendix Table A2. Ukraine: Key Economic and Social Indicators, 1993-2005 Appendix Table A3a. Ukraine: External Assistance, Total Net ODA Disbursements, 1993-2004 Appendix Table A3b. Ukraine: World Bank Commitments by Sector Board, 1993.2006 Appendix Table A3c. Ukraine: List of IBRDllDA Approved Projects, 1993.2006 Appendix Table A4. Ukraine: Economic and Sector Work, 1993.2005 Appendix Table A5a. IEG Project Ratings, Exit FY1999-2006, Ukraine and Comparators Appendix Table A5b. Portfolio Status Indicators, Ukraine and Comparators, FY06 Appendix Table A6. Cost of Bank Programs for Ukraine and Comparison Countries, FY99-06 Appendix Table A7. Ukraine: Senior Management, CY1996.2006 Appendix Table A8. Ukraine: Millennium Development Goals 71 A APPENDIX SUPPLEMENT STATISTICAL Amendix Table AI: Ukraine At A Glance (as of 9/16/06) Europe & Lower I Key Development Indicators Central middle Age distribution, 2005 Ukraine Asia income (2005) Male Female Population, rnld-year (millions) 47.1 473 2,475 Surface area (thousand sq. km) 604 24,238 39,946 Population growth (%) -0.7 0.1 10 Urban population (% of total population) 68 64 50 GNI (Atlas method, US$ billions) 71.4 1,945 4,746 GNI per capita (Atlas method, US$) 1,520 4,113 1,918 GNI per capita (PPP, international $) 6,720 9,142 6,313 GDP growth (%) GDP per capita growth (%) 2.6 3.3 6.0 5.9 6.9 5.9 I 5 0 percent 5 1c (most recent estimate, 2000-2005) Poverty headcount ratio at $1 a day (PPP, %) Poverty headcount ratio at $2 a day (PPP, %) Life expectancyat birth (years) Infant mortality (per 1,000 live births) Child malnutrition (% of children under 5) Adult literacy, male (% of ages 15 and older) <2 5 68 14 1 100 2 16 69 28 5 99 70 33 12 93 r Under4 mortality rate (per 1,000) Adult literacy, female (% of ages 15 and older) 99 96 85 Gross primary enrollment, male (% of age group) 95 105 115 Gross primary enrollment,female (% of age group) 95 102 113 Access to an improved water source (% of population) 96 92 82 Access to improved sanitation facilities (% of population) 96 85 57 I 7 Ukraine 0 Europe & Central Asia Net Aid Flows 1980 1990 2000 2005 ~' (US$ millions) Net ODA and official aid Top 3 donors (in 2004)' United States 289 8 541 245 360 103 IGrowth of GDP and GDP per capita (%) 20- 120 - I Germany 289 38 51 10 Canada 3 19 19 0 Aid (% of GNI) 0.3 1.8 0.6 10 Aid per capita (US$) 6 11 8 -20 Long-Term Economic Trends -30 95 00 Q5 Consumer prices (annual %change) 4734.9 28.2 13 5 GDP implicit deflator (annual YOchange) 16.3 23.1 18.2 +GDP -GDP per capita Exchange rate (annual average, local per US$) 0.0 5.4 5.1 Terms of trade index (2000 = 100) 100 109 1980-90 1990-2000 2000-05 (average annual growth %) Population, mid-year (millions) 50.0 51.9 49.2 47.1 04 -0 5 -0 9 GDP (US$ millions) 81,456 31,262 81,664 -9 3 80 (% of GDP) Agriculture 25.6 17.1 10.8 -5.6 3.5 Industry 44.6 36.3 34.2 -12.9 9.7 Manufacturing 39.3 19.2 21.9 -11.2 14.0 Services 29.9 46.6 55.0 -8.1 7.8 Householdfinal consumption expenditure 57.1 54.3 55.2 -6.9 10.8 General gov't final consumption expenditure 16.5 20.9 18.1 -4.1 6.7 Gross capital formation 27.5 20.2 19.4 -18.5 6.7 Exports of goods and services 27.6 62.4 61.2 -3.6 8.7 Imports of goods and services 28.7 57.9 49.1 -6.6 9.2 Gross savings 35.8 25.0 29.7 Note: Figures In italics are for years other than those specified. 2005 data are preliminary estimates. .. indicates data are not available. a. Aid data are for 2004. Development Economics, Development Data Group (DECDG). 73 APPENDIXA SUPPLEMENT STATISTICAL Ukraine Balance of Payments and Trade 2000 2005 IGovernanee indicators,2000 and 2004 (US$ miftions) Total merchandise exports (fob) Total merchandise imports (cif) Net trade in goods and services 15,722 14,943 1,406 39,322 33,592 1,438 I Voice and accountability Political stability Workers' remittances and compensation of employees (receipts) 33 595 Regulatory quality Current account balance 1,481 3,400 Rule of law as a % of GDP 4.7 4.2 Control of corruption Reserves, including gold 1,476 15,011 I 0 25 50 75 1W Central Government Finance Country's percentile rank (0-100) higher vducs impiv biter rain* (% of GDPj S o m e . Kaufmann-Kraay-Mas1~Urzl. World Bank Revenue 27.6 31.3 Tax revenue 14.1 13.3 Expense 26.9 33.0 Technology and Infrastructure 2000 2004 Cash surplus/deficit -0.6 -3.2 Paved roads (% of total) 96 7 97.0 Highest marginal tax rate (Oh) Fixed line and mobile phone Individual 40 13 subscribers (per 1,000 people) 228 545 Corporate 30 25 High technology exports (% of manufactured exports) 51 4.7 External Debt and Resource Flows Environment (US$ mi//ionsj Total debt outstanding and disbursed 12,190 21,652 Agricultural land (% of land area) 71 71 Total debt service 3,661 4,301 Forest area (% of land area, 2000 and 2005) 16 4 16.5 HlPC and MDRl debt relief (expected, flow) - - Nationally protected areas (% of land area) 3.9 Total debt (% of GDP) 390 33.4 Freshwater resources per captta (cu meters) 1,119 Total debt service ( O h of exports) 18.1 10.7 Freshwater withdrawal (% of internal resources) 70.7 Foreign direct investment (net inflows) 595 1,715 CO2 emissions per capita (mt) 70 64 Portfolio equity (net inflows) -193 -2.204 GDP per unit of energy use (2000 PPP $ per kg of oil equivalent) 16 1.9 Composition of total external debt, 2004 Energy use per capita (kg of oil equivalent) 2,644 2,772 '%I r I M F 16053 US$ millions I Private Sector Development 2000 2005 Time required to start a business (days) - 34 Cost to start a business (% of GNI per capita) - 10.6 Time required to register property (days) - 93 Ranked as a major constraint to business (% of managers surveyed who agreed) Tax rates .. 45.7 Cost of financing .. 36.8 Stock market capitalization (x of GDP) 6.0 30.6 Bank branches (per 100,000 people) Note. Figures in italics are for years other than those specified. 2005 data are preliminary estimates. 8/13/06 .. indicates data are not available. - indicates observation is not applicable. Development Economics, Development Data Group (DECDG) 74 N h C T W C m r : : . : .. / / . / d . : i . . / . . / . : . : . . ... . ; ./ . . ! , . ! ,. . : ' / . . , .. . j E a APPENDIXA SUPPLEMENT STATISTICAL 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Total Australia 0.1 0.0 0.1 0.1 0.3 Austria I 1.31 1.11 1.01 0.31 0.41 3.21 0.41 0.61 1.41 1.91 2.81 3.91 18.2 Belgium .................... ~ ...................... - 0.0 ............ 0.0 ............. - ..... 0.0 0.4 1.4 .......... Canada ~ 13.8 14.1 19.2 13.8 14.0 15.0 19.3 181.1 Denmark 2.8 4.5 5.6 6.2 5.1 7.9 2.2 39.4 France ...... " . 3.6 3.6 4.9.... ............... 10.0 4.3 20.5 5.3 . 5.1 ...... 4.3 6.8 .. 8.1 11.3 ~ 87.9 Germany 233.4 .......138.6 ....... 55.9..._ 67.6 35.6 36.3 29.5 38.3 33.5 44.6 ............................................................................................................................................................................. 41.5 805.4 50.8 ................................ Greece - 0.3 2.2 2.6 1.9 1.0 0.5 1.3 4.0 5.3 19.1 Ireland I -I -I -I 0.11 0.11 -I -I -I -1 -1 -1 0.01 0.2 Italy 3.7 0.6 0.1 1.4 0.0 0.1 ................................................................................................................................................................................................................................................................. 0.4 0.1 - 0.7 0.1 ..................................................... 0.3 7.4 Japan 0.1 - 0.7 0.5 0.5 0.7 0.9 2.7 7.1 1.6 1.8 2.1 18.7 ..... Luxembourg .......................................................... 0.1 ....................................... - 0.3 0,3 0.4 0.7 0.6.......................................................................................................... 0.4 .......... 0.5. . .............................................. 0.1 0.1 0.1 3.7 ......................................... Netherlands 4.3 - 5.1 - 0.1 28.9 0.6 3.1 3.6 2.8 4.0 5.8 58.3 Norway .... 0.1 0.2 0.6 0.1 0.1 0.3 ............................................................................ 0.2 2.4 ....... 0.2 0.2 0.2 0.2 4.7 ........... Spain - 0.1 0.1 0.2 0.8 ......................... 0.3 1.0 0.8 0.2 0.7................................................................................................. 1.1 5.3 ..................................... ...................................................................................................................................... .... -. Sweden 0.0 0.0 0.7 2.7 6.9 2.1 3.5 4.0 5.9 5.0 7.3 9.6 47.8 Switzerland - 0.8 0.2 2.9 8.7 6.7 5.4 8.8 2.8 4.2 5.5 ....................................................................................................................................................................................... _.................................................................................................................................................................................................... 5.8 51.8 United Kingdom 5.6 ........................................................................................................... 7.7 10.3 14.2 18.8 15.0 13.4 13.9 13.7 12.5 11.7 11.1 147.8 ............................................................................................................................................................................................................................................. .... United States 66.0 99.0 45.0 256.0 ................................................................................................................................................................................... 72.0 139.2 319.7 244.8 247.0 255.5 104.9 102.8 1,951.7 ............................................................................................................................................................................... G7,Total .................................................................................... ................................ " " 363.3 143.8 225.5 383.2 323.9 319.4 ........................................................................................................ 316.6 260.0 148.0............................................................................................................... 335.0 183.6 197.8 3,199.9 DAC Countries, Total 322.5 262.4 157.5 372.9 166.4 273.6 401.7 352.3 342.5 358.2 218.1 231.3 3,459.2 .................................................................................................................................................................................... ................................................................................................................................................................................................................... Arab Countries - 1.4 ................................................................................................................................................................................................................................................................• 0.4 - 1.7 Other Bilateral Donors 0.5 0.2 0.2 0.3 87.1 82.1 89.1 109.5 60.3 46.4 40.0 35.0 550.6 EC 2.6 23.6 155.5 16.1 5.7 97.8 ................................................................................................................................................................................................................................................................q 70.8 71.7 97.4 58.5 48.6 75.4 723.7 GEF ..................................................................................................... ^ - 0.6 1.0 0.5 2.5 8.7 7.0 3.2 ................................................................................................................................................................................................................................................................ 1.5 25.0 UNDP ................. 0.0 0.4 0.9 0.9 1.0 0.4 0.9 1.7 1.2 ................................................................................................................................................................................................................................................................e 1.4 1.7 2.2 12.6 UNTA ........................... 0.3 0.3 0.9 0.7 0.6 1.2 0.9 0.9 ................................................................................................................................................................................................................................................................ 0.8 1.1 1.1 1.0 9.9 ......................................................... UNICEF 2.0 0.9 .................................................................................................................................................... .^ 1.1 .................. 1.8 0.0 0.1 ........................................................................... - 1.2 ....... ~ 1.1 ............... 8.2 ................. UNHCR ..................................................................................................................... - 0.4 ................................ 1.4 . . ._ 2.9 2.5 .............2.2 . 2.3 .......................................................................... 2.8 2.1 1.7 .............. 2.6 20.8 ................. ~ Other UN 0.5 0.1 0.5 0.5 ........................................................................................................................................................... - ... ........................................... " - 0.4 1.3 0.6 ............ - 3.9 ..................................... UNFPA - 0.0 0.2 0.5 0.2 0.1 0.3 0.6 0.5 0.5 2.8 Multilateral, Total 5.4 27.4 162.1 24.9 14.4 109.1 78.3 79.4 116.4 79.2 65.9 91.7 854.3 EU Members, Total 251.9 151.9 79.8 99.4 72.5 113.0 61.6 74.6 71.7 82.7 90.7 101.1 1,250.9 TOTAL DONORS 328.4 290.0 319.7 398.1 267.9 464.7 569.1 541.2 519.2 483.8 324.0 358.0 4,864.2 76 APPENDIX A SUPPLEMENT STATISTICAL 1993- 1999- Sector BoanllFiscal year f993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2006 2006 Education ............... .... ..................................... " " --- - ..... .~ .......... ... ..................... 87 ................ ^__I. ." ......................... 87 ............. ............ 87 Energy and Mining .-..... " ~ I_ ~ ~ 114 16 617 200 18 28 ...................................... 106 ..... ..._...I_.._... 1,099 153 Financial Sector _............... ................ " ...." ........... 300 ............ "....... . ............._. 150 450.................. 450 Health, Nutrition and Population ........ ." ~ ................................................................. ..................................................................................................................... 60 ._.................................... 60 60 ................................................. Private Sector Development ............ .................................................. ~ 310 300 ...................................................................................................... 30 5 ........................................ 645 .......335 .... Public Sector Governance .- 27 ....... 16 "................. ._.. " ~ _ 250 40 250 251 ............. 835 ~ 791 Rural Sector 32 300 195 527 195 _Social .............. Protection ^ ................................................................... 3 ...................................... 50 .......................................................... ." 99 152 ........................................................................... 150 " ..... Urban ........... 17 ......................................................................................................................... .................. ........... 17 ...................................................................... 0 Water 24 24 24 Total Commitments I 271 01 6461 3431 9901 2161 6001 181 531 3301 3001 2821 1931 5011 4,49812,276 Source: World Bank internal database as of April 2007. 77 ! : : j j : j j j j j j j j j j ! j j j : j ! j j ! ! j j i j j j i / ! : w o o c o m o o m m o o m ?NN.- s :== m m m m a s s z 0 - 7 . - II ' m H v)zv) . / j. j . . . . ! . ! : ; : I : j : ;. :. i ' / . . . .: m m m d N 0 b I U o o o c 0 1o 0 c o o 0 o o o c CI.C\.NC\ N N'N c . . . . : :. j j j / ! ' wiV)'N;u (Di mi h ..r mi mi mi c b ' b ' b lc mi - 8 h i r 0 ' oi 0 1 c ai a:a: A APPENDIX SUPPLEMENT STATISTICAL Appendix Table A4. Ukraine: Economic and Sector Work, 1993-2005 Document Title Date ReportNo Document Type Country Assistance Strategy !.a k .!@!Y !k ! ..as.sis!a!ce..strae.g.~ " .- 06!P?!I??!. _-15674 coun!r>c.As~s!a?ce.s!ra!~y.Documen! .. Ukraine-Country assistance ................ strategy progress report ........ .............. .............. ...." ~ ........ ... ............... 19225 04/29/1999 CAS Progress Report Ukraine-Country assistance strateg, -. ~ _ 08/16/2000 20723 Country Assistance Strategy,,Document .......................................................... ..ukral?~co~n!.~..a~~~stance..s!ra~e~~ OS!??!?!??? ........?.w! co?t.ry..As!!s!a.?.ces!ra~e~~.Docu.~e.?.t ............... Ukraine-Country assistance strategy progress report 07/05/2005 32250 CAS Progress Report Ukraine-Country assistance evaluation (English) .................................... ........... ~ 11/08/2000 21358 Operations ... Evaluation Study .............................................. Ukraine-Report on the observance of standards and codes (R0SC)- 08/15/2002 35190 Economic Report accounting and auditing Poverty and Social Sector in Ukraine (English) Ukraine-Poverty .............................................................. 06/27/1996 15602 ........................................... Sector Report ............ Ukraine-Social safety nets and poverty (English) ........................................................................................................................................... " 06/15/2001 22677 Sector Report .................................................................................................... forward on regional development and regional policy Ukraine-Moving.................................................................................................................................................... (English) 06/10/2002 25945 E ...................................................................................................................... ................................ ...... Ukraine-Jobs study, ......... _ fostering.............................................................................................. productivity and job creation (Vol. 1 of 2)....................................................................... 11/30/2005 32721 ................................. S ............... .. Ukraine-Jobs study, fostering productivity and job creation (Vol. 2) technical 1212012005 32721 Sector Report chapters ......................... ~ .._ ......... Ukraine-Poverty assessment: poverty and inequality in a growing economy 12/01/2005 34631 Sector Report (English) Macroeconomic Ukraine-Public investment review (English) ................................................................................................................................... 0513011997 16399 .... ..................................................................................................................... Economic Report .- ............................................................................... ^.... . ................ Ukraine-Public expenditure review: restructuring government expenditures 0612511997 16112 Sector Report ..(E... nglish) ................................................................................................................................................................................................................................................................T .................................................. Ukraine-Review of the budget process: a public expenditure and institutional 03/08/2002 23356 Economic Report review (English) ................................................................................................................................................................................................................................................................x .. Ukraine-Trade policy study (Vol. 1 and Vol. 2): Main report and Main 11/16/2004 29684 Sector Report conclusions and recommendations (English) .............................................................................................................................................. ..................................................................................................................................................................................................................................................... ^ ....... Ukraine-Building foundations for sustainable growth: a country economic 12/27/2004 30928 Economic Report memorandum (English) Agriculture and Other 0613011994 11880 Sector Report ................................................................................................................................................................................................................................................................ Ukraine-Transport sector review (English) ........................................................................................................................................................................................................................................................ !.1/?0!!??8 ........ 18636........... ,sec!?l Report................................................................................... Achieving Ukraine's agricultural potential: stimulating agricultural growth and 06/01/2004 29919 Sector Report improving rural life (English) Environment, Energy and Energy Sector Management Assessment Program (ESMAP) Ukraine-Suggested priorities for environmental protection and natural resource 06/15/1994 12238 Sector Report management (English) ............................................... ................................................................................................................................................ ..................................................................................................................................................................... .. Ukraine-Coal industry restructuring sector,report (English) ................................................................................................................................................................................................................................................................t 03/04/1996 15056 Sector Report ..............._ ......... ^ Central and Eastern Europe-power " sector reform in selected countries (English)............................................. ..................................................................................................................................................... 0713111997 ESM196 ESMAP Paper Increasingthe efficiency of heating systems in Central and Eastern Europe and 08/31/2000 ESM234 ESMAP Paper the former Soviet Union (Enalish) Source: ImageBank, as of April 2007. Note: Due to disclosure policies of the World Bank, 9 reports were excluded from this list. 79 Appendix Table A5a. IEG Project Ratings, Exit FY1999-2006, Ukraine and Comparators Total Total Satisfactory lnst. Dev. lnSt* SustainabilitySustainability FY1999-2006 Sat (No, % Outcome % Evaluated Evaluated Outcome lmpact % Impact % % Likely (No, % Likely ($, ($M) (NO) (8 Subst (No) Subst ($1 .... Ukraine .............. ~ 2,285 ......... .- 21 80.0 96.0 50.0 "._ 64.4 68.4 82.3 .. Belarus .-....... "............... ~ 33 2 "...~ 50.0 0.0 .. " 50.0 0.0 100.0 100.0 ... Poland 2,142 25 84.0 95.0 48.0 65.7 83.3 90.2 Romania 2,237 25 92.0 82.3 79.2 75.1 95.8 86.4 Russian Federation 5,195 ~ ....... 37 58.3 45.4 41.7 .................. 30.7 ........... 79.3 ... ^ 75.1 ....................................................... Turkey 5,673 33 90.6 92.5 48.4 66.2 78.6 ~ 90.8 .................. ECA 25,485 453 82.4 81.5 56.9 59.3 84.6 85.7 World Bank 152,058 2,155 76.1 80.3 49.6 54.0 73.3 80.7 Source: World Bank internal database as of April 2007. Appendix Table A5b. Portfolio Status Indicators, Ukraine and Comparators, FY06 % Commit at Country # Proj Net Comm Amt # Proj At Risk Yo At Risk Comm At Risk Risk Ukraine 12 1,008.6 3 25.0 260.1 25.8 Belarus 2 72.6 0 0.0 0.0 0.0 Poland 9 1,172.8 ......................................................................................................................................................................................... 0 0.0 ....................................................................................................... ._ 0.0 0.0 ..................................................................................................................... Romania 19 ..................................................................................................... 1,457.9 1 5.3 80.0 ._................................................................................................................................................................................................................................................................ 5.5 Russia 22 1,950.7 2 9.1 250.0 12.8 Turkey 22 6,021.9 1 4.5 60.3 1.o ECA 294 16,295.5 ...................................................................................................................................... 28 9.5 .................................................................................................................................................... " 1,177.8 ............. 7.2 .................... Bank 1,345 92,888.8 188 14.0 10,849.8 11.7 Source: World Bank internal database as of 30 April 2007 (for FY06). 80 A APPENDIX STATISTICAL SUPPLEMENT Appendix Table A6. Cost of Bank Programs for Ukraine and Comparison Countries, FY99-06 Total SuiDervision Lending DroPPed Proi. AAA Other In US$ '000 Ukraine 38,567 10,081 11,961 2,673 11,653 2,198 Russia 83,384 29,831 16,203 4,585 ~ ..... 25,281 " 7,484 _ Poland " 27,191 10,406 ................. " 8,117 1,839 " 6,326 503 Romania 40,532 15,917 14,621 778 7,021 2,195 Turkey 57,575 20,973 16,178 2,879 13,528 4,017 ^ Belarus 6,557 1,114 547 -. 701 ~ 3,216 ....."............................................................... ... " 979 ECA ......... " 819,367 271,597 ............ 203,435 28,322 -- . ................. 222,410 ......... " 93,603 .............. Bankwide 4,200,230 1,332,690 937,861 117,831 1,085,264 726,582 Cost Structure by Percentage Ukraine 100 .................................................................. ....... " ~ 26 31 7 30 6 ..... Russia 100 36 19 5 30 9 Poland 100 38 30 7 23 2 Romania 100 39 36 2 17 5 Turkey ". 100 ............... .^" " 36 ............ ~ ~ ........... ................ ~ 28 ._ 5 23 7 Belarus 100 17 8 11 49 15 ECA 100 33 25 3 27 11 Bankwide 100 32 22 3 26 17 Source: World Bank internal database as of April 2007. 81 Appendix Table A7. Ukraine: Senior Management, CY1996.2006 Resident Represen fafive/ Year Vice-president Country Director Counfrv Manaaer ~~" ~ ~~ . ~ 1996 Johannes Linn Basil G. Kavalsky ~ . Daniel Kaufmann _ 1997 Johannes Linn Paul Siegelbaum ~ "__ _ Edilberto Segura 1998 Johannes Linn Paul Sieaelbaum Edilberto Seaura 1999 Johannes . Linn . Paul Siegelbaum ......................... . Gregory Jedrzejczak .................................................. 2000 Johannes Linn Luca Barbone Gregory Jedrzejczak . ............................................... 2001 Johannes Linn Luca Barbone Gregory Jedrzejczak .................................................................................... ..... 2002 Johannes Linn Luca Barbone Gregory Jedrzejczak - . ............ 2003 Shigeo Katsu .......................................................... .................................................... ._ Luca Barbone ._ Dusan Vujovic ............................................................................................................ 2004 Shigeo Katsu Luca Barbone -.................. ....................................................... Dusan Vujovic ............................................. 2005 Shigeo Katsu Paul Bermingham ................................................................................................................................................................................................................................................................• Dusan Vujovic 2006 Shigeo Katsu Paul Bermingham Dusan Vujovic Source: World Bank Directories 1996-2006. 82 A APPENDIX SUPPLEMENT STATISTICAL Appendix Table A8. Ukraine: Millennium Development Goals With selected targets to achieve between I990 and 2015 (estimate closest to date shown, +/- 2 years) Ukraine Goal 1: halve the rates for $1 a day poverty and malnutrition Poverty headcount ratio at $1 a day (PPP, % of population) Poverty headcount ratio at national poverty line (% of population) Share of income or consumption to the poorest qunitk (x) Prevalence of malnutntion (% of children under 5) Goal 2: ensure that children are able to complete primary schooling Primary school enrollment (net, %) Primary completion rate (% of relevant age group) Secondary school enrollment (gross, X ) Youth literacy rate (% of people ages 15-24) Goal 3: eliminate gender disparity in education and empower women Ratio of girls to boys in p n G r y and secondary education (%) Women employed in the nonagricultural sector (% of nonagncultural employment) Proportion of seats held by women in national parliament (%) Goal 4: reduce under-5 mortality by two-thirds Under-5 mortality rate (per 1,000) Infant mortality rate (per 1,000 live births) Measles immunization (proportion of one-year olds immunized, %) Goal 5: reduce maternal mortality by three-fourths Maternal mortality ratio (modeled estimate, per 100,000 live births) Births attended by skilled health staff (% of total) Goal 6 : halt and begin to reverse the spread of HIWAIDS and other major diseases Prevalence of HIV (% of population ages 15-49) Contraceptive prevalence (% of women ages 15-49) Incidence of tuberculosis (per 100,000 people) Tuberculosis cases detected under DOTS (%) Goal 7 : halve the proportion of people without sustainable access to basic needs Access to an improved water source (% of population) Access to improved sanitation facilities (% of population) Forest area (% of total land area) Nationally protected areas (% of total land area) CO2 emissions (metric tons per capita) GDP per unit of energy use (constant 2000 PPP $ per kg of 011 equivalent) Goal 8 : develop a global partnership for development Fixed line and mobile phone subscribers (per 1,000 people) Internet users (per 1,000 people) Personal computers (per 1,000 people) Youth unemployment (% of total labor force ages 15-24) iducation indicators (%) Measles immunization (% of I-year olds) ICT indicators (per 1,000 people) 600, 504 1998 +Primary +Ratio , , , 2000 , , 2002 , net enrollment ratio 2004 of girls to boys in pnmary & I 1990 i?Ukraine 1595 2000 2004 0 Europe & Central Asia 2000 2002 2004 I2 Fixed + mobile subscnbers Internet users secondary education Note Figures in italics are for years other than those specified indicates data are not available ai13/06 Development Economics. Development Data Group (DECDG) 83 Appendix B: Guide to IEGWB’s Country Assistance Evaluation Methodology 1. T h i s methodological n o t e describes t h e k e y elements of I E G W B s c o u n t r y assistance evaluation (CAE) methodology.1 CAEs rate the outcomes of Bank assistance programs, not the Clients’ overall development progress 2. A Bank assistance p r o g r a m needs to b e assessed on how w e l l it m e t i t s particular ob- jectives, w h i c h are t y p i c a l l y a sub-set of t h e Client’s d e v e l o p m e n t objectives. If a Bank assis- tance p r o g r a m i s large in r e l a t i o n to t h e Client’s t o t a l d e v e l o p m e n t effort, t h e p r o g r a m out- come will b e similar to t h e Client’s o v e r a l l development progress. H o w e v e r , m o s t B a n k assistance p r o g r a m s p r o v i d e only a f r a c t i o n of the t o t a l resources d e v o t e d to a Client’s de- v e l o p m e n t by donors, stakeholders, a n d t h e g o v e r n m e n t itself. InCAEs, IEGWB rates only the outcome of the Bank’s program, not t h e Client’s o v e r a l l d e v e l o p m e n t outcome, a l t h o u g h t h e latter i s clearly relevant for judging t h e program’s outcome. 3. T h e experience g a i n e d i nC A E s c o n f i r m s t h a t Bank p r o g r a m outcomes sometimes diverge sigruficantly from t h e Client’s o v e r a l l development progress. C A E s h a v e i d e n t i f i e d B a n k assistance p r o g r a m s w h i c h had: satisfactory outcomes m a t c h e d by good C l i e n t development; unsatisfactory outcomes i n Clients w h i c h achieved good o v e r a l l d e v e l o p m e n t re- sults, n o t w i t h s t a n d i n g t h e w e a k Bank program; and, satisfactory outcomes i n Clients w h i c h did not achieve satisfactory o v e r a l l results during t h e p e r i o d of p r o g r a m implementation. Assessments of assistance program outcome and Bank performance are not the same 4. By the same token, a n unsatisfactory Bank assistance p r o g r a m o u t c o m e does not al- w a y s m e a n t h a t Bank performance w a s also unsatisfactory, a n d vice-versa. T h i s becomes clearer once w e consider that t h e Bank‘s c o n t r i b u t i o n to the outcome of i t s assistance pro- g r a m i s only p a r t of t h e story. T h e assistance program’s outcome i s d e t e r m i n e d by t h e joint i m p a c t of four agents: (a) t h e Client; (b) t h e Bank; (c) partners and other stakeholders; and (d) exogenous forces (e.g., events of nature, international economic shocks, etc.). U n d e r t h e right circumstances, a negative c o n t r i b u t i o n from a n y one agent might o v e r w h e l m t h e posi- t i v e contributions from t h e other three, and l e a d to a n unsatisfactory outcome. 5. IEGWB measures Bank performance p r i m a r i l y on t h e basis of c o n t r i b u t o r y actions t h e Bank directly controlled. Judgments r e g a r d i n g Bank performance t y p i c a l l y consider t h e relevance and i m p l e m e n t a t i o n of t h e strategy, the design a n d s u p e r v i s i o n of t h e Bank’s l e n d i n g interventions, the scope, q u a l i t y and follow-up of diagnostic work and other AAA activities, the consistency of t h e Bank’s l e n d i n g with i t s n o n - l e n d i n g work a n d with i t s safe- g u a r d policies, and t h e Bank’s p a r t n e r s h i p activities. ‘In this note, assistanceprogram refers t o products and services generated in support o f t h e economic devel- opment o f a Client country over a specified period o f time, and client refers t o the country that receives the benefits o f that program. 85 APPENDIX B EVALUATION GUIDETO IEGWB'S COUNTRY ASSISTANCE METHODOLOGY Rating Assistance Program Outcome 6. Inr a t i n g t h e outcome (expected development impact) of an assistance program, IEGWB gauges the extent to w h i c h major strategic objectives w e r e relevant and achieved, without any shortcomings. Inother words, did t h e Bank do t h e right thing, and did it do it right. Programs typically express their goals in terms of higher-order objectives, s u c h as pov- erty reduction. T h e c o u n t r y assistance strategy (CAS) may also establish intermediate goals, such as i m p r o v e d targeting of social services or promotion of integrated r u r a l development, and speclfy how t h e y are expected to contribute toward achieving the higher-order objective. IEGWB's task i s t h e n to validate whether t h e intermediate objectives w e r e the right ones and whether t h e y p r o d u c e d satisfactory n e t benefits, and w h e t h e r the results c h a i n specified int h e C A S w a s valid. Where causal linkages w e r e not fully specified i nt h e CAS, i t i s t h e evaluator's task to reconstruct this causal c h a i n from the available evidence, and assess relevance, effi- cacy, and outcome with reference to the intermediate and higher-order objectives. 7. For each of t h e m a i n objectives, t h e CAE evaluates t h e relevance of t h e objective, t h e relevance of the Bank's strategy t o w a r d m e e t i n g t h e objective, i n c l u d i n g the balance be- t w e e n l e n d i n g and n o n - l e n d i n g instruments, t h e efficacy with w h i c h t h e strategy w a s im- p l e m e n t e d a n d t h e results achieved. This i s d o n e i n two steps. T h e f i r s t i s a top-down re- v i e w of w h e t h e r t h e Bank's p r o g r a m achieved a p a r t i c u l a r B a n k objective or p l a n n e d outcome a n d h a d a substantive i m p a c t on t h e country's development. T h e second step i s a bottom-up r e v i e w of t h e Bank's p r o d u c t s a n d services (lending, analytical and a d v i s o r y ser- vices, and a i d coordination) u s e d to achieve t h e objective. Together these two steps test t h e consistency of f i n d i n g s from t h e p r o d u c t s and services and t h e development i m p a c t d i m e n - sions. Subsequently, an assessment i s m a d e of t h e relative c o n t r i b u t i o n to t h e results achieved by the Bank, other donors, the g o v e r n m e n t and exogenous factors. 8. Evaluators also assess the degree of C l i e n t o w n e r s h i p of international d e v e l o p m e n t priorities, such as the M i l l e n n i u m D e v e l o p m e n t Goals, and B a n k corporate advocacy priori- ties, such as safeguards. Ideally, any differences on d e a l i n g with these issues would b e iden- t i f i e d a n d resolved by the CAS, enabling t h e evaluator to focus on w h e t h e r t h e trade-offs a d o p t e d w e r e appropriate. However, i n other instances, t h e strategy m a y b e found to h a v e glossed over certain conflicts, or a v o i d e d addressing k e y C l i e n t d e v e l o p m e n t constraints. In either case, the consequences c o u l d i n c l u d e a diminution of p r o g r a m relevance, a loss of C l i e n t ownership, and/or u n w e l c o m e side-effects, s u c h as safeguard violations, a l l of w h i c h njudging p r o g r a m outcome. m u s t b e t a k e n into account i Ratings Scale 9. IEGWB utilizes six r a t i n g categories for outcome, r a n g i n g from highly satisfactory to highly unsatisfactory: H i g h l y Satisfactory: The assistance program achieved at least acceptable progress toward a l l major relevant objectives, & h a d best practice development impact on one or more of them. N o major shortcomings were identified. Satisfacto y: The assistance program achieved acceptable progress toward a l l major relevant objectives. N o best practice achievements or major shortcomings were identified. 86 B APPENDIX GUIDE ASSISTANCE TO IEGWB’S COUNTRY METHODOLOGY EVALUATION Moderafely Satisfacto y: The assistance program achieved acceptable progress toward most of its major relevant objectives. N o major shortcomings were identified. Moderately Unsatisfacto y: The assistance program did n o t make acceptable pro- gress toward most of its major relevant objectives, or made acceptable progress o n a l l of them, but either (a) did n o t take into adequate account a key development constraint or (b) produced a major shortcoming, such as a safeguard violation. Unsatisfacto y: The assistance program did n o t make acceptable pro- gress toward most of its major relevant objectives, and either (a) did n o t take into adequate account a key de- velopment constraint or (b) produced a major short- coming, such as a safeguard violation. Highly Unsatisfacto y: The assistance program did n o t make acceptable pro- gress toward any of i t s major relevant objectives and did n o t take into adequate account a key development constraint, while also producing at least one major shortcoming, such as a safeguard violation. 10. The institutional development impact (IDI)can be rated as: high, substantial, modest, or negligible. ID1measures the extent to w h i c h t h e program bolstered the Client’s ability to m a k e m o r e efficient, equitable and sustainable use of its h u m an, financial, and n a t u r a l resources. Ex- amples of areas i n c l u d e d injudging the institutional development i m p a c t of the program are: t h e soundness of economic management; t h e structure of t h e p u b l i c sector, and, in particular, t h e c i v i l service; t h e i n s t i t u t i o n a l soundness of t h e f i n a n c i a l sector; t h e soundness of legal, regulatory, a n d j u d i c i a l systems; t h e extent of monitoring a n d evaluation systems; t h e effectiveness of a i d coordination; t h e degree of financial accountability; t h e extent of building NGO capacity; and, t h e l e v e l of social and e n v i r o n m e n t a l capital. 11 . Sustainability can b e rated as highZy likely, ZikeZy, unZikely, highZy unlikely, or, if available in- formation is insufficient, nonevaluable. Sustainability measures the resilience to risk of the devel- opment benefits of the country assistance programover time, taking into account eight factors: technical resilience; financial resilience ( i n c l u d i n g policies on cost recovery); economic resilience; social s u p p o r t ( i n c l u d i n g conditions subject to safeguard policies); e n v i r o n m e n t a l resilience; o w n e r s h i p by governments and other k e y stakeholders; i n s t i t u t i o n a l s u p p o r t ( i n c l u d i n g a s u p p o r t i v e legal/regulatory framework, a n d or- ganizational and management effectiveness); and, 0 resilience to exogenous effects, such as i n t e r n a t i o n a l economic shocks or changes in t h e p o l i t i c a l and security environments. 87 Appendix C: List of People Met AND EX~GOVERNMENT 1. GOVERNMENT OFFICIALS Chechulina, Olena Deputy Head, State Treasury Dovbyshchenko, Volodymyr Head of Department, Ministry of Education and Science Gal, Vira Director, National Bank of Ukraine Gavrylyuk, Olena Commissioner, National Electricity Regulatory Commis- sion of Ukraine Gorbunov, Victor Head of Department, Ministry of Environment Gutina, Zhanna Deputy Head, Dnipro H y d r o Power, Kiev Hnybidenko, I v a n Former Deputy Minister of Labour and Social Policy Ignashchenko, Volodymyr Former Deputy Minister, Ministry of Economy Iskra, Larysa A. Project Management Consultant, Min of Labor and Social Policy Kalashnyk, Natalia Deputy Head, State Prisons Department Kalchenko, Valeriy Head, National Electricity Regulatory Commission Khata, Yevhen Member of Board, AES Kireyev, Oleksander Head, State Tax Administration Kolosova, Viktoria Head of Dept for Cooperation with International Organi- zations, Ministry of Finance Koshchynets, Vasyl Head, State Prisons Department Krotyuk, Volodymyr Deputy Governor, National Bank of Ukraine Kubakh Serhiy Coordinator, State Committee for L a n d Resources Kucherenko, Elena Head of Dept for Cooperation with IFIs, Ministry of Economy Kuzhel Oleksandra Former Head, State Committee for Enterpreneurship and Regulatory Policy Lisovenko, Vitalyi Deputy Minister of Finance Litkovska, Viktoriya Dept Head, W o r l d Bank Projects, Min of Finance Lusan, Lyudmila Head of Financial Department, Ministry of Health Lyssykh, Victor Head of PIU, Kiev District Heating Improvement Project Lysytskyi, Victor Ex-Government Secretary, Cabinet of Ministers Maksiuta, Anatoliy Deputy Minister, Ministry of Economy Mityukov, Mr. Ihor Former Minister, Ministry of Finance Motrenko, Tymofiy Chief, M a i n Department of Civil Service Musina, Ms. Lyudmila Deputy Minister of Economy 89 APPENDIX C LISTOF PEOPLE MET Myrgorodsky, Vitaliy Deputy Project Manager, K i e v District Heating Im- provement Project Nikolayenko, Stanislav Minister, Ministry of Education and Science Ohon, Cezar Deputy Minister, Ministry of Education and Science Rohovyi, Vasyl Former Minister, Ministry of Economy Sakhan, I v a n Minister, Ministry of Labor and Social Protection Shanal, Yuriy H e a d of PIU, Kyiv Public Buildings Energy Efficiency Project Shapovalov, Alexander Head, Dnipro H y d r o Power, Kiev Station Shevchenko, Aleksandr Head of Department, Ministry of Environment Shyshkina, Kateryna Deputy Head, State Statistics Committee Sorokin, Oleksander Advisor to the Governor of NBU, Former Chairman of Eximbank Suslov, Victor Head, State Commission o n Regulation of Markets Finan- cial Services Taraba, Andriy Director, PIU for Rural L a n d Titling Project, State Com- mittee for L a n d Resources Tarashchenko, Alexei Director, Securities and stock Market State Commission Titenko, Serhiy Deputy Minister, Ministry of Fuel and Energy Tolmachov, D m y t r o Head of Project Coordination, Energy Sector Reform Pro- gram Tsapline, Valeriy Head of Strategic Planning Department, National Regula- tory Comission Tsenilova, Zhanna Head, Dept of European Integration and Int. Relations, Ministry of Health Vasychenko, Vasyl Former Deputy Minister, Ministry of Environment Yushko, Ihor Former Minister, Ministry of Finance Zahorodniy, Volododymyr Former Deputy Head, State Committee for Enterpreneur- ship and Regulatory Policy Zhanna, Gutina Head of Department, Ministry of Energy II.THINK NGOs, PRIVATE TANKS, INTERNATIONAL SECTOR, ORGANIZATIONS Blashcuk, Y u r i Chairman of Board, International Mortgage Bank Burakovsky, Igor Director, Institute for Economic Research Chraye, Helene Chief of Operations, European Commission Clottes, Francoise Project Manager, European Commission, Healthcare Sec- tor Diukanov, Vadim Director, Ukrainian Society for Sustainable Development 90 APPENDIXC LISTOF PEOPLE MET Duflot, Remi Deputy Head, EU-TACIS Technical Assistance Depart- ment Gouvras, Stefanos Head of Operations, European Commission Flanagan, M a r k Sr. Economist, International Monetary Fund Francs, Jaffrey Resident Representative, International Monetary Fund Fyshko, Yevhen Manager, Institute of Reforms Grigorenko, Eugen General Director, Ukrainian Association of Investment Business Hollman, Jason Manager, CIDA Hryhorenko, Yevhen President, Association of Investment Business Klepikov, Andriy Member, International HIV/ AIDS Alliance Marion, Michel Consultant, International Monetary Fund Maynzyuk, Kateryna Economic Adviser, D F I D Mitiukov, Ihor General Director, Financial Policy Institute Nesterenko, Oleksander Deputy Chairman, Ukrsotsbank Onats, Olena President, School Managers Assoc. Panioto, Vladimir Director General, Kiev International Institute for Sociol- om Paskhaver, Aleksander President, Ukroconsulting Pidluska, Inna Director, Europe XXI Foundation Polyuk, Serhiy Project Manager, European Commission Shpak, Ihor Sr. Economist, International Monetary Fund, Resident Representative Office Sofij, Natalia Manager, Ukrainian Fund for Education Stuppel, John Manager, D F I D Vasychenko, Vasyl Project Coordinator, Danish Environmental Protection Agency Vitaliy, Myrgorodskiy Deputy General Director, Kyivenergo Zahariev, Kamen Country Director, EBRD 111. WORLDBANK Alam, Asad Sector Manager Anderson, James Sr. Economist Andrews, Emily Former IEG Staff Barbone, Lucca Former Country Director Bekh, Olena HD Specialist Bermingham, Paul Country Director 91 APPENDIXC LISTOF PEOPLE MET Bezhanyan, Anush Sr. Operations Officer Budagovska, Svetlana Economist, PREM Burunciuc, Lilia Country Program Coordinator Chao, Shiyan Sr. Economist Chevallier, Jerome Consultant, Country Office Davis, M a r k Sr. Country Economist De St. Antoine, Jean-Jacques Lead Operations Officer Dener, Cem Sr. Public Sector Specialist Derkach, D m y t r o External Affairs Officer Dethier, Jean-Jaques Research Manager Dorotinsky, William Lead Public Sector Specialist, PRMPS Ebiri, Kutlay Regional Chief Economist, ECA, IFC Gray, Cherly Sector Director, PREM Jeria, Ana Maria Education Specialist Jesse, Maris Health Specialist Kaliberda, Aleksander Sr. Projects Coordinator, Agriculture Katsu, Sigeo Regional Vice President Kavalsky, Basil Former Country Director Kryshchenko, D m y t r o Infrastructure Projects Officer Kulyk, Sergiy Country Program Coordinator Linn, Johannes Former Vice President, E C A Lovei, Laszlo Director, FEU Neal, Craig Sr . Public Sector Specialist Mitra, Pradeep Chief Economist Montes-Negret, Fernando Sector Director Mori, H i d e k i Sr. Social Protection Specialist Murrugarra, Edmundo Sr. Economist Nadkami, Kishore ECSIE (Lviv Water)' Ostojic, Dejan Sr. Energy Specialist Pindyuuyk, Olga ECSPESTC PREM Pokanevych, Igor ECSHD, Health Prigozhina, Angela Sr. Financial Sector Specialist Rybalchenko, Katia ECSHD, Social Investment F u n d Sanchez, Luis Alvaro Consultant, ECSPE Sharif, Khalid Sector Manager 92 APPENDIXc LIST OF PEOPLE MET Shuker, I a i n Sector Manager Siryachenko, Victoria DPL Coordinator, PREM Slenzak, Alexei, Sr. Operations Officer, Environment Solyanyk, Tamara Sr. Advisor to Executive Director Stewart, John Sr. Biodiversity Specialist Vujovic, Dusan Country Manager 93 Bibliography (Core Documents) IMF. 1997. Ukraine: Accelerating the Transition to Market. Washington, D.C.: IMF. IMF. 2005. Ukraine: Staff Report for the 2005 Article IV Consultations and Ex Post Assessment o f Longer- Term Program Engagement. Washington, D.C.: IMF. IMF. 2005. Ukraine: Proposals to Reform the Tax System. Washington, D.C.: IMF World Bank. 1996. Ukraine: County Assistance Strategy. Washington, D.C. World Bank. 1997. Ukraine: Public lnvesfment Review. Washington, D.C. World Bank. 1998. Ukraine: County Assistance Strategy Progress Report. Washington, D.C. World Bank. 1999. Ukraine: Country Assistance Strategy Progress Report. Washington, D.C. World Bank. 2000. Ukraine: Country Assistance Strategy. Washington, D.C. World Bank. 2000. Ukraine: Country Assistance Evaluation. Washington, D.C. World Bank. 2002. Financing the Environment: Ukraine's Road to Effective Environmental Management ( A Public Expenditure Review). World Bank. 2003. Ukraine: Country Assistance Strategy. Washington, D.C. World Bank. 2004. Ukraine: Trade Policy Study. Washington, D.C. World Bank. 2004. Ukraine: Building Foundations for Sustainable Growth, A Country Economic Memorandum. Washington, D.C. World Bank. 2005. Ukraine: County Assistance Strategy Progress Report. Washington, D.C. World Bank. 2005. Ukraine: Investment Lending Review. Washington, D.C. World Bank. 2005. Ukraine: Poverty Assessment: Poverty and Inequality in a Growing Economy. Washington, D.C. World Bank. 2006. Ukraine: Poverty Assessment: Poverty and Inequality i n Social Dimensions. Washington, D.C. World Bank. 2006. Ukraine: Creating Fiscal Spacefor Growth: A Public Finance Review. Washington, D.C. World Bank. 2007. Ukraine: Project Performance Audit Report. Washington, D.C. 95 Attachment 1: Comments from the Government MIHICTEPCTBO EKOHOMIKM MINISTRY OF ECONOMY YKPAIHM OF UKRAINE 01008, in, syn. M. rpyrueecbroro, 1Y2, M. 01008, Kyiv, 12/2 M. Hrushevskoho str., T~JI. 253-93-94, @ a ~226-31-81 c tel. 253-93-94, fax 226-31-81 www.me.gov.ua E-mail: meconomy@me.gov.ua www.me.gov.ua E-mail: mecmomy@me.gov.ua 4 0 d o Ko.neHmapie do seimy Ceimosoro 6 a ~ v * O y i m a nporpawu dono.woru Ceimoeozo 6UHKy YKpaikiw 97 ATTACHMENT I COMMENTS FROM THE GOVERNMENT g o po3dLvy 3. Jocxznewix cmanozo eKononriwozo 3pocmannx ma iHmezpaziii' y ceimosv eKono.uitcv fcmop. 21-38) Po n. 3.7. fcmop. 23) "Y 2002-2004 poKax p i s e m in@myii' ~ H U ~ U B Cdo X ds03~arnu ipqbp, a n0mi.u 3 ~ 0 s y ' 3pic y 2005 poyi, sido6paxamru no.vimuuy 6 m d x e m ~ o ieKcnancif, m a 6y.va y nepiod neped npe3udenmcb~uuu su6opawi nanpuuinyi 2004 POKY...". AOnyUeHa HeTOqHiCTb y @OpMyn€OBaHHi lIpW3BOAUTb A 0 @OpMyBaHHX BuKpwBneHoro yaaneHHn npo peaJlbHi is@nrruifiei npouecu, mi Mann Micue B YKpai'Hi y n e p i o n 3 2002 n o 2004 p o w , o T x e nponoHyeMo HacTynHy peaaKuiro uboro 4parMeHTy TeKCTy: "Y 2001-2003 P O K pisenb ~ inqbnzyii' s~axoduscxy M e x a x O ~ H O ~ H ~ Y H O vucna, ZO a nomi.rr 3pic d o d 6 0 3 ~ a ~ ~ o z o y 2004 poyi, s i d o 6 p a x a i o r u nonimmy 6 i o d x e m ~ o i ' pisnx eucnancii; m a nposodwracb y nepiod neped npe3udenmcb~wu su6opaz.1ii HanpuKinili 2004pOKY ... ". L 98 ATTACHMENT 1 COMMENTS FROM THE GOVERNMENT 3 99 1 ATTACHMENT COMMENTS FROM THE GOVERNMENT Po n. 3.38 tcmon. 34) Oa a T u iHaopMa9im npo ((senmi e K o n o r i w i iHBecTnuifiHi n p o e n u ~ ~ O C U MH 3 , n a ~y OrnueHHx noni.rpm CsiToBoro 6 a ~ ~ syr a i n. 3.38. 2001 2002 2003 2004 2005 3arWbHUfi PiBeHb 6iAHOCTi 27,2 27,2 26,6 27,3 27,l PiBeHb 6 i n ~ o cB~Ci i n b C b K i f i MiCUeBOCTi 32,3 34,3 36,7 35,O 35,2 4 100 ATTACHMENT 1 COMMENTS FROM THE GOVERNMENT 101 ATTACHMENT 1 COMMENTS FROM THE GOVERNMENT Additional Comments 103 ATTACHMENT 1 COMMENTS FROM THE GOVERNMENT MiHicTpa 3aclyn~uic A.M. Kpaseqb 104 ATTACHMENT 1 COMMENTS FROM THE GOVERNMENT (Unofficial translation) MINISTRY OF ECONOMY OF UKRAINE Ali K h a d r M a y 7,2007 Senior Manager #64-21/53 IEGCR World B a n k Dear Mr. Khadr: Re: Comments on the Ukraine Country Assistance Evaluation Report T a k i n g this opportunity the M i n i s t r y of Economy of U k r a i n e assures you of i t s high esteem. In r e p l y to your Letter of Apr. 5,2007 concerning m a k i n g comments on the d r a f t WB Report on U k r a i n e Country Assistance Evaluation, prepared by the WB Independent Evaluation Group, t h e MoE, together with the central executive bodies concerned, h a v e processed the document i n question and notifies you of the following. On the whole, the ministries and the other government agencies h a v e agreed with the IEG's ratings on outcomes of Bank assistance to U k r a i n e in 1999 through 2006, w h i c h are d e f i n e d as "moderately satisfactory." This i s supposed to m e a n that the country assistance p r o g r a m has b e e n reasonably successful in attaining m o s t of i t s k e y objectives, with no serious short- comings found. At the same time, w e think it i s sensible to consider the following comments: Section 2. The WB Promam i n Ukraine Item 2.25. Between 1999 a n d 2006, u n d e r the WB CAS, assistance was g i v e n to the efforts of the Government of U k r a i n e a i m e d a t promoting conditions conducive to entrepreneurial ac- tivities, reduction of administrative costs of conducting business, i m p r o v e m e n t of the regu- l a t o r y environment, and development of the p r i v a t e sector i n particular. W e suggest a d d i n g a brief evaluation of t h e Private Sector Development Project, w h i c h w a s closed by the Bank i n2006: "Support to private sector development through investment lending was not duly actualized because of systemic mistakes at the launching of the Private Sector Development Project, which caused problems for its implementation." "Material progress in cutting administrative costs in the conduct of business was made due to the fulfillment of the conditionalities the World Bank had stipulated during the dialog con- cerning adjustment lending." 105 ATTACHMENT 1 COMMENTS FROM THE GOVERNMENT T h e g o a l of the Project w a s to establish a s t r o n g and competitive p r i v a t e sector by creating a favorable climate f o r the promotion of entrepreneurial activities, r e v i t a l i z a t i o n of p r o d u c - tion, development o f p r o m i s i n g businesses, creation of n e w jobs, a n d r a i s i n g the efficiency of restructured enterprises. So w e v i e w as reasonable t h e recommendations bv t h e IEG for t h e n e e d for adjustment a n d n one a n d t h e same sphere. investment l e n d i n g operations to c o m p l e m e n t each other i C o n s i d e r i n g t h e recommendations contained i nt h e Evaluation, w e amee - t h a t t h e WB strat- e m s h o u l d b e m o r e selective as to i n s t i t u t i o n a l d e v e l o p m e n t projects, g - i v e n t h e Govern- ment's interest i n a n d readiness for l o n g --term reforms i n t h e area of p u b l i c finance a d m i n i - stration, p r i v a t e sector development, social protection. Among - t h e s a i d objectives, management i m p r o v e m e n t and i n s t i t u t i o n a l d e v e l o p m e n t through - adjustment l e n d i n g and g assistance i n s t r u m e n t s s h o u l d h a v e prioritv. n o n - l e n d i n- Section 3. Achieving Sustainable Economic Growth and Integration into the World Econ- omz! Item 3.7 (v. 25). "Inflation dropped below double digitsfiom 2002-2004 before rising again i n 2005 reflecting the expansionayfiscal policy during the run-up to the presidential elections i n late 2004 ..." T h e inaccuracy of the statement results in a d i s t o r t e d p i c t u r e of t h e actual i n f l a t i o n a r y proc- esses t h a t took place in U k r a i n e b e t w e e n 2002 and 2004, so w e suggest t h e following lan- guage for this p a r t of the text: "In 2001-2002, the level of inflation was within one digit and then rose to double digits in 2004 reflecting the expansionayfiscal policy during the run-up to the presidential elections in late 2004.. ." Item 3.14 (p. 27). "The two main laws, on the central bank (NBU) and the Banking Law were amended in 1999 and 2000." W e suggest e l i m i n a t i n g the inaccuracy of t h e statement, as the language of t h e t e x t p r o p o s e d by the World Bank does not reflect t h e actual events i n t h e development of t h e statutory base r e l a t i n g to the b a n k i n g system a n d t h e NBU. T h e L a w of U k r a i n e On the National Bank of Ukraine w a s f i r s t passed by the V e r k h o v n a R a d a of U k r a i n e in 1999. In 2000, t h e VR passed t h e L a w of U k r a i n e On Banks and Banking, w h i c h h a d a n e w language. Before t h e passage of these laws, t h e activities of t h e banking system a n d t h e N a t i o n a l B a n k of Ukraine, w h i c h w e r e established in 1991 in t h e w a k e of disintegration of t h e Soviet bank- ing system, w e r e regulated by t h e L a w of U k r a i n e On Banks and Banking, a d o p t e d by t h e V e r k h o v n a Rada of the Ukr.SSR on M a r c h 20,1991, a n d t h e Decree of t h e VR of t h e U k r S S R On the Procedurefor Putting into Efect the Law o f Ukraine On Banks and Banking. 106 ATTACHMENT 1 COMMENTS FROM THE GOVERNMENT Inview of this, w e suggest the following language of the text: ” I n 1999 and 2000, the Verkhovna Rada of Ukraine passed two major laws - the Law of Ukraine On the National Bank o f Ukraine and the Law of Ukraine On Banks and Banking, which had a new language.” Item 3.16. (P. 28). ”Also, the remaining publicly owned banks are at risk in spite of improvements in their profitability. ” Since Ukraine only has two publicly owned banks, w e suggest specifying t h e statement as follows: ”. . .The two publicly owned banks, in spite of improvements i n their profitability, are exposed to a high risk.” _- Subsection ”Financial and Private Sector Development. Financial Sector. Bank Stratem” , Item 3.13. ( ~ . 2 7 )subitem (id, items 3.16, 3.1 7, 3.18. Regarding the conclusions of the IEG o n w o r k done o n ”privatization and restructuring o f the publicly owned banks.” In accordance with Regulation of the Cabinet of Ministers of Ukraine On Establishment o f the Open Joint Stock Company State Export and Import Bank of Ukraine (#lo20 dated 06.27.2000), the State Export and I m p o r t Bank of Ukraine was transformed i n t o open joint stock company the State Export and I m p o r t Bank of Ukraine. In accordance with Regulation of t h e Cabinet of Ministers of Ukraine On Some Issues of Man- agement of the State Specialized Commercial savings bank of Ukraine (#876 dated 05.21.1999), the State Specialized Commercial Savings Bank of Ukraine was transformed i n t o open joint stock company the State Savings Bank of Ukraine. There are currently two publicly owned banks i n Ukraine: t h e State Savings Bank of Ukraine and the State Export and I m p o r t Bank of Ukraine. Item 3.16. To ensure t h e disclosure of information about real bank owners, t h e L a w of Ukraine On Amendments to Some Laws o f Ukraine (Regarding Regulation of Operations of Banks) (registration #2248) has been drafted. NOTE: the bill was assumed by parliament as a basis Dec. 14,2006. Item 3.18. Regarding the conclusion that “the liquidation of Bank Ukraine was an important first step in state bank restructuring.” H e r e w e want to note that Bank Ukraine is a joint stock commercial agroindustrial bank, n o t a publicly owned one. Currently Bank Ukraine i s in the process of liquidation. Item 3.19. Regarding the restructuring of the Savings Bank. 107 ATACHMENT1 COMMENTS FROM THE GOVERNMENT Considering the positive dynamics of development of the SB and the Short Action Plan de- signed for a period till 07.01.2007, a joint letter (#12/1/2-07/27-8368 of 12.11.06) of MoF, MoE, N B U and the SV was forwarded t o Country Director Mr. Paul Bermingham containing proposals for deleting activities, in t h e part "The State Savings Bank of Ukraine," f r o m t h e Matrix of institutional and policy outcomes under DPL-2. In its reply to that letter, t h e WB agreed to delete the said activities f r o m the Matrix. Item 3.38.(~.36). You are kindly requested to provide information o n "large environmental investment projects in the cleanup ofair", as mentioned in I t e m 3.38. Section 5. Povertv Reduction, Social Development, and Reduction of Regional Imbalances (p.52) The issues of poverty reduction in Ukraine reviewed in t h e Evaluation are important for identifying ways of raising living standards and improving t h e social security of the popula- tion. At the same time, the Ministry of Labor and Social Policy has furnished information o n the poverty indicators set by national criterion. According t o the Poverty Elimination Strategy approved by Presidential Enactment #637 dated 08.15.2001, the poverty level in Ukraine is determined according t o a relative criterion, which is calculated by the fixed portion of average per capita costs (75% of median total costs o n the basis of one conditional adult.) The criterion is calculated based o n t h e data of a comprehensive survey of household living conditions that is conducted by t h e Statistics Committee of Ukraine by t h e comprehensive poverty evaluation method. The trends of indicators in 2001-2005 suggest t h e situation with poverty i s stable, as deter- mined according to t h e national criterion. I 2001 I 2002 I 2003 I 2004 1 2005 I I General Dovertv l e v e l I 27.2 I 27.2 I 26.6 I 27.3 I 27.1 1 I Rural poverty l e v e l I 32.3 I 34.3 I 36.7 I 35.0 1 35.2 1 According t o t h e MillenniumDevelopment Goals (MDG) that were formulated a n d agreed by international conferences and w o r l d summits, in particular by t h e UN Millennium Sum- mit i n2000, the main objective of the UN in the eradication of poverty is "reduction by half of the proportion of people living o n less than one U.S. dollar a day." Based o n the l e v e l of total incomes in Ukraine, by this criterion there are n o persons w h o fall u n d e r the category of t h e poor. Given this fact, the program of implementation of the MDGs o n the national level provides for the use for Ukraine of the international criterion: USD 4.3 per day according to purchas- ing power parity (PPP), as set by the UN for Central a n d East European countries. The criterion is used in international comparisons and calculated for t h e whole of Ukraine. Calculations of t h e PPP of UAH and the dollar are made by the W o r l d Bank a n d interna- tional institutions. 108 ATTACHMENT 1 COMMENTS FROM THE GOVERNMENT T h e dynamics of poverty level by the international criterion (USD 4.3) is as follows: 11% i n n2002,4.0% i 2001, 7.4% i n 2003,3.2% i n 2004,1.3% i n 2005. Consistent steps are being made towards increasing government social guarantees and bringingt h e m closer to a living wage. If the minimum wage (UAH 118) in 2001 was only 36% of the living wage set for an able- bodied person for 2001 (UAH 331.05), as of Aprill, 2007 t h e minimum wage (UAH 420) al- ready constitutes 75% of the minimum wage set for a n able-bodied person (UAH 561). Table 11. Environment Outcomes (Section 3, a. 35). We suggest replacing t h e phrase "substan- tial improvement in toxic waste" (Table 11)by "substantial decrease in the production of toxic waste." Item 5.14, Section 5 (v. 57). Regarding t h e performance of t h e first project i n t h e education area, Equal Access to Quality Education i n Ukraine, approved by t h e W o r l d Bank i n 2005, w e w o u l d l i k e the following to be added to I t e m 5.14, which lists the three broad objectives of the project: "improving the qualify of education through assuring the projkssional development o f teach- ers and streamlining the educational process; improving equal access to education in rural areas; and improving eficiency i n management and resource use." Item 5.30, Section 5 (p. 62). The amount of funds disbursed under t h e project, as shown i n Item 5.30, i s n o t correct. As of 04.01.07, i t stands at USD 11.3. Section 6. Conclusions, Lessons, and Recommendations Item 6.23 (v. 72). I t should b e noted that the decision about establishment of PIUs, outside of or within the regular government structure, should b e based on t h e specific features of management and administration i n a given sector and the objectives to b e attained under the project. For efficient performance of institutional development projects, it is essential for the PIUs t o be part of executive-branch bodies. Looking forward to continued productive cooperation. Sincerely, V. M u n t i y a n D e p u t y Minister 109 1 ATTACHMENT COMMENTS FROM THE GOVERNMENT (Unofficial translation) MINISTRY OF ECONOMY OF UKRAINE Copied to the Cabinet of Ministers of Ukraine D e a r Sirs, Ino r d e r to execute Cabinet of M i n i s t e r s of U k r a i n e assignment Ng584-DCK d a t e d April 17,2007, r e g a r d i n g the letter by Ali Khadr, Senior Manager, t h e World B a n k IEGCR, d a t e d April 5,2007, concerning t h e r e v i e w of the WB I n d e p e n d e n t E v a l u a t i o n Group (IEG) r e p o r t e n t i t l e d t h e ”Country Assistance E v a l u a t i o n for Ukraine,” t h e M i n i s t r y of Finance of U k r a i n e informs you of the following: T h e M i n i s t r y of Finance of U k r a i n e h a s processed t h e WB IEG r e p o r t ”Country As- sistance E v a l u a t i o n for Ukraine,” w h i c h contains a n assessment of t h e World Bank assis- tance for U k r a i n e during t h e p e r i o d of financial years 1999-2006, and d e e m it necessary to n o t e t h a t cooperation with t h e World Bank i s a n i m p o r t a n t element of external financing, a n d supports t h e economic r e f o r m s p r o g r a m i nUkraine, a i m e d a t f i n a n c i n g t h e b u d g e t deficit, p r e p a r a t i o n a n d i m p l e m e n t a t i o n of l o n g - t e r m i n v e s t m e n t projects t h a t are consistent with the priority directions of Ukraine’s economic development, and s u p p o r t for U k r a i n i a n enterprises exports. T h e M i n i s t r y of Finance of U k r a i n e supports t h e World B a n k p o s i t i o n r e g a r d i n g t h e p r o v i s i o n of g o v e r n m e n t priorities to investment projects and d e e m it appropriate to b r o a d e n t h e assistance evaluation s u m m a r y of t h e WB IEG r e p o r t ”Country Assistance E v a l u a t i o n for Ukraine” by p r o v i d i n g m o r e detailed i n f o r m a t i o n r e g a r d i n g t h e area of l e n d - ing and i n v e s t m e n t projects design and d e t e r m i n i n g t h e i r i m p l e m e n t a t i o n capacity. A s regards changing over to m o r e n a r r o w one-tranche l e n d i n g operations to s u p p o r t t h e D e v e l o p m e n t Strategy, it s h o u l d b e n o t e d that i n U k r a i n e t h e World Bank has already i m p l e m e n t e d t h e adjustment projects w h i c h h a d a n a r r o w specific g o a l a n d w e r e financed with one tranche ( A g r i c u l t u r a l Sector A d j u s t m e n t Loan, C o a l Sector A d j u s t m e n t Loan), n U k r a i n e . In our opin- w h i c h facilitated i m p l e m e n t a t i o n of p o l i c y a n d i n s t i t u t i o n a l r e f o r m s i ion, the World B a n k p r o p o s a l to i n t r o d u c e one-tranche l e n d i n g operations to s u p p o r t t h e D e v e l o p m e n t Strategy requires a m o r e thorough s t u d y of t h e above-referenced projects. Decentralizing the Project M a n a g e m e n t U n i t s i s fully s u p p o r t e d by t h e M i n i s t r y of Finance of U k r a i n e a n d i s successfully accomplished i n Ukraine, specifically, i n t h e World B a n k TB and H I V / A I D S Control Project for U k r a i n e and Access to Financial Services Pro- n t h e structure of ject, within t h e f r a m e w o r k of w h i c h relevant d i v i s i o n s w e r e established i t h e central bodies of executive p o w e r . 111 1 ATTACHMENT COMMENTS FROM THE GOVERNMENT Section 2 of A r t i c l e ” L e n d i n g Efficiency’’ of the WB IEG r e p o r t ”Country Assistance E v a l u a t i o n for Ukraine” notes t h a t difficulties t h a t arose on t h e w a y of i n v e s t m e n t projects w e r e caused by t h e countries themselves (for instance, t h e country’s request to r a t i f y each project in parliament, as a r e s u l t of w h i c h t h e project effectiveness deadline w a s extended for o n e year).” A s regards t h e above-mentioned statement, w e d e e m it necessary to set forth this information i n a m o r e correct manner, since t h e n e e d for projects r a t i f i c a t i o n i s deter- m i n e d by Ukraine’s legislation t h a t i s c u r r e n t l y i nforce. T h e WB Country Assistance P r o g r a m s h o u l d b e accompanied by q u a l i t y and concen- t r a t e d analytical work a t t h e p r o p e r level, specifically, as this i s c u r r e n t l y b e i n g d o n e by t h e World Bank, as pertains to t h e analysis of Ukraine’s legislative f r a m e w o r k i n t h e area of p r o c u r e m e n t of goods, w o r k s a n d services u n d e r t h e joint projects. T h e M i n i s t r y of Finance of U k r a i n e supports the World Bank assistance p r o g r a m s a n d i s grateful to t h e World Bank for p r o d u c t i v e cooperation and p r e p a r a t i o n of t h e WB IEG i n - d e p t h r e p o r t ”Country Assistance E v a l u a t i o n for Ukraine.” Sincerely, A.M. Kravets Deputy Minister 112