Document of The World Bank FOR OFFICIAL USE ONLY Report No. 66279-UA INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL FINANCE CORPORATION COUNTRY PARTNERSHIP STRATEGY FOR UKRAINE FOR THE PERIOD FY12-FY16 January 20, 2012 Ukraine, Belarus, Moldova Country Management Unit Europe and Central Asia Region International Finance Corporation Europe and Central Asia Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. The last Country Partnership Strategy was discussed by the Board on November 8, 2007 CURRENCY EQUIVALENTS Ukraine Hryvnia (UAH) US$1 = UAH 7.9898 (January 18, 2012) GOVERNMENT FISCAL YEAR (January 1 to December 31) WEIGHTS AND MEASURES Metric System ABBREVIATIONS AND ACRONYMS AAA Analytical and Advisory Assistance LGAF Land Governance Assessment Framework ACU Accounting Chamber of Ukraine NERC National Energy Regulatory Commission CIDA Canadian International Development Agency NPLs Non-performing Loans CIS Commonwealth of Independent States MDGs Millennium Development Goals CN Concept Note MIC Middle Income Country CPI Consumer Price Index M&E Monitoring and Evaluation CPPR Country Portfolio Performance Review NBU National Bank of Ukraine CPS Country Partnership Strategy OECD Organization for Economic Co-operation and CPS CR Country Partnership Strategy Completion Development Report ORAF Operational Risk Assessment Framework CR Concept Review PAD Project Appraisal Document CSOs Civil Society Organizations PEFA Public Expenditure & Financial Accountability DCFTA Deep and Comprehensive Free Trade Area PFM Public Finance Management DGF Deposit Guarantee Fund PFRL Programmatic Financial Rehabilitation DFGG Demand for Good Governance Development Policy Loan DPL Development Policy Loan PPIAF Public-private Infrastructure Advisory Facility DR Decision Review PP Public Procurement EBRD European Bank for Reconstruction and PPP Public-Private Partnerships Development QER Quality Enhancement Review EC European Commission RBF Results Based Financing ACU Accounting Chamber of Ukraine ROC Regional Operations Committee EDP-2 Second Export Development Project SAFE Accountability and the Fiduciary Environment EIB European Investment Bank SFI State Financial Inspection EITI Extractive Industries Transparency Initiative SILs Specific Investment Loan ESW Economic and Sector Work SMEs Small and Medium Enterprises EU European Union SOE State-owned Enterprise FDI Foreign Direct Investment STS State Tax Service GAC Governance and Anti-Corruption STSMP State Tax Service Modernization Project GDP Gross Domestic Product TA Technical Assistance GFS Government Finance Statistics TF Trust Fund GRECO Group of States Against Corruption TIMSS Trends in International Mathematics and HACCP Hazard Analysis and Critical Control Point Science Study HBS Household Budget Survey TSA Treasury Single Account IDF Institutional Development Fund UCAN United Consumer Advocacy Network IFC International Finance Corporation UIP Urban Infrastructure Project IFIs International Financial Institutions USAID United States Agency for International IMF International Monetary Fund Development INTOSAI International Organization of Supreme Audit USIF Ukrainian Social Investment Fund Institutions VAT Value-added Tax IPSAS International Public Sector Accounting WBI World Bank Institute Standards WBG World Bank Group ISA International Standards of Auditing WEM Wholesale Electricity Market IBRD IFC Vice President: Philippe Le Houérou Dimitris Tsitsiragos Country Director: Qimiao Fan Tomasz Telma Task Team Leaders: Gregory T. Jedrzejczak, Yulia Snizhko Rufat Alimardanov, Oksana Nagayets Team Members: The CPS was prepared under the guidance of the former Country Director, Martin Raiser, with overall direction from the ECA Chief Economist, Indermit Gill. The CPS team included Connie Luff, Pablo Saavedra, Ruslan Piontkivsky, Paolo Belli, Tamara Sulukhia, Marius Vismantas, Rajeev Swami, Astrid Manroth, Jana Kunicova, Dmytro Derkatch and contributions are gratefully acknowledged from Oleksiy Balabushko, Julia Smolyar, Katerina Petrina, Angela Prigozhina, Svetlana Budagovskaya, Maria Angelica Sotomayor, Gary Stuggins, Dmitry Kryshchenko, Dmytro Glazkov, Malcolm Childress, Alexei Slenzak, Craig Meisner, Munaver Sultan Khwaja, Viktoria Siryachenko, Elena Kladova, Serhiy Osavolyuk, and Tevfik Yaprak. Administrative support was provided by Olesya Gafurova. ACKNOWLEDGMENTS The preparation of this strategy greatly benefited from consultations with national and local government officials and representatives of development partners, civil society and academia. FY12-16 COUNTRY PARTNERSHIP STRATEGY FOR UKRAINE TABLE OF CONTENTS EXECUTIVE SUMMARY ....................................................................................................................... iv I. COUNTRY CONTEXT...................................................................................................................... 1 A. Introduction ....................................................................................................................................... 1 B. Social and Political Context .............................................................................................................. 2 C. The Economic Context...................................................................................................................... 2 D. Public Governance and Corruption ................................................................................................... 8 E. Poverty, Quality of Life, MDGs, Gender.......................................................................................... 9 II. DEVELOPMENT CHALLENGES AND OPPORTUNITIES AND THE GOVERNMENT AGENDA ................................................................................................................................................... 13 A. Government Agenda ....................................................................................................................... 13 B. Mid-Term Challenges and Opportunities........................................................................................ 14 C. Long-Term Challenges and Opportunities ...................................................................................... 15 III. WORLD BANK GROUP PARTNERSHIP STRATEGY............................................................. 15 A. Lessons Learned during 2008-2011 CPS ........................................................................................ 15 B. CPS Principles ................................................................................................................................ 16 C. CPS Pillars and Expected Results ................................................................................................... 17 IV. IMPLEMENTING THE STRATEGY............................................................................................ 23 A. Proposed Lending and Knowledge Program................................................................................... 23 B. Monitoring and Evaluation ............................................................................................................. 25 C. Managing Program Implementation ............................................................................................... 25 V. RISKS................................................................................................................................................. 30 VI. ANNEXES ......................................................................................................................................... 32 Annex 1. FY08-11 Country Partnership Strategy Completion Report ................................................... 32 Annex 2. Ukraine FY12-16 CPS Results Framework............................................................................. 56 Annex 3. Resource Depletion Adjusted National Savings ..................................................................... 66 Annex 4. Assessment of Progress in Reducing State Capture and Corruption ...................................... 68 Annex 5. Assessment of the Impact of PFM Strengths and Weaknesses in Ukraine ............................. 71 Annex A2: Ukraine - Country at a glance ............................................................................................... 79 Annex B2: Ukraine - Selected Indicators* of Bank Portfolio Performance and Management ............... 81 Annex B3: Ukraine - IFC Investment Operations Program .................................................................... 82 Annex B5: Ukraine - Key Social Indicators ........................................................................................... 83 Annex B6: Ukraine - Key Economic Indicators ..................................................................................... 84 Annex B6: Ukraine - Key Economic Indicators (continued) .................................................................. 85 Annex B7: Ukraine - Key Exposure Indicators ...................................................................................... 86 Annex B8: Ukraine - Operations Portfolio (IBRD/IDA and Grants)...................................................... 87 Annex B8(b): Ukraine - IFC Committed and Outstanding Investment Portfolio ................................... 88 iii EXECUTIVE SUMMARY 1. Ukraine is emerging from the 2009 economic and financial crisis with serious structural weaknesses left unaddressed. Fiscal imbalances remain significant and large social transfers, inefficient public services and significant quasi-fiscal subsidies threaten sustainability. The financial sector is fragile and the business climate ranks persistently at the bottom in the region. Despite export led recovery over the past two years, output is still below pre-crisis levels and the economy remains vulnerable to volatile commodity prices and dependent on foreign financing. The public sector is large, but the quality of many public services has been deteriorating. Surveys conducted on the eve of Ukraine‘s 20th anniversary of independence and recent social protests reveal widespread discontent with the economic situation and with poor public governance1. The gap between public expectations and economic reality masks some underlying strengths and achievements such as progress in poverty reduction over the past decade, relatively good medium-term growth prospects and by regional standards low levels of public debt. 2. In the face of well-identified social and economic development challenges, successive Ukrainian governments have struggled with reform implementation. Since independence in 1991, progress in economic and social reforms has lagged behind targets and social aspirations. Behind many implementation difficulties lie fundamental challenges of economic and political governance. Corruption and state capture have been pervasive and are broadly recognized as a major development constraint. Ukraine has always had low rankings on critical aspects of governance and in some areas Ukraine‘s scores have deteriorated since 2006. Despite progress in negotiating a Deep and Comprehensive Free Trade Agreement (DCFTA) with the European Union (EU), concerns over Ukraine‘s commitment to European political values may yet set back the integration momentum. 3. Over the past decade, Ukraine’s authorities have shied away from addressing the challenges of state capture and corruption, and public trust in the state has been undermined. This in turn has created public resistance to necessary but painful reforms of social transfers and public services. Consecutive governments have thus opted for short-term fiscal handouts, which have diminished the fiscal space needed for public investment and weakened the focus on strategic priorities. Lack of a level playing field and persistent fiscal pressures have limited private entry and, in consequence, investment and productivity growth has been slow by regional standards. Without renewed trust, the government continues to struggle. Without reform, public sector performance continues to disappoint. World Bank Group analytical work and many public voices in Ukraine indicate that weaknesses in public governance are rooted in the lack of constructive relations between the authorities and civil society and business. 4. President Yanukovych came to power with the mandate of introducing more effective economic management, in a country characterized by deep political divisions and public disappointment about past economic and social outcomes. In response, the Economic Reform Program of President for 2010-2014 not only sets out an ambitious reform agenda but also puts emphasis on improving implementation by strengthening institutions, imposing discipline on the bureaucracy, and reining in corruption. The President has confirmed the country‘s European orientation which – among others – would help to strengthen implementation mechanisms and governance standards. Results of the Program so far have been mixed in the face of strong vested interests and growing public reform fatigue. There is growing understanding in the government that increasingly complex reforms in sensitive social areas such as pensions, healthcare, or municipal services cannot be effective without public engagement, particularly at the local level, in monitoring and implementation. Ukraine needs a shift in the governance paradigm – moving away from a system dominated by the state to a system inviting participation by a broad array of social stakeholders. This new participatory model 1 See for example, Life in Transition survey conducted by the EBRD and the World Bank in 2010. See also regular opinion polls published by Ukrainian research institutes such as the Razumkov Center, the Gorshenin Institute, or the Institute of Sociology. iv of social relations has already started to emerge in few cities with constructive cooperation between elected mayors and civil society and business organizations. 5. The Country Partnership Strategy (CPS) 2012-16 aims to assist Ukraine in overcoming implementation bottlenecks identified in the Presidential Program and thus help to make progress in the declared ambitious reform and EU integration agenda. It will support efforts of the authorities to improve relations with civil society and business; to turn social distrust into support for reform and make government both more accountable and more effective. The willingness and determination of the authorities at all levels will be critical to success in the ambitious reform agenda. The World Bank Group will adjust its policy dialogue, lending, investment, and technical assistance respectively to respond to the government‘s demonstrated commitment. Support of donors in building the capacity of CSOs will continue to be very important. 6. The Bank's support is organized around two pillars, both emphasizing the importance of improved governance for sustained socio-economic progress in Ukraine. Pillar I supports deepened relations between government and citizens, focused on improving public services, sustainability and efficiency of public finances, and a more transparent and accountable use of public resources. Pillar II supports more productive cooperation between government and business by focusing on growth, competitiveness and job creation, improvements in the business climate, the promotion of domestic investment and foreign direct investments (FDI) to achieve productivity improvements, and channeling public investment into critical public infrastructure. 7. Areas of engagement will continue to be defined selectively and flexibly with a focus on quality and development effectiveness. Lending constraints on the Bank side, as well as lessons learned regarding the importance of building a track-record of implementation, are likely to limit the number of new investment lending operations to a maximum of two per annum. A key continuing focus of the CPS will be improving portfolio quality, including increased disbursements in the existing investment portfolio and strengthening institutional implementation capacity on the client side. The CPS does not specify a detailed lending program beyond FY14, given past experience and the need to adapt nimbly to changing country circumstances and priorities. The results matrix reflects primarily the impact of activities launched until end FY14, given the considerable lead time needed in Ukraine to see concrete results on the ground. 8. The Bank's assistance to Ukraine in the new CPS will be calibrated to match the scope and instruments of support to the strength of the authorities' commitment, capacity and track-record in key areas of potential engagement. Specifically, investment loans will be offered where governance risks are manageable, where a track record of implementation has been established and capacity has been built and where there is broad consensus on the general policy framework. Analytical and advisory services will be offered to help strengthen reform consensus and build capacity. Development policy lending will be contingent on demonstrated progress in tackling key governance weaknesses and thereby on evident commitment and leadership in overcoming vested interests to carry out a coherent reform and development strategy. 9. The investment lending program for the first two years of the CPS envisages base level support in the range of USD 500 million per annum. The current investment lending pipeline for FY13 includes a follow up to the existing Roads and Safety Improvement project and an additional financing to the State Statistical System Development project. In FY14, indicative lending includes an operation to support scaling up targeted social assistance, a second Urban Infrastructure project and a Gas Sector Efficiency and Modernization project. Financing amounts are still indicative and the total lending envelope may change based on the government‘s demand and the Bank‘s lending capacity. In FY15-16, additional investment lending may be envisaged in the following areas: (i) transport and trade facilitation, (ii) energy efficiency and energy security, (iii) municipal services and governance, (iv) health services and financing, (v) private sector development and access to financing. v 10. The calibrated engagement strategy leaves scope for an upward revision of lending amounts through the addition of DPLs should reforms accelerate and consistent progress on governance be made. The Second Programmatic Financial Rehabilitation Development Policy Loan could be delivered quickly and a new cross-sectoral DPL series (building on the earlier DPL I-III series) supporting improved economic governance and competitiveness could be launched in FY13-15 subject to the government's request for IBRD resources, Ukraine's performance, IBRD's financial capacity, demand from other borrowers, and global economic developments. 11. IFC will contribute to the CPS outcomes under the second pillar through combined investment and advisory operations for the development of the private sector. IFC strategy in Ukraine will continue to support: (i) banking sector stabilization and targeted finance, (ii) agribusiness, and (iii) infrastructure, accompanied by two cross-cutting themes of improving business environment and promoting energy efficiency. 12. All areas of engagement in the CPS will build on strong diagnostic work and technical assistance, with a focus on building greater consensus in society regarding policies and processes to tackle key structural challenges. Key focus areas for analytical and advisory assistance (AAA) engagement will be (i) the investment climate, including advice in key policy areas such as agriculture, land, business regulations, (ii) fiscal, tax and PFM, (iii) energy efficiency and governance (including gas sector modernization), (iv) financial sector stability and development, (v) municipal governance and service delivery, (vi) social reforms (targeted social assistance and pension reform) and (vii) health sector reforms. Partnerships in policy dialogue and AAA with the European Commission (EC), the International Monetary Fund (IMF), United Stated Agency for International Development (USAID), European Bank for Reconstruction and Development (EBRD) and other bilateral donors will continue and be expanded where possible. 13. The CPS will benefit from more focused risk management and implementation support. The new approach is three pronged: (i) greater attention to implementation readiness by incorporating the lessons of the CPS Completion Report (CR) ("readiness filter"), (ii) greater attention to governance and anti-corruption (GAC) risks and opportunities through upstream diagnostic work and broader consultations and consensus building to mitigate political economy risks, and (iii) development of selected pilot initiatives to bring in non-state actors as partners, to be reviewed and scaled up at mid- stream. These initiatives extend work already begun under the previous CPS but this CPS brings implementation and GAC risks to the forefront of the World Bank Group (WBG) engagement in Ukraine. 14. Risks to the objectives of the CPS remain high due to historically disappointing implementation of reforms, a mixed track-record of the existing portfolio. The proposed calibrated assistance program allows the Bank to respond to the strength of the government‘s reform commitment. The governance and readiness filters and the emphasis on consensus building and consultation with a broad array of stakeholders should help mitigate implementation risks, while a strong analytical and advisory program in macroeconomic and financial sector policies as well as close coordination with other development partners will provide a basis to react quickly to external shocks. 15. A key macroeconomic risk is related to access to external financing. The existing Stand-by Arrangement with the IMF is at risk to be discontinued and rollover risks are exacerbated by large debt service repayments falling due in 2012, including to the Fund. Sustaining progress in critical areas such as fiscal consolidation is predicated on politically difficult reforms such as energy tariff increases for households and utilities and addressing structural problems in the gas sector will severely test the government's resolve, especially ahead of parliamentary elections in 2012. Ukraine depends critically on growth in the EU for export prospects. The exposure to European banks is high and Europe‘s banking crisis or banks deleveraging could cause financial instability in Ukraine. These risks cannot be mitigated by the Bank; however, experience during the 2008-09 crisis also suggests that the authorities can and do act quickly at times of crisis to regain access to financing. vi I. COUNTRY CONTEXT A. Introduction 16. Ukraine’s economy remains vulnerable and many spheres of economic and social activity are in need of fundamental reforms. Over the last 20 years there has been no shortage of strategic visions and government programs to realize Ukraine‘s vast economic potential. However, implementation of these programs has been disappointing and performance has remained below expectations. 17. Three main factors account for Ukraine’s mixed reform implementation: inherited industrial assets and natural wealth which limited the incentives for reform, the gradual erosion of public trust in the government and in most of public institutions, and the lack of a strong external anchor to drive the reform process. Ukraine inherited capacity in metallurgy and chemicals, revenues collected from the transit of energy resources from Russia to Europe, and abundant resources of fertile land have created economic rents which allowed Ukraine to muddle through without deep reforms. The concentration of these rents in the hands of few privileged domestic entrepreneurs has bred widespread state capture and contributed to the erosion of social trust. 18. Lack of trust in the state has consistently undermined public support for economic reform. The transition recession of the early 1990s has left deep scars. The outcome of the early transition years was the concentration of wealth in the hands of the few and the erosion of social security and public service standards. The failure of early reform efforts to deliver tangible improvements and the failure of government to stem state capture and corruption have sapped public support for reform and prompted successive administrations to opt for short-term fiscal hand-outs instead. Unlike in non-CIS transition economies, Ukraine failed to benefit from the strong anchor of an EU membership perspective which might have provided a focal point for reform efforts. 19. Ukraine’s traditional engines of growth are running out of steam and economic risks are significant. Without the attraction of FDI and the encouragement of domestic investment and entrepreneurship, Ukraine risks repeating previous boom and bust cycles without significantly catching up with its western neighbors. Internationally, Ukraine risks being overtaken in its traditional markets by competitors in Asia. The current volatile international economic environment only exacerbates these risks. 20. President Yanukovych’s declared commitment towards European integration and the reform roadmap laid out in his 2010-14 Presidential Reform Program present an opportunity to address Ukraine’s structural economic weaknesses, if combined with concerted efforts to improve governance. Ukraine stands at an important juncture of an Association Agreement with the European Union, including a DCFTA which would provide an anchor for economic reforms. Some important steps have been taken in setting a legislative framework for anti-corruption, responding in part to recommendations of international organizations including the Organization for Economic Co-operation and Development (OECD) and the Group of States against Corruption (GRECO). There is growing understanding among the country‘s leadership that without a more constructive dialogue with civil society and business, ambitious development goals will not be achieved. Heightened risks in global financial markets lend additional urgency to Ukraine‘s comprehensive reform agenda. 21. The CPS 12-16 will focus on assisting the government to address bottlenecks to the implementation of the 2010-14 Presidential Program. The Program provides a foundation for reinvigorating reform efforts; however, to be successful, the lessons of past disappointments need to be taken into account. Instruments and levels of financial assistance to the Program provided by this CPS will be calibrated to allow the Bank to target support where commitment is strongest and a positive track-record has been established, and to increase support in response to clear signals that the authorities are beginning to tackle governance weaknesses. This CPS envisages significantly scaled up activities to engage with civil society and other stakeholders to promote the case for reform. 1 B. Social and Political Context 22. After almost 2 years in power, President Yanukovych and the coalition government formed in the wake of his presidential victory face significant economic and political challenges. Despite rapid progress in consolidating power and overcoming the divisions and paralysis that characterized relations between the previous President and the then Prime Minister, early reform momentum has been seriously weakened and public resistance against unpopular measures to bring sustainability to public finances, such as pension reform, utility price increases, or the reform of social privileges runs high. 23. In foreign policy, the authorities have sought to balance relations with both East and West, but tensions with both sides remain. Under the Yanukovych Presidency, Ukraine has improved relations with Russia without however abandoning the priority of European integration. The country has completed technical negotiations on a Deep and Comprehensive Free Trade Area (DCFTA) and an Association Agreement with the European Union. However, high profile criminal cases brought against opposition leaders have raised concerns in Europe and in the USA, and may stall the progress towards the Association Agreement. Ukraine has signed a new Free Trade Agreement with the members of the Commonwealth of Independent States, but has declared that it does not envisage joining the Common Economic Space with Russia, Kazakhstan and Belarus. 24. Ukraine’s civil society is vocal and strong. In 2010, there were about 4,000 active Civil Society Organizations (CSOs), with some 40 percent having permanent staff of 3 and more. They covered a broad range of issues of civic education, human rights protection, social issues, politics, public governance and economy; youth and children and regional development. As only 10 percent of CSOs have an annual budget of more than USD 50,000, CSOs leverage their position by joint activities - some 70 percent are members of coalitions or networks. The capacity of the Ukrainian CSOs for advocacy and lobbying was ranked above world average by United Consumer Advocacy Network (UCAN). The vitality of Ukraine‘s civil society presents a potential opportunity for the government to rebuild public support by inviting civil society to a dialogue over economic and social priorities and to monitor the outcome of policies. However, for this opportunity to become reality, CSOs will need support to improve their capacity for evidence based policy analysis and for monitoring the outcomes of government reform measures. Support of donors in building the capacity of CSOs will continue to be very important. C. The Economic Context i. Macroeconomic Developments and Outlook 25. Ukraine’s economy returned to growth in 2010-2011, but the recovery remains fragile. After a 14.8 percent Gross Domestic Product (GDP) decline in 2009, the economy grew 4.2 percent in 2010, and posted 6.6 percent growth in the third quarter of 2011. Domestic demand has played an increasing role in driving growth in 2010 and 2011, in contrast with 2009. Industrial production has also recovered but with volatile growth rates, highlighting the dependence on few commodity prices such as steel (See Figure 1). 26. Improved external debt roll-over rates have financed the widening current account deficit, but FDI remains subdued. The current account deficit deteriorated in the second half of 2010, leading to a USD 2.9 billion (2.1 percent of GDP) deficit for the year. This trend has continued into 2011. Rising domestic demand has driven up import growth, while exports have been depressed with the introduction of export quotas on grain in the fall of 2010 (and other policy interventions in the agriculture sector). External private debt roll-over rates improved to 109 percent in 2010, supporting net inflows in the capital account. Net FDI inflows amounted to 4.2 percent GDP in 2010. FDI flows 2 remain low compared to the pre-crisis level, partly due to governance concerns and the poor investment climate. Figure 1. Narrow Competitive Base 25% 100% 20% 80% 15% 60% 10% 40% 5% 20% 0% 0% -5% -20% -10% -40% -15% Ukr real GDP y/y [LHS] -60% -20% EU steel price y/y [RHS] -80% -25% -100% 2005q1 2006q3 2002q1 2002q3 2003q1 2003q3 2004q1 2004q3 2005q3 2006q1 2007q1 2007q3 2008q1 2008q3 2009q1 2009q3 2010q1 2010q3 27. Monetary policy has been anchored in exchange rate stability with lesser but growing attention to inflation. Although amendments to the law on the National Bank of Ukraine (NBU) (adopted in mid-2010) shifted the focus of policy towards price stability as the primary objective, however, the NBU de facto continues to aim for exchange rate stability as an anchor of macroeconomic stability, trying to avoid excessive fluctuations. Since August 2011, the NBU has lost around USD 5.8 billion in reserves to defend the current exchange rate and monetary conditions have significantly tightened. Inflation has declined significantly in 2011 and is forecast to end the year below 6 percent. 28. Fiscal policy has been concentrated on the gradual reduction of the deficit, but structural measures to secure sustainability remain incomplete. The new IMF supported program (approved in July 2010) set the general government deficit for 2010 at 5.5 percent of GDP and 3.5 percent in 2011. In addition, the State Owned Oil and Gas Enterprise Naftogaz was expected to run a 1 percent of GDP deficit in 2010 and balance its finances in 2011. The target for 2010 was missed, chiefly on the account of a larger deficit in Naftogaz. Steady tariff increases in gas and heating are needed to entrench fiscal consolidation. The implementation of pension reform approved in September 2011 is essential to restore sustainability to the system, safeguard the security of future pensioners and thereby strengthen incentives to contribute. These reforms, together with other measures on the expenditure side are critical to stabilize public debt (currently above 41 percent of GDP). 29. Ukraine made progress in restoring financial sector stability during the global financial crisis; though in the face of external volatility the financial system needs to become more resilient to potential future shocks. After significant deposit outflows during October 2008 – March 2009, the situation has stabilized, banks have been recapitalized, and deposits have returned to the system. The banks‘ non-performing loans (NPLs) remain high at around 40 percent, with few policy measures so far taken to address them. Low client demand and high risk aversion are limiting lending growth and NPLs depress bank earnings. Volatility in international financial markets and pressures for increased deleveraging among European banks, which hold around one third of Ukraine‘s banking system assets, raise new risks given significant outstanding external liabilities and the reliance of the balance of payments on sustained roll-over rates. Commercial banks taken over by the state remain unresolved. All these risks call for a comprehensive program of strengthening crisis resilience and laying the foundations for a return to sustained private sector credit expansion. A framework was established for recapitalization of systemic problem banks and for least-cost resolution of non-systemic problem banks. The Deposit Guarantee Fund (DGF) was strengthened in 2009 and steps were taken to turn the DGF into a problem bank resolution agency. 3 30. The Bank’s base case forecast calls for a continued but fragile and not free of risks recovery. Assuming that conditions in the Eurozone do not deteriorate beyond moderate expectations, GDP growth is expected to be 2.5 percent in 2012. Growth rates would be around 4 to 5 percent over the medium term, below Ukraine‘s potential given serious GDP decline in 2009. Assuming that the IMF program carries on (which is not certain at the moment), financing for the widening current account deficit would be secured and progress on fiscal consolidation would be achieved through the implementation of pension reform, utility tariff increases, and additional measures (although such measures are politically difficult and can be challenging to implement). Inflation would come down gradually, with energy and municipal tariff increases creating upward pressure in 2012. Table 1: Key Macroeconomic Indicators 2006 2007 2008 2009 2010 2011F 2012F 2013F 2014F Nominal GDP, UAH billion 544 721 948 913 1095 1301 1466 1664 1858 Real GDP, % change 7.3 7.9 2.3 -14.8 4.2 4.5 2.5 4.0 4.0 Consumption, % change 12.4 13.6 10.1 -12.2 5.9 8.6 1.0 3.2 4.0 Fixed Investment, % change 21.2 23.9 1.2 -50.5 4.9 6.7 0.9 4.2 4.1 Export, % change -5.6 3.3 5.7 -22.0 4.5 4.1 3.8 5.4 5.1 Import, % change 6.8 21.5 17.0 -38.9 11.1 9.8 1.8 4.1 5.0 GDP deflator, % change 14.8 22.7 28.6 13.0 15.0 13.7 10.0 9.1 7.4 CPI, % change eop 11.6 16.6 22.3 12.3 9.1 5.6 9.4 7.4 7.1 Current Account Balance, % GDP -1.5 -3.7 -7.0 -1.5 -2.1 -5.4 -4.9 -4.2 -4.2 Terms of Trade, % change 4.9 9.8 6.1 -6.8 4.4 0.3 -0.4 1.0 0.1 Budget revenues, % GDP 43.7 42.3 44.3 42.3 42.8 42.2 41.3 40.1 40.0 Budget expenditures, % GDP 45.1 44.3 47.4 51.0 50.2 46.4 43.8 42.1 41.7 Fiscal balance (with Naftogaz, -1.3 -2.0 -3.1 -8.7 -7.4 -4.2 -2.5 -2.0 -1.7 w/o bank recap), % GDP External debt, % GDP 50.4 58.6 83.6 90.8 85.0 76.7 78.1 78.4 77.4 Public and Guaranteed Debt, % GDP 14.8 12.4 20.0 34.8 39.5 40.8 42.4 41.8 40.2 Source: Ukrainian Authorities, WB staff projections 31. A combination of external and domestic factors poses significant downside risks to Ukraine’s economic outlook. The increased uncertainty in international financial markets has resulted in a lower appetite for risk, and investors have opted to reduce their exposure to several emerging markets, including Ukraine. As Figure 2 shows, Ukrainian sovereign bond spreads have almost doubled over August-October 2011, reaching 970 basis points. While this remains significantly below historical highs of 2009, the costs of rolling-over both public and private external debt are now non- negligible. Ukraine‘s public sector, banks and corporations faced about USD 50 billion (almost 30 percent of estimated GDP) of external debt repayment in 2012. In 2012, the Government has to repay USD 8.2 billion (4.5 percent of GDP) in domestic and external debt. Public sector financing requirements thus make prudent macroeconomic policies and structural reforms to retain official financing support and improve investor confidence especially critical. However, parliamentary elections scheduled for October 2012, may relax the required spending restraints and undermine the efforts. 4 Figure 2. Sovereign bond spreads over US Treasuries, basis points 3500 Argentina 3000 Hungary 2500 Poland 2000 Russian Federation Turkey 1500 Ukraine 1000 500 0 2008M01 2008M04 2008M07 2008M10 2009M01 2009M04 2009M07 2009M10 2010M01 2010M04 2010M07 2010M10 2011M01 2011M04 2011M07 2011M10 Source: World Bank Global Economic Monitor ii. Business Environment and Competitiveness 32. Improvement in Ukraine’s medium-term growth prospects requires substantial private investment to modernize industrial facilities, increase energy efficiency and improve agricultural yields. Ukraine has significant unexploited efficiency reserves in the real sector, but without significant complementary private investment and public spending to improve transport, energy and municipal infrastructure, these reserves cannot be tapped. Lack of competitive pressures and a poor investment climate have tilted private sector incentives against investing in the official real sector, and instead sponsored a burgeoning shadow economy. Constraints in the business environment have also limited opportunities for Ukraine to better exploit its scientific and research potential. 5 33. While some progress has been made Box 1. SMEs: Barriers to Entry and Exit and Lack of on regulatory issues, barriers to successful Competition business remain high. Ukraine has been trapped in a self-perpetuating low Ukraine ranks 152th out of 183 countries on the ease of doing business (Doing Business 2012 Survey) – and equilibrium of high entry barriers, low worsened its position from 149th in the previous year competition, limited incentives for ranking. Reforms to entry regulations, the tax system and to technology adoption, low export construction permits undertaken during the first half of 2011 diversification and sophistication, high came too late to affect the 2012 rankings. vulnerability to commodity prices, and On registering property (rank 166th), trading across the incumbent fears of reduced rents if entry borders (140th), construction permits (180th), getting barriers were reduced. Heavy handed electricity (169th), resolving insolvency (156th) and paying administrative practices hinder market taxes (181th) Ukraine trails at the very bottom of the global contestability and competition, create economy. corruption opportunities and ultimately To start a business it takes 9 procedures and 24 days; to generate losses to the economy. Regulatory close a business, owners have to go through a long, barriers affect mainly small and medium cumbersome, and costly process - it takes almost 3 years to enterprises (SMEs) and foreign entry (FDI). close a business in Ukraine. Ukraine has a very low number of new entries of firms compared to other emerging Ukraine ranking worsened on trading across the borders in the face of new customs inspection requirements. It takes economies, which considerably reduces the about a month to cross the border while for Ukraine‘s potential of productivity gains and economic western neighbors it takes about two weeks. diversification, and job creation. 34. FDI has been lackluster; moreover, FDI has been concentrated on thin capitalization schemes of existing businesses often recycling domestic capital via tax havens (Figure 3). Transformational FDI in the real sector that would bring technology, enable modernization and foster diversification - central to the economic development strategy of the country – has been insignificant. Figure 3. FDI amounts and “quality� continue a downward trend 35. The share of the shadow economy in Ukraine is one of the highest in the world. According to national statistics, in 2010, 4.7 million people in Ukraine between the ages of 15-70 worked in the informal sector, equivalent to about 23 percent of total employment. International comparative studies put the shadow economy at 55 percent of GDP (average over 1999-2007), or 145th the largest out of 151 countries for which estimates have been produced.2 Informality is concentrated in rural areas, partly because of the prevalence of informality in the agricultural sector. It is also most common among the 2 Schneider, Buehn and Montenegro (2010), ―Shadow Economies All Over the World‖, World Bank Policy Research Working Paper 5356. 6 low-skilled workers, those aged 60-70 years and slightly more prevalent among men than women. Increasing formalization is important for Ukraine‘s development even though its fiscal impact is likely to be limited initially (perennial difficulty to tax under-reported wages and profits), as it would bring other important benefits, such as increased productivity, greater investment in human capital and more innovation. 36. Ukraine has tremendous agricultural resources which can become a potential new engine of growth through high value-added food production chains. However, the sector has been plagued by inconsistent government policy, intervening in domestic and export markets to benefit selected businesses, and by the failure of contract enforcement which has significantly increased financing costs and cut-off most middle sized farms from any bank credit. Ukraine has gone through a cycle of export restrictions and their subsequent abolition. In particular, during 2010-11 Ukraine implemented export restrictions not justified by shortages of grain in the local market. These restrictions (mostly revoked by now) caused significant losses to exporters and undermined the trust of investors, potentially causing longer term damage in terms of forgone investment opportunities in grain handling and storage, logistics, but also upstream farming. Consistent and credible policy signals are thus needed for the country to capitalize on its agro-potential. Agricultural land, while formally privatized in the early 2000s, remains non-tradable; while a lease market has developed, land is undervalued and hence incentives for investments in higher land productivity are low (in recent years the sector has seen increased investments by large agro-holdings). The authorities plan to lift the moratorium on land sale to attract investment, but there are justified concerns that the general unpreparedness of the land market could result in underpricing and large sways of fertile land ending up in the hands of well-connected insiders. 37. The Ukrainian economy generates far more transport volumes relative to its GDP than any other country in Europe due to the role of agriculture and heavy industry. The transport system has substantial potential to improve aggregate productivity and regional competitiveness but requires significant investments in roads and railways. Bank estimates that Ukraine should spend around 1.5 percent of GDP on road maintenance alone, and investment needs are at around USD 5 billion over 10 years. Ukraine‘s current spending is a fraction of this amount, and poor conditions of Ukraine‘s intercity roads are an important cost factor. Ukraine‘s relatively efficient railway transport system also needs large investments in track renewal, track capacity increases, electrification, rolling stock replacement and terminals. These investments would contribute to increased competitiveness of Ukraine‘s heavy industries and agricultural exports, and limit a shift of rail cargo and passenger transport to road transport with benefits of lower carbon emissions.3 38. Ukraine is among the most energy-intensive economies in the Figure 4. Energy Intensity in Ukraine is Among the Highest in the ECA/CIS Region world (Figure 4). The primary energy supply in Ukraine is dominated by fossil fuels: natural gas (39 percent), coal (30 1.00 percent) and oil (10 percent). About 70 0.80 percent of the total natural gas consumed is imported from Russia. 0.60 Industrial inefficiencies are significant, 0.40 the efficiency of communal district 0.20 heating is estimated to be about five 0.00 times below that in Western Europe due to lack of investments, metering, and limited price signals.4 Source: World Bank World Development Indicators 3 See World Bank Public Finance Review (2006) for investment estimates. See World Bank Country Economic Memorandum (2010) for an analysis of the impact of infrastructure deficits on growth. 4 Annex 3 includes a ―green accounting‖ exercise which calculates Ukraine‘s national savings rate since the late 1990s. In part due to the significant reduction of energy consumption and increased utilization of existing capacity, 7 D. Public Governance and Corruption 39. Corruption and state capture are broadly recognized as a major development constraint. Ukraine has had persistently low rankings on critical aspects of governance. A range of indicators, such as the Index of Economic Freedom of the Heritage Foundation and the Corruption Perception Index of Transparency International reveal a further deterioration in the past three years. The World Bank Institute‘s (WBI‘s) Governance Indicators show a largely inconsistent pattern since the mid-1990s, but with Ukraine ranked below the 50th percentile globally on all six dimensions (Figure 5). Figure 5. Ukraine Ranking on Corruption UKRAINE Comparison between 2010, 2005, 2000 (top-bottom order) Country's Percentile Rank (0-100) 90th-100th 50th-75th 10th-25th Percentile Percentile Percentile 75th-90th 25th-50th 0th-10th Percentile Percentile Percentile Source: Kaufmann D., A. Kraay, and M. Mastruzzi (2010), The Worldwide Governance Indicators: Methodology and Analytical Issues Note: The governance indicators presented here aggregate the views on the quality of governance provided by a large number of enterprise, citizen and expert survey respondents in industrial and developing countries. These data are gathered from a number of survey institutes, think tanks, non-governmental organizations, and international organizations. The WGI do not reflect the official views of the World Bank, its Executive Directors, or the countries they represent. The WGI are not used by the World Bank Group to allocate resources. Ukraine‘s national savings rates have improved in recent years. Yet, clearly, there is much room for further improvement. 8 40. The sources of weak governance are complex. Ukraine shares weak governance with many former Soviet Republics, suggesting that historical legacies play an important role, such as the emergence of oligarchs who have sponsored political parties and often exercise strong influence over government officials and institutions. Civil society, while strong, has not yet become a force to influence politicians and decision makers to act in the public interest. Social collective action is often hampered by the juxtaposition of unrealistically high expectations of what the state should deliver against low confidence in its ability to do so. A weak judicial system has provides limited options for legal redress. 41. Vulnerabilities to corruption are found along two main value chains. The first chain runs along the management of public resources, with key weaknesses in areas such as public procurement, the management of state-owned enterprises, non-transparent quasi-fiscal flows in the energy sector, and public investment planning and execution. The second chain links the state to business and citizens, where corruption is prevalent in the provision of public services, in tax administration, customs and business inspection, and the creation of economic rents through government intervention. 42. Ukraine’s procurement and financial management systems are risky but acceptable subject to mitigation. The 2007 Public Expenditure and Financial Accountability Assessment (PEFA) ranked Ukraine above average for lower Middle Income Countries (MICs). An internal Bank analysis carried out in preparation for the previous CPS found weaknesses in procurement and financial management systems, but suggested Bank lending could go ahead with due attention to risk mitigation measures. The Law on Public Procurement adopted in 2010 and further amended in 2011 follows European standards and received positive opinions from the Bank and international experts, though effective implementation has only started. Ukraine performs well in the area of the availability of budget information, as rated by the Open Budget Initiative5. The overall conclusions for the purposes of this CPS remains the same (see Annex 5) but a re-evaluation of implementation risks to structural reforms resulting from governance weaknesses has led the Bank to halt Development Policy Lending until the government shows its commitment to tackle governance weaknesses. 43. Ukraine has recently strengthened its legal framework to address corruption. The newly adopted anti-corruption law provides a framework for fighting corruption and a Presidential decree ―On Anticorruption Strategy in 2012-2015‖ sets out a roadmap for Ukraine to implement many recommendations of OECD and the Council of Europe‘s GRECO. Key remaining legal weaknesses include the lack of rules for compulsory financial disclosure by public officials and the absence of a competent anti-corruption body with enforcement powers. Moreover, the DCFTA negotiations and associated regulatory reforms, such as the adoption of a new public procurement framework, and improvements in the licensing and certification system, provide the opportunity to tackle corruption risks in these areas. 44. Ukraine has also taken steps to improve access to information. The Law on Access to Information adopted in early 2011 follows best international practices and marks a significant step forward despite inconsistent implementation to date. Ukraine has committed to join the Open Government Partnership Initiative and launched domestic consultations to draft a National Action Plan. E. Poverty, Quality of Life, MDGs, Gender 45. Ukraine has experienced a substantial reduction in poverty rates over the last decade. In the pre-crisis years, the headcount index fell steadily from 47 percent in 2002 to just 8.9 percent in 2008 using a poverty line of USD 5 (purchasing power parity), with a faster decline in urban areas. National indicators of relative poverty, however, show less of a decline6. The decline in absolute poverty rates 5 http://internationalbudget.org/what-we-do/open-budget-survey/country-info/?country=ua 6 Poverty assessments vary depending of the methodology chosen to measure it. When an alternative approach - assessment of the relative poverty – has been used the perception of poverty (living below minimum subsistence) 9 was mostly driven by real wage increases but aided also by substantial government transfers. Inequality has remained moderate by regional standards. Social assistance transfers account for 2.5% of GDP (2009), comparable with the OECD average. 46. Despite a significant GDP contraction in 2009, poverty increased only moderately (by 1 percentage point). However, the impact of the crisis on poverty has been more profound when measured by the number of people who would have avoided poverty were it not for the crisis – this stood at 1.4 million, or 3.2 percent of the population7 (see Figure 6 a-b). The transmission channels of the crisis to the population were multiple, including tightening of the labor market, decline in real wages, and increased household debt service costs due to the exchange rate change. The results could have been worse were it not for coping mechanisms that helped to contain a potentially larger negative impact of the crisis on poverty. For example, instead of employment shedding, a significant portion of private sector firms resorted to part time employment (there was little employment shedding in the public sector). Households tapped their savings during 2009 until employment and wages started picking up in 2010. 47. Ukraine has an extensive social protection system and spends a sizeable share of GDP on non-contributory social assistance programs, including through income-tested programs. However, in terms of targeting accuracy of the overall social assistance, Ukraine does not score high within the group of transition economies, because a large share of the spending is channeled through programs with mediocre targeting accuracy. About 24 percent of the overall spending is reaching the poorest 10 percent of the population and only 37.4 percent of the social assistance spending goes to the poorest 20 percent of the population. Figure 6a-b: Impact of the Crisis on Poverty Rate and Projections $5 dollar a day Poverty Rates $5 dollar a day Poverty 14.0 Millions people $5 dollar a day poverty and vulnerability rates 12.3 6.0 5.5 $5 dollar a day poverty and vulnerability rates 12.0 9.8 5.0 10.0 4.3 8.9 9.0 4.1 4.0 4.0 8.0 7.2 3.2 7.9 5.8 3.0 3.5 2.6 6.0 6.6 4.6 2.9 2.1 5.5 2.0 2.5 4.0 4.1 1.8 3.2 1.0 1.4 2.0 2.5 1.1 0.0 0.0 2007 2008 2009 2010 2011 2012 2013 2007 2008 2009 2010 2011 2012 2013 Pre crisis projections Poverty Current projections Pre crisis projections Poverty Current projections Source: Ukraine HBS and Bank staff calculations 48. The health system is costly and outcomes are unsatisfactory. Adult death rates in Ukraine (particularly for males) are among the highest in the world. Non-communicable diseases and injuries are the main culprits for the mortality crisis in Ukraine: cardiovascular diseases and all other non- communicable diseases are responsible for approximately 79 percent of the total number of deaths, followed by injuries and poisoning with 14 percent (most of which are alcohol-related and traffic- related injuries), and communicable, maternal, and perinatal diseases at 7 percent. The health care sector is characterized by an oversized hospital sector (the third in Europe in terms of number of has been worsening over the last post-crisis years, and the incidence of poverty has been higher. This CPS uses the absolute poverty line cut-off as a better indicator of poverty during the volatile time. 7 This estimate is obtained by using the pre-crisis trend in poverty reduction to estimate a ―without crisis‖ scenario and comparing this with what happened in reality. 10 hospitals and hospital beds per capita), high prevalence of informal out-of-pocket payments (42 percent of total expenditure in the sector, according to 2009 data), outdated clinical protocols and poor quality of care, and almost non-existent non-communicable disease prevention programs. Figure 7. Probability of dying between 15 and 60 years per 1,000 population; men and women), 2009 500 450 400 350 300 250 200 150 100 50 0 Source: World Health Statistics 2011. WHO 49. Literacy rates and school enrollment have been traditionally high. However, demographic and economic realities require deep reforms to improve the inefficient platform of education provision. While there is a shortage of places in childcare facilities, Ukraine has an oversized school network. The number of teachers and schools barely changed despite the severe (40 percent) decline in student population over the last two decades. Efficiency indicators including the average school size and the student-teacher ratio (9 on average, one of the lowest in the world) have been falling sharply. Increasing budget allocations to education have had not resulted in improvements in the quality of education. In 2007 international assessment of student learning in Math and Science for 4th- and 8th- graders from Ukraine scored below Trends in International Mathematics and Science Study (TIMSS) average, and below regional comparators such as Armenia, Russia, Lithuania or Kazakhstan. Skill mismatch with the demand of the labor market is becoming an issue. 50. The municipal services sector in Ukraine suffers from decades of underinvestment and poor maintenance adding to the worsening quality of life. The investment backlog in water and wastewater utilities is substantial8 and existing low tariffs are a major limitation to the sustainability of utilities. The needs for rehabilitation are exacerbated by the overall high energy consumption in water production and wastewater treatment - the energy use intensity in Ukraine is one of the highest in the region. 8 Investment and rehabilitation needs of water supply and sanitation are USD7 billion. Water supply investments require 60 percent of that amount, and the remaining 40 percent is needed for the rehabilitation of sanitation systems. An additional USD7 billion is needed for district heating companies and retrofitting activities on the demand side (World Bank Public Finance Review, 2006). 11 51. Ukraine’s progress toward the Millennium Development Goals (MDGs) has been uneven. Ukraine has reduced absolute poverty and has made progress in achieving the targets for education, maternal health and child mortality. At the same time, reducing gender inequality and meeting the targets on sustainable environmental development continue to be a challenge. Importantly, HIV remains a critical area for improvement. Ukraine has the highest estimated adult prevalence rate of HIV in Europe at 1.3 percent. The national response to the AIDS epidemic has brought some positive results; mother-to-child transmission rates were reduced from 21 percent in 2002 to 6 percent in 2010. However, overall the scope and quality of interventions have been insufficient to reduce the spread of HIV. 52. Although Ukraine took steps towards implementation of gender conscious legislation, problems of gender inequality are widespread in Ukrainian society and require a long-term solution. Despite a tertiary education ratio of 1.19 female to male students, there is a high level of professional gender segregation. In particular, women are underrepresented in political life (the administration and business management). While over the past two decades women have become active entrepreneurs, with around one third of private businesses run by women, only a very small fraction of managers in large firms are women. Ukraine is also characterized by a significant gender gap in income levels as well as feminization of poverty as women dominate among the vulnerable categories of the population (one-parent families with children and elderly living alone). Illegal migration and human trafficking, as well as domestic violence, represent further risks to women. At the same time, there is a huge gender gap of 10 years in the average life expectancy between women and men, mainly as a result of extremely high mortality among working age men (more on gender issues in Annex 6). 12 II. DEVELOPMENT CHALLENGES AND OPPORTUNITIES AND THE GOVERNMENT AGENDA A. Government Agenda 53. President Yanukovych came to power with the mandate of introducing more effective economic management, in a country characterized by deep political divisions and overall disappointment with past economic and social outcomes. In response, the Economic Reform Program of President for 2010-2014, not only sets out an ambitious reform agenda but also puts emphasis on improving implementation by strengthening institutions, imposing discipline on the bureaucracy, and reining in corruption. The President has also confirmed the country‘s European orientation which – among others – would help to strengthen implementation mechanisms and governance standards. The Presidential Program for 2010-2014 ―Prosperous Society, Competitive Economy, and Efficient State‖ adopted in June 2010 envisages sequencing reform in three stages and sets measurable indicators for reform outcomes throughout 2014. The Program is built on five pillars:  Sustainable economic development addresses stabilization of the state budget, tax reform, financial sector development, and reform of intergovernmental fiscal relations;  Improvement of Standards of Living covers reforms of medical care, pension system, education and social assistance.  Improving business climate and attracting investments encompasses deregulation and entrepreneurship, public asset management and privatization, development of science and innovations, and international integration and cooperation.  Modernization of infrastructure and basic sectors addresses reforms of the power, coal, oil and gas and utilities sectors, development of transport infrastructure and agriculture and land reform.  Raising public administration efficiency presents reforms to improve the efficiency of government agencies by merging some agencies, streamlining bureaucratic processes, and rationalizing state employment. 54. Results of the Program so far have been mixed which may be understood given layers of resistance with roots reaching to Ukraine’s Soviet past. Fiscal consolidation has started but underlying fiscal imbalances and inefficiencies in the allocation of government spending have not been fully tackled. Pension reform marks a significant step forward, health sector reforms have been launched and the government is committed to improve targeting of social transfers. These efforts have not so far been followed by improvements in the quality of public services. Despite significant deregulation efforts, the investment climate remains poor, the security of property rights has been undermined by cases of forced change of ownership and corruption in the judicial system, and – in result - foreign investors remain lukewarm to Ukraine (the significant part of FDI is in fact the local capital circulated through offshore accounts). The backlog of investments in public infrastructure is significant, the regulatory and tariff policies inadequate to attract private investment despite some initial pilot public private partnerships and strategic prioritization and cost management in public capital spending is poor. The authorities have advanced privatization in the power sector, and sold the state fixed line monopoly Ukrtelecom but the transparency of these transactions has been disputed. The ambitious administrative reform launched in late 2010 has not yet brought the desired increases in administrative efficiency. A self-evaluation of the government‘s implementation of the reform program conducted in the Fall of 2011 showed only around 50 percent of the targets for the first 18 months had been achieved. 55. There is growing understanding in the government that increasingly complex and socially sensitive reforms cannot be effective without public engagement, particularly at the local level, in their design, monitoring and implementation. Improvements in the business climate require dialogue with entrepreneurs about the binding constraints to investment and regular feedback to ensure central deregulation efforts are matched by changes in the behavior and practices of state agencies on the 13 ground. Ukraine needs a shift in the governance paradigm – moving away from the system dominated by the state to a system inviting participation by a broad array of stakeholders. This new model of relations already started to emerge in a few cities with constructive cooperation between elected mayors and civil society and business organizations. B. Mid-Term Challenges and Opportunities 56. As the Presidential Reform Program rightly highlights, a multitude of structural and social challenges will need to be addressed to deliver sustained and shared growth at rates commensurate with Ukraine’s economic potential. Over the medium-term the most pressing challenges for structural reforms include:  creating a transparent and even playing field for SMEs and FDI by reducing and simplifying entry and exit regulations, abstaining from distortive interventions (such as in agriculture) and by lowering costs and time burden related to permits and inspections;  broadening the tax base and improving the efficiency of tax management to reduce the obstacles of doing business (particularly for SMEs), reducing informality in the economy, but also creating more stable fiscal revenues;  implementing reform of pensions and other social transfers to reduce currently unsustainable budgetary social costs, improve fairness and transparency, and to better target social assistance;  securing financial and technical viability of public services to improve their availability and quality;  implementing energy sector reforms including phasing out the deficit of Naftogaz and improving transparency in the energy sector;  improving the public financial management system, including implementing a transparent public procurement, strengthening corporate governance in state-owned enterprises, and modernizing the system of capital budgeting more generally;  safeguarding the soundness of the banking sector, rationalizing the state‘s role and direct ownership in the financial system, including exiting of state ownership from commercial banks. 57. These reforms cannot succeed without progress in reducing corruption and improving public governance. However, the reverse is also true - slow or no progress on the above reforms would protect rents resulting from economic distortions and further entrench interests vested in the status quo. This vicious circle has to be addressed from both sides: on the one hand, better regulations and more transparent institutions should reduce opportunities for corruption; on the other hand, even- handedness and strong sanctions in high profile corruption cases (irrespective of political affiliations) should send a clear signal that regulations and institutions are to be treated seriously. 58. The planned Association Agreement and DCFTA with the EU could provide an important anchor for many of the reforms listed above. Indeed, agreement with the EU itself could send a strong signal to foreign and domestic investors. The regular public monitoring of compliance with the commitments made in the Association Agreement and the existence of a sanctioning mechanism in the DCFTA would support implementation of reforms. This would present Ukraine with an opportunity to break the cycle of poor governance and lagging reforms. 14 C. Long-Term Challenges and Opportunities 59. Ukraine faces worrisome Box 2. Sustainability of pension system demographic trends. Ukraine has one of the lowest birth rates in the world (10.8 At 17.5 percent in 2010, Ukraine has the highest share of live births/1,000 population (2010), which, pension spending in GDP in the world,. Ukraine also has one of the highest total contribution rates to the pension system together with high mortality rates (15.2 in Europe at 35 percent of gross salaries. The total rate of deaths/1,000 population) and emigration, contribution to all 4 social insurance funds is above result in a rapid decline of the population. 41percent. A combination of socio-economic factors, including uncertainty and labor market The pension fund ran a broad deficit (including transfers from the state budget to finance special pension programs) conditions, account for the low birth rates. of almost 7 percent of GDP in 2010. Yet, because there are A shrinking and graying population and the 13.7 million pensioners, the pension received by a large erosion of Ukraine‘s human capital due to portion of pensioners is low and is being eroded by inflation. low quality health and education services All this is compounded by a worsening demographic profile pose significant risks to Ukraine‘s long- and large deficits in the system. It is predicted that in 10 term development outlook. These years there will be 1 pensioner for every contributor to the fundamental challenges cannot be resolved system and this ratio will worsen sharply thereafter. within the timeframe of this CPS but The government embarked on reforms to the pay-as-you-go structural development challenges have to public pension system in 2011 by gradually raising the be addressed without delay, in particular retirement age and tightening eligibility criteria. These steps broadening the tax base by improving the will help redress financial imbalances but additional business environment, right-sizing social measures will be needed to ensure adequate pension levels transfers and improving the efficiency of and affordable contribution rates. Pension reform is not only the public sector. Failure or delay would a matter of concern for fiscal sustainability but also for costs cause unsustainable public debt and for business competitiveness and intergenerational fairness. increasing macroeconomic vulnerabilities It is a challenge Ukraine shares with many other countries in Europe. as the population ages (Box 2). 60. At the same time, Ukraine has big long-term potential resulting from its strategic location, its abundant food production capacity, sophisticated industrial tradition, and hard-working entrepreneurial people. For these advantages to be unleashed Ukraine has to improve its image as an investment friendly country with a light regulatory touch, unquestionable property rights, and corruption under control. III. WORLD BANK GROUP PARTNERSHIP STRATEGY A. Lessons Learned during 2008-2011 CPS 61. The FY08-11 CPS Completion Report (CPS CR, Annex 1) acknowledges the relevance of Bank assistance. This CPS spanned the global economic and financial crisis and important political changes in Ukraine which had affected the coherence of economic policy making and the performance of the economy and therefore the implementation of the CPS. The FY08-11 CPS reflected high implementation risks, including problems in investment portfolio performance, the uncertain political context and weak governance. The CPS was based on modest expectations regarding the pace of reform, including in public sector governance, recognizing that the political context and institutional weaknesses were not conducive for the government to take on ―big ticket‖ items. The Bank program called for selectivity, with a shift of investment lending towards infrastructure projects, continuation of DPLs as a tool to advance reforms and a sizable AAA program informing policy dialogue. At the same time, implementation risks, although appropriately identified, were underestimated and the capacity of the government to respond likely overestimated. In particular, the analysis of implementation risks did not go deep enough, focusing on selectivity but missing flaws in design and implementation readiness. 62. The CPS CR rates the previous CPS as moderately unsatisfactory, reflecting the failure to achieve planned outcomes due to a delay in fiscal and structural reforms while recognizing the 15 timely and effective support offered during the financial crisis. The Bank‘s crisis response through DPLs as part of an international package, coordinated closely with the IMF, the EC and EBRD, helped restore confidence and prevent a run on the banking system. The crisis did, however, set back the reform momentum in critical areas such as reducing quasi-fiscal deficits in the energy sector, moving forward with pension reform and improving the business climate. The CPS CR commends the authorities and the Bank for the active and detailed work done to improve the implementation of the investment portfolio, which achieved some progress towards the end of the CPS period. Nonetheless, Ukraine‘s performance remains below the Bank‘s average. The CPS CR also points to weaknesses in the results framework of the FY08-11 CPS, in particular regarding the choice of higher order objectives and the overly optimistic timeframe chosen for several key outcome indicators. 63. The proposed CPS takes into account many of CPS Completion Report recommendations. The following key lessons have influenced the design of the CPS:  Greater attention will be given to implementation risks affecting portfolio performance. Interventions will be simple, targeted, and mindful of capacity constraints. Greater attention to project readiness will be given during preparation as inadequate preparation of technical specifications and procurement packages is one of the reasons behind significant disbursement delays. Repeater operations and supplemental financing for successful projects will be utilized more.  Risks posed by volatile politics, governance weaknesses, and inconsistencies in policy implementation will be mitigated through upfront diagnostic governance assessments and greater consensus building around an agreed roadmap for change in each sector as well as through greater flexibility to exit when policies shift. Selectivity at the sectoral level would help support reform champions and mitigate governance risks.  Activities supporting the demand for good governance will be scaled up and integrated with the Bank‘s financing and AAA by making greater efforts to involve CSOs in the design and monitoring of policies and investments supported by the Bank. Previous demand side governance work mainly relied on advocacy and was insufficiently linked with core Bank operations. B. CPS Principles 64. In response to implementation risks and in recognition of lessons learned during the previous CPS, the Bank proposes a calibrated approach to financial assistance. Financing and the range of instruments would increase when reforms accelerate and governance improves and the client is ready to absorb financing and knowledge, but financial exposure would be kept modest if reforms stall:  The Bank will offer investment lending to address basic infrastructure needs in the sectors with established track records of cooperation. This includes road construction, state statistics, the power sector, municipal utilities and social protection. Investment lending would require implementation capacity to be in place (as Board and/or effectiveness conditions) and broad agreement on the policy framework in the sector.  The Bank will offer analytical and advisory services to help create consensus in important but controversial reform areas and to build capacity. The AAA program will be key to the Bank‘s engagement and prepare the ground for possible financial support.  Ukraine needs to deepen structural reforms in many areas, including the business climate, financial sector regulation, the energy sector, public finance management and fiscal and tax policy. The calibrated engagement strategy leaves scope for an upward revision of lending amounts through the addition of DPLs which would support reform efforts in these areas. The Second Programmatic Financial Rehabilitation Development Policy Loan could be delivered quickly and a new cross-sectoral DPL series supporting improved governance (a pre-condition to DPLs) and economic competitiveness and building on the early DPL I-III series could be launched in FY13-15 subject to the government's request for IBRD resources, Ukraine's performance, IBRD's financial capacity, demand from other borrowers, and global economic developments. 16  Inconsistent implementation of past reforms and significant governance problems create unacceptable risks for the Bank to provide direct budget support. The authorities are aware of the need for more consistency and have committed themselves to a program of addressing some of the most prominent governance concerns: public procurement, VAT refunds, transparency in the energy sector, business regulation and red tape, and government investments into failed financial institutions. The government and the Bank will jointly evaluate progress in these areas to determine whether DPL lending can be resumed. 65. The Program, irrespective of its size and lending instruments, will be built on the foundations of sound diagnostics. AAA will be focused on deepening the Bank‘s knowledge of and the dialogue with the authorities on key issues affecting development effectiveness in the Bank‘s current and planned future portfolio of investment activities. Core diagnostics in fiscal policy, PFM, financial stability and growth will continue. AAA in new areas, where the Bank currently does not have or does not plan interventions in the foreseeable future, would be limited. This implies a more narrow scope for advocacy work outside core areas in the Bank program and reflects increasing resource constraints. The potential for reimbursable technical assistance is low at present, but opportunities will be actively explored, including making better use of synergies with other donor programs such as EC technical assistance. C. CPS Pillars and Expected Results 66. The core objective of this CPS is to help the government overcome implementation bottlenecks that have affected successive reform programs. A premise of this CPS is that this will require not just work on the content of reforms but also on building more constructive and trustful relations between the state, citizens and business. Work would proceed along two main axes: (i) in the area of relations between government and citizens, efforts would focus on improving the quality of public services, strengthening accountability to service users, cost recovery and financial transparency and targeted assistance to the poor and vulnerable; and (ii) in the area of relations between government and business, attention will be directed towards the creation of new jobs in the private sector, the attraction of FDI and private domestic investment to improve productivity and international competitiveness, the creation of transparent and stable rules of the game, and complementary public investments in physical infrastructure. Consequently, Bank supported activities in this CPS are organized along two main pillars: (i) support for ‖building relations with citizens‖ and (ii) support for‖building relations with business‖. 67. The importance of building social trust and stakeholders’ participation to govern effectively is increasingly recognized by the country’s leadership, even if not yet fully embraced at all levels of the administration. On the one hand, examples of municipalities where popular mayors build effective coalitions with civil society and business organizations are becoming known across the country and, on the other hand, reforms with potential benefits for people over the medium term are contested because of mistrust and a lack of public participation in their preparation. This CPS draws the attention of policy makers to the increasingly binding constraints imposed by the lack of social trust in state institutions for the realization of a medium-term reform program. The design of this CPS supports the need for a new approach to policy design and implementation to depart from the muddle through strategy of the first two decades of independence. 68. There is a strong complementarity between steps to increase Ukraine’s economic potential covered under the second pillar and improvements in the social outcomes covered under the first pillar. Embracing the benefits of international openness and competition will require better public services and safety nets to protect the vulnerable and those likely to lose from the resulting structural changes, at least in the short term. At the same time, improvements in the business climate are also critical to nurture the development of a middle class with a strong stake in a lighter, more effective and less intervening state. Private businesses and citizens wishing to benefit from European and international integration are the key stakeholders for successful reform in Ukraine. This CPS offers 17 support to the authorities and members of the civil society for collaboration necessary to realize Ukraine‘s aspirations. 69. The expected outcomes of the CPS reflect the calibrated assistance model. The CPS results framework reflects outcomes achievable under the base case. It provides an accountability framework for the existing investment lending portfolio, lending in the pipeline for FY13 and ongoing AAA. The CPS includes AAA program geared towards helping the authorities address the backlog of structural reforms and improve governance, where progress is dependent on the authorities‘ commitment and ability to deliver. Since this would be clear only if the Bank were to return to DPL lending under a high case, the results framework would need to be revisited in such a case. 70. IFC will contribute to the CPS outcomes under the second pillar through combined investment and advisory operations for the development of the private sector. IFC strategy in Ukraine will continue to support: (i) banking sector stabilization and targeted finance, (ii) agribusiness, and (iii) infrastructure, accompanied by two cross-cutting themes of improving business environment and promoting energy efficiency. Financial sector stabilization in the aftermath of 2008 crisis and in the deteriorating environment due to the Eurozone debt crisis will entail an expansion of the Global Trade Finance Program to facilitate trade and possible capital and liquidity support of selected banks. The investment and advisory work on distressed assets and non-performing loans will continue. In the longer term, IFC will provide targeted financing through banks for SMEs, energy efficiency and the agribusiness sector. In addition, agribusiness development, which constitutes the core part of IFC‘s strategy in Ukraine, will be supported throughout the supply chain to address the main bottlenecks to the sector‘s growth and to generate broad sectoral impact. In its agribusiness investments, IFC will place emphasis on projects with individual companies to maximize impact through demonstration effect. Investments in agribusiness will be accompanied by advisory work to improve investment climate for agribusiness, bring food safety standards to international level, and develop agri-finance and agri-insurance. IFC‘s investment climate advisory will also support implementation of the recently enacted permits and licenses legislation, adoption of legislation on certification and standardization, as well as institutional reform in the area of technical regulations. In the infrastructure sector, IFC is considering renewable energy projects and exploring opportunities in waste, transport, and IT services as well as trying to promote Transaction Advisory work to support structuring PPP transactions and developing proper transparent mechanisms of attracting private sector financing. IFC is aiming to improve Ukraine‘s energy efficiency in a cross-cutting investment effort, complemented by advisory services on Cleaner Production, Residential Energy Efficiency, and Sustainable Energy Finance. 71. In the context of deteriorating investment climate in Ukraine, IFC intends to adopt a more cautious stance in selecting prospective clients and estimating the amount of financing it will be able to provide. Historically, IFC‘s levels of investment have consistently fallen short of what would have been expected based on the market potential. Efforts to increase investments were impeded by slow progress of key reforms, administrative market interventions (such as grain quotas and their non- transparent allocation, export duties and selective domestic price interventions, and legislative proposals that would create an uneven playing field in the grain market) and by governance concerns that required IFC to exercise greater selectivity in choosing clients. IFC is ready to invest in Ukraine and would like to increase its annual commitments to approximately USD 400 million. However, this would only be possible if (i) reforms to improve investment climate remain on track; (ii) IFC can find clients that meet its reporting and transparency standards; (iii) IFC can provide local currency financing in Ukraine; and (iv) public procurement legislation is amended to allow IFC to provide sub-national financing. Barring these changes, IFC‘s investments are likely to stay at the historical levels of USD 200-300 million per year. i. Pillar 1: Improving public services and public finances: support to building relations with citizens 18 72. Work under the first pillar would demonstrate how open dialogue in reform formulation, accountability in implementation of policies, and transparency in the monitoring of their impact can yield better development results. The Bank‘s efforts will be targeted at achieving improvements in three main areas: (i) fiscally responsible and sustainable budget revenues and expenditures; (ii) service delivery efficiency in health and education, and targeted social assistance (iii) provision of municipal services (water, sanitation, heating). The WBG will finance investments in public sector infrastructure, work on setting up improved monitoring mechanisms and strengthening governance of public service providers, while supporting intensified dialogue between the government and civil society in key policy areas such as pension reform, health care reform, district heating and public procurement. Result Area 1: Improved governance of public finances 73. Outcome 1: Strengthened operational efficiency and transparency of PFM. Despite improvements in PFM systems over last decade, some persistent weaknesses need to be addressed. They include the weak link between policy objectives and budget allocations and the lack of integrated expenditure and revenue data and analysis for timely decision making. The PFM project under implementation will help address these problems by: (i) helping to elaborate an operational medium- term budget framework, and (ii) establishing an integrated management and information platform to improve data access to decision makers with an expected 20 percent reduction in time required to obtain information for managerial decisions. 74. Outcome 2: Increased transparency in public procurement (PP). Given that around 80 percent of the budget is comprised of wages and transfers to the population, most governance concerns are focused on the public procurement system, which covers around 12-15 percent of public spending in a given year. Policy dialogue will build on the progress already made. After the significant progress achieved in 2010-11, the focus will be on completing some final pieces of the legal and regulatory framework (in partnership with the EC) and building a public performance monitoring platform. Through public data and information on public purchases, the monitoring platform will enable civil society to monitor the performance of public procurement and hold officials accountable. Over time, this would help to improve competition and transparency in the PP system. 75. Outcome 3: Improved efficiency of capital expenditures. According to 2011 PEFA, capital budgeting practices remains one of the weakest PFM areas. Capital expenditures represent around 5 percent of the budget in a given year. The Bank‘s advice on fiscal policy has been to create fiscal space for needed infrastructure investments to support private sector growth (doing so while maintaining a prudent stance on the deficit and gradually reducing the size of the general budget). But to make this policy efficient, the process of capital budgeting needs to be improved. Currently, investment planning is detached from national strategic planning, project evaluation and selection processes are weak (or ad hoc in many cases), multi-year investments and implementation costs are not always factored in the budget, and asset management and maintenance require significant improvements. Building on previous analytical work and technical assistance the Bank will continue to support the improvements of capital budgeting and help to enlarge the share of investment projects that go through an enhanced process of evaluation and selection. 76. Outcome 4: Improved governance in the energy sector. The Bank, through the EC-funded trust fund, will assist Naftogaz in preparation and implementation of modernization projects in the gas transit system; assist the Ministry of Energy and Coal Industries with gas market reforms and adoption of an Action Plan for Naftogaz restructuring and an update of Energy Strategy until 2030. Through a joint work with IMF, EBRD, European Investment Bank (EIB), and with the EC supporting policy measures, the Bank will continue to advocate for energy sector reforms. In particular, the donors expect Ukraine to join the Extractive Industries Transparency Initiative (EITI) and to reduce the price distortions in the gas, electricity and heating sectors (the Government has expressed its commitment to join EITI though the progress is slow). 19 77. Outcome 5: Implemented Pension Reform Law and sustainability of the Pension Fund improved. Dialogue on pension reform will continue to be focused on the fiscal sustainability of the pension system. Following policy dialogue between the Bank, the IMF and the authorities, in September 2011, a key pension reform law was enacted, that increases the retirement age for women and extends the contribution period. The Bank will continue its policy dialogue throughout the implementation period of this Law and will advise on measures needed to secure long-term sustainability of the pension system. Result Area 2: Improved efficiency of social expenditures 78. Outcome 6: Improved efficiency of spending in health and education. While the health and education systems absorb a significant share of total government resources the efficiency and quality of services have been declining. To improve the government efficiency in public spending, both in health and education, the Bank will assist in building the analytical capacity for managing public expenditures using the BOOST tool. In the health sector the Bank will support the pilot phase of the renewed reform in three oblasts and Kyiv, with potential for the Bank project in the second half of the CPS. Results at the pilot level will be measured by reduction in the length of stay in hospital, increase in the number of cases treated at the primary care and outpatient level, reduction of unnecessary hospital admissions, reductions in informal payments, and reductions in the number of hospital beds. 79. Outcome 7: Improved efficiency and equity of social safety net. The Bank will build on the existing Social Assistance Systems Modernization Project aimed at improving targeting of the social protection programs and better protection of the poor. The project has helped to build new models for local welfare offices by increasing efficiency of the social assistance administration. Improvements in the targeting accuracy of social assistance, revised eligibility criteria of means tested programs and the rationalization of multiple social benefits programs have yet to materialize and will continue to be a focus of the CPS. In particular, a new means-testing instrument, developed under the Project to improve overall social assistance targeting, is slated for introduction in 2012. The Bank has launched preliminary work on a new lending operation to scale up social assistance programs. Result Area 3: Improved efficiency, quality and governance of municipal infrastructure services 80. Outcome 8: Improved energy efficiency of targeted municipal water utilities. The main challenges in the water supply and sanitation are associated with cost recovery tariffs too low to cover operation and maintenance costs and undertake investments. The Urban Infrastructure Project (UIP) supports two of the government‘s priorities: (i) energy efficiency; and (ii) quality of the urban water supply and wastewater services. In particular, energy efficiency investments in fifteen utilities under the UIP are expected to reduce the total energy consumption of participating utilities by 15 percent. The planned Gas Sector Efficiency and Modernization project and the Energy Efficiency project will improve energy efficiency of district heating companies. 81. Outcome 9: Increased transparency and accountability of municipal service provision. Quality and responsiveness of municipal services, including water and sanitation and district heating, are particularly vulnerable to lack of transparency and accountability of service providers. Strengthening the demand for good governance at the municipal level is a promising platform for strengthening transparency and responsiveness across a range of services. Bank will examine the framework for improved governance in the water and sanitation sector through assessing entry points and developing a road map for improved governance. The Bank will advise on implementation of a sector information system based on benchmarked performance indicators. The Bank will also assist in building the capacity of the newly created communal service regulator. ii. Pillar 2: Improving policy effectiveness and economic competitiveness: support to building relations with businesses 20 82. Improvement in the business climate is the key to unlocking Ukraine’s economic potential and achieving greater competitiveness. This pillar will support implementation of the recommendations of analytical and diagnostic work undertaken during the previous CPS. The expected outcomes will focus on (1) friendliness, sustainability and predictability of the business environment, for both domestic and foreign investors, (2) improving infrastructure to reduce the cost of doing business, and (3) comprehensive reform of the agricultural sector to allow Ukraine to benefit from high international demand for food and agricultural commodities. The authorities have further requested assistance in better utilizing Ukraine‘s innovation and industrial potential, embodied in a strong scientific and machine building tradition and growing potential in the outsourcing of digital services. While important, the Bank‘s assistance in this pillar will focus first on tackling first order constraints in the business climate and the scope for broadening support to other areas will be reviewed at mid-term. Result Area 4: Improving business regulatory environment for a more competitive and diversified economy 83. Outcome 10: Reduced regulatory burden on enterprises. Despite progress in reducing the burden of the regulatory framework, barriers to business entry, operation and exit remain high. Ukraine ranks 152th out of 183 countries on the ease of starting a new business (2012 Doing Business Survey). IFC will support implementation of the recently enacted permits and licenses legislation (prepared in the previous CPS under the WBG advice), adoption of legislation on certification and standardization as well as technical assistance to advance institutional reform in the area of technical regulations. The Government has expressed interest in engaging Indicator-Based Reform Advisory unit of the WBG to focus its efforts on improving investment climate through the use of regular SME surveys to measure reform effectiveness and improve accountability. The shift to sampling in statistical surveys rolled out nation-wide as part of the Additional Financing provided for the State Statistics Development Project would reduce compliance costs for companies and improve the timeliness of key national business statistics. 84. Outcome 11: Reduced tax compliance costs. Improving tax administration is critical given the burden of costs of compliance and tax inspections. The Bank will continue its engagement through the ongoing State Tax Service Modernization Project (STSMP). Under this project the Bank supports implementation of the Government‘s tax service modernization program aimed at improving efficiency of tax administration and fostering voluntary compliance. It includes improved taxpayers‘ access to information with the establishment of a centralized Call Center by the State Tax Service (STS) and the expansion of e-filing. The implementation of the Tax Block and Document Management systems will be a milestone and will allow the STS to operate a modern IT platform, centralize operations and considerably reduce the number of tax inspections. The Bank will also continue policy dialogue on improving VAT refunds administration. The introduction of automated VAT refunds and an electronic register of VAT invoices that simplifies the process of verifying tax liabilities and tax credit claims as well as identifying potential tax avoidance schemes became important improvement in tax administration. These developments, if properly implemented, should decrease the compliance costs for taxpayers and reduce the workload for tax inspectors. 85. Outcome 12: Increased access to medium and long-term finance for export. While traditional export industries have reasonable access to medium and long-term financing, access is still limited for smaller exporting firms. The Second Export Development Project (EDP-2) credit line, strengthened in FY12 with additional financing, will continue to support export growth and diversification through provision of long-term investment and working capital loans to a diverse pool of established and new exporters. The credit line, channeled through Ukrexim Bank to eligible exporters directly or through other participating banks, will result in new incremental exports, a more stable source of funding, new export sectors and wider export geography. It will also contribute to better credit assessment skills in participating banks and to the financial and institutional strength of Ukrexim Bank. 86. Outcome 13: Increased stability of the financial system. The financial system in Ukraine is still dominated by an insufficiently regulated and supervised banking sector. The WBG will continue 21 providing technical assistance and advisory services (potentially supported with policy lending as part of the calibrated 2012-2015 CPS approach). Areas of collaboration will include macro and micro- prudential and market conduct regulation and supervision (including consolidated supervision, Basel 3, consumer protection, regulatory architecture), crisis preparedness and resolution (including development of the DGF as the bank resolution agency), defining the role of the state in the financial sector and supporting the state‘s exit from recapitalized banks, and achieving a better balanced mix of funding for the economy from the banking sector as well as the capital markets. Given heightened international market risks, the continued focus will be on banking sector stability and enhancing system preparedness for response to crisis if needed. IFC‘s Financial Markets Crisis Management Project will continue to work on the establishment of an operating distressed asset market and on improving the risk management in the financial sector. Result Area 5: Improving infrastructure for business activities 87. Outcomes 14: Improved energy efficiency in the public and private sectors. The Energy Efficiency project will address energy efficiency through Ukrexim Bank‘s credit lines for improving energy efficiency in the industrial enterprises and municipalities. Depending on progress in sectoral reforms, the Bank may consider, together with the EBRD and EIB, financing a Gas Sector Efficiency and Modernization project, which would target efficiency improvements of the gas transport network, in particular, through network and compressor rehabilitation, or reducing gas consumption by households through the installation of building-level meters and building-level substations combined with consumption-based billing. IFC will contribute to this outcome through the Cleaner Production Advisory Project, the Sustainable Energy Finance Project, and the Residential Energy Efficiency Project, as well as direct real sector investments and targeted credit lines for energy efficiency improvements through financial intermediaries. 88. Outcome 15: Improved performance of power sector. The Bank has been addressing the problems of aging assets, outdated technologies, below cost-recovery pricing for households, and non- payments from district heating companies by supporting the implementation of the governmental Energy Sector Reform and Development Program. The Bank‘s Hydropower Rehabilitation Project has assisted to increase regulatory capacity, efficiency and safety of hydroelectric plants, identification of long-term development priorities in the energy sector, and development of a new model of the wholesale electricity market. The Power Transmission Project, launched in FY09, aims to improve reliability and quality of power supply through the rehabilitation of transmission substations and strengthening of the power transmission network. The project also improves institutional capacity and technical capabilities of transmission system operator, UkrEnergo, to assure secure and reliable operation of the high voltage power grid, and contribute to the opening of the electricity market. A follow-on project (PTP2) is envisaged. 89. Outcome 16: Improved road connectivity and safety. The Bank will continue to support connectivity to key markets through investments in modernization of road networks and improving road safety. The Roads and Safety Improvement Project finances rehabilitation to European standards of 126 km section of the important transport artery Kyiv-Kharkiv. The Project also supports elimination of high-risk ―accident black-spots‖ throughout the Ukraine‘s road network, and provides technical assistance to the Road Agency to strengthen its capacity in road management and maintenance. The Second Road and Safety Improvement Project to upgrade the next section of the Kyiv-Kharkiv road (from Lubny to Poltava) and improve road safety is under preparation. If requested, the Bank could consider supporting this important sector through additional road modernization projects. 90. Outcome 17: Private participation in the transport sector. IFC‘s Public-private Partnership (PPP) Transaction Advisory Services will focus on the transport sector and municipal services aiming to bring to financial closure at least one pilot PPP project in transport applying best international practices. Result Area 6: Improving productivity and competitiveness in agriculture 22 91. Outcome 18: Increased efficiency of cadastral registration. Establishment of a legal framework for secure land ownership and development of an efficient registration system are important prerequisites for ensuring free and transparent land market in Ukraine. The Rural Land Titling and Cadastre Project is supporting the Government in delivering improved services to land-owners and ensuring establishment of an efficient land cadastre system. With the Bank‘s assistance, the electronic Land Cadastre has been established and the computerized cadastral information system will be gradually rolled out into oblasts and regional offices in 2012. The Bank also supports a public awareness campaign to inform small land holders of their rights to individual title, as well as their land use rights and obligations. To advise the Government in improving the evidence base for guiding well- governed and efficient land market development the Bank will assist Ukraine in developing a Land Governance Assessment Framework in 2012. The Bank‘s regional activities to improve the legal and regulatory framework for governance in the forestry sector will also continue. 92. Outcome 19: Reducing the cost of compliance for agribusinesses through alignment of regulations in agriculture with international best practice. IFC‘s Investment Climate for Agribusiness project will aim to improve the business environment in the agriculture sector by developing transparent and consistent regulations, which should create more attractive investment climate. Specific focus areas will include streamlining regulations for i) post-harvest handling and storage investments, ii) food safety, iii) agricultural input markets, and iv) resource efficiency in agribusiness, each contributing to the reduction in cost of compliance for business. Parts of this work will be carried out in close cooperation with the ongoing IFC‘s Food Safety project, which introduces Hazard Analysis and Critical Control Point (HACCP) at the company level, trains private and public sector operators in HACCP requirements, and raises awareness of food safety issues with the broader population. Both projects will jointly develop proposals on new legal acts to improve food safety - the Investment Climate project will ensure regulatory quality and friendliness of new regulations to business, while the Food Safety project will ensure that new regulations are efficient for food safety and comply with best international practice. 93. Outcome 20: Development of agri-insurance and access to agri-finance for IFC clients. IFC‘s Agri-Insurance Development and Agri-Finance Projects will target this outcome by aiming to support farmers in adopting agri-insurance as a risk management tool, facilitate increased value of agri- insurance as a means to access finance, and improve access to finance for farmers through financial institutions in Ukraine. These projects are expected to facilitate increased investment in agribusiness, alongside IFC‘s own direct investments in the sector as well as targeted credit line through financial intermediaries. IV. IMPLEMENTING THE STRATEGY A. Proposed Lending and Knowledge Program 94. Implementation of the current portfolio will be critical to achieving CPS outcomes. The current investment lending portfolio includes eleven operations for a total amount of USD 1.8 billion of which 67 percent is undisbursed. About half of the projects in the active portfolio are over 6 years old and have been carried over from the FY04-07 CAS. Portfolio performance has been improving, as a result of joint efforts by the Bank and Ukrainian counterparts. At present, no IBRD operation is rated as unsatisfactory and disbursement rates on investment loans, while still low, have risen to 15 percent in FY11, up from 7.4 percent on average during the previous CPS period. The time for new loans to become effective dropped from an average of 15 months in FY07 to 9 months in FY08 and 4.5 months in FY09-10. 95. The challenge of the CPS will be to sustain improvements in implementation of ongoing and new projects. Despite restructurings and intensive portfolio management since 2007 the portfolio is still suffering from delayed implementation. These portfolio problems, mostly related to design and procurement management flaws and repeated changes in policy direction, with many old ―legacy‖ projects in the portfolio, are not likely to be resolved quickly. Also, the previous CPS underestimated 23 the impact of implementation delays and was too optimistic in terms of results. In order to address these issues, a detailed assessment of implementation readiness will be a core element of project preparation under the new FY12-16 CPS. The Bank will also more aggressively restructure poorly performing projects. 96. The lending program for FY13-14 envisages base level support of about USD 500 million per annum in investment loans. Additional Financing to the current Second Export Development project (USD 150 million), approved in August 2011, is the only FY12 lending deliverable. New lending has been identified for the next two years of the CPS. The CPS Progress Report will propose lending in the outer years based on the evolution of country priorities, the WBG‘s value-added, and progress in the implementation of reforms and in addressing governance concerns. The investment lending pipeline for FY13-14 (Table 3) scales up support to counterparts with established capacity and a proven implementation track record. It includes a repeater Roads and Safety Improvement operation, additional financing to the State Statistical System Development project (both in FY13) and a second Urban Infrastructure project (FY14). In addition, a new operation (FY14) to support the scaling up of targeted social assistance programs is envisaged. Depending on progress against a roadmap of sector reforms agreed between the government, the EC, and the IFIs, a Gas Sector Efficiency and Modernization project may be delivered in FY14. In FY15-16, additional investment lending may be considered in the following areas: (i) transport and trade facilitation, (ii) energy efficiency and security, (iii) municipal services and governance, (iv) health services and financing, and (v) private sector development and competitiveness, and access to financing. IFC may increase its annual commitments to approximately USD 400 million if investment climate and the legislative environment improve. In the absence of these changes, IFC‘s investments are likely to stay at the historical levels of USD 200- 300 million per year. Table 3: Indicative IBRD Lending Program in FY13-14* Pillar 1: Improving public services US$ m Pillar 2: Improving policy effectiveness US$ m and public finances and economic competitiveness FY12 Second Export Development Additional 150 Financing (Actual) FY13 State Statistical System Development 10 Second Roads and Safety Improvement 450 Additional Financing FY14 Social Assistance Program 100-200 District Heating/Gas Sector Efficiency 200- and Modernization 300 Second Urban Infrastructure 200 Power Transmission Project 2 200 * Financing amounts are indicative and the total lending envelope may change based on the government’s demand and the Bank’s lending capacity. 97. The Bank program will build on strong diagnostic work and knowledge transfer, with a focus on building a more participatory approach regarding policies and actions to tackle key structural challenges (Table 4). Focus for AAA engagement will be on advice in key policy areas such as fiscal, tax, and PFM; agriculture, land and business regulations, SOEs governance. A number of TA activities will continue from the previous CPS to support the dialogue in sectors and build the basis for possible new lending and will include the financial sector, energy efficiency and governance (district heating and/or gas sector modernization), and social reforms (social assistance and health care). Several TA activities will support dialogue at the municipal level, in particular on issues of municipal governance and service delivery and barriers to municipal finance. 98. The contribution of Trust Funds to the CPS outcomes and their role in leveraging the World Bank resources are expected to increase. Efforts to better integrate trust funds into the core Bank program and ensure their alignment with country priorities supported by the CPS will continue. Trust fund activities will support a number of priorities under both CPS pillars, including PFM (capital budgeting, PPPs, quasi-fiscal activities and their reporting, public procurement and service delivery), 24 municipal services, health sector reforms, energy and road infrastructure. Noting that trust funds disburse in Ukraine much faster than investment financing, the country team will seek any lessons that might be applied to IBRD investment lending. Table 4. Indicative IBRD Knowledge Services, FY12-13 Pillar 1: Improving public services and public Pillar 2: Improving policy effectiveness and finances economic competitiveness Structural and Governance Reforms TA Structural and Governance Reforms TA PEFA Update Labor Mobility TA Capital Budget Effectiveness Assessment (SAFE TF) Measuring Governance in Health Financial Sector TA (Programmatic) Support of Health Reform Pilots (IDF Grant) Healthcare Quality and Population Health Impacts in Gas Sector TA Ukraine Governance of Large State-Owned Enterprises TA Improving Implementation for an Effective Response to the AIDS Epidemic in Ukraine EC-WB trust fund for gas sector restructuring Education Dialogue (BOOST) Naftogaz corporatization strategy (PPIAF) Municipal Demand Side Governance: Improving Land Governance Assessment Framework (LGAF) Accountability in Water and Sanitation Sector Modernization of District Heating Systems in Ukraine PPP framework administration and fiscal risks (SAFE TF) Improving Creditworthiness of Ukrainian District Heating Companies (PPIAF) Auditing Road Infrastructure Projects (IDF Grant) Preparation of municipal energy efficiency projects (CTF) Facilitating financing of municipal energy efficiency projects (ESMAP) B. Monitoring and Evaluation 99. The results matrix will be expanded in the CPS Progress Report. The results matrix reflects the current portfolio and lending operations proposed in the next two years. The CPS Progress Report will expand the results framework to reflect Bank activities in the outer years of the CPS. 100. The Bank will strengthen its results-based monitoring and evaluation (M&E) to assess how Bank activities are contributing to results on the ground. The results matrix reflects long term government development goals in areas where the Bank is engaged. However, as the CPS Completion Report indicated, establishing direct attribution between the Bank program and higher level results was difficult in the previous CPS. Moreover, not all projects monitored results-based indicators, which in turn led to difficulties in assessment and in making mid-course corrections. This CPS will keep Bank- influenced outcomes attributable, realistic, and monitorable. C. Managing Program Implementation 101. The CPS FY12-16 addresses implementation risk using three complementary and mutually reinforcing elements. First, the CPS will benefit from greater attention to quality at entry and a more focused implementation support model, incorporating the lessons from the CPS Completion Report and the ECA Disbursement Review. Second, the revised and strengthened approach to manage GAC related risks will help achieve more sustainable development outcomes in areas where the Bank decides 25 to intervene. Lastly, the Bank will continue leveraging support for reforms through strategic partnerships. i. Readiness for Implementation 102. Ramped up portfolio monitoring through regular Country Portfolio Performance Review (CPPRs) and project by project action plans will continue. The Government and the Bank have started to address jointly some of the implementation bottlenecks through more hands-on implementation support combined with stronger discipline and the proactive use of restructuring, cancellations or suspensions in case of poor performance. Increased disbursement rates and a reduced number of problem projects have been the result. These efforts will be sustained. 103. To remedy systemic portfolio performance problems, such as poor design, inadequate preparation and excessive complexity, the CPS introduces an “implementation’ filter. The filter will address procurement readiness and realism, fiduciary and implementation arrangements. It will be initiated at the concept stage and will continue to be applied during project preparation and before any new project is submitted for Board presentation. The filter will be also applied to trust fund financed activities and substantial knowledge products. 104. New activities will build on successful projects, working with agencies with experience and implementation capacity. Preference will be given to repeater operations and supplemental financing – continuation of work with agencies where project ownership is the strongest, implementation capacity has been created, and fiduciary arrangements tasked. In case of new counterparts, capacity to manage procurement processes and contract implementation will be assessed and implementation and disbursement schedules will be tailored to be consistent with the build-up of such capacity. The Bank will also assist project implementation units and final beneficiaries through training activities to build their capacity in project management, monitoring and evaluation. 105. A new procurement planning and monitoring tool SEPA will be launched to facilitate improved procurement planning and implementation of the World Bank funded projects. This web-based procurement management system will provide public access to all the information related to the contracts for the projects financed by the World Bank, allowing not only to increase efficiency but also promoting transparency, accountability and compliance in delivery of the Bank program. ii. Approach to Governance and Anti-Corruption 106. The Bank will follow an integrated approach to address governance and corruption related risks in achieving development results in Ukraine, including: • A focus on the ―corruption value chains‖ to identify areas where reforms could have the biggest impact to reduce corruption; • Continued focus on supply side interventions to reduce policy distortions, strengthen country systems (in particular PFM, procurement), and build capacity; • Scaled up engagement on the demand side to build consensus for critical reforms by working more closely with CSOs, think tanks, academia; and to promote information systems for greater accountability and transparency; • More upfront diagnostic work to identify GAC risks, potential entry points and to better understand the political economic factor which influence performance and results of Bank supported measures and activities. 107. Operationally, the CPS proposes to use a GAC filter for every lending operation, trust funds, and AAA engagement to examine both GAC related implementation risks and the potential to positively influence country GAC outcomes. The filter will be applied at three stages: (i) pre-concept, (ii) design, and (iii) implementation. The purpose of the filter is to ensure GAC issues are 26 given appropriate attention, risks are identified and mitigation measures discussed early on, as well as opportunities to improve Ukraine‘s governance record. The filter is not intended to add another layer to the internal review process, but rather as a guide to management and teams about the kinds of issues that should be given particular attention. The filter thus can be seen as an adaptation of the Operational Risk Assessment Framework (ORAF) to Ukraine‘s circumstances. 108. GAC Filter: Pre-Concept Stage. At this stage, before WBG resources are committed, GAC risks and benefits of proposed operations will be identified and discussed, using a set of guiding questions summarized in Table 5. This stage will focus on the most salient risks and opportunities, as well as a recommended course of action; for example, additional GAC or political economy diagnostics, demand-side initiatives, and other design features could be advised. In some cases, it may be recommended not to pursue the proposed activity further. Table 5. GAC Filter at the Pre-Concept Stage A. Sectoral 1. What are the GAC issues specific to the sector? Issues 2. Do vested interests play a major role in policy decisions in the sector? 3. What is the impact of sector regulation on the proposed operation? 4. Is there a potential for GAC improvement in the sectors, including on demand side? B. Government 1. What is the institutional capacity of the government to absorb the proposed Issues reform? 2. What is government‘s track record in implementing similar reforms? 3. What is a track record of the local authorities where the project is to be implemented? C. Civil Society 1. Who are civil society champions for the reform that the proposed operation Organizations supports? Issues 2. How a project is going to include cooperation with CSOs? 3. Is there an appropriate CSOs capacity to follow on GAC? D. Partners 1. What are the complementarities with the existing engagement of the development Issues partners? 2. Is it possible to leverage support for this activity? 109. GAC Filter: Project Design Stage. The project documents (e.g., Concept Note (CN), Project Appraisal Documents (PAD)) will be reviewed against the recommendations agreed in Stage I of the filter. Task teams will be requested to report back to management on how GAC issues identified have been addressed during review meetings (Concept Review (CR), Quality Enhancement Review (QER), Decision Review (DR) or Regional Operations Committee (ROC)). 110. GAC Filter: Project Implementation Stage. An assessment of GAC risks and how they have been addressed will be included in implementation documents and mid-term reviews. iii. Deepening Engagement with Civil Society 111. Ukraine has a vibrant civil society that is able to self-organize and to challenge the authorities, though with untested ability to constructively cooperate with the government. Strong civil society - if properly engaged - can be instrumental in improving governance by building bottom- up accountability of the government, and can be a valuable partner for M&E of Bank projects. The good examples of constructive relations between CSOs and authorities are emerging in some larger cities of Ukraine, where directly elected mayors have strong incentives to involve stakeholders for better results of municipal investments. 27 112. The CPS will move from intensive but ad hoc engagement to cooperation with CSOs, better connected to the CPS core programs. The new approach will start by implementing a few "demonstrations" of successful engagement – either through project preparation, ESW or policy/TA engagement - rather than imposing a new mandatory process to engage civil society in all operations. After two years, the results of these "demonstrations" would be reviewed and new actions and corrections proposed. For the initial "demonstrations", the following initiatives are being considered: • Municipal governance (ESW and project preparation). In order to inform the design of the possible future lending operation, a review of measures to improve accountability in the water and sanitation sector will be held to identify a menu of demand side governance tools and mechanisms feasible in Ukraine. Selected Demand for Good Governance (DGFF) mechanisms will be piloted in UIP partner cities. Possible instruments to be introduced to improve service quality would be score cards and support for housing associations, as well public access to performance information. A UIP-2 would incorporate demand side governance improvements in project design, including public hearings in partner cites on communal services, increased public participation among cities‘ selections criteria for participation in the project, and introduction of the feedback mechanism at local government/ local utility level. • Public Procurement Monitoring (Policy/TA). The Bank will work with a CSO coalition recently formed to monitor the transparency and efficiency of public procurement. The Bank will develop and use a new procurement monitoring framework to assess procurement costs efficiency and transparency, following the adoption of a key framework law. • Improving business environment (Policy/TA). The Bank will explore opportunities to engage local business communities on deregulation and improvement of the business environment. CIDA has expressed an interest to partner in these efforts which will build on many years of successful IFC Advisory Services. • Ukrainian Social Investment Fund -2 (USIF-2). The USIF, created to support poor communities by investing in rehabilitation of small-scale infrastructure will be considered as a mechanism to mobilize communities and channel money to support priority social needs. USIF would engage in more intensive work with civil society organizations at the local level to give local governments a greater role in managing local projects and to strengthen participatory methods with project preparation, management and maintenance. • Portfolio Monitoring. The CPS will pilot an annual "social auditing" of the Bank‘s portfolio in the context of the CPPR, where interested public stakeholders would be invited to provide feedback on how the work could be made more effective and result-oriented. 28 Global lessons for public feedback for efficient reforms – practical implications for the enhanced relations between the government and the civil society Civil Society and Accountability: How does it work? Civil society organizations can play an important role in providing feedback on service quality and monitor performance locally, as well as help define local priorities. In addition, they are the vehicles of collective action by organizing beneficiaries to ask for better services and can stimulate citizens to get politically involved beyond the local level and rebuild trust. The accountability role of civil society works best when chains of accountability are short, i.e. at the local rather than central level, which is easier when government is decentralized (both fiscally autonomous and locally elected). It requires a population that is politically active and genuine consultations which are followed-up by concrete actions.. Opportunities and Constraints Ukraine has some positive enabling conditions for fostering accountability through civil society participation. There is a relatively free access to information, further strengthened by the new Access to Information Law and relatively strong investigative media. The new Anti-Corruption Strategy provides an opportunity to reshape joint surveillance. Moreover, there is significant experience with local accountability and strong international links and financial support are available to civil society. However, there are constraints. The government is centralized with limited local accountability. Judiciary reform would be key, but is an extremely complex task requiring committed country leadership. Civil society, while active, is fragmented and dependent on funding from donors. The population has few institutionalized mechanisms to contribute to better policies in a constructive way: for example, political parties do not discuss policy, and there are few fora for open dialogue. Pilots and Scaling Up The practice of other countries has showed that starting with pilots could send a credible signal for reform and demonstrate quick wins, delivering results before embarking on systemic change. The key is to choose areas where government needs feedback to do better: e.g. municipal services, health care, deregulation. It is important to work on institutionalizing policy debate – create discussion fora with representatives of civil society and business. The pilots could include civil society monitoring initiative for the Public Procurement Law; information systems, report cards, and support for housing associations for municipal services; locally supported investments in improved services, and others. The pilots could then be scaled up. This would require that the government creates policy platforms for high risk areas, such as public procurement, health, education, land, business climate, tax administration, where representatives of the government and civil society would agree on diagnostic of problems, collect information, and identify leading CSOs. A national coordination committee for all policy platforms should be created to review the overall approach, and the Anti-Corruption Strategy reviewed and revised jointly as a ―living document‖. iv. Partnerships and Donors Coordination 113. Significant efforts in forming strong partnerships have been made in the previous CPS. The Bank Group, with the IMF and other partners, provided support to stabilize the banking system and address underlying vulnerabilities in the crisis response. Cooperation between the IFIs in the energy sector, under the aegis of the Brussels declaration, allowed donors to agree on an IFI-EC list of key structural reforms to enable IFI investment in the gas sector. Joint advocacy has also been made with the EC on public procurement, with EBRD and the IMF on grain quotas and agricultural market interventions, with USAID on transparency in capital markets, and with the UN on health sector issues. 114. Leveraging impact through strategic partnerships will continue to be a core ingredient for successful delivery of the World Bank Group program in the new CPS. Partnerships on key policy issues, technical assistance and advice will continue with IMF, EU, EBRD, EIB, USAID, and bilateral donors. It will help signal donors‘ willingness to engage once there is commitment to reforms on the government‘s side. In particular, the Bank will continue close coordination on policy matrices under the IMF program and EU sector budget support. In addition to public procurement, agricultural policies, and energy sector, new areas for collaboration may include public sector governance, transport 29 and health sectors. The ramped up engagement in demand for good governance activities will rely substantially on partnerships with other donors, as the Bank‘s own resources to support civil society directly are limited. Opportunities resulting from a new civil society fund now under discussion in the Bank will be actively explored. If the Eurozone crisis deepened, cooperation across the World Bank Group and with other IFIs would be strengthened further in order to maximize impact. The World Bank Group is currently engaged in dialogue with the EBRD, EIB, and the IMF on a joint and coordinated response to a possible new wave of crisis. V. RISKS 115. The key risk to the objectives of this CPS is that relations between the authorities and business and civil society do not improve. While President Yanukovych has publicly committed his government to renew trust between the people and the state, and some reform initiatives such as pension reform were approved after long and intensive national debate, there are those within bureaucracy who want a less consultative style and believe that effective government requires political consolidation and stability. Should the protagonists of ―managed democracy‖ hold sway, Bank activities would be limited to uncontroversial projects in basic physical and social infrastructure with greater emphasis on advocacy in the AAA program, but development impact would be constrained by the lack of renewed trust between government, citizens and business. The calibrated approach proposed in this CPS is a risk-mitigation tool. 116. Vested interests and weak institutional capacity may reinforce each other and undermine the realization of CPS objectives even if government commitment is strong. Increased sector diagnostics, including political economy analysis, and the use of stakeholder consultations during the preparation phase will allow the Bank to better assess this risk. Readiness filters will ensure Bank financing is provided only to counterparts with sufficient capacity to implement in accordance with Bank fiduciary requirements. Partnerships with other donors, first and foremost the European institutions, will be used to leverage Bank support and provide a strong anchor that will help reform champions overcome internal resistance. 117. Protracted slow growth or recession in Europe would negatively affect Ukraine’s economic prospects. Ukraine depends critically on growth in the EU for export prospects and as a source of investment. The exposure to European banks is high in Ukraine and Europe‘s banking crisis or banks deleveraging could cause financial instability in Ukraine. The impact of a renewed crisis on poverty and social indicators in Ukraine could be severe, and would further limit fiscal space for critical investments, and thus make many targeted results in the CPS unachievable even if a comprehensive reform effort is launched. These risks may be further compounded with inappropriate policy responses. The Bank has some room to provide additional support should the authorities improve policies to regain the confidence of their international partners as it was in case of a coordinated crisis response in 2008- 2009. 118. A key macroeconomic risk is that the existing Stand-by Arrangement with the IMF is discontinued and Ukraine is cut off from external financing. Under the front-loaded 2008 Stand-by Arrangement (SBA) with the IMF (SDR 11.0 billion), only two out of eight program reviews were completed. Under the successor 2010 SBA (SDR 10.0 billion), only the first program review has been completed after the first 15 months of the 29-month program due to wavering government commitment to crucial policies and reforms. The second program review has been repeatedly postponed during 2011. Rollover risks are exacerbated by Ukraine's inability to issue domestic or external debt and large debt service repayments falling due in 2012, including to the Fund. Sustaining progress in critical areas such as fiscal consolidation is predicated on politically difficult reforms such as energy tariff increases for households and utilities, and addressing structural problems in the gas sector, will severely test the government's resolve, especially ahead of parliamentary elections in 2012. This risk cannot be mitigated effectively by the Bank, however, experience during the 2008-09 crisis also suggests that the authorities can and do act quickly at times of crisis to regain access to official financing. 30 119. The Bank’s leverage in addressing policy related governance risks may be limited in the absence of policy-based lending. The DPL instrument was used as a vehicle to promote policy reforms in critical areas such as public procurement, banking, and energy sector reforms. While the Bank will continue to provide advice and technical support, without accompanying financial resources its contribution to the dialogue on politically difficult issues with the government may be reduced. The CPS will mitigate this risk by leveraging impact through strategic partnerships. The Bank will strive to be a convener for joint policy initiatives to signal donors‘ willingness to step up their engagement once there is commitment to reforms on the government‘s side. To this end, the Bank, jointly with the other partners, has identified a list of significant and measurable policy benchmarks that would allow Ukraine to regain access to DPLs. 120. Poor portfolio performance and inadequate risk management could lead to delays or failure to achieve the envisaged outcomes under this CPS. The Bank will seek to mitigate this risk with the following actions: (i) the focus of the CPS will be first on implementing current projects, which will undergo regular review jointly with the government and without corrective action or restructuring in a reasonable time frame, poorly performing operations will be cancelled; and (ii) in considering new projects, the Bank will put special emphasis on a positive implementation track record within the sector and re-emphasize the need for projects to have fully developed technical and procurement plans, and safeguards arrangements in place projects must be ready to allow implementation immediately after Board approval. The enhanced approach to manage GAC risks will further contribute to ensuring Bank activities are selected and designed with appropriate risk mitigation tools incorporated and that non- performing activities are swiftly exited. 31 VI. ANNEXES Annex 1. FY08-11 Country Partnership Strategy Completion Report UKRAINE World Bank Group (WBG) FY08-11Country Partnership Strategy (CPS) Completion Report Date of CPS: November 8, 2007 (Report No. 40716-UA), Board Discussion on December 6, 2007 Date of CPS Progress Report: April 19, 2010 (Report No. 54089-UA) Period Covered By The CPS Completion Report: December 2007 – December 2011 CPS Completion Report prepared by: Viktoria Siryachenko (IBRD), Oksana Nagayets (IFC) and Myrna Alexander (Consultant) under the guidance of Country Director, Martin Raiser (ECCU2). The CPS CR team included Connie Luff, Gregory Jedrzejczak, Yulia Snizhko, Pablo Saavedra, Ruslan Piontkivsky, Paolo Belli, Tamara Sulukhia, Marius Vismantas and WBG Ukraine Country Team. Summary and Conclusions The Bank Group, under the 2008 CPS, anticipated supporting a reform agenda, responding to the many challenges facing Ukraine as it lagged behind its Central European neighbors in making the transition to a modern market economy. These efforts were to concentrate on two main pillars: improving Ukraine‘s investment climate and strengthening public policies, institutions and service delivery. Cross cutting the program were governance and macro-economic management. The CPS acknowledged that implementation would be difficult and risks high, given the country‘s chronic problems in executing investment operations, the uncertain political context, and the weak governance setting. The Bank's program thus called for greater selectivity than in the past, with a shift in investment lending towards infrastructure operations, the continuation of programmatic Development Policy Loans to advance the reform agenda and targeted AAA to inform the policy dialogue. In turn, IFC directed its efforts to promoting private sector development through a combination of advisory services and direct investments in the real and financial sectors. The Bank Group‘s strategy was adjusted mid-stream in light of the global financial crisis that hit in late- 2008. The Bank Group, along with the IMF and other partners, provided extra-ordinary support to stabilize the banking system, address underlying vulnerabilities, rebuild confidence, and reinforce social protection. IFC complemented these efforts by providing crisis management and insolvency advisory services to financial institutions and corporations, helping to stimulate trade flows, and supporting its portfolio clients. This support has been largely effective in helping to stabilize the economy with economic growth at about 4 to 5 percent per annum for 2010 and 2011. However, the political stalemate of the past years as well as lack of political will to implement difficult policy actions has delayed some important reforms, and the crisis has further impacted the reform agenda, especially with respect to fiscal measures. Pension reform and reduction of quasi-fiscal subsidies in the energy sector have been delayed and the final resolution of troubled banks remains outstanding. Against the immediate crisis-related pressures, many other challenges facing Ukraine have not been addressed. The implementation of the 2008 CPS, thus, ends with two hurtles. One is to gain consensus on the policy front, given the setbacks during the crisis and the ambiguous policy stance by the new administration. The other is to sustain and extrapolate improvements in performance of the investment portfolio, which is the result of four-years of hard work on the part of the Bank and the Ukrainian counterparts. Overall, the program performance was moderately unsatisfactory, with insufficient progress on several major development issues. In turn, the Bank Group‘s performance is judged at moderately satisfactory, given the uneven success on the policy front, offset by continued generation of high quality AAA, responsiveness, demonstrable improvements to the ongoing program of investment operations, and the partnerships formed especially during the crisis. 32 Key Developments during the CPS Period Ukraine has long been considered a country performing below its potential, lagging behind its Central European neighbors and facing serious governance and institutional weaknesses. The period of the CPS started with very promising developments: political transformations were underway after the ―Orange Revolution‖, a clear strategy of alignment with Europe had emerged, and the economy was regaining its former position. Because of strong demand for Ukraine‘s traditional products, economic growth averaged at 7.5 percent per year from 2000 to 2007; the fiscal deficit was a low 2 percent of GDP; foreign capital was flowing in; and public debt stood at only 14.8 – 12.3 percent of GDP in 2006 and 2007 respectively. Thanks to high social spending and the buoyant economy, poverty had fallen sharply, leveling off at about 12 percent of households as of 2007, from 46 percent in 2002. Among other things, Ukraine was opening its economy and working towards becoming a member of the WTO. The DPL program supported the approval of a package of legislative amendments that enabled Ukraine to become a WTO member in 20089. Meanwhile, close ties with Europe were being pursued under the EU‘s Neighborhood Policy and negotiations have begun for an Association Agreement and a Deep and Comprehensive Free Trade Agreement. In October, 2008 Parliament passed a separate anti-crisis legislation package containing critical elements of the authorities‘ response to the financial crisis, which was also supported by adjustments in both the exchange rate (departing from the de-facto peg regime) and monetary policy. In addition, the authorities requested an IMF supported program in late October 2008, and in November 2008 the IMF‘s board approved an SBA for SDR 11 billion (USD 16.6 billion) over two years. However, due to the lack of vision and political skill to build a coalition to implement reforms by the political leadership, the momentum was lost and implementation of the broad reform agenda was delayed. Moreover, interest groups took advantage of political volatility and important reforms faced significant resistance with further deterioration of governance issues. The Impact of the Global Crisis. Ukraine faced a severe triple crisis in late 200810, as vulnerabilities had built up for years along several dimensions and macro-imbalances had been accumulating. Markets reacted very quickly: by the end of 2008, Ukraine was shut out of international capital markets, suffering loss of reserves and bank deposits, and encountering sharp drops in fiscal revenues and exports, especially of steel, its major export. Gas imports from Russia, on which Ukraine is dependent, were temporarily cut off in early 2009 over delays in signing a new long term import and transit agreement. The bottom was reached about mid-2009, with GDP shrinking by 14.8 percent year to year, one of the most significant drops among developing countries. Fortunately, these effects where short lived with the economy rebounding in 2010 and the negative impacts on employment and incomes contained. Political Developments. Ukraine's complicated political situation continued to confound policy-making and efforts to translate broad consensus on reforms to concrete action. Constitutional amendments, which took effect in 2006, added ambiguities with respect to the respective responsibilities of the executive, head of state and parliament. As a result, the years 2007 to 2009 were characterized by a tug-of-war among political factions that led to a breakdown of the then governing coalition, repeated stalemates, blockages, reversals, and frequent changes in authorities. Over the course of 2009, differences among the Presidency, the Prime Minister‘s Office and the Parliament emerged on the fiscal stance and measures on exchange rates, tax policy, energy pricing, pensions and wages, all part of the initial stabilization program supported by the Bank, IMF and other donors. Against this background, governance weaknesses and state capture failed to be addressed, affecting the pace of reform. Critical issues such as land reform were put on the back burner. Policy Challenges. The 2010 elections brought to power a consolidated political front. Taking over in March 2010, the new Government articulated its priorities for 2010-2014 which form the basis for the Bank‘s continuing dialogue with the Government and starting point for the next strategy. While stated policies are in tune with the advice from the IFIs, they entail tough choices to resist politically more appealing but less sustainable alternatives that will hamper competition and future growth. So far, the authorities have been struggling to implement unpopular reforms such as energy pricing, increasing the 9 ICR for the Second and Third DPL as of June 30, 2011. 10 IMF Country Report No.11/325. Ukraine: Ex Post Evaluation of Exceptional Access under the 2008 Stand-By Arrangement. November 2011. 33 age of retirement, and resolving the situation faced by troubled banks, while giving the population a stake in a credible medium term reform plan. At the same time, there have been concerns about the deteriorating investment climate, ill-advised state interventions such as those in the grain market, and persistent complaints about corruption and weak rule of law. The CPS’s Strategic Goals Relevance. The CPS‘s goals were highly relevant to the challenges facing Ukraine in 2007 and even more so during the crisis that unfolded in late 2008. The Bank Group‘s strategy was to continue to advocate structural reforms, particularly those that would improve public sector institutional capacity, enhance investment climate and support improvements in public finances and service delivery. Thus, the 2008 CPS focused on two pillars—improving competitiveness and the investment climate and public sector reform. In addition, there were two crosscutting themes - macro-economic stability and public governance. As pointed out in the CPS, risks remained high, given Ukraine‘s evolving political processes, low export diversification, high energy dependence, and the pending agenda of institutional, governance and policy reforms to complete its transformation to a modern market based economy. Selectivity. The Bank anticipated a lending program with Ukraine in the range of US$2-6 billion, with flexibility to adjust to country conditions, portfolio performance, and reform efforts. To improve selectivity, the CPS incorporated the lessons learned from the previous CPS. The scope of the Bank‘s program was greatly reduced, as compared to the 2003 CPS, with investment lending shifting to large scale infrastructure operations, notably in transport and energy, while directing the Bank‘s AAA to core government priorities, namely, competitiveness and energy, and to those areas high on the Bank‘s list for advocacy, especially health, demographics, social issues and environment. The program was to continue to deploy DPLs as the lending instrument of choice as under earlier CPSs, given that that instrument was markedly more successful in achieving the loans‘ development goals than investment operations and provided continuity in the core aspects of the reform agenda. Interim Progress. The 2010 CPS Progress Report was prepared at the height of the crisis. It reframed the first pillar to deal with the macro-economic implications of the crisis and outlined the additional support to be provided. It also reaffirmed the Bank‘s approach to dealing with governance as a cross-cutting theme. New lending in FY10 and FY11 was to bring the total lending to US$4 billion over the CPS period, depending on the pace of reform and portfolio performance. In response to the crisis, the already planned DPL III was increased to US$500 million, accelerated and approved in December 2008. Two new financial sector operations were planned for a total of US$750 million, the first of which was approved in September 2009. Additional financing of US$60 million was also added for the Hydropower Rehabilitation project to offset problems with counterpart financing. On IFC‘s side, both its strategy and operations were affected by the crisis, as portfolio clients required greater support, expansion projects were put on hold, and financing needs changed. Thus, the crisis reduced IFC's investment volumes but led it to focus on narrow strategic issues and immediate private sector needs, such as resumption of trade flows through trade finance lines to the banks, NPL advisory work carried out jointly with IBRD, and provision of support for existing clients. The product mix for IFC investments moved to more short-term finance and guarantees, while IFC‘s advisory programs were reoriented. Commensurately, targets in the CPS results matrix were revised to take into account the crisis and what was more likely realizable under the changed conditions.11 Program Delivery As of December 2011, the Bank‘s lending for Ukraine under the FY08-11 CPS amounted to US$2.3 billion, at the low end of the original CPS envelop. (See Annex 1.A and 1.B for details of the planned and actual delivery of the lending and AAA programs, respectively.) The CPS‘s reframed first Pillar— Restoring Economic Growth and Improving Competitiveness— received a total of US$2,110 million in 11 A number of activities and targets in the CPS could not be realized within the FY08-11 CPS timeframe and will be carried over into the new CPS. Thus, the results matrix extends beyond the current CPS period, which ends June 2011. 34 new IBRD lending12. Most of this was to support major infrastructure undertakings in transport and energy and to rehabilitate the financial sector and restore economic stability in response to the crisis (see Box 1). The second Pillar—Restoring Public Finances, Public Sector Reform and Improving Delivery of Public Services— received US$190 million in IBRD support for urban infrastructure services and public financial management, key entry points to address governance. The total IBRD portfolio has eleven on- going investment operations with an undisbursed balance of US$1,172.4 million as of December 2011. With respect to IFC, Ukraine now represents its 13th largest client (and third largest in the ECA Region after Russia and Turkey), with a committed portfolio of US$848 million as of the end of April 2011. This constitutes a 50 percent increase in the size of portfolio since FY07. Over the CPS period, IFC invested a total of US$910 million in 30 projects for its own account and raised an additional US$339 million through syndications. About 40 percent of the new investments were directed to the financial sector, the rest to manufacturing, agribusiness and services. In addition, IFC provided advisory services in the areas of business enabling environment, supply chain development, crisis response, energy efficiency, and corporate governance through 25 advisory projects of which 11 remain active to date. Program Performance The following addresses the contributions made by the Bank Group in realizing the strategic goals set out in the updated CPS. Annex 1.C provides a detailed assessment of program outcomes and performance ratings. 1. Pillar One: Restoring Economic Growth and Improving Competitiveness. The overarching goal of this pillar was to induce greater economic growth and private sector investment thanks to an improved investment climate, reductions in the costs of doing business, and actions to restore confidence. Strategic goal 1: Improving business climate and invigorating private investment and trade. Agri-business was a main area of focus for the Bank Group, playing to one of Ukraine‘s comparative advantages. There have been modest improvements in agricultural yields and strong export response by the agriculture sector, particularly livestock, offset by government restrictions on grain exports. There has been some limited progress on the legislative front with respect to land markets13, and this has reemerged on the policy agenda during the course of 2011. The Bank-supported Rural Land Titling and Cadastre project is putting in place the land cadastre system needed for such reform. As the crisis abated, IFC resumed its focus on agribusiness as a key sector where Ukraine has a strong comparative advantage. Over the course of the CPS period, IFC committed over US$300 million in nine agribusiness projects across the supply chain, from primary producers to food retailers. While the volumes of investment remained moderate, IFC developed innovative financing mechanisms for this sector: one example was a US$70 million risk sharing facility for a key supplier of crop protection products, another was the provision of IFC‘s first partial credit guarantee of US$11.25 million for leasing agricultural machinery by the country‘s largest poultry producer. Advisory projects have focused on developing agro-insurance and finance, improving food safety standards, developing pre-harvest financing, and strengthening supply chains in dairy, fruit and vegetable production. More generally, there has been good, albeit far from sufficient, progress in adopting structural measures that address constraints facing the private sector. On the Bank‘s side, reforms supported by the series of DPLs have helped reduce the number of business inspections and tax audits and time spent on getting licenses. Tax compliance costs, according to data collected under the Bank-financed State Tax Administration project, have been reduced although other surveys such as BEEPS continue to point to tax administration as a major business cost. Delays in VAT refunds and large costs of tax compliance remain key weaknesses affecting business. IFC‘s work resulted in some US$325 million in private sector 12 The original CPS had the DPLs as supporting Pillar Two while the CPS Progress Report had them supporting Pillar One. The assignment of the DPLs to Pillar One is thus arbitrary and, in practice, DPLs have supported both pillars. 13 Draft Law of Ukraine ―On Land Market‖ was approved by Cabinet of Ministers of Ukraine on June 20, 2011 and the Law of Ukraine ―On State Land Register‖ was adopted on July 7, 2011. 35 savings from the changes recommended by IFC‘s investment climate advisory services. A total of 33 IFC-recommended laws and regulations have been enacted during the CPS period, focusing mainly on permits and licenses, technical regulations, and inspections, as well as a law on starting a company. Although Ukraine still remains one of the Region‘s least hospitable places to do business, due to the joint IFC and Bank efforts the ranking in the ease of starting the business improved from 136th place in 2009 to 112th place in 201114. IFC‘s advisory work in the area of access to finance and sustainable business has facilitated investments of more than US$1.4 billion over the CPS period. Twenty companies receiving IFC advisory services report improved performance in areas such as productivity, operations, loan terms, and valuations. IFC‘s own direct investments have improved access to finance for SMEs, supporting modernization and higher value added production. Strategic goal 2: Rehabilitating the banking sector and strengthening financial markets. There was considerable progress in preserving the financial sector. From the peak of the crisis in 2009, the situation as of December 2011 has stabilized, the run on deposits reversed, and banks have been recapitalized. Lending is slowly recovering. However, the stock market has remained volatile, and the bond market has remained depressed. Around thirty banks were intervened. The level of NPLs has been somewhat reduced from the peak of 41 percent but remains higher than the level anticipated under the CPS. IFC‘s Financial Markets Crisis Management Program provided pragmatic advice and contributed to new regulations by the NBU on non-performing loans (NPLs). There has also been progress on enhanced shareholder disclosure and introduction of consolidated supervision, with relevant laws enacted in 2010- 1115. Nevertheless, challenges remain for the medium-term, especially on how to deal with troubled assets, problem bank resolution reform, exit of the state from intervened banks, and adoption of coherent strategy for financial sector development and state‘s role in the sector. The share of majority state owned banks has not been reduced, the result of the Government‘s steps to contain the crisis by recapitalizing banks under stress with public funds. Strategic Goal 3: Ensuring Energy Security and Improving Energy Efficiency. With respect to energy security and efficiency, there have been both setbacks and advances. A major setback has been the Government‘s decision not to increase gas tariffs between 2006 and 2010 apart from a one-time nominal increase of 50 percent in 2010. As a result, rebalancing of tariffs, to encourage cost recovery from domestic users, has not been realized during this CPS period as the Government needs more time to ease these price increases on retail consumers. Significant progress in the reduction of the quasi fiscal deficit was made until the end of 2009. However, with higher import gas price in 2009 and 2010 the quasi fiscal deficit increased to 2.7 percent of GDP by the end of 201016. Greater competition in the electricity sector has also not been forthcoming and some anticipated operational improvements have been delayed in part because of slow implementation of Bank-supported investments. This equally applies to gains in energy efficiency: although energy consumption has decreased, energy intensity has remained stable because of the rapid contraction of the economy in 2008. Reducing energy intensity will take more time as the new IBRD Energy Efficiency loan was only recently approved. IFC has approved and fully disbursed its first Energy Efficiency loan before the crisis and launched three new advisory programs in 2010 to promote sustainable energy finance, residential energy efficiency, and cleaner production. At the same time, Ukraine over the CPS period has made a commitment to ensuring energy security by joining the European Energy Commission, beginning to reform some of its domestic legislation to comply with European standards, moving to a price formula based on long-term contracts for gas imports from Russia, and developing a reform plan of the gas sector that could unlock financing from the IFIs and commercial sources for modernization. Strategic Goal 4: Reduce costs of trade to support export led recovery. 14 IFC. Doing Business 2012: Doing Business in a More Transparent World. 15 The following laws were adopted to ensure these developments: ―On amending certain laws of Ukraine concerning regulation of banking operations‖ (#3024-VІ, became effective on 16.05.2011) and ―On amending certain laws of Ukraine concerning consolidated supervision‖ (#3394-VI, adopted 19.05 2011). 16 This estimate is based on the weighted average cost of cheap (well below import price) domestically-produced gas and imports from Russia. It also does not account for full potential economic costs. 36 The last area under the first pillar deals with reducing trade costs and spurring export led recovery. A major milestone was reached during the CPS period with Ukraine becoming a member of the WTO in May 2008, with the enactment of critical pieces of legislation required for WTO accession supported by DPL 2. This has been complemented by specific measures under the CPS and, indeed, there is evidence that the recovery has been export led. IFC‘s support has contributed to the resumption of trade flows, with US$150 million provided to local banks through the Global Trade Finance Program. IFC‘s loans to the agri-business sector have also helped to expand the operations of export-oriented companies, although trade bans on grains created serious challenges during 2010-11. While a new PPP framework law was adopted, the framework remains untested and the obstacles related to procurement, the lack of suitable clients that meet IFC criteria, and the regulatory risks have prevented IFC from being more active in the infrastructure and sub-national sectors. On inter-connectivity, there is progress under Bank supported operation in the transport sector, albeit slower than anticipated, but work on modernizing Ukraine‘s railway system was dropped due to the lack of agreement on governance reforms. 2. Pillar Two: Public Finances and Public Sector Reform and Improved Service Delivery This pillar aiming at reordering the public finances, suffered a severe set-back during the crisis as revenues dropped sharply, costs increased as a result of the currency devaluation, and a number of anticipated reforms did not materialize. Structural measures to secure public finance sustainability remained incomplete. While some progress on reducing the deficit has been achieved, deeper fiscal reforms need to be taken to restore sustainability to public finances. Strategic Goal 5: Fiscal reform to secure stability and enable a sustained recovery. The crisis exacerbated an already difficult situation in pension spending, as pension payments jumped to 18 percent of GDP in 2010. This is also the case of increasing the rate of cost recovery for gas and heating. Although the Government has made efforts to increase tariffs with interim adjustments, these had been set back by the effects of the crisis on personal incomes and the need to ease increases on retail consumers. Tax policy has improved marginally, with excise taxes raised but exemptions not reduced. Strategic Goal 6: Improved Efficiency in Service Delivery. New models for operating local welfare offices, supported by the Bank, have been put in place, with the processing times for social assistance applications reduced in line with CPS expectations. However, improvements to targeting social assistance, means testing and rationalizing the array of benefit programs slipped to the next CPS period. Expectations for improving social insurance administration were scaled down and the accompanying investment operation dropped. Most of the original strategic goals for improvements on the quality and access of education and health service delivery have not been realized, as investment operations in these sectors have fallen short in yielding the desired results. The lack of progress on the investment front has been offset, but only in part, by actions under DPLs to strive for greater efficiency in budget allocations and teacher-student ratios and by AAA to advocate for greater public awareness to public expenditure and service quality. There has been a good start made in improving the quality of municipal services, albeit on a limited scale, under the Urban Infrastructure project, but the specific targets contained in the CPS on improvement to municipal services were out of sync with the scope and timing of the support being provided as it was too early to expect to see concrete results. Strategic Goal 7: Improved Governance and Accountability Improvements to governance and accountability in service delivery and public finances figured prominently in the CPS. Progress was largely to be measured by Ukraine‘s PEFA ratings, with particular goals to increase the alignment of budget allocations and national priorities, transparency, accountability, auditing, and tax administration. The conclusions from the preliminary 2011 repeat PEFA assessment show that progress has been made across the board, as compared to 2006, although the improvements fall short of those anticipated under the CPS. A new Procurement Law was passed in July 2010. In July 2011 amendments were passed (Law 3861), which further improved the system by introducing framework agreements, increasing accountability for use of non-competitive procedures, and reiterating requirement to pass parallel legislation governing procurement of utilities and by utility companies. At 37 the same time, however, while the framework has improved, implementation remains a challenge. In the education sector, there has been limited progress, with external assessments adopted and improvements to rural student-teacher ratios realized on a pilot basis. In health, the modest goals set under the CPS— increased awareness of primary health risks and capacity to deal with environmental health risks at the municipal level—have likely been achieved, supported by AAA and an IDF grant, respectively. 3. Cross-Cutting Theme: Governance and Anti-Corruption Building on the diagnostics done for the CPS, the CPS laid out a multi-faceted program for dealing with governance, cutting across the entire program.17 Recognizing political constraints and state capture in Ukraine, the CPS approached governance through selective entry points and using multiple instruments. The two key entry points were public financial management and municipal service delivery. In terms of instruments, both investment operations and DPLs were deployed: for example, DPLs have helped to reduce business inspections and audits, reform permit and licensing systems to narrow the ambit in which corruption can flourish and efforts to make budgets and subsidies more transparent were supported by the PFM and State Tax Services Modernization projects. Furthermore, supply-side mechanisms used in Bank-financed operations to ensure sound fiduciary controls have been effective and ongoing operations do not seem to confront any new or heightened risks. But, these gains fall short of what it would take to address Ukraine‘s pervasive governance weaknesses. Moreover, the Bank‘s interventions have been mainly on the supply side: the possible scaling up of the pilot People‘s Voice did not occur and the planned Judicial Reform operation was dropped. Since the CPS did not establish any singular target on governance, proxies help to gauge where Ukraine stands overall. The World Bank-EBRD Survey of Business Environment and Enterprise Performance Survey (BEEPS)18 show that perceptions have deteriorated across most dimensions since 2005. This trend was also evident in Transparency International‘s Corruption Perception Index: in 2007, Ukraine was ranked 118th out of 179 countries; in 2010, 134th out of 178 countries; and in 2011 152nd out of 182 countries19. Similarly, the World Bank‘s Worldwide Governance Indicators puts Ukraine in the lower range of its comparators. The results for 2010, as compared to 2008 and 2005, show reversal on key governance indicators. Taken together, these data paint a disappointing picture with respect to progress on governance. The Bank Group’s Performance Design of the Strategy The 2008 CPS reflected a thoughtful process of retrospection of what was achieved and what did not work during the previous CPS for 2003 to 2007. The goals set under the current CPS were relevant to the challenges facing Ukraine, and by and large aligned with the Government‘s core priorities, notwithstanding the frequent changes in leadership. The CPS was more selective than past CPSs, ratcheting down expectations of what could be achieved and narrowing focus to five themes—energy, trade, tax, PFM, and transport—that constituted the common denominators in programs articulated by changing governments. Areas in which there was less of a consensus as to the path for reform were to be addressed in a more opportunistic way via advocacy efforts, particularly AAA and other non-lending tools. The CPS was also more modest than in the past, recognizing that the political context was not conducive for the government to take on ―big ticket‖ items. This realistic stance was also followed during the crisis, with efforts geared towards stabilizing the situation, and not trying to use the crisis as an opportunity for far-reaching reforms. The downside of this strategy is that now, with recovery 17 Ukraine was one of the initial 27 countries identified as a target country to receive GAC support at the country level designed to deepen the Bank‘s understanding of what could be done to strengthen GAC in CASs and to identify entry points. Diagnostic work for the 2007 CPS included a case study of the demand-side People‘s Voice pilot project, a corruption vulnerability scan, and an update of the CPAR. A How-to Guide for increasing the demand for good governance was prepared and stock-taking of the GAC work program carried out in FY08. Ukraine did not benefit from further support under the Global Partnership Facility. 18 BEEPS At-A-Glance 2008 Ukraine. January 2010 19 Corruption Perception Index 2011. 38 progressing, there is less pressure to take action and risks of a return to complacency about tackling Ukraine‘s deeper structural challenges. Leading up to the crisis, IFC had been actively expanding its program, focusing on the sectors of comparative advantage for Ukraine such as agri-business and value-added manufacturing, as well as providing targeted financing through financial intermediaries. The crisis led to a contraction in IFC investments and reorientation toward portfolio clients, short-term finance, and crisis response advisory work. More recently, longer term strategic objectives have come back into greater focus as the economy has stabilized. The ensuing results matrix closely corresponded to the strategic goals set out in the CPS and contained mostly observable outcomes facilitating monitoring during implementation. The matrix suffered from two shortcomings, however. The first was the lack of direct linkages between some actions and the influence on higher order objectives. This was most problematic in dealing with private sector development where the Bank Group may be limited to providing best practice examples and modeling the desired behaviors. This was also the case in realizing improvements in health, education, and municipal services where support by the Bank was insufficient to have any material influence, or simply failed to produce the desired results as in the Quality Education and TB-HIV/AIDS projects. The other shortcoming was unrealistic expectations about achieving results in a relatively short timeframe, particularly in the Ukrainian context, where delays in implementation of investment operations are chronic. This is the case of operations in tax modernization, land titling and cadastre, energy, and urban infrastructure. Moreover, there was an overly optimistic assessment of the extent to which the pressure of the crisis would lead the authorities to take decisive measures to resolve non-performing loans, to decide what to do with intervened banks, and to put the fiscal situation back on track. These are all taking longer than anticipated. Risks—both for implementation and macro-economic policies—were appropriately identified in the CPS but, in retrospect, their potential impacts were underestimated and the capacity of the government to respond overestimated, as acknowledged in the CPS Progress Report. In the case of implementation risks, the analysis of risks did not go deep enough, focusing on selectivity, but missing flaws in design and readiness that were identified subsequently. In the case of macro-economic risks, the CPS Progress Report appropriately emphasized the risk of the political context and will to undertake reforms. Program Implementation The Bank Group has done well in managing a difficult program during a difficult period. The Group has been responsive, working closely with partners such as the IMF and the EU most notably on responses to the crisis and on the energy sector, and has forged relationships and engaged across a broad array of actors in Ukraine. Importantly, the Group has taken in stride the frequent changes in Ukraine‘s leadership, adjusting accordingly. Bank support for DPLs has been largely successful in achieving intended outcomes, especially in the case of the Bank Group‘s crisis response as part of the international package of support (see Box 1). Box 1: The Bank Group’s Crisis Response IEG‘s assessment of the Bank Group‘s efforts in Ukraine was positive (See ―Phase I: The World Bank Group‘s Response to the Global Economic Crisis‖, IEG, 2010). According to IEG, there were strong reform elements, operations were well designed and results measurable. In addition, the focus on improved targeting of social protection spending was considered appropriate given Ukraine‘s already substantial social protection spending. Importantly, IEG‘s observation that good analytical work is a prerequisite for a good response holds true for Ukraine. Starting as a crosscutting theme in the 2008 CPS, macro-economic issues came to the fore as uncertainties grew and the global financial crisis struck. This was reflected in several ways: first, due diligence on the financial sector with an update of the FSAP in 2007-2008; second, a Country Economic Memorandum (CEM), launched in 2008; and, third, a specific macro-assessment by the IMF requested by the Bank in anticipation of possible macro- economic difficulties. Throughout the CPS period, the Bank continued to analyze and provide policy advice in areas such as financial sector, pension reform, energy sector and social programs that have 39 critical macro dimensions. Besides the CEM and FSAP, AAA that contributed to realizing this goal include: Improving Targeting Accuracy of Social Assistance Programs (April 2010), Ukraine; Trade and Transit Facilitation (May 2010); Improving Intergovernmental Fiscal Relations and Public Health and Expenditures Policy (February 2008); and Ukraine is Aging—Reforms Are Needed to Deal with the Consequences (June 2007). IFC‘s crisis response strategy complemented the IBRD program. In the financial sector, IFC worked in the context of the Joint IFI Initiative for Eastern European Banks. The Global Trade Finance Program (GTFP) accounted for 40 percent of all IFC financial sector investments in Ukraine during the CAS period and helped to improve liquidity and facilitate trade flows. In the twelve months following the onset of the crisis in Ukraine, IFC provided US$110 million to the financial sector, of which US$90 million was through the GTFP program. The Financial Markets Crisis Management Program focused on increasing knowledge of best practices on distressed asset resolution, helped financial institutions assess risks and improve management of non-performing loans through in-depth diagnostics, and supported distressed asset market development by helping to create an appropriate regulatory base. Most recently, cooperation with one of the local stock markets has begun to develop a secondary market for distressed assets. In the real sector, IFC implemented its Corporate Sector Crisis Management Advisory Program, supported existing clients, and selectively invested in companies with viable business models, providing approximately US$100 million in new investments in the twelve months following the crisis. The Investment Climate project worked to improve insolvency and bankruptcy procedures. There have also been notable improvements to the implementation of IBRD‘s ongoing investment portfolio, reflecting concerted efforts on the part of both the Bank and Ukrainian counterparts to undertake joint measures and to monitor progress quarterly. At present, no IBRD operation in Ukraine is rated as unsatisfactory and disbursement rates on investment loans have risen to 15 percent as of July 2011, up from 7.4 percent on average during the previous CPS period. The time taken for new loans to become effective has dropped from an average of 32 months in FY00, to 15 months in FY07, 9 months in FY08 and 4.5 months in FY09-10. On the other hand, less could be done with some of the legacy IBRD operations dating from earlier CPSs. At the start of the FY08-11 CPS, 4 out of 11 operations were at risk, representing almost 50 percent of commitments. Furthermore, despite restructuring and intensive attention to portfolio management since 2007, five out of the six investment operations completed during the CPS period were rated as unsuccessful in meeting their development objectives. Several of these were especially disappointing, notably the TB-HIV/AIDS and the Access to Financial Services projects. These operations suffered from both design flaws (for example, combining what were originally two projects into one, choosing the wrong executing agency, or having too many components) and lack of ownership (for example, there was no consensus on the best way to treat TB). They were also buffeted by the repeated changes in policy direction and leadership: for example, the TB-HIV/AIDs project had seven ministers of health, 11 deputy ministers, and five project directors over ten years. The program had more success with recently approved IBRD operations and those with longer lives remaining before their completion. Much of this is due to intensive attention to portfolio management led by the CMU and the exhaustive learning review undertaken by QAG at the request of the ECA Region. The QAG review, completed in April 2010, brought to light issues of readiness: in almost all cases, there was inadequate advanced preparation of technical specifications and procurement packages resulting in delays of three to four years before any significant disbursement. Of late, there has been notable improvement in Urban Infrastructure and Power Transmission projects. The Public Financial Management and State Tax Services Modernization projects remain challenging, in part due to frequent changes in counterparts and in part due to wavering commitment by authorities to the operations‘ development objectives. One operation, the Improving Access to Financial Services project, was under performing with demand for credit negatively affected by the crisis: in response, the project was closed and the remaining funds were reallocated to the successful Export Development II Project. IFC has also been successful at managing its portfolio despite the negative effects of the crisis. At the peak of the crisis, loans to one client (accounting for about 20 percent of the portfolio) required restructuring as this client was particularly affected by the decline of commodity prices and low global and domestic demand. IFC has taken proactive steps to address the 40 deteriorating quality of its portfolio and the situation has since stabilized. Trust fund portfolio comprises altogether of 33 grants, managed by the Bank and IFC. The disbursement ratio of the Bank Trust Fund portfolio, comprising fourteen grants has reached 49 per cent by the end of 2011. This relatively high disbursement ratio has been inspired by several factors: i) the implementation filters were applied equally to TFs; ii) TFs follow simpler in-country effectiveness and disbursement procedures, given they are not external borrowings; iii) unlike investment projects, TFs usually do not have heavy procurements, which is the most common reason for delays in investment operations. Lessons Learned and Suggestions for the New CPS This self-evaluation of the Bank Group's activities over the FY08-11 period generates lessons that may be relevant for the next CPS as highlighted below:  Synergies. After seventeen years since joining the World Bank, Ukraine is still in the midst of making its transition to a modern market economy with many enabling policies yet to be formulated and put into practice. While the weight of policy reform is typically borne by DPLs, with investment operations helping to implement those policies and/or overcoming bottlenecks, all operations need to be keenly in tune with the shifting tides that characterize Ukraine‘s policy agenda and political system. This is most critical for transformational and institutional capacity building efforts, whether in public administration, social sectors, municipal services, or land reform. Given that the policy formulation cycle is shorter than the project cycle, the challenge is to build bridges between the time the project is originally designed and the future years over which implementation takes place, overcoming the risk that projects may be not keeping up with ever changing policies.  Learning and Knowledge. There needs to be continuous interaction and learning between policy makers and the Bank on core strategic goals as well as increasing awareness among the public. Since Ukraine is still reforming and lacks a systematic approach, it is keen to learn and authorities perceive the Bank as a leader in that process. There is a sense that this was lost during the crisis but, now that the worst is over, the Bank can revert to a learning mode, exposing counterparts to what has worked in other countries, providing the platform for debating how those approaches might be adapted, and moving policy advice from generalities to specifics that fit Ukraine. This approach thus endorses the continuation of WBI efforts and advocacy AAA, as done under this CPS, to increase awareness and understanding and the use of knowledge instruments to introduce reforms, familiarize institutions, and establish rapport before launching new lending activity, thereby avoiding costly commitments to operations that are dropped (e.g. Railway Modernization project) or ultimately fail because of a lack of common understandings of what needs to be done (e.g. TB-HIV/AIDs project). The Bank‘s solid work in outlining the path to reform in the energy sector is an example of the kind of knowledge needed a priori to understand the issues, build those into investment operations and/or DPLs, and leverage that knowledge with partners to influence boarder sector outcomes. The challenge is to sustain such efforts.  Governance. The achievements attained in improving governance under specific actionable areas of the Bank‘s program have been undermined by the overall worsening corruption indicators during the CPS period. This deterioration points to the need for the Bank Group to rethink its approach to addressing governance issues. New approach should reinforce efforts in those areas where there has been progress and ought to update the underlying diagnostics and deepen sector specific and political economy analysis. Further, depending on an assessment of the viable options, the new CPS may consider greater use of overt demand side interventions, likely using knowledge and analytical products in sectors where no new lending is anticipated, and/or building such interventions into investment operations at the municipal level.  Readiness and Realism. As noted in the QAG review, problems of readiness have confounded investment operations for years. In some cases, initial implementation plans were not realistic (e.g. Rural Land Titling and Cadastre project) or incomplete (e.g. Urban Infrastructure project). And, even though considerable progress has been achieved at cutting bureaucratic processes (e.g. reducing time taken for effectiveness), project preparation still takes a formidable amount of time: thus, the time 41 horizon of the pipeline planning ought to be longer than two years with support provided for preparation efforts, either through PPFs, grants, trust funds, and/or including in one project providing the funds to prepare a new one. This is especially the case for operations, such as major infrastructure and those with complex IT components, which require considerable upfront technical design and specification. It also implies getting into the nitty-gritty of the Ukrainian administrative systems, budgets, and roles and responsibilities, particularly in decentralized settings and with first time borrowers. Such detailed understanding of local procedures had been missing at the design stage of several operations (e.g.-HIV/AIDS, Access to Financial Services, Equal Access to Quality Education, and Urban Infrastructure projects) and had to be acquired during implementation, with delay and not always successfully.  Procurement and Contract Management. There are incidences, highlighted in the QAG review, that point to procurement and contract management being a particular bottleneck. The lack of familiarity of Ukrainian authorities with the Bank‘s rules has been exacerbated by: the lack of detailed technical specification (e.g. Hydropower Rehabilitation project); the ring-fencing of projects that means works less amenable to ICB (e.g. smaller, dispersed works under the Road and Road Safety project) are let by ICB rather than NCB; and the need to deal with major IT contracts that are complicated by their nature (e.g. Hydropower Rehabilitation, State Tax Service Modernization, Land Titling and Cadastre, Development of State Statistical Services, and Public Financial Management projects). Development of integrated information and processing systems requires not only high levels of ownership by clients, but good management of procurement processes, full use of the flexibility allowed under Bank guidelines for IT, and solid attention to design and contracting by both the Bank and authorities. All procurement needs realistic advanced planning and close downstream management. Procurement planning should thus involve a form of initial "triage", where by contracts that are on the critical path for execution and demand a high level of scrutiny by management on both sides, can be flagged and their progress well monitored. There is also merit in adjusting thresholds to allow simple, low risk contracts let by NCB without Bank prior review.  Project Design. Most IBRD investment operations in Ukraine have had implementing agencies that were first time borrowers with all of the risks that entails in terms of the lack of familiarity with Bank procedures and the need for careful and close monitoring and supervision. Past errors in design which exacerbate this steep learning curve should be avoided and good practices, encouraged. This entails steps to:  Ensure that the implementing agency is correctly positioned within the overall bureaucratic structure to have legitimacy during implementation and to have the requisite policy and/or operational mandate. Cases in hand: Access to Financial Services and Equal Access to Quality Education projects (negative experience) and the Export Development II project (positive experience).  Establish the project implementation unit so that it complements the roles and responsibilities of other units in the implementation agency. Case in hand: Equal Access Quality Education and State Tax Service Modernization projects (negative experience) and Export Development II and Social Assistance Modernization projects (positive experience).  Limit support to activities critical to realizing ultimate development goals, without non- essential, albeit worthwhile, activities being added exacerbating coordination efforts. Cases in hand: Rural Land Titling and Cadastre projects (negative experience) and Social Assistance Modernization project (positive experience).  Keep to one sector and/or agency at a time, given the limited implementation capacity. Cases in hand: Urban Infrastructure and Access to Financial Services projects (negative experience) and Hydropower Rehabilitation, Power Transmission, Roads and Safety Improvements, and Social Assistance Modernization projects (positive experience). 42  Realize that, even with good design, things will go wrong. Continuity and strength of project management and appropriate deployment of Bank in-country and HQ staff are important. Continued supervision on the ground combined with the on-time technical expertise has been a crucial element and often means in practice that the implementing agency is able to deal with ever changing political issues and trade-offs. Cases in hand: TB-HIV/AIDS project (negative experience) and Export Development II and Social Assistance Modernization projects (positive experience). 43 ANNEX 1.A TO CPS CR: PLANNED LENDING PROGRAM AND ACTUAL DELIVERIES (CPS FY08-11) CPS Plans as of November 8, 2007 FY Project US$(M) Status US(M) Power Transmission Project 200 Actual 200 Urban Infrastructure 140 Actual 140 Public Finance Modernization Project 50 Actual 50 2008 DPL 2 300 Competed 300 Judicial Reform Support 40 Dropped Social Insurance Administration 110 Dropped Subtotal 840 690 Municipal Infrastructure Development 300 Dropped Power Transmission 2 250 Dropped 2009 DPL 3 400 Completed 500 Roads & Safety Improvement 400 Actual 400 Subtotal 1,350 900 Subtotal FY 2008-2009 2,190 1,590 CPS Completion Report as of December 14, 2011 Hydropower Rehabilitation additional financing 60 Actual 60 2010 Programmatic Financial Rehabilitation Loan1 400 Completed 400 Subtotal 460 460 DPL4 500 Dropped Energy Efficiency project 250 Actual 250 Programmatic Financial Rehabilitation Loan2 350 Moved to FY12 2011 Railway Modernization Reform project 500 Dropped Second Export Development project additional financing 120 Moved to FY12 Subtotal 1,720 250 Subtotal FY 2010-2011 2,180 710 TOTAL FY 2008-2011 4,370 2,300 44 ANNEX 1.B TO CPS CR: PLANNED KNOWLEDGE AND ANALYTICAL PRODUCTS AND ACTUAL DELIVERIES (CPS FY08-11) FY CPS Plans as of November 8, 2007 STATUS Public Finance Review 2 Completed in FY08 People's Voice TA Completed in FY08 Labor Demand and Skills Relevance Completed in FY09 Human Development Sector TA Completed in FY08 Financial Sector Dialogue Completed in FY08 Capital Market TA Partnership Program Completed in FY08 Private Sector TA / Dialogue Completed in FY09 Financial Sector TA/ Dialogue Completed in FY08 2008 Knowledge Economy - Competitiveness Dialogue Completed in FY08 Environmental Protection (Environmental Partnership in Zaporizhia TA) Completed in FY08 IET Institutions and Green Investment Schemes TA Completed in FY08 Impact of Free Trade with EU on the Agriculture Sector Completed in FY08 ESMAP: Thermal Power Plant Rehabilitation Completed in FY09 ESMAP: Affordable Gas-Fired District Heating in Eastern Europe Completed in FY10 FSAP Update Completed in FY09 ROSC Accounting&Audit Completed in FY08 Strengthening demand for good governance Follow-up TA Completed in FY08 CEM Completed in FY10 UA HD Policy AAA Completed in FY10 2009 Ukraine Gas Sector Reform Completed in FY09 Corporate Finance Reporting Completed in FY09 CPS CR as of December 14, 2011 CTF Investment Plan Completed in FY10 SOE Financial Oversight Completed in FY10 Health and Demography Completed in FY10 Environmental Protection TA Completed in FY10 2010 Corporate Restructuring resolution Completed in FY11 ROSC Follow Up TA Completed in FY10 Capital market Reform TA Dropped PFM TA Completed in FY12 Ukraine –Impact of FTA with the EU on agriculture Completed in FY12 Improving Efficiency and Accountability in the HD Sectors Forwarded to FY12 Gas and District Heating Reform Completed in FY12 2011 Agriculture Investment Note Completed in FY11 PTAFTA Completed in FY11 45 ANNEX 1.C TO CPS CR: SUMMARY OF CPS FY08-11 PROGRAM SELF EVALUATION Outcomes that the Bank expects to Status and Evaluation Summary Lending and knowledge Lessons and Suggestions for the new CPS influence in the CPS period products that contributed to the outcome Pillar 1: Restoring Economic Growth and Improving Competitiveness Strategic Goal 1: Improving business climate and invigorating private investment and trade 1.1 Improved agricultural 1.1 The outcome has been partially achieved. Indicators of Despite the effects of the crisis on the Ukrainian economy, competitiveness agricultural productivity have improved despite the crisis, but Bank Lending: there are observable signs of progress in the agricultural these gains have been partly reversed by government intervention DPL II, DPL III sector, setting up the land cadastre infrastructure needed for in grain export markets. rural land markets, and simplifying state-private sector State Tax Service interfaces. However, this progress has taken considerably 1.1.a Increased productivity in 1.1.a livestock sales increased by 4% in January 2011 yoy, while Modernization Project longer than originally anticipated and, considering Ukraine’s selected agri-businesses decreased in crops; export performance increased in livestock (STSMP) starting point, there is a long way to go with major policy (sales/employee, export (32%), livestock and crop fats (41%) in 2010, however, crop exports decisions (e.g. allowing the sale of agricultural land) still to be performance) decreased by 25% due to the grain export restrictions. Rural Land Titling and taken. Cadastre Project 1.1.b(i) average crop yields have decreased by approx. 3% for In general, DPLs have been effective instruments in 1.1.b Increased farm level grains, 9% for vegetables and almost no change for oil crops; fruit IFC Lending: encouraging policy reforms especially to the business climate, productivity in selected supply yields increased by 8%; productivity in livestock has been growing backed by intensive dialogue and empirical data, that have chains: (i) yields, (ii) quality of and was 10% higher in January 2011 yoy; (ii) there has been a Financial and real sectors enabled the agriculture sector (as well as other sectors) produce and (iii) farm gate prices tendency in agro-holdings and individual processing companies to improve their competitiveness. In the meantime, IBRD implement EU quality standards; and (iii) farm gate prices Agro- machinery leasing investment support under this pillar has been plagued by increased by 15% in January 2011 yoy, in particular by 33% in crop facility (partial credit risk delays and bureaucratic complexities (also affecting operations and by 4% in livestock sectors. guarantee) under other pillars). In the case of the Rural Land Titling and Cadastre project, the institutional and coordination problems 1.2 The outcome has been partially achieved and is likely to be Risk Sharing Facility with could have been foreseen and mitigated through simpler achieved during the next CPS. supplier of crop design, adequate scope (and/or timeframe), and 1.2 Establishing foundation for protection products implementation readiness. Instead, those risks were to be transparent land market operation 6.81 million rural land titles have been issued out of a total of 6.9 addressed by the creation of a number of Councils, Steering million. Land surveys, preparation of orthophotomaps and AAA: and Coordinating Committees, which proved not to be Number of individual rural land cadastral index maps are very advanced across the country and an effective. At the commencement of the CPS period those risks titles issued increased from around electronic cadastre system is being piloted in Vynnytsya oblast. FIAS survey of tax were recognized and the project was fundamentally 6.5 million in 2006 to 7 million by The electronic cadastre system across the country should be put in compliance costs restructured in 2009 in order to simplify the project design, 2010. place within the time frame of the project (by June 2012). Law on scale down the PDO, reduce its scope and address the Cadastre has been adopted, but all these are only part of the Doing Business Report implementation deficiencies. The State Tax Service foundation required. The legal and institutional framework and Modernization project also faced problems in dealing with efficient procedures for registering the transfer of legal rights BEEPS major IT procurements and in setting up an effective PIU. between willing sellers and buyers are also needed to ensure the foundation for transparent land market operation. CEM (2010) Development of integrated modern systems of tax administration, land cadastre and public finance requires not 1.3 The outcome has been partially achieved within the CPS Corporate Sector only high levels of ownership by clients, but also good period. Although progress in coverage has been less than expected Restructuring TA management of procurement processes by the Bank. (Note 1.3 Move towards risk based and in the CPS, it has been offset by significant savings to the private that this same theme reoccurred in other projects with major 46 ANNEX 1.C TO CPS CR: SUMMARY OF CPS FY08-11 PROGRAM SELF EVALUATION Outcomes that the Bank expects to Status and Evaluation Summary Lending and knowledge Lessons and Suggestions for the new CPS influence in the CPS period products that contributed to the outcome simplified inspections, licensing and sector as a result of procedures simplification in permit and Removing Barriers to IT components as well: e.g. Development of State Statistical standards system inspection. Economic Growth in Systems, State Tax Service Modernization, Hydropower Ukraine (WBI) Rehabilitation projects.) 1.3.a Last data available for 2010 show a decrease to 74%. (Source: “Investment Climate in Ukraine as Seen By Private IFC Advisory Services: 1.3.a Share of enterprises that Businesses�). Other measures point to progress in simplification in Agri-Insurance underwent at least one inspection permit and inspection system. IFC work shows that US$325 million Development during the year decreased from 95% has been generated in terms of private sector savings from the (2006) to under 60% (2010) changes recommended by IFC’s investment climate advisory Agri-Finance services, of which i) US$284 million from inspections system reform, calculated as ex-post impact as of 2008; ii) US$4.6 million Vinnytsia Fruit Supply as a result of cancellation of certain types of licenses, term-less Development status of all licenses (with exception for those that defined by the Government), and the “Silence is consent� principle for permits Southern Ukraine obtaining (ex-ante impact); and iii) US$20.7 as a result of Vegetable Supply cancellation of compulsory certification for food stuff (ex-ante Development impact). Vinnytsia Dairy Supply 1.3.b (By comparison with 2008, in 2010 the percentage of Chain Development enterprises obtaining permits reduced from 54 % to 32 % (40% 1.3.b Decrease in time spent to drop). Since 2003, the average time required for obtaining all Fresh Fruits and obtain all permits to operate during permits has gradually reduced from 103 calendar days to 24 Vegetables Supply Chain one year from 60 days (2006) to less calendar days in 2010. The most significant reduction of time took Development than 35 days (2010) place in recent years – from 54 days in 2008 to just 24 days in 2010. Source: “Investment Climate in Ukraine as Seen By Private Food Safety Improvement Businesses�, 2011). Investment Climate 1.3.c Reduced to 22% (Source: “Investment Climate in Ukraine as Advisory Seen By Private Businesses�, 2011). 1.3.c Reduction to 30% in the share of enterprises that have to comply 1.3.d. This has not been achieved. There has been progress albeit with compulsory standards, down from a low base. The Law on Licensing was amended in 2009-2010 from 60% in 2007 that, according to IFC’s estimates, will help the private sector save 1.3.d Government policy recognizes approximately US$15 million. Other laws improving the business need to reduce implementation gap environment have been adopted and/or amended including the in business environment Law on Inspections, Law On Market Surveillance, Law On General Safety of Products, and the Concept for Food Safety Reform. 1.4 The outcome has been achieved: 1.4 Tax compliance costs are reduced 1.4.a In 2008 a risk based system for planned inspection was 1.4.a The percentage of firms piloted and rolled out. Since the implementation of this program, 47 ANNEX 1.C TO CPS CR: SUMMARY OF CPS FY08-11 PROGRAM SELF EVALUATION Outcomes that the Bank expects to Status and Evaluation Summary Lending and knowledge Lessons and Suggestions for the new CPS influence in the CPS period products that contributed to the outcome subject to planned tax audits is according to taxpayer survey data, the share of legal entities that reduced compared to the 2007 level were subject to audits went from 23% in 2007 to 16% in 2008 and as evidenced by the taxpayers 14% in 2009. However, other surveys show still high levels of tax surveys audits. For example, IFC survey shows that 46% of all enterprises were inspected by tax authorities in 2010. 1.4.b The new tax code reduces the number of payments for land taxes and other local taxes. The law on the single payment to all 4 1.4.b The number of tax payments is social funds will reduce the number of payments from 48 to 12. reduced as evidence by the Doing The results of the Doing Business survey to be issued later in 2011 Business survey. will reflect these achievements. 1.5 The outcome has been partially achieved. It is too early to tell if this level can be sustained. The stock of VAT refunds was reduced in 2010 with the issuance of VAT bonds 1.5 Revenue administration reform worth UAH 16.4 billion. By the fall of 2010, the stock was reduced help to level the playing field to below 30% of quarterly flow of claims. The new Tax code, effective January 1, 2011, contains provisions of simplified refund VAT Refund claims for more than 60 procedures, although it is too early to tell how it will be days / quarterly flow of VAT refund implemented in practice. However, VAT refunds continue to be a claims is reduced to below 30%. problem and ratio fluctuates from month to month. Strategic goal 2: Rehabilitating the banking sector and strengthening financial markets 2.1 Banking sector rehabilitated 2.1 The outcome has been partially achieved. The banking sector IBRD Lending: The Bank Group’s response to the crisis was swift and effective and able to intermediate has stabilized and lending has slowly resumed. Rehabilitation First Programmatic and done in multiple partnerships with other IFIs. It put the efficiently; key risks reduced; crisis efforts have proceeded satisfactorily. Challenges remain, and Financial Rehabilitation issue of banking sector vulnerability on the table early and costs to taxpayers minimized there is much to be done for the sector to achieve desired levels of operation (PFR I) used all the tools available to respond. Nevertheless, given the consolidation and efficiency. This will likely extend into the next political situation and the lack of a clear vision for the sector CPS period. The final cost to the taxpayer is not yet known, but among the political leadership, the Bank and other partners cost minimization efforts are underway. IFC Investments: were likely too optimistic in the time needed to move from the IFC investments in the immediate crisis stage to the stage of being able to put into 2.1.a Capital adequacy of the system 2.1.a The outcome has been achieved. NBU intervened in about financial sector effect all of the actions needed to rehabilitate the banking is strengthened. All banks comply 30 banks since fall 2008; 19 of them had their licenses revoked and system and to overcome underlying weaknesses in the with minimum established capital were put into liquidation. A few banks remain in provisional AAA: regulatory framework. levels; banks which do not comply administration. Under the new legal and institutional framework Pension reform and are resolved by bank resolution established in 2009, the Government recapitalized three systemic capital markets TA (PTAP) Although this was the first time in recent history that multiple authority. troubled banks in July 2009 and is now implementing an exit teams from multiple institutions worked together, strategy to minimize fiscal costs. All non-intervened banks comply Accounting and Auditing collaboration has been effective. For the future, the central with the minimum capital requirement. ROSC, FSAP update bank authorities indicated they would like to have more hands-on advice in dealing with banking crises and greater 2.1.b Stock of non-performing loans 2.1.b This outcome has not been achieved. The volume of NPLs Dutch Grant to NBU for differentiation among partners. According to local authorities, (NPLs) reduced in the banking escalated rapidly in 2009-2010 and remained high as of early 2011. Financial Sector dialogue the Bank bases its advice on more general experience while system from 35 % (2009) to15% NPLs peaked at 41% as of April 2010 and dropped to around 35% Ukrainian partner s need specific country-tailored advice. In (2011) in late 2010 based on the broadest measure according to the IMF IFC Advisory Services: this regard the advice from IFC on troubled assets, for methodology, decreasing somewhat more by year-end. As of IFC Advisory Services on example, was considered as appropriate, country-specific and 48 ANNEX 1.C TO CPS CR: SUMMARY OF CPS FY08-11 PROGRAM SELF EVALUATION Outcomes that the Bank expects to Status and Evaluation Summary Lending and knowledge Lessons and Suggestions for the new CPS influence in the CPS period products that contributed to the outcome August 2011, NPLs as reported by NBU using a different definition internal controls and pragmatic. were 11.8% and have been on a decreasing trend. Loan loss corporate governance to provisions and subsequent infusions of new capital have been at investment beneficiaries satisfactory levels, however introduction of regulatory and tax in financial sector incentives for banks to either transfer NPLs out of their books or resolve them rapidly have been slow and fragmented. IFC Financial Markets Crisis Management 2.1.c This outcome has not been achieved. As of October 1, 2010, Advisory 2.1.c Share of majority state-owned the share of majority state-owned banks in terms of total assets banks in the banking system’s total and capital remains largely unchanged, at 17% and 28%, assets and capital is reduced respectively. Notwithstanding the lack of progress in reducing the (Baseline (2009) – 17% and 25%; state’s share of the banking system, recapitalization by the Target (2012) -10%and 15%) Government was a major factor in restoring financial sector stability during the crisis. 2.1.d This outcome has been partially achieved, major progress has 2.1.d Ultimate controllers and been made. A relevant law has been adopted and enacted. Once essential participants (with 5% or fully implemented, it will tighten requirements for disclosure of more) of all banks are made public information on beneficial owners and banking group activities. on a regular basis 2.1.e This outcome has been partially achieved, major progress has 2.1.e Financial statements of all been made. Legal changes have been introduced to make IFRS regulated financial market entities standards applicable to all financial institutions – including banks – are IFRS-based and publicly from 2012. disclosed. 2.2. This outcome has been achieved in the case of the stock 2.2 Financial markets are market but not the bond market. strengthened and deepen 2.2.a This outcome has been achieved. Stock markets recovered in 2.2.a Capitalization and volume 2010. Key market index went up by about 70%. Capitalization of traded on all Ukrainian stock the stock market was around 37% of GDP (2009) at year-end 2010. markets reaches 40% of GDP by Capitalization of Ukrainian stock market listed companies 2012. Baseline (2009) 23% increased by 48.75% to UAH171.76 bln. in 2010. Trading volume during 2010 was around 17% of GDP. 2.2 b. This outcome has not been achieved Volume of new stock and bond issues reached 3.4% of GDP for the 2.2.b Volume of new stock and bond period of Jan-Sep 2010 (compared to 9.3% for the same period of issues reaches 15% by 2012 of GDP. 2009) Baseline (2009) 2 % Strategic Goal 3: Ensuring Energy Security and Improving Energy Efficiency 49 ANNEX 1.C TO CPS CR: SUMMARY OF CPS FY08-11 PROGRAM SELF EVALUATION Outcomes that the Bank expects to Status and Evaluation Summary Lending and knowledge Lessons and Suggestions for the new CPS influence in the CPS period products that contributed to the outcome 3.1 Increased financial 3.1 The outcome has not been achieved. The borrower reduced IBRD Lending: The Bank’s efforts in the Energy sector have benefitted from sustainability of energy sector quasi fiscal deficit in gas sector in 2006 and progress continued in Hydropower taking a sector wide view, and mapping out a comprehensive 2008 and 2009 but due to high import gas prices and lack of Rehabilitation reform program, which has been supported by both DPLs and further adjustment of tariffs quasi fiscal deficit increased in 2010 Project and Additional investment operations. This has also allowed the Bank to be an and 2011. Financing effective interlocutor along with other development partners in facilitating Ukraine’s integration into the European energy 3.1.a Quasi fiscal deficit in gas sector 3.1a The outcome has not been achieved. The quasi fiscal deficit Power Transmission markets. below 0.5% of GDP (by 2010) from was 2.7% of GDP in 2010. This estimate is based on the weighted Project over 1% of GDP (2006) average cost of cheap (well below import price) domestically- DPLs have proved to be effective in targeting specific reforms produced gas and imports from Russia. It also does not account for Energy Efficiency Project in the institutional and regulatory environment, in particular, full potential economic costs. improving financial solvency of state-owned energy 3.1.b Share of inherited power DPL II, DPL III enterprises, reducing the quasi fiscal deficit in the energy sector debts restructured above 3.1.b The outcome has been achieved. The share of inherited sector, and eliminating tariff cross- subsidization. However, 30% by 2010 (from 5% in 2006) power sector debts has been restructured above 30% by 2010. IFC Lending: the crisis has set back efforts on the fiscal side as the Government needs a more auspicious time to deal with the 3.2 Power sector improves 3.2 The outcome has not been achieved. There have been some IFC credit lines for energy issues of gas and electricity tariffs and subsidies. Similarly, the operational performance due to signs of improvement but the target on competition has not been efficiency opening of the electricity market to more competition has increased investment and greater met. More progress is likely during the next CPS. been set back due to the economic crisis and will take longer competition The power sector has continued to experience improvements in AAA: to achieve. 20% of power market supplied operational performance due to increased investments. However, TA to NERC on market competitively by 2011 greater competition has lagged behind with delay in introduction regulation and opening of the new model of WEM (the Law has not been adopted yet). Coal Policy Note Update On the investment side, albeit well laid out in terms of the According to the Presidential Program of Economic reforms, dated energy sector strategy, initial expectations were too high: (i) August 2010, gradual opening of the WEM is planned by the end Gas Market Development complex projects such as Power Transmission and Hydropower 2012 with 100% opening by the end of 2014. Note Rehabilitation require advanced work on detailed specification and planning; and (ii) there were significant delays on the Bank 3.3 Greater power system reliability 3.3 The outcome has not been achieved. On December 15, 2010, Kyoto TA side while reviewing large procurement packages. (Note this Increase in hydropower capacity by Ukraine ratified the protocol of the country's accession to the has also been the case in some other projects.) 225 MW and increase of Energy Community and the Law on the ratification of the protocol IFC Advisory Services: hydropower production by 360 GWh on Ukraine's accession to the Energy Community was signed by the between 2007 and 2011. President of Ukraine on December 28, 2010. UHE has increased its Sustainable Energy capacity by about 106 MW (26 units) by the end of 2010. UHE is Finance continuing to improve dam safety and has finalized two contracts for automated dam safety monitoring systems. Residential Energy Efficiency 3.4 Improved energy efficiency in 3.4 The outcome has been partially achieved. The reduction in the public and private sector energy intensity of the economy was reduced by 12.7 % between Cleaner Production 2006 and 2009. On the other hand, there was no reduction during the 2009 – 2010 period, but an increase, in the difference between household, communal, and industrial tariffs for gas and electricity. The authorities have kept household tariffs substantially below cost recovery through cross-subsidization by the industry. A failure 50 ANNEX 1.C TO CPS CR: SUMMARY OF CPS FY08-11 PROGRAM SELF EVALUATION Outcomes that the Bank expects to Status and Evaluation Summary Lending and knowledge Lessons and Suggestions for the new CPS influence in the CPS period products that contributed to the outcome to increase the cost-recovery by tariff adjustment is explained by the fact that government’s primary objective during the crisis was to minimize any potential negative social impacts. 3.4.a Decreasing Ukraine’s energy 3.4.a Energy consumption has decreased by 10% between 2008- intensity by 15% by 2011. 2010, but energy intensity has remained stable over the same time period due to a proportional decrease in GDP. 3.4.b Approval and Implementation of the Energy Efficiency Action Plan 3.4.b This outcome has not yet been achieved, but it is being with intermediate targets for 2011 implemented with technical assistance from the EC. reached. Strategic Goal 4: Reduce costs of trade to support export led recovery 4.1 Support exports by improving 4.1 The outcome has been partially achieved. IBRD Lending: Some of the key factors for successful outcomes are access to markets and financing Road Improvement and demonstrated in the Ukraine Export Development project. 4.1.a Reduction in the share of 4.1.a The data for 2010 are not available but Q1 2010 shows Safety Project has a simple design and borrower with built up exports and imports undergoing significant progress with the share of inland inspections reduced to Export Development II systems, processes, and human resource capabilities. physical inspections from 11% at 55% in Q1 2010. (Source: The Customs Control Organization DPL II, DPL III Moreover, frequent interactions with Bank staff and a borders to 5% and from 80% inland Directorate). continuous dialogue, were important to support a rapid to 50% IFC Lending: response to the effects of the 2008 financial crisis. The Bank IFC investments in private was also flexible: instead of wholesale lending through 4.1.b Share of SMEs involved in 4.1.b The outcome has not been achieved. sector transport and participating banks, Ukreximbank, was allowed to lend retail. export operations increases from Share of SME exporting indirectly or directly (at least 1% of sales) infrastructure, logistics 25% to 30% (BEEPS) has been declining: in 2005 – 33.9%; in 2008- 22.8%. (BEEPS 2009). companies, and provision On the other hand, procurement of smaller road safety work of working capital during contracts under the Road and Safety Improvement Project 4.2 Improved connectivity to key 4.2 The outcome has not been achieved yet, but will likely be the crisis. (RSIP) has suffered delays due to the lack of interest by markets achieved during the next CPS. contractors in small dispersed contracts. Contracts have been IFC Global Trade Finance consolidated into larger packages covering the same 4.2.a. Riding quality along the 4.2.a. and b. Works on Boryspil-Lubny section of M03 road are Program geographical areas. Boryspil-Lybny section of the M03 progressing well and will be completed in 2012. Results on road improved improving riding quality on completed sections are excellent, with IFC investments in export- 4.2.b International Roughness Index IRI reduced to 2 or lower. oriented businesses (IRI) reduced from >5 in 2007 to 2 in AAA: 2012. 4.3 The outcome has not been achieved. Contracts for road Trade and Transport 4.3. Road safety on the network safety works have finally been awarded after some initial tenders Facilitation Audit improved were unsuccessful due to lack of response by bidders. The project (performance At least 106 black spots with highest was restructured and the scope of the component reduced. measurement system) accidents eliminated by 2012 Country Economic 4.4 The outcome has been partially achieved. The Law on PPP was Memorandum 4.4. Private participation promoted enacted in 2010 and the rest of the framework has been adopted in road management and in 2011. Two Output- and Performance-based road pilot contracts Services Trade Reform and maintenance (prepared with WB support but funded by EBRD) are about to be Negotiations (WBI) Legislative framework for PPPs awarded. IFC Advisory Services: 51 ANNEX 1.C TO CPS CR: SUMMARY OF CPS FY08-11 PROGRAM SELF EVALUATION Outcomes that the Bank expects to Status and Evaluation Summary Lending and knowledge Lessons and Suggestions for the new CPS influence in the CPS period products that contributed to the outcome revised Corporate Sector Crisis Management Advisory Pillar 2: Public Finance and Public Sector Reform and Improved Service Delivery Strategic Goal 5: Fiscal reform to secure stability and enable a sustained recovery 5.1 Viability and sustainability of 5.1 The outcome has not been achieved. In fact, there has been a IBRD Lending: Ukraine suffers from political instability, with frequent the pension fund is advanced. worsening of the current system’s sustainability as pension DPL III turnover of counterparts, and delays caused by dysfunctional Parametric changes to the pay-as- payments rose to 18% of GDP in 2010, as a result of the crisis. inter-agency coordination and processes. These often affect you go system are implemented to However, in 2011 the government passed legislation on pension AAA: the pace at which reforms can take place, and the rate of reduce the deficit to below 1% of reform, which will help to bring sustainability to pension system. PFR and Fiscal TA implementation. GDP in 2010 and help to achieve its sustainability. The impact of the economic crisis on Ukraine’s fiscal position 5.2 Fiscal subsides to the gas and has made adjustments to social programs, such as pensions, heating sectors are reduced 5.2 The outcome has not been achieved. Although the more difficult. It has also been difficult to bring state- through higher cost recovery. Government has made efforts to increase tariffs with interim determined prices for sensitive consumer items such as adjustments, these have been set back by the effects of the crisis heating and gas in line with international prices. on personal incomes and the need to ease increases on retail 5.2.a Higher levels of cost recovery consumers. are achieved on household gas and heating tariffs. 5.2.a The outcome has not been achieved. Nominal gas tariffs for HH and DH increased by 50% in August 2010. However, as import gas prices have grown more quickly than gas tariffs to households, cost recovery has deteriorated. Nominal heating tariffs increased in January 2011. Power tariffs for HH increased by 30% for higher- volume users as of February 2011 and in April 2011 and by 15% for 5.2.b Tariff setting and collection all other categories of consumers. mechanisms are improved. 5.2.b The outcome has been partially achieved. Tariff setting has improved while collection rates have remained stable. Legislation to centralize heating tariffs was enacted in 2010. NERC has regulated heating tariffs until a new municipal service regulator 5.3 Tax policy is improved, was created in 2011. Overall collection rates have remained including through the elimination broadly stable of inefficient tax exemptions and revenue collection is enhanced 5.3. The outcome has been partially achieved. through higher excise taxes. Higher excise taxes (mainly for alcohol and tobacco) were implemented but exemptions were not reduced. Strategic Goal 6: Improved Efficiency in Service Delivery 52 6.1 Improved administrative 6.1 The outcome has been achieved. A standard model for local IBRD Lending: Lessons provided by Social Assistance Systems Modernization efficiency of social assistance welfare offices has been developed, piloted, evaluated and formally Social Assistance (SASM) Project demonstrate that progress can be achieved by: system. approved. As of April 2011, 750 out of 757 offices throughout the Modernization (a) timely adjustment for a better match with implementation country have introduced this new ―one-stop-shop‖ service model. capacity, following a rigorous assessment of the latter; (b) Equal Access to Quality improved procurement preparation and processing; (c) 6.1.a In 2010, the average time for processing applications in the Education addressing supervision gaps due to staffing changes (on both 6.1.a Reduction in application local welfare offices was 1.4 hours. sides); and (d) accurate reporting and flagging of issues to processing time for social assistance DPL II, DPL III management; systematic up-dating and monitoring of payments from 4.1 hours in 2007 to implementation plans on both sides. 1.5 hours in 2010 AAA: Public Finance Review II Moving forward, Bank and the government should be building 6.1.b Number of benefits processed 6.1.b In 2010, the average number of benefits processed per month Pension Reform and on success, working with agencies with prior experience, where per month per staff in social per staff of the SA office was 370. Capital Market adequate capacity has been created and then scaling up assistance offices increased from Development TA sequentially. 290 in 2007 to 530 in 2010 HD Policy TA 6.2 Improved targeting of social 6.2 This outcome has not been achieved. Despite improvements IBRD Lending: Continuity and strength of project management and appropriate assistance benefits in the administration of social programs, no improvement in DPL III deployment of Bank in-country and HQ staff is an important targeting has so far been made. Nevertheless, authorities remain lesson. The ability to combine continuous contacts from the committed to consolidating programs, reducing duplication and TTL in the country office, with visits from HQ specialists was a improved targeting. This could be carried forward to the next CPS. crucial element of moving the SASM project forward. 6.2 a The outcome has not been achieved. 6.2 a Share of non poor families among beneficiaries decreased from 55% in 2006 to 45% by 2010. 6.2.b The outcome has been partially achieved. Presumptive 6.2.b Improve the eligibility criteria incomes are being used. Modernization and integration of IT The results in the area of efficiency of public resources use in for all means tested programs, by systems in local welfare offices are being implemented and are in health and education demonstrate a mismatch between using presumptive income to the final stages in the majority of offices. instruments and objectives. Neither the use of DPLs or account for hard-to-verify incomes. investment lending was sufficient to get a critical mass of 6.2.c The outcome has not been achieved The issue is still being knowledge and energy behind a reform agenda. Before 6.2 c Better targeting of HU discussed and there are likely to be measures taken during the next embarking on such a profound reform, more underlying work program expenditures. CPS period. would need to have been done. 6.3 Improved efficiency of public resource use in education and 6.3 The outcome has not been achieved although limited The Equal Access for Quality Education project suffered from health progress has been made. Performance under the Equal Access to some design flaws, especially in terms of the role of the PIU. It Quality Education project was disappointing and its objectives not was founded on an incomplete understanding of the roles and met. Nevertheless, conditions to advance towards school responsibilities of local levels of government which have the optimization were created in 32 rural hub-schools in 6 pilot districts IBRD Lending: authority to close or keep open schools. benefiting a total of 190 satellite project schools. Equal Access to Quality In the healthcare sector, the dialogue on reforms has intensified and Education Project What started as a municipal service project, with ambitious results are expected to materialize in the next CPS cycle. The objectives in different urban services, was defined by demand of hospital sector is moving towards global budgets in the pilot DPL II, DPL III the participating municipalities as an urban water and sanitation oblasts. project. The Urban Infrastructure Project got off to a slow start. 6.3.a Schools budgeted on per 6.3. a. and b. The outcome has not been achieved. Dialogue AAA: The Bank embarked on a lending operation without a clear capita basis underway. Hospital and school autonomy, with greater flexibility Public Finances Review II definition of the investments to be financed and the underlying 6.3.b Number of hospitals in use of financial resources, is being experimented on a pilot basis. baseline work to be done. Moreover, there was no clear path on implement global budgets HD Policy TA the nature and depth of the reforms that would ultimately be 6.3.c The outcome has been partially achieved. The student teacher needed. Nor were these reforms reinforced by the Bank‘s policy 6.3.c Student/teacher ratios in pilot ratio of rural schools in the pilot network for optimization increased dialogue. However, targeted efforts at improving selected water 53 rural schools rise significantly from from a baseline of 8.4:1 in 2008 to 9:1 in 2010 utilities‘ performance was combined with wider improvements baseline of 8 students/teacher. to energy efficiency across the country, expanding the reach and 6.4 The outcome has not been achieved. Progress under the scope of the project. 6.4 Improved financial Bank-financed Urban Infrastructure project has been slower than performance of selected utilities anticipated and results will depend on implementation of the Working with new and inexperienced borrowers in a due to reduced operating expenses planned investments related to 6.4.a and 6.4.b. 15 municipal water decentralized setting is particularly challenging. The Bank and improved efficiency utilities have developed business plans to improve their operational should allow sufficient time for new agencies to learn and efficiency and tangible progress is expected during the next CPS by absorb new ways of structuring and implementing development 6.4.a Improvement of energy the closing of the on-going Urban Infrastructure project. assistance. efficiency of municipal water utility IBRD Lending: companies in targeted cities 6.4.a. The outcome has not been achieved as the supply and Lviv Water installation of equipment to increase energy efficiency is in progress. Reduction of energy efficiency levels (against 15% Urban Infrastructure target) can only be reported after completion of installation/works, Project 6.4.b Reduction in water losses in by the project closing date (December 31, 2012) target cities 6.4.b Not yet achieved, but progress is underway. Reduction from 28% to 25% is planned for Chernihiv. Works are ongoing and results will be reported once those are completed and all goods installed by project closing in 2012. 6.5. Improved quality of 6.5 The outcome has not been achieved. Quality of municipal municipal services in selected services shall improve in selected municipalities (Chernihiv, Ivano municipalities Frankivsk, and Odessa) based on the ongoing physical and operational improvements, financed by the Urban Infrastructure project. This is to be achieved in the next CPS timeframe but no baseline exists. Strategic Goal 7: Improved Governance and Accountability 7.1 Improved alignment between 7.1 The outcome has been partially achieved. Based on the IBRD Lending: In terms of fiscal policy and public administration, the DPLs national priorities and budgetary results of the preliminary 2011 repeat PEFA assessment, there have State Tax Service supported a new procurement framework, which would signal allocations been improvements across the board since 2005-06, although the Modernization the commitment of the government to increased efficiency and improvements fall short of those anticipated under the CPS. transparency in public spending. State Statistical Capacity 7.1.a This rating improved from C to C+ mainly reflecting Building The Bank‘s analytical and advisory work was effective with 7.1 a PEFA rating on multi-year improved MTEF implementation. The project appraisal requirement some very good examples (e.g. reform of inter-governmental perspective of in fiscal planning is established by Law on Investment Activities, the new Budget Public Finance fiscal relations). Even though the results were not always improves from C to B. Code legislated elements of MTEF that are used for 2012 budget Modernization evident, AAA served as a form of training for Ukrainian proposal. counterparts. Since Ukraine is still reforming and lacks a DPL II, DPL III systematic approach, it is keen to learn. Authorities perceive the 7.2 The outcome has been partially achieved. A strategy of Bank as a leader in that process and request the Bank‘s help in 7.2 Increased transparency in the PFMS Modernization is approved and supported by PFM project. . AAA: thinking through how to adopt and adapt country experiences. utilization of public finances Public Finances Review II This is now very ad-hoc and driven by smaller donors. 7.2.a The PEFA rating on public procurement has improved to C+. 7.2.a PEFA rating on public Most notably, a new Procurement Law was passed in July 2010. In Dutch TF on capital procurement improves from D+ to B July 2011 amendments were passed (Law 3861) which further budgeting and PFM improved the system by introducing framework agreements, (including training and increasing accountability for use of non-competitive procedures, capacity building through and reiterating requirement to pass parallel legislation governing WBI) procurement of utilities and by utility companies. Parliamentary Financial 54 7.2.b. The PEFA rating on predictability has improved to C+. Oversight for Audit 7.2.b PEFA rating predictability in Continuing weakness is the frequency and transparency of budget Committees (WBI) the availability of funds for adjustments. commitment of expenditures Capacity Building for improves from D+ to B Performance Budgeting 7.3 The outcome has not been achieved. The results of the and MT Expenditure 7.3 Increased accountability of preliminary 2011 repeat PEFA assessment have not revealed any Framework; Workshop on public institutions improvements in external audit due to inability of Supreme Audit Capital Budgeting (WBI) PEFA ratings on scope, nature and Inspection to audit revenues off-budget funds and SOEs. The follow up of external audit improves extent of legislature follow up is low. Regional Knowledge from D+ to C+ Exchange on Anti- 7.4 The outcome has been achieved. The PEFA rating for the Corruption (WBI) 7.4 Improved effectiveness in tax effectiveness of tax collections improved to C+ up from D+ in administration 2006. Note the discrepancy with the original outcome in the CPS PEFA ratings on effectiveness in matrix. The main areas of improvement have been reduced tax collection of tax payments increase arrears and introduction of risk-based audit. (Tax arrears as a share from D+ to C+ of total taxes has fallen from 18% (2006) to 5.7% (2010)). 7.5 Improved governance in 7.5 The outcome has been partially achieved but its IBRD Lending: The engagement on the education sector, both through education sector sustainability doubtful. National External Assessment was investment project and TA, has been only partially successful in External assessment instruments are launched in 2008. Ukraine participated in TIMMS in 2007. On the DPL II, DPL III transforming the attitude of the Ministry towards independent carried out regularly and accepted other hand, acceptance by education stakeholders has not been testing and assessments. by education stakeholders tested. It is also unclear whether the use of independent external Equal Access to Quality testing will be sustained in the future. Education 7.6 Increased awareness of 7.6 No baseline data is available to test whether awareness IBRD Lending: As already mentioned above, one of the lessons is the lifelong health risks and causes of towards health risks has increased or not over the CPS period. importance of baselines to measure the results. Results should premature adult mortality Over the last year, sustained dissemination campaigns of the DPL II, DPL III be formulated only in areas where baselines are available and/or Increase of public awareness of key findings of the Health and Demography study may have led to baseline data collection should be prioritized. health risks (baseline to be greater awareness, particularly in the young groups. AAA : established through survey). PFR II + follow-up AAA used to increase awareness among the general population 7.7 The outcome has been achieved. Human Health Risk on issues, such as health and demographics, can have a broad Assessment Methodology has been introduced in 6 industrial Health and Demography impact. The design of such studies should incorporate ways to 7.7 Increased capacity of public municipalities and 4 of them have adopted the methodology measure and monitor those impacts. sector to manage environmental (Zaporizhya, Cherkassy, Drushkivka, Rivne). The fifth one - Kiev Zaporizhzhia health risks plans to adopt it in nearest future. Dialogue among stakeholders and Environmental TA and The strong ownership at the sub-national level was a key factor Number of municipalities using risk awareness regarding minimization of health risks from industrial follow up which contributed to the successful implementation of Human assessment methodology to inform pollution have substantially improved. Environmental Governance Health Risk Assessment Methodology which has been adopted public policy increased from 1 in Assessment Tool (EGAT) developed Legal Framework and in 4 municipalities. The lesson is that solid work using other 2001 to at least 3 in 2010. Enhancing Institutional than lending tools can pave the way to developmental outcomes Capacity for at municipal level. Environmental Permitting (IDF) 55 Annex 2. Ukraine FY12-16 CPS Results Framework Country Development Goals (President’s Program of Issues and Obstacles CPS Outcomes CPS Milestones WBG Program (and Partners) Economic Reforms 2010-14) Pillar 1: Improving Public Services and Public Finances: Support to Building Relations with Citizens Result Area 1. Improved governance of public finances Optimize management of Governance concerns about the state Strengthened operational efficiency  Public Financial Management System Ongoing Lending: public finance by improving budget are focused on the public and transparency of PFM established and functioning. efficiency of capital procurement (PP) and capital  The Budget Code is amended to PFM expenditures, increasing expenditures. The new PP Law  Reduction of at least 20% in time introduce MTEF. transparency of public marks a crucial step forward, but its required to get necessary finance, introducing medium- effective implementation is not information for managerial decisions as compared with 2011 Indicative Lending: term planning and improving completed.  Public procurement monitoring tool is financial management of state Increased transparency in public functional (designed, populated with Gas Sector Efficiency and owned enterprises procurement current data and allows monitoring Modernization project Capital budgeting is identified by  Civil society has easy and performance of the procurement system PEFA as one of the weak PFM areas unrestricted access to public in ensuring competition, transparent in Ukraine. It suffers from a number procurement information on selection and complaints resolution and of drawbacks resulting in high procurement process and system available to public in unrestricted way). public investment under-execution AAA: performance on a regular basis. rates.  A framework for assessing efficiency PEFA Update Improved efficiency of capital expenditures capital budgeting practices developed.  A Law enacted establishing project  Capital expenditures execution rate selection framework for all capital expenditures. Capital Budget Effectiveness improved as a result of better project planning and Assessment implementation from 70% in 2010 to over 80% by the end of CPS  Financial restructuring and period. corporatization strategy for NAK The multi-tier pricing system in the Naftogaz adopted and ongoing Governance and PFM: gas sector creates significant quasi- Improved governance in the energy implementation. Improving Efficiency and fiscal deficits. The gas sector flows sector Accountability in Public are not fully transparent due to poor  Naftogaz subsidiaries publish Investment Management, PP reporting and metering. separate financial accounts  WB advice provided on implementation of the pension law and additional and Healthcare Services according to international standards Pension expenditures and measures to ensure long-term 56 Country Development Goals (President’s Program of Issues and Obstacles CPS Outcomes CPS Milestones WBG Program (and Partners) Economic Reforms 2010-14) contribution rates are among highest Implemented Pension Reform Law sustainability of the pension system in the world, yet, the pension fund and sustainability of the Pension runs large deficits and pensions of Fund improved Fiscal, Structural, and most pensioners are low. Worsening  Pension expenditures reduced as a Governance Reforms TA demographic profile threatens share of GDP (from 18% in 2010) system stability. Partnerships Improve transparency and governance in the use of EU, IMF public resources outside the budget. AAA: Gas Sector TA Stabilize and improve Partnership administration of the pension system. EU, EBRD, EIB, IMF Result Area 2. Improved efficiency of social expenditures 57 Country Development Goals (President’s Program of Issues and Obstacles CPS Outcomes CPS Milestones WBG Program (and Partners) Economic Reforms 2010-14) Improve health of the Ukraine has the largest population Improved efficiency of spending in  Financially sustainable and technically Ongoing Lending: population, ensure equal and decline in Europe. Non- health and education sound health reform plans designed on a fair access to medical services communicable diseases and chronic  Average length of stay in hospital pilot basis in three oblasts. Social Assistance Systems of proper quality and improve conditions drive high mortality. reduced in pilot oblasts by 20  New design of the monitoring system for Modernization Project HIV-AIDS prevalence is one of the percent against 2011 level Ministry of Health developed public spending efficiency highest in the ECA region. Health  Visits to PHCs in pilot oblasts spending is inefficient. Rigid increased by 10 percent as of 2011 budgeting of resources hampers the level Indicative Lending: ability of local governments to base expenditures on local needs.  BOOST created in the education sector Second Social Assistance  Improved government‘s capacity to and used to analyze sub-national entities Targeting accuracy of the social spending on education vs. test score Project analyze public spending efficiency assistance is low. Spending on in education through hands-on results. poorly targeted privileges is taking training of up to 25 key specialists of the lion share of the overall MOE, MOF and treasury on the use spending on social assistance. of the BOOST tool for public AAA: expenditure analysis (with manual Poor quality of education despite and video describing how to use Measuring Governance in high expenditures. One of the BOOST produced and provided) Health Expand social assistance lowest student/teacher ratios in the world, extremely small class sizes, coverage of the needy with and an oversized network of efficient budget spending, Improved efficiency and equity of facilities. increase social assistance social safety net Health Sector Dialogue targeting, improve efficiency  Reduction in application processing time of administrative decisions in  Targeting accuracy of the overall for social assistance payments stays at Social Safety net in Ukraine less than 1.5 hours throughout CPS the social assistance system increased from 37.4% in 2011 to  Number of benefits processed per month IDF Grant in support of health 50% in 2016 per staff in social assistance offices reform pilots  By 2016 spending on categorical increased from 370 in 2007 to 530 in benefits reduced by 30% of their 2013 Improve competitiveness of level in 2011 state budget  The losses from fraud and errors in means Ukrainian education by tested benefits are reduced by 30% Education Sector Dialogue improving quality of and access to education and efficiency of education funding 58 Country Development Goals (President’s Program of Issues and Obstacles CPS Outcomes CPS Milestones WBG Program (and Partners) Economic Reforms 2010-14) Result Area 3. Improved efficiency, quality and governance of municipal infrastructure services Improve the quality of Poor quality of municipal services Improved energy efficiency of  Energy efficiency investments in Ongoing Lending: housing and utility services by due to aging, obsolete assets and targeted municipal water utilities: municipal utilities completed (per providing for the profitable lack of maintenance in water and baseline and targets in UIP) Urban Infrastructure project sanitation infrastructure.  Increased energy efficiency in at performance of the housing and utilities service providers, least 12 participating water and reducing arrears in the sector, sanitation utilities (total kWh/m3 reduced by 15% in each utility as Indicative Lending: creating competitive of 2011) environment in the market for Inefficient operation of water and Urban Infrastructure Project 2 HUS services and fostering sanitation systems (including high (UIP-2) technical modernization and energy consumption and over Increased transparency and  Municipal side governance study designed systems) and substantial contributed to strengthened increasing resource efficiency accountability of municipal service losses leading to high service government‘s knowledge base on of the sector delivery cost and lack of financial provision improving transparency and resources needed for investment  Water and sanitation utility accountability of municipal service AAA: performance benchmarking provision. introduced in 2014.  Sector information system introduced by Supporting Kyiv in City  Performance information is 2013. Vision and Development reported by targeted WSS utilities Strategy to the central government through the new sector information system. Modernization of the DH Systems: Heat Metering Municipal Demand Side Governance AAA CTF Grant for Municipal Energy efficiency  59 Country Development Goals (President’s Program of Issues and Obstacles CPS Outcomes CPS Milestones WBG Program (and Partners) Economic Reforms 2010-14) Pillar 2: Improving Policy Effectiveness and Economic Competitiveness: Support to Building Relations with Businesses Result Area 4: Improving business regulatory environment for a more competitive and diversified economy Improve business climate and Despite some progress, regulatory Reduced regulatory burden on  Legislation adopted on certification IFC create favorable environment barriers to business entry and exit, enterprises and standardization: (i) cancelling for investments and and costs of operation remain high.  WTO commitments pertaining to compulsory certification of low-risk Investment Climate Advisory accelerated economic Regulatory barriers affect mainly certification and standardization are goods; and (ii) introducing voluntary accomplished in line with the Law status of standards development by reducing cost SMEs and foreign entry. They of Accession to the WTO.  The new design of the technical of business entry, operation hinder market contestability and regulations system, that stipulates and exit competition, create corruption separation of the functions of issuing opportunities and generate losses to  ACAA (Agreement on Conformity of standards, conformity assessment, the economy. Assessment and Acceptance of metrology and market surveillance, industrial products) with the EU is compatible with the EU system, is signed. implemented.  Integrated Statistical Data Processing System is developed and ready for  Burden on enterprises is reduced by implementation throughout the country shifting to the sample based data collection approach (from 10 surveys elaborated in 2010 to 15 by the end of CPS period) Ongoing lending: Development of the State Statistics System for Monitoring the Social and Economic Transformation Project (DEVSTAT) Reduce share of taxes in Delays and weak management of Reduced tax compliance costs  Tax Block and Document Management Ongoing Lending: business expenditures and VAT refunds arrears are highlighted  Share of legal entities that systems implemented. reduce taxpayers‘ time to by businesses as a major investment undergone on-site audits is reduced  Tax code amendments enacted to State Tax Service 60 Country Development Goals (President’s Program of Issues and Obstacles CPS Outcomes CPS Milestones WBG Program (and Partners) Economic Reforms 2010-14) calculate and pay taxes climate and governance issue. from 16.3% in 2010 to below 12% improve criteria for automatic VAT Modernization Project throughout the CPS. refunds and grounds for ad-hoc audits. High tax rates and high compliance costs lead to tax evasion and Increase effectiveness of tax underinvestment in formal  Share of VAT refunds under the 30 sub-loans approved under EDP-2 administration economy. ‗automatic‘ refund system increases from 48% in July 2011 to above 70% . Second Export Development Fundamental weaknesses in banking Facilitate export through sector (capitalization, corporate Project (EDP-2) Increased access to medium and improved access to export governance, insider lending, long-term finance for export finance inadequate supervision) threaten stability and do not allow efficient intermediation. Weak disclosure  All borrowers under the EDP-2 AAA: standards increase investor and expanded their exports volumes as depositor risks and reduce market per targets in the EDP-2. Strengthen regulation, transparency Improved legal and regulatory framework supervision and transparency through: Fiscal, Structural and of the banking system to Increased stability of the financial make more resilient to shocks Governance TA system (i) Adoption of the new law on Deposit Guarantee Fund in line with WB Financial Sector TA  DGF capacity as bank resolution recommendations; agency is strengthened as (ii) New legislation on banks‘ ultimate IFC: confirmed by Bank expert controllers and consolidated supervision assessment; fully implemented; Financial Markets Crisis  Consolidated supervision of (iii)Restructuring of the recapitalized banks financial institutions implemented; completed; Management Project  State has exited three banks (iv) Improved legislation for sale and recapitalized in 2009 following low workout of distressed assets enacted. Direct investments in the cost option; (v) Internationally recognized Risk financial sector  Distressed asset market established Certification in place nationwide and and actively operating. three demonstration banks have their Partnerships  Risk management in 28 financial Risk Management systems upgraded institutions improved (IFC clients). with IFC support. IMF, EU, USAID 61 Country Development Goals (President’s Program of Issues and Obstacles CPS Outcomes CPS Milestones WBG Program (and Partners) Economic Reforms 2010-14) Result Area 5: Improving infrastructure for business activities Efficiency of energy sector is Lack of investments in energy Improved energy efficiency in the Ongoing Lending: improved to support to efficiency equipment has kept public and private sectors support the real sector Ukraine‘s energy intensity at a very  Increase in available investment Hydropower Rehabilitation high level (approximately 3 times  Energy intensity of selected finance for energy efficiency projects Project competitiveness higher than that of the EU‘s). industrial enterprises decreased by from commercial banks, with at least 5 15% by 2014, as compared to 2011 loans to industrial energy efficiency Power sector pool model and cost projects and one pilot loan to mark-up pricing does not create municipal energy efficiency projects Power Transmission Project sufficient competition among  Loans granted through the credit generators, thus diminishing line for energy efficiency incentives for cost reduction. investments generated 750,000 toe in energy savings Energy Efficiency Project The dynamic stability of the Ukraine system is inadequate and Improved performance of power would not meet EU standards. sector AAA: Improved operational performance of power sector Gas Sector TA  20% of power market transactions IFC: are concluded on the basis of bilateral contracts in line with the  Wholesale Electricity Market (WEM) Cleaner Production Advisory WEM law law adopted to improve incentives for Project price reduction for generation by replacing the regulated market with Sustainable Energy Finance  Greater power system reliability competition among generating Project  Increased hydropower capacity by companies 80 MW and hydropower Residential Energy Efficiency production by 160 GWh between 2011 and 2014. Greater power system reliability Project  Energy not served reduced by at least 35 GWh/year and  Rehabilitation of targeted hydropower transmission losses reduced to less plants on the Dnipro river and than 2.5%. improvements of dam safety are completed  Rehabilitation of high voltage 62 Country Development Goals (President’s Program of Issues and Obstacles CPS Outcomes CPS Milestones WBG Program (and Partners) Economic Reforms 2010-14)  Greater uptake of investment in substations and new power resource efficiency in agribusiness transmission line under PTP completed  Cost savings of US$30 million per year through the implementation of resource efficiency initiatives with IFC support  230,000 tons of CO2 per year in Greater uptake of investment in resource emissions avoided as a result of efficiency in agribusiness these investments.  Resource efficiency investment opportunities of US$30-50m identified.  IFC Residential EE Project  Regulatory procedures for using "green facilitated US$50 million in tariff" for agribusiness-related projects financing, achieving 48,000 ton improved through IFC‘s Cleaner p.a. of CO2 emission reduction. Production Project. Access to finance for residential energy efficiency improves with IFC support  NBU regulations on reserve requirements reduced for borrowers from multi-family residential sector are amended according to IFC recommendations.  Law on Homeowners Associations, Law on Ownership of Premises and Laws on Municipal Services are enacted according to IFC recommendations. 63 Country Development Goals (President’s Program of Issues and Obstacles CPS Outcomes CPS Milestones WBG Program (and Partners) Economic Reforms 2010-14) Exports are fostered, Poor transport infrastructure Improved road connectivity and 210 km of main network roads Ongoing Lending: including through improved increases export and transit costs. safety rehabilitated and upgraded by end of 2015 transport and logistics Parts of the current infrastructure Roads and Safety infrastructure and facilitation. are old and need rehabilitation and  Riding quality along the Improvement (RSIP) upgrading and cannot support rehabilitated road sections of the private sector growth. M03 road improved: International Roughness Index reduced from over 5 in 2011 to less than 2 m/km Indicative Lending: Ukraine has very high traffic fatality in 2015 and beyond and injury rates. Traffic accidents  Road capacity increased on 2-lane RSIP - 2 sections of the M03 between Lubny are among the main reasons of and Poltava (by widening to four AAA: premature deaths. lanes).  Road safety along the TA on PPP framework rehabilitated sections of the M03 administration and fiscal risks and high risk corridors treated is improved as evidenced by at least (TF SAFE) 40% reduction in traffic fatalities and injuries as compared to 2011, IDF Grant for Auditing Road on rehabilitated road sections on Infrastructure Projects the M03 and on treated blackspots and corridors. IFC PPP Transaction Advisory Private participation in transport Services sector Direct investments in  At least one pilot PPP project in infrastructure and in exporting transport brought to a financial enterprises closure applying best international practices. Trade facilitation through Global Trade Finance Facility (GTFP) Improved legislative, regulatory, and fiscal risk management framework for PPPs Partnerships adopted. EU, EBRD, EIB 64 Country Development Goals (President’s Program of Issues and Obstacles CPS Outcomes CPS Milestones WBG Program (and Partners) Economic Reforms 2010-14) Result Area 6: Improving productivity and competitiveness in agriculture Ensure efficient operation of Ukraine‘s agricultural potential is Increased efficiency of cadastral  Electronic land cadastre system in place Ongoing Lending: land market constrained by lack of transparent registration: and functioning land market. Some progress has  State ownership acts issued for all Rural Land Titling Project been made in putting in place  Time for cadastral registration is agricultural land in Ukraine. enabling legislative framework for reduced from 3-24 months in  Transparent and pro-market Land Increase agricultural sector land cadastre. 2011 to 14 days by 2014 Markets Law adopted competitiveness and ensure AAA: Technical standards and sanitary efficient control over products and phyto-sanitary (SPS) and food Reducing the cost of compliance for Fiscal, Structural and safety by bringing technical safety regulations are outdated, and agri-businesses Governance TA regulations and standards in not aligned with the EU, which line with EU and WTO hampers market access.  The system of food safety control requirements is aligned with the EU practice as  Appropriate amendments to the Law on confirmed with IFC experts, in Food Safety and other relevant laws are Land Governance Assessment corporation with the EU. adopted. As a result, food business Framework (LGAF)  US$60m in increased sales for operators bear full responsibility for client companies of IFC‘s Food food safety and the duplication between Safety Project. different agencies is eliminated.  Food Safety Advisory Services provided to 50 companies, including in-depth Development of agri-insurance and engagement with 10 pilot companies. access to agri-finance for IFC IFC clients:  Farmers adopt agri-insurance as a  12 insurance companies selling new Investment Climate Advisory risk management tool: value of standardized products for agri-insurance Project premiums collected increases to and 12 banks accepting insured crops as US$3 million, value of insurance collateral Food Safety Project contracts issued increases to US$40 million as per project surveys. Agri-Finance Project  Access to finance for farmers  Agribusiness Risk Assessment Toolkit through financial institutions developed and used by IFC bank clients Agri-Insurance Development improves: value of loans disbursed and training provided for bank loan Project increases to US$40 million; value officers for agri-finance of NPLs is below 3% as per project Direct investments in service agreements with IFC client agribusiness sector banks. 65 Annex 3. Resource Depletion Adjusted National Savings Large participation of energy and resource intensive GDP, and domination of fossil fuels justify ―green assessment‖ of the Ukrainian economy. Table 1 presents calculation of the adjusted net savings (ANS) and their components over the period of 1994-2009 (as percentage of Gross National Income). Characteristically, Ukraine went through a cycle with three distinctive phases: from 1995 to 2001 very low or negative ANS, 2002-200 significant improvement of ANS, and 2008-2009 reversal and decrease of ANS. This pattern is different than in other comparable middle-income countries, were changes were less dramatic and mostly one directional (Table 2). Table 2: Adjusted Net Saving Comparisons with other Middle-Income Countries, 2000-2009 (% GNI) Country 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Ukraine (1.8) 1.7 7.0 8.2 13.0 10.1 11.6 12.3 9.7 5.6 Poland 8.1 6.5 5.6 6.1 5.9 8.6 9.1 10.7 9.8 9.7 Romania 2.9 4.8 7.2 4.8 4.4 4.7 6.6 10.3 11.5 18.8 Argentina 0.8 1.2 5.1 4.0 3.8 5.5 9.1 10.7 7.8 10.6 Mexico 11.4 9.4 10.1 13.6 14.3 9.4 11.2 10.5 9.9 9.1 Ukraine cyclical pattern - different than in comparable economies - has had its causes both on the side of unadjusted savings (a traditional measure of economic investments increased by education expenditure treated as investment in the human capital) and adjustment factors (energy depletion, and environmental damages20). ANS was negative from 1996-2000, largely as a consequence of a fall in gross savings coupled with constant year-over-year consumption – and after accounting for natural resource depletion (i.e. energy) and environmental degradation. During 2002 – 2007 Ukraine went through the phase of very strong growth which resulted in both higher Gross national savings and slightly lower environmental damages (as percentage of GNI but not in 20 Basic emissions data are from the Carbon Dioxide Information and Analysis Center (CDIAC, 1993), covering fossil fuel combustion and cement manufacture. The global marginal social cost of a metric ton of C is assumed to be $20 US in 1990, taken from Fankhauser (1994). Translated into 2005 dollars per ton of CO 2 emitted, it would be approximately $6.69 per ton of additional CO 2 emissions. Estimates from the literature range from $4 to $70. Particulate damage is defined as the willingness to pay (WTP) to avoid mortality and morbidity attributable to particulate emissions. It is calculated as the disability adjusted life years (DALYs) lost to PM emissions times WTP. 66 absolute terms). It confirms volatility of Ukrainian economy dependent on external factors, with very little structural adjustments in the use of production factors and the final outcome. Table 1: Adjusted Net Savings for the Ukraine, 1993-2009 Percent of GNI 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Gross savings 32.8 23.3 20.2 19.0 18.8 23.1 25.1 25.9 28.0 28.1 31.8 25.9 23.6 22.5 20.2 15.9 - Consumption of fixed capital 19.1 18.6 18.3 18.8 19.2 18.3 18.3 17.1 16.2 14.7 13.7 11.6 10.9 10.3 9.3 9.9 = Net national savings 13.7 4.8 2.0 0.2 (0.4) 4.8 6.8 8.8 11.8 13.3 18.1 14.3 12.8 12.2 10.9 6.0 + Education expenditure 5.9 6.4 6.4 6.4 4.4 4.4 4.4 4.4 4.4 4.4 4.4 4.4 5.9 5.9 5.9 5.9 - Energy depletion 2.3 2.9 3.4 2.8 2.5 3.0 6.2 5.7 3.8 4.7 5.7 5.7 4.8 4.0 5.5 3.8 - Mineral depletion1 - - - - - - - - - - - - - - - - - Net forest depletion1 - - - - - - - - - - - - - - - - - Carbon dioxide damage 4.4 4.9 5.0 3.7 4.4 6.0 6.0 5.0 4.5 4.3 3.3 2.6 2.1 1.6 1.4 2.4 - Particulate emission damage 1.5 1.7 1.1 1.1 1.0 0.8 0.8 0.8 0.9 0.6 0.5 0.3 0.2 0.2 0.1 0.1 = Adjusted net savings 11.3 1.6 (1.1) (1.1) (3.9) (0.6) (1.8) 1.7 7.0 8.2 13.0 10.1 11.6 12.3 9.7 5.6 Source: World Bank, 2011 1 - Estimates not available 67 Annex 4. Assessment of Progress in Reducing State Capture and Corruption Due to high levels of state capture by well-connected businessmen, the credibility of the authorities with the Ukrainian public has been quite low and worsening. Even reform initiatives and public projects beneficial for the society are often met with distrust of the population. According to a recent national survey21 92.2 percent of Ukrainians believe that corruption among government officials is a key problem in the country, but no more than 17 percent believe in the commitment of the government to fight corruption. There is a widespread perception that instead of substantive changes, the government seems to adopt and publicize superficial anti-corruption measures with little impact, while actual corruption levels remain on the rise. Also, citizens believe that most of the existing anti-corruption effort concentrates at the middle and lower levels of the government public servants, while high-level government officials involved in grand corruption remain untouchable. There is a growing understanding in the government that the low credibility has had substantial negative consequences for effectiveness of the government. To address this situation, the government has undertaken steps in three interrelated policy areas: (1) strengthening legal and institutional framework for the fight against corruption in line with the European standards; (2) implementing the law on access to public information to increase government transparency and give the public an anti-corruption tool to hold government officials accountable; and (3) creating an environment for the civil society to participate in the policy process. Legal and Institutional Framework for Fight Against Corruption. A recent assessment by the Council of Europe22 states that as of May 2011, only 12 out of 25 GRECO recommendations were fully implemented.23 The new anti-corruption law entered into force on July 1, 2011.24 There are various weaknesses25 in the Law itself, including some obvious omissions of GRECO recommendations. For example, the Law does not create a provision for an independent anti-corruption body that would coordinate anti-corruption policy and monitor its implementation, recommended by GRECO. 26 Standing alone, the Law will accomplish very little, unless it is properly implemented and accompanied by other anti-corruption legislation (e.g., laws on conflict of interest, ethics, financial control) and criminal justice reform. On October 21, 2011 the President signed a decree promulgating the National Anti-Corruption Strategy (GRECO recommendation), paving the way for the development of the Action Plan for fighting corruption. However, the Strategy, despite having been in the making for over a year, has not been a subject of the national discussion, is overly general without clear prioritization and sequencing, and the involvement of civil society in its development has been minimal. Next recommended steps to strengthen legal and institutional anti-corruption framework include: 21 . http://uniter.org.ua/data/block/corruption_in_ukraine_2007-2009_2011_engl.pdf The survey was conducted in March-May 2011 on a nationally representative sample of over 10,000 respondents. 22 http://www.minjust.gov.ua/files/GRECO_report_20110714.zip. A third round of GRECO assessment was made public at the end of October 2011 and deals primarily with recommendations regarding criminalization of corrupt acts and political corruption. 23 Some of the remaining recommendations where little or no progress was found refer to key issues, such as making a clear-cut distinction between criminal and administrative procedures and ensuring that all corruption offences are treated as a rule as criminal offences; enhancing the independence of the prosecution services; improving the legal framework for seizures and confiscation; introducing criminal liability for legal persons for corruption offences; ensuring a legal framework on public procurement in line with European standards, etc. 24 The Law on the Principles of Preventing and Fighting Corruption was adopted by Parliament on April 7, 2011 and entered into force on July 1, 2011, except for some asset and expenditure declaration provisions, which will enter into force on January 1, 2012. 25 These include, inter alia: (1) no liability of legal persons (corporations); (2) no penalty for filing a false financial return; (3) no legal structure for freezing and forfeiture of all proceeds traceable to corruption. 26 The state of discussion in the policy circles in Ukraine is currently about whether the new AC body should deal with the AC law enforcement (per OECD recommendation) and/or AC policy (per GRECO recommendation). The President issued a decree tasking Ministry of Justice to carry out the policy coordination and monitoring function temporarily, while drafting a law on an independent anti-corruption body. However, discussions with government officials indicate that the most likely outcome is that Ministry of Justice will retain this function indefinitely, thus compromising the GRECO requirement of independence of such body from the executive. 68  Adoption of the laws on Conflict of Interest, Ethics, and Financial Control;  Creation of an anti-corruption body outside the executive branch of the government responsible for monitoring and coordination of anti-corruption policy;27  Ensuring that the Action Plan for the Anti-Corruption Strategy is developed in a participatory manner with all stakeholders including NGOs, creating a platform for broad consultations and feedback leading to a national discussion on the implementation of anti-corruption strategy. Implementation of the Law on Access to Public Information. The adoption of the Law is regarded as an example of successful cooperation between the authorities, NGOs, media, and donors. The Law, modeled on international best practice,28 came into force on May 9, 2011, and its implementation so far has been relatively successful. An independent NGO monitoring29 confirms that the majority of local government bodies have created special units that are responsible for providing information to the public. Government allocated staff working with documents and started posting public inquiries on the web.30 Basic training of civil servants has been conducted and further training is planned. Ministry of Justice does not report significant problems with interpretation of the law by government bodies issuing secondary legislation. However, there are several issues for concern: a/ the government has not yet adopted the procedures for creation of registers of public documents, which would reduce the number of misdirected or incorrectly formulated inquiries; b/ directives for publishing of the government information on the web have not been adopted, leading to currently high workload of answering inquiries; c/ citizens are not fully aware of the Law or how to use it; and finally, d/a draft law on information with restricted access is currently being discussed in the Parliament, causing fears that some of the achievements of the current Law may be rolled back. Next recommended steps to ensure access to public information include:  Strengthening provisions for passive access to information: adopting and implementing regulations on the registers of public documents and web-publishing of government information;  Together with civil society organizations, developing an information campaign and training for general population on access to information;  Ensuring that the discussed draft law on access to restricted information does not roll back achievements of the current law on access to public information. Civil Society Environment. The formal regulatory environment for the civil society activities remains unchanged since 1992. The new draft law on civic organizations passed through the first reading in the Parliament and – luckily - did not include a controversial proposal to prohibit foreign funding for NGOs, although it might be revisited in subsequent readings. Presidential Administration has positioned itself as a leader in promoting the collaboration of the authorities with NGOs and developed a draft Strategy on State Policy of Development of Civil Society in Ukraine. The draft was prepared in a participatory manner with leading Ukrainian NGOs. If adopted and implemented in its current form, the Strategy has a potential to make the relationship between the Ukrainian government and civil society more constructive and productive. Currently not all ministries and regional administrations are open to collaboration with NGOs in developing, implementing, and monitoring policies, some reportedly shunning civil society from any involvement in policy decisions. Also, there are multiple reports that the government often involves 27 The body could be accountable to either the Parliament (akin to the supreme audit institution) or the President (akin to the anti-monopoly committee), but should be independent of the executive that drafts and implements the anti-corruption policy. 28 Ukraine ranked 9th worldwide in a recent cross-country comparison of national access to information laws by a Canadian watchdog group, The Centre for Law and Diplomacy. The ranking included a global sample of 89 countries: http://www.rti-rating.org/results.html 29 Ukrainian Independent Center for Political Research: http://www.ucipr.kiev.ua/index.php?newlang=eng 30 The government implementing agency, State Committee on Radio and Television Broadcasting, reports that the bodies of central government answered 73 percent of inquiries received in the 3rd quarter of 2011 (out of total of 6,302 inquiries; additional 12.7 percent were redirected to appropriate bodies. It is unclear what happened with the remaining 14.3 percent of the requests.) 69 NGOs in the policy process only pro forma, as an imitation of the truly participatory process, or replaces independent NGOs with government-sponsored structures. Finally, some civil society representatives report that despite the positive change in their de jure regulatory environment, the de facto situation has worsened in the past year: they report increase in control through various state structures, sometimes presented as information gathering (e.g., by tax administration, security services, etc).31 Next recommended steps to adopt the Strategy on Civil Society Policy and develop a detailed Action Plan include:  Ensuring that the Action Plan includes concrete and fully costed steps for involving civil society in policy formulation, implementation, and monitoring (as envisioned by the draft Strategy), and is developed in a participatory manner;  Ensuring that the Coordination Council on Civil Society Policy32 comprises a wide spectrum of analytical and advocacy NGOs selected in consultation with international organizations engaged in training and development of the civil society in Ukraine. 31 All issues in this paragraph were discussed at the World Bank roundtable on regulatory environment for civil society in Ukraine, held in WB CO in Kyiv, Ukraine, on October 20, 2011, as well as at mission‘s meetings with individual NGOs. 32 Advisory body to the President envisioned in the draft Strategy to include minister-level government officials and civil society representatives. 70 Annex 5. Assessment of the Impact of PFM Strengths and Weaknesses in Ukraine The improvements in PFM systems in Ukraine that took place over last decade have helped to improve overall economic management at the aggregate level and to maintain a reasonable level of budget discipline in spite of a severe economic downturn and political upheaval during 2008-9. A well established and transparent budget process, a strong centralized Treasury system and improving tax collection provided the foundations for this good performance. According to the 2011 PEFA Assessment, some persistent weak links in the PFM system have prevented improvements elsewhere from being translated into better public service delivery and have contributed to worsening perceptions of corruption in the public sector. Despite the fact that Ukraine‘s PFM system perform reasonably well compared to similar countries, several PFM weaknesses that continue to have negative effects on spending efficiency and contribute to poor perceptions (transparency and governance):  weak links between policy objectives and budget allocations and poor capital budgeting practices that mean resources are used sub-optimally;  a target driven approach to revenue collection, which ensures high collection ratios but at significant cost to business and contributing to negative external perceptions of Ukraine as a place to do business;  lack of focused oversight of state owned enterprises, which represent a large part of the economy and have, from time to time, imposed heavy burdens on the budget in the form of tax write offs and recapitalizations;  flaws in the public procurement system that have limited fair and open competition thereby undermining value for money;  the narrow focus of scrutiny by State Financial Inspection on transaction processing and compliance and the absence of a modern internal audit function that would focus on improving systems; and  limitations on the scope of work of the Accounting Chamber of Ukraine and the lack of a dedicated audit committee in the legislature, which limit accountability for how public funds are used and reduce the incentives for ministers and officials to pay attention to performance and efficiency. Ukraine has taken some steps backwards since the previous PFM assessment; limiting the scope of the Accounting Chamber‘s work and exempting the budgets of the four social funds from legislative oversight. Perceptions of corruption in parts of the PFM system contribute to negative perceptions of Ukraine as place to do business. The most recent World Bank BEEPS survey and the Global Integrity Index indicate that poor practices in tax collection and procurement are a particular problem for Ukraine, which scores well below regional averages. The broad based Transparency International Corruption perceptions index also shows Ukraine on a divergent path from other Eastern European and former soviet countries (see Figure 1 below). 71 Figure 1: Corruption Perception Index: Ukraine and Other Countries in the Region Source: Transparency International Corruption Perception Index 2006-2010 The recent changes in the budget code, the tax code and the procurement law offer good prospects for future improvements, but this depends on effective implementation and oversight. Medium term budgeting elements are present and evolving but the link between policy and budget continues to be missing. While the medium-term elements were present for several years including medium term fiscal framework, budget ceilings for line ministries, and, finally, the new version of Budget Code introduced the multi-year appropriations for investment nature budget programs, there are several important elements still missing and decisions to be made. First, the preparation of the medium term estimates should be linked with strategies and policies and the relevant objectives to be achieved. As for the decisions to be made, according to article 21 of the new code, budget requests by line ministries must cover not only the year for which the budget is prepared but also the following two years, and the cabinet of ministers must make a decision on medium-term revenue and spending forecasts one month after the adoption of the budget law by Parliament. What is important is to ensure that ceilings are respected going forward and any changes introduced in the following years should be based on clear rules and properly justified. The approved Public Procurement legislative framework is largely compliant with international practice but implementation remains a challenge. The key elements that are still required to ensure a transparent, efficient and competitive public procurement process in Ukraine are: (1) approving bylaws and regulations to make the system effective, including for utility companies and natural monopolies; (2) putting in place a monitoring framework to evaluate the performance of the system, including publicly available measurable outcomes (such as the ratio of single source procurement to total government procurement) to allow civil society to monitor the processes; (3) further approximation of the public procurement framework with EU Directives and investment in capacity building in beneficiary agencies to implement the new legislation. SOE oversight is weak and fragmented and requires considerable streamlining and strengthening. Absence of comprehensive registry of all SOEs operating in Ukraine poses difficulties on obtaining data and thus taking decisions in regards to SOE operations. Improvement in transparency and accountability of SOEs can be achieved by requiring publication of operating objectives, including non-commercial objectives, annual independent mode and revising performance measurement framework to incorporate standard measures and methodologies for the assessment of SOE performance. Internal and external audit functions are just emerging and developing performance audit function in additional to traditional compliance oriented control system is required. On internal audit there should be clear vision of development of internal control and financial management functions that guides changes in the roles and functions of the State Financial Inspection and internal inspectors and auditors 72 located in the ministries. There is a need to strengthen the independence of the Accounting Chamber (de- politicization of senior staff appointments, budget approval should be placed not under the MOF but directly under the Parliament), and the coverage of external audit should be explicitly extended to local budgets and revenues. The auditing methodology Accounting Chamber uses should be strengthened by bringing it into full compliance with the international standards. Changes to the PFM system should be designed to improve service delivery to Ukrainian citizens. Reorientation of the PFM system from an input-driven traditional mode to a result-oriented system, greater involvement of civil society and better evaluation and feedback mechanisms, in the form of modern internal and external audit and accountability for results are key steps to improve the management of public funds and the quality of services, while at the same time improving perceptions of governance. Overview of Ukraine’s PFM (Country) Systems Credibility, Comprehensiveness and Transparency of the Budget The budget system is generally orderly and quite comprehensive and the budget framework is followed. Budget classification is compliant with the IMF GFS 1986 classification (allowing for administrative, economic and functional classifications) and work is on-going to implement the IMF GFS 2001. Information included in the budget documentation is comprehensive, although regular use of detailed classification in reporting is desirable. Projects are presented by the code of economic classification. Ukraine has a well established budget process that allows for orderly consultations with line ministries and with the legislature. The 2010 budget code which came into effect in the current financial year promises some further strengthening of the links between policy and the budget. The 2010 Budget Code brings about important improvements, with the introduction of sector expenditure ceilings and a medium term perspective for long term public investment programs. The main weakness remains in capital budgeting practices; project evaluation is not systematic or fully objective and recurrent cost implications are not always factored into the budget. The existence of four important social insurance funds, reported separately from the main budget, negatively affects overall budget transparency. A negative development in the 2011 budget code no longer required social insurance funds, extra-budgetary funds including special purpose vehicles (e.g., EURO 2012) to report on their budget to the legislature. Intergovernmental fiscal relations are regulated by clear formula that determines central government transfers to local governments, based on the principle that all local governments should be able to meet their statutory responsibilities to provide public services. Over 90 percent of transfers are rule based, with the remainder financing investment projects or compensating for lost revenues. This system appears to offer little incentive for local governments to look for efficiency gains or savings. Use of the centralized treasury system by local governments aids and facilitates the timely and consistent reporting of local government spending. The main source of fiscal risks from public sector entities outside central government comes from the activities of state owned enterprises, which represent around 22 percent of GDP. Local governments‘ fiscal activities by contrast are subject to more active oversight with strict controls on borrowing and full visibility within the Treasury system. Oversight of SOEs is generally weak and fragmented across ministries, although the main concentration of quasi-fiscal activities is in the energy sector, which accounts for around 40 percent of the SOE sector. Control in Budget Execution Ukraine’s PFM system is highly centralized with a focus on input controls. The automated treasury system is applied both horizontally across all units of government and vertically at all levels and it does a satisfactory job in controlling expenditures and commitments. The revenue, expenditure and treasury balances are known daily through the Treasury Single Account (TSA) with the central bank consolidating 73 most of the liquid resources of the government. The TSA provides real-time data about available cash balances. Procedures for controlling loans and guarantees are in place. The internal controls for non- salary expenditures are in place but could be strengthened further. The introduction of commitment system that was put in place since the 2006 PEFA Assessment has further improved budget discipline. According to the reports of the State Financial Inspection (SFI) and the Accounting Chamber of Ukraine (ACU), there are compliance failures (however minor) related to stages prior to payment execution and occurring mostly outside of central government. In-year budget monitoring is strong and budget reporting is possible in several classification formats and levels of details, and is possible on a near real-time basis. Expenditure reports are prepared at least monthly and quarterly, and transmitted to the MOF. Consolidated government financial statements are prepared quarterly, and then annually. Budget execution rules are less stringent for the Special Fund, and the balances may be carried forward indefinitely if the actual spending is lower than budgeted. Payment arrears have been low (around 1 percent), and further declining, indicating no major issues. Alignment of internal audit practices with international standards is still under development and is only partially effective. The central inspection service continues to perform reasonably well and there is good report distribution, and some evidence of follow-up. The work of the SFI is still primarily focused on control and the scope of the SFI‘s work is driven to ensure compliance with budget rules rather than taking a systems review approach. The public procurement framework has improved markedly since the previous assessment and is now largely compliant with good international practice. The public procurement law of 2005 was considerably deviating from the good practice and distorting public procurement system by privatizing core regulatory and oversight functions. This law was abolished in 2008 and the new law was drafted in consultations with the European Commission and the World Bank and adopted in June 2010. The deficiency of the current law is related to vague definition of the rationale for use of non-competitive methods leading to frequent use of single source procedure. Attempts to further improve the law and strengthen accountability for using non-competitive procurement methods are underway and the draft legislation is being considered by the Parliament. Accounting and Reporting The Treasury Single Account (TSA), which was established under the first phase of PFM reforms, underpins the strong financial reporting and cash management practices in government. Coverage of the TSA is comprehensive, and combined with the improved budget classification system, enables the treasury to produce good quality, timely in-year reports on budget execution and cash flows. Treasury practices have further improved since the 2006 PEFA assessment with the incorporation of commitment control and monitoring. In addition, treasury has been able to reduce the time produce in-year budget reports while at the same time, through the improvements in budget classification, generating reports with considerably more detail than before – reports are generated for 3 different classification structures (administrative, economic and functional) and for the different tiers of government (central government, local government). Accounts reconciliation is continuous through the Treasury system. Budget reporting is generally of high quality, although some problems were noted with appropriate recording of the spending. One of the problems that were noted is that the transactions which may be in transit at the end of accounting period may require one to two months to make necessary adjustments. The size of adjustments post-period are not known, but this suggests some problems in adherence to treasury procedures. Information management at the level of service delivery units (e.g., schools and hospitals) can be improved even further. While systems and processes are in place to facilitate the execution of budget expenditures at this level, the budget framework, rules and procedures (including the allocation of budgets across functional categories) are predicated on the traditional ex-ante control system (i.e., control of inputs) and the current system generally does not permit service units to determine how to allocate the resources they are allocated – either budget transfers or own-generated revenue. 74 The public sector accounting reform strategy is anticipated to further improve the quality and comprehensiveness of government financial reporting. However, the full impact of IPSAS Accrual implementation will not materialize in the immediate/short term as this reform will result in the introduction of a completely new and complex accounting regime for the public sector in Ukraine. Despite the on-going efforts, much work remains to be done to prepare line ministries and agencies to execute and record transactions on the basis of new accounting standards. In addition, work is also needed to prepare functional units in the Treasury and Ministry of Finance so that government financial statements can be prepared on the basis of the new accrual standards. The government is on track to develop and approve 24 new public sector accounting standards by December 2011 and the final 7 standards will be approves in 2012; the government anticipates the full set of standards (31 standards in total) to come into effect as of January 2013. External Scrutiny and Audit While the Accounting Chamber (Supreme Audit Institution of Ukraine) annually conducts a financial audit of the government’s budget execution statement, this audit does not meet international standards. This annual audit is primarily a compliance review and does not offer an audit opinion on the government‘s financial position or financial statements and does not include report on the reliability of government systems to produce such statements. The scope of the annual audit of the government‘s budget statement is limited to expenditures. It does not include audit of revenues, following a decision issued by the Constitutional Court of Ukraine in September 2010, or the activities of local governments or extra-budgetary funds. The Accounting Chamber has made some progress over the last several years in revising its approach to the audit of public expenditure. The Accounting Chamber regularly executes performance audits (known as ‗Efficiency Audits‘) as part of its annual work program. Though the methodology can still benefit from further refinement to more closely align with INTOSAI standards, these audits have enhanced the oversight of public expenditure programs and the allocation of budget resources. It is not clear, though, what impact this new audit approach has had in positively affecting government policy. Ukraine’s Parliament does not have a dedicated audit committee and tracking of hearings by parliamentary committees, and government responses to issues raised by parliament, is not systematic. The Budget Committee and other (sector) committees share responsibility for reviewing audit reports based on the subject matter, but the reviewers were unable to obtain clear evidence of the extent to which audit reports were considered in detail by the relevant committees or whether officials of the relevant ministries participated. There are a number of areas (related to policy and independence, institutional development, and audit methodology) that could benefit from modernization. At the time the assessment was carried out the head of the Accounting Chamber had completed his two-term mandate, but a new Head had not been appointed by the Parliament. Although the Accounting Chamber has benefited from partnership and twinning programs with peer institutions, the Chamber has yet to develop a medium-to-long term institutional development strategy which would introduce modern training and professional development programs, upgrade audit methodology and techniques and so help the Chamber to bring its work fully into line with international standards. 75 Annex 6: Gender Issues33 Legal Framework. The fundamentals of gender equality are provided by the Constitution of Ukraine adopted in 1996. The principles of equal gender treatment and special protection for working women are provided in the Labor Code of Ukraine, which was adopted in 1971 and continues to be in force. The Law on Equal Rights and opportunities for Women and Men was adopted in 2005. The State Program for Ensuring Gender Equality in Ukrainian Society was approved by the Decree of the Cabinet of Ministers of Ukraine in 2006. Political Participation. Among 450 members of Parliament there are only 33 women, a mere 7,5 percent of the total number of parliamentarians. In Ukraine, the proportion of women in Parliament has not exceeded 8 percent since independence, and between 2002-2006 it was as low as 5 percent. This is one of the lowest rates in Europe where about 30 percent of parliamentarians are women. According to UNDP Equal Opportunities and Women‘s Rights in Ukraine Program, there are almost 40 percent of women in village councils but no more than 10 percent in the regional authorities (oblast). Currently, there is not a single woman cabinet member in the Cabinet of Ministers. Ukraine is the only country in the world to have no women in its government. Education and Labor Issues. The recent ILO study finds that despite the fact that the Ukrainian gender gap in employment rate is lower than the EU average and that Ukrainian women experience lower unemployment than men, the Ukrainian labor market is characterized by pronounced inequalities between men and women. Major inequalities can be witnessed in the significant gender gap in employment rates during the child bearing (age 24-29) and pre-retirement (over 50 years old) groups; a high gender wage gap; unequal sharing of regular paid work and unpaid domestic work; a high share of women in precarious jobs; and gender gaps in unemployment coverage, resulting in unequal unemployment benefits and participation in active labor market programs. The level of education of women in Ukraine is extraordinarily high – considerably higher than for men. At the same time, wages of women are 75 percent of wages of men, and women‘s pensions are only 67 percent of pensions of men. Government Policies. Ukraine has acknowledged that gender balance is an indicator of democracy, human rights, as well as social and economic standards of development. It has backed the UN‘s Millennium Development Goals and committed itself to ensuring at least a 30/70 balance in Parliament and in higher executive bodies by 2015. However, the progress is mixed, for example the most recently, administrative reform eliminated the Ministry of Family, Youth and Sports – a central executive body responsible for implementation of gender policy. The Ministry has been transformed into the State Service of Youth and Sports which no longer deals with gender policy. As result, the prevention of domestic violence, human trafficking and ensuring equal rights and opportunities for women and men is no longer part of its portfolio. 33 This Annex was prepared based on the work of the following development partners: UNDP: Gender Statistics of Ukraine/ Equal Opportunities and Women’s Rights in Ukraine Program. - UNDP, 2011 - http://gender.org.ua/images/lib/gender_statistics_2011.pdf ILO: Gender Mainstreaming at the Labor Market of Ukraine / Olga Kupets. - ILO, 2010 - http://gender.ilo.org.ua/eng/Gender%20equality/Publications/PES_Study_EN.pdf Institute for Demography and Social Studies of the National Academy of Science of Ukraine: Human Development in Ukraine/ Editor Ella Libanova. – Institute for Demography and Social Studies of the National Academy of Science of Ukraine. – Kyiv, 2010. http://www.idss.org.ua/monografii/Lud_rozvitok_2010.pdf 76 Annex 7. CPS – Public Consultations The CPS consultations were carried in two stages: starting in February 2011, consultations focused on the general approach and the critical elements of the proposed CPS; and the final draft was consulted in November 2011. Meetings were held in Kyiv, Kharkiv, Ivano-Frankivsk and Donetsk to better understand social and cultural diversity of Ukraine. The discussion was focused on the general directions of the proposed World Bank Group strategy; adequacy of the Bank evaluation of the Ukraine's economic, social and political context; developmental challenges and opportunities; as well as the CPS principles, pillars and expected results. CPS team met in total with about 300 representatives of NGOs, academia, professional associations, think-tanks, business circles, members of local self-governments, youth, and donor organizations. Draft CPS along with the CPS CR was distributed in advance. The draft CPS was also published on the Bank Ukraine web page and solicited public feedback and comments from individuals not participating in the meetings. Consultations with the business community in Kyiv were prepared in cooperation with the Kyiv-Mohyla Business School; Youth Democratic Alliance provided support in organizing consultations with the youth; local NGOs assisted with meetings with the civil society and businesses in Kharkiv, Ivano- Frankivsk and Donetsk. During consultations in February and in the following months, the World Bank team solicited views on the economic and social reforms in Ukraine, public perception of the government agenda, governance and corruption and recommendations on how to improve the business environment and enhance the civil society‘ role in advancing reforms. Participants were in agreement that since the Independence there have been dozens of government programs of economic and social development; but implementation of these programs has been inappropriate, not meeting the country needs and the public expectations. Typically, there has been quite a large gap between declarations and legislation on one side, and implementation on the other side. Outcomes of these reforms have been not visible, in particular in improvement of people‘s lives. Due to a high level of state capture and conflict of interests, the Ukrainian authorities have had a credibility problem within the Ukrainian society. Even constructive reform initiatives have been often met with distrust by the population. This feedback was mostly used in formulation of the ―County Context‖ and ―Development Challenges and Opportunities and Government Agenda‖ chapters of the CPS. During consultations on the draft CPS in November 2011, vast majority of stakeholders appreciated the very high level of analytical work behind the CPS and candid assessment of the economic, social and political developments in Ukraine. Consultations confirmed that slow and ineffective implementation of the reforms and entrenched corruption were the major challenges to bold reforms. Representatives of the civil society and the business community agreed with the calibrated approach to financial assistance proposed in the CPS. From their prospective, this could stimulate government‘s interest in achieving tangible results of the reforms. Participants confirmed the Bank diagnosis that deep structural reforms cannot succeed without progress in reducing corruption and improving public governance, and that the vitality of Ukraine‘s civil society presents an opportunity for the government to build public support by inviting civil society to dialogue on economic and social priorities and to monitor outcomes of public expenditures. Participants highly appreciated placing a new social compact at the very center of the CPS. It was understood that while WBG would use the policy dialogue, lending, investment, and TA to strengthen constructive relations between the government and the civil society, the willingness and determination of the authorities would 77 be critical to the success of building the new social compact. Support of donors in building the capacity of CSOs will continue to be a very important factor. Representatives of the business community noted that removing obstacles for private business development was essential to creating a real middle class, increasing Ukraine‘s competitiveness and the sustained economic growth. However, persistent pressure on businesses from government inspection agencies continues despite declared measures to lighten the burden of the regulation. Participants voiced an opinion that Bank has a large role to play in facilitating the dialogue between the government and the business community in order to achieve predicted and easy-to-follow business rules and appropriate legal protection of businesses. At the same time, businessmen indicated that there was promising progress in some cities where directly elected mayors understood the importance of the constructive work with the civil society and business. Such cases should be supported and propagated, and be rolled-over to other regions. It is a practical problem of successful decentralization of responsibilities to local authorities but also to CSOs in such areas as education, health, and social protection. The participants of the consultations welcomed the Bank initiative to involve grass-root organizations in monitoring of implementation of the WBG supported projects and creation of opportunities for public procurement monitoring. Overall, it was a prevailing tenor of the consultations that the proposed CPS for FY12-16 was strategic and realistic and made proper use of the lessons learned. 78 Annex A2: Ukraine - Country at a glance (as of 2/25/11) 79 80 Annex B2: Ukraine - Selected Indicators* of Bank Portfolio Performance and Management As Of Date 10/24/2011 Indicator 2009 2010 2011 2012 Portfolio Assessment Number of Projects Under Implementation a 12 11 11 11 Average Implementation Period (years) b 3.4 4.4 4.9 5.2 Percent of Problem Projects by Number a, c 33.3 27.3 0.0 9.1 Percent of Problem Projects by Amount a, c 24.2 20.7 0.0 2.9 Percent of Projects at Risk by Number a, d 33.3 27.3 0.0 9.1 Percent of Projects at Risk by Amount a, d 24.2 20.7 0.0 2.9 Disbursement Ratio (%) e 11.1 7.8 15.9 7.8 Portfolio Management CPPR during the year (yes/no) yes yes yes Supervision Resources (total US$) $1,616.2 $1,622.4 $1,423.2 $639.0 Average Supervision (US$/project) $107.7 $108.2 $109.5 $49.2 Memorandum Item Since FY 80 Last Five FYs Proj Eval by OED by Number 31 4 Proj Eval by OED by Amt (US$ millions) 3,300.9 104.8 % of OED Projects Rated U or HU by Number 28.6 75.0 % of OED Projects Rated U or HU by Amt 10.1 77.1 a. As shown in the Annual Report on Portfolio Performance (except for current FY). b. Average age of projects in the Bank's country portfolio. c. Percent of projects rated U or HU on development objectives (DO) and/or implementation progress (IP). d. As defined under the Portfolio Improvement Program. e. Ratio of disbursements during the year to the undisbursed balance of the Bank's portfolio at the beginning of the year: Investment projects only. * All indicators are for projects active in the Portfolio, with the exception of Disbursement Ratio, which includes all active projects as well as projects which exited during the fiscal year. 81 Annex B3: Ukraine - IFC Investment Operations Program 2007 2008 2009 2010 2011 Commitments (US$m) IFC and Participants 250.0 300.0 38.7 - - IFC's Own Account* 74.5 283.5 176.5 230.2 244.2 Net Commitments by Sector (%) Financial Markets 9 37 52 39 40 Manufacturing - 53 - - 14 Agribusiness 91 - 39 59 36 Consumer & Social Services - 10 8 2 9 Oil, Gas, Mining - - - - - IT & Telecom - - - - 1 Total 100 100 100 100 100 Net Commitments by Investment Instrument (%) Loan 87 89 76 50 31 Equity 4 8 1 Quasi-Loan 13 7 3 13 13 Quasi-Equity 2 Guarantee 12 35 55 Total 100 100 100 100 100 *Excluding regional projects. 82 Annex B5: Ukraine - Key Social Indicators Latest single year Same region/income group Europe & Low er- Central m iddle- 1980-85 1990-95 2003-09 Asia incom e POPULATION Total population, mid-year (millions) 50.9 51.5 46.0 404.2 3,810.8 Grow th rate (% annual average for period) 0.3 -0.1 -0.6 0.2 1.2 Urban population (% of population) 64.7 67.0 68.0 64.0 40.9 Total fertility rate (births per w oman) 2.1 1.4 1.5 1.8 2.5 POVERTY (% of population) National headcount index .. .. 7.9 .. .. Urban headcount index .. .. 6.3 .. .. Rural headcount index .. .. 11.3 .. .. INCOME GNI per capita (US$) .. 920 2,800 6,793 2,321 Consumer price index (2000=100) .. 19 179 141 130 Food price index (2000=100) 0 29 121 .. .. INCOME/CONSUMPTION DISTRIBUTION Gini index .. 25.7 27.5 .. .. Low est quintile (% of income or consumption) .. 9.4 9.4 .. .. Highest quintile (% of income or consumption) .. 34.8 37.1 .. .. SOCIAL INDICATORS Public expenditure Health (% of GDP) .. 4.1 3.8 3.9 2.1 Education (% of GDP) 5.2 .. 5.3 4.1 4.1 Net prim ary school enrollm ent rate (% of age group) Total .. .. 89 92 87 Male .. .. 89 93 88 Female .. .. 89 92 86 Access to an im proved w ater source (% of population) Total .. 96 98 95 86 Urban .. 99 98 98 94 Rural .. 91 97 89 81 Im m unization rate (% of children ages 12-23 months) Measles .. 97 94 96 79 DPT .. 98 90 95 79 Child malnutrition (% under 5 years) .. .. .. .. 24 Life expectancy at birth (years) Total 70 67 69 70 68 Male 66 62 64 66 66 Female 74 73 75 75 70 Mortality Infant (per 1,000 live births) 21 18 13 19 43 Under 5 (per 1,000) 24 21 15 21 57 Adult (15-59) Male (per 1,000 population) 283 395 385 286 201 Female (per 1,000 population) 116 148 142 123 136 Maternal (modeled, per 100,000 live births) .. 45 26 32 230 Births attended by skilled health staff (%) .. .. 99 97 66 Note: 0 or 0.0 means zero or less than half the unit show n. Net enrollment rate: break in series betw een 1997 and 1998 due to change from ISCED76 to ISCED97. Immunization: refers to children ages 12-23 months w ho received vaccinations before one year of age or at any time before the survey. World Development Indicators database, World Bank - 15 April 2011. 83 Annex B6: Ukraine - Key Economic Indicators Actual Estimate Projected Indicator 2006 2007 2008 2009 2010 2011 2012 2013 2014 National accounts (as % of GDP) Gross domestic product a 100 100 100 100 100 100 100 100 100 Agriculture 9 7 8 8 8 8 8 8 8 Industry 36 37 34 30 31 31 31 31 31 Services 55 56 58 62 61 60 60 60 60 Total Consumption 78 79 81 85 83 87 86 84 84 Gross domestic fixed investment 25 27 26 18 19 19 19 19 19 Government investment 3 3 2 1 1 2 2 2 3 Private investment 22 24 24 17 18 18 17 17 16 Exports (GNFS)b 47 45 47 46 50 52 49 48 46 Imports (GNFS) 49 50 55 48 53 58 54 51 49 Gross domestic savings 22 21 19 15 17 13 14 16 16 c Gross national savings 23 23 20 16 17 13 14 15 14 Memorandum items Gross domestic product 107753 142719 179992 113335 137936 163076 171839 182220 202520 (US$ million at current prices) GNI per capita (US$, Atlas method) 1990 2610 3200 2820 3000 3130 3560 3920 4240 Real annual growth rates (%, calculated from 03 prices) Gross domestic product at market prices 7.3 7.9 2.3 -14.8 4.2 4.5 2.5 4.0 4.0 Gross Domestic Income 9.4 12.7 5.9 -20.5 6.3 4.6 2.4 4.6 4.1 Real annual per capita growth rates (%, calculated from 03 prices) Gross domestic product at market prices 8.0 8.5 2.9 -14.4 4.6 5.3 3.1 4.6 4.6 Total consumption 13.2 14.1 11.5 -16.9 6.8 9.5 1.6 3.8 4.6 Private consumption 13.8 16.4 13.5 -19.5 7.6 10.0 0.6 4.9 4.9 Balance of Payments (US$ millions) Exports (GNFS)b 50240 64001 85612 54253 69255 84870 84810 87952 92813 Merchandise FOB 38368 49840 67717 40394 52191 64781 63707 65816 69243 Imports (GNFS)b 53307 71877 100132 56275 73105 94178 92564 93812 98833 Merchandise FOB 45034 60412 84651 45049 60903 79243 77263 77999 82202 Resource balance -3067 -7876 -14520 -2022 -3850 -9308 -7754 -5860 -6021 Net current transfers 3173 4075 3127 2661 2975 2900 3200 3600 4000 Current account balance -1617 -5918 -12933 -1801 -2884 -8605 -8414 -7648 -8617 Net private foreign direct investment 5336 9218 9683 4654 5759 6200 5500 6300 7200 Long-term loans (net) 4356 12634 19300 3019 3322 4397 6595 13288 17485 Official .. -322 440 747 -154 -123 24 176 216 Private .. 12956 18860 2272 3476 4520 6571 13112 17269 Other capital (net, incl. errors & ommissions) -6076 -6954 -14970 -11526 2262 -4557 -4960 -2371 -895 Change in reserves d -1999 -8980 -1080 5654 -8459 2564 1279 -9570 -15173 Memorandum items Resource balance (% of GDP) -2.8 -5.5 -8.1 -1.8 -2.8 -5.7 -4.5 -3.2 -3.0 Real annual growth rates ( YR03 prices) Merchandise exports (FOB) -6.0 3.7 30.9 -40.2 27.2 4.1 3.8 5.6 5.2 Primary .. .. .. .. .. .. .. .. .. Manufactures .. .. .. .. .. .. .. .. .. Merchandise imports (CIF) 8.3 21.7 35.0 -46.6 33.1 9.7 1.9 4.4 5.1 (Continued) 84 Annex B6: Ukraine - Key Economic Indicators (continued) Actual Estimate Projected Indicator 2006 2007 2008 2009 2010 2011 2012 2013 2014 Public finance (as % of GDP at market prices)e Current revenues 42.9 41.2 43.6 41.9 40.0 41.5 40.6 39.4 39.4 Current expenditures 40.0 38.2 41.4 46.1 45.5 41.7 40.8 38.7 38.1 Current account surplus (+) or deficit (-) 2.9 3.0 2.2 -4.2 -5.5 -0.2 -0.2 0.7 1.4 Capital expenditure 4.6 5.6 6.0 2.5 2.9 4.7 3.0 3.3 3.7 Foreign financing 1.3 1.0 0.4 4.7 4.6 2.4 0.7 0.1 1.2 Monetary indicators M2/GDP 47.7 54.3 54.1 53.4 54.6 52.6 52.4 52.6 52.4 Growth of M2 (%) 34.3 50.8 31.0 -4.9 22.7 14.5 12.2 14.1 11.1 Private sector credit growth / 95.4 92.9 83.1 -96.6 9.7 88.0 64.0 63.3 -24.8 total credit growth (%) Price indices( YR03 =100) Merchandise export price index 199.9 246.7 256.1 255.3 259.4 309.2 292.8 286.5 286.4 Merchandise import price index 172.4 193.9 201.2 200.6 203.8 241.7 231.4 223.7 224.3 Merchandise terms of trade index 115.9 127.3 127.3 127.3 127.3 127.9 126.6 128.1 127.7 Real exchange rate (US$/LCU)f 94.3 95.7 92.3 77.4 79.4 0.0 0.0 0.0 0.0 Real interest rates Consumer price index (% change) 9.1 12.8 25.2 15.9 9.4 9.2 10.1 8.3 7.3 GDP deflator (% change) 14.9 22.8 28.6 13.1 15.0 13.7 10.0 9.1 7.4 a. GDP at factor cost b. "GNFS" denotes "goods and nonfactor services." c. Includes net unrequited transfers excluding official capital grants. d. Includes use of IMF resources. e. Consolidated central government. f. "LCU" denotes "local currency units." An increase in US$/LCU denotes appreciation. 85 Annex B7: Ukraine - Key Exposure Indicators Actual Estimated Projected Indicator 2006 2007 2008 2009 2010 2011 2012 2013 2014 Total debt outstanding and 49887 73600 92479 93153 117128 125025 134179 142836 156890 disbursed (TDO) (US$m)a Net disbursements (US$m)a 8641 17294 22143 4110 6919 7897 9154 8657 14054 Total debt service (TDS) 9389 11836 18084 21288 30045 26085 30017 36236 38650 a (US$m) Debt and debt service indicators (%) TDO/XGSb 96.2 110.5 99.3 153.9 155.1 136.9 146.9 150.8 156.8 TDO/GDP 46.3 51.6 51.4 82.2 84.9 76.7 78.1 78.4 77.5 TDS/XGS 18.1 17.8 19.4 35.2 39.8 28.6 32.9 38.2 38.6 Concessional/TDO 3.6 2.2 1.6 0.0 0.0 0.0 0.0 0.0 0.0 IBRD exposure indicators (%) IBRD DS/public DS 12.5 15.0 18.9 11.4 15.6 19.6 5.3 3.0 4.5 Preferred creditor DS/public 37.6 41.5 44.4 23.7 31.9 47.0 69.7 58.9 68.5 DS (%)c IBRD DS/XGS 0.6 0.5 0.3 0.5 0.4 0.4 0.4 0.4 0.3 IBRD TDO (US$m)d 2362 2309 3022 3294 3240 3196 3235 3416 3688 Of which present value of guarantees (US$m) Share of IBRD portfolio (%) 2 2 3 3 3 3 3 3 4 d IDA TDO (US$m) .. .. .. 0 0 0 0 0 0 IFC (US$m) 349.0 495.0 564.0 655.0 591.0 Loans 265 368 431 498 393 Equity and quasi-equity /c 84 127 133 157 197 MIGA MIGA guarantees (US$m) a. Includes public and publicly guaranteed debt, private nonguaranteed, use of IMF credits and net short- term capital. b. "XGS" denotes exports of goods and services, including workers' remittances. c. Preferred creditors are defined as IBRD, IDA, the regional multilateral development banks, the IMF, and the Bank for International Settlements. d. Includes present value of guarantees. e. Includes equity and quasi-equity types of both loan and equity instruments. 86 Annex B8: Ukraine - Operations Portfolio (IBRD/IDA and Grants) As Of Date 10/24/2011 Closed Projects 35 IBRD/IDA * Total Disbursed (Active) 495.64 of w hich has been repaid 31.74 Total Disbursed (Closed) 2,032.56 of w hich has been repaid 1,747.80 Total Disbursed (Active + Closed) 2,528.20 of w hich has been repaid 1,779.54 Total Undisbursed (Active) 1,199.06 Total Undisbursed (Closed) 0.00 Total Undisbursed (Active + Closed) 1,199.06 Active Projects Difference Between Last ISR Expected and Actual Supervision Rating Original Amount in US$ Million Disbursements a/ Development Implementation Project ID Project Name Fiscal Year IBRD, original IBRD, revised Cancel. Undisb. Orig. Frm Rev'd Objectives Progress P076338 Devstat MS S 2004 32.0 32.0 2.5 2.5 1.2 P083702 Hydropower Rehabilitation S MS 2005 166.0 166.0 110.2 50.2 17.5 P090389 PFMP MS MU 2008 50.0 50.0 47.9 44.6 16.7 P096207 Power Transmission MS MS 2008 200.0 200.0 183.4 115.4 19.0 P100580 Roads and Safety Improvement S S 2009 400.0 400.0 290.8 180.8 Rural Land Titling and Cadastre P035777 Development MS MS 2003 195.1 89.7 105.5 43.7 136.7 13.0 Social Assistance Systems P075231 Modernization S MS 2006 99.4 99.4 19.3 19.3 19.3 P057815 State Tax Service Modernization S S 2003 40.0 40.0 19.2 19.2 12.1 P096586 Energy Efficiency S S 2011 200.0 200.0 200.0 P095203 Export Development - 2 S MS 2007 304.5 304.5 166.3 16.3 P095337 Urban Infrastructure MS MS 2008 140.0 140.0 115.6 115.6 14.6 TOTAL 1,827.0 1,721.6 105.5 1,199.1 700.7 113.4 87 Annex B8(b): Ukraine - IFC Committed and Outstanding Investment Portfolio As of 9/30/2011 (in USD millions) Committed Outstanding Sector Institution LN ET QL + QE GT TOTAL PART LN ET QL + QE GT TOTAL PART CF3 ADM Capital CEE - 16.7 - - 16.7 - - 4.4 - - 4.4 - CF3 EEGF II - 16.0 - - 16.0 - - 8.0 - - 8.0 - CF3 Euroleasing 5.0 - 5.0 - 10.0 - - - 1.0 - 1.0 - CF3 Evrotek Group - 15.0 5.0 - 20.0 - - 15.0 5.0 - 20.0 - CF3 EVU II - 7.2 - - 7.2 - - 6.5 - - 6.5 - CF3 First Lease 6.8 - - - 6.8 - 4.8 - - - 4.8 - CF3 Forum - - - 0.0 0.0 - - - - - - - CF3 Megabank - 3.5 16.2 - 19.7 - - 3.5 16.2 - 19.7 - CF3 OTP Bank - - - 15.3 15.3 - - - - 15.2 15.2 - CF3 Platinum Bank 15.9 - - - 15.9 - 15.9 - - - 15.9 - CF3 Platinum Group - 1.1 - - 1.1 - - 1.1 - - 1.1 - CF3 ProCredit UKR 17.8 - - - 17.8 - 17.8 - - - 17.8 - CF3 Raiffeisen Aval - - 70.0 - 70.0 - - - 70.0 - 70.0 - CF3 Ukreximbank GTFP - - - 28.2 28.2 - - - - 28.2 28.2 - CF3 Zeus 2.5 - - - 2.5 - 2.5 - - - 2.5 - CM3 Asnova 7.0 - 8.1 - 15.1 - - - 3.1 - 3.1 - CM3 Bayer Farmers RSF - - - 68.7 68.7 - - - - - - - CM3 Bucha 13.9 - - - 13.9 - 13.9 - - - 13.9 - CM3 Delta-Wilmar CIS 39.6 - - - 39.6 - 39.6 - - - 39.6 - CM3 Galnaftogaz 41.7 - 42.0 - 83.7 62.5 26.7 - 22.0 - 48.7 32.5 CM3 Globino 14.7 - 10.0 - 24.7 - 4.7 - 10.0 - 14.7 - CM3 ISD 180.0 - - - 180.0 416.7 180.0 - - - 180.0 416.7 CM3 Mriya 35.0 - 25.0 - 60.0 - 35.0 - 25.0 - 60.0 - CM3 Myronivsky 46.7 - - 11.3 57.9 - 6.7 - - 11.3 17.9 - CM3 NET Hyatt 7.3 - - - 7.3 6.5 7.3 - - - 7.3 6.5 CM3 Nova Linia 3.0 - 7.0 - 10.0 - 3.0 - 5.5 - 8.5 - CM3 OJSC Khlibprom 5.8 - 10.0 - 15.8 - 5.8 - 10.0 - 15.8 - CN3 AES Rivneenergo 8.4 - - - 8.4 - 8.4 - - - 8.4 - CN3 AESKyivoblenergo 15.8 - - - 15.8 - 15.8 - - - 15.8 - CN3 DeNovo - 3.5 - - 3.5 - - 3.5 - - 3.5 - CN3 HPC Ukraina 32.0 - - - 32.0 - - - - - - - CN3 Kuwait Energy - 17.5 - - 17.5 - - 17.5 - - 17.5 - Total 498.9 80.5 198.3 123.4 901.1 485.7 387.9 59.5 167.8 54.7 669.8 455.7 88 This map was produced by 25°E 30°E 35°E the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other information shown To Minsk USS I AN R US S IA N on this map do not imply, on the part of The World Bank BELA RUS FE D E ATI F E DE R AT I ON Group, any judgment on the legal status of any territory, To or any endorsement or To Zhlobin acceptance of such Warsaw To boundaries. 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Kryvyi Rih M M Zaporizhzhia O O Nykopol To MYKOLA�V LD Satu Mare 25°E To Tirgu Mures Kakhov OV Reservoir s let Mariupol ODESSA OD ESSA ZAPORIZHZH IA ZAPORIZHZHIA hu UKRA I N E Mykolayiv In Melitopol A Berdiansk SELECTED CITIES AND TOWNS To Kherson Birlad OBLAST CAPITALS Odessa KHERSON Sea AUTONOMOUS REPUBLIC CAPITAL ROMANIA of R US S I AN MUNICIPALITIES (CITIES WITH SPECIAL STATUS) To Azov F E DE R AT I ON Tecuci Kerch NATIONAL CAPITAL Izmail Vilkova RIVERS To CRIMEA 45°N Buzau Yevpatoriia Teodosiia To MAIN ROADS 45°N Armavir Mouths of Simferopol’ RAILROADS the Danube To Sevastopol Sochi OBLAST BOUNDARIES To IBRD 33505R Medgidia Yalta 0 50 100 150 Kilometers AUTONOMOUS REPUBLIC Blac k Sea MAY 2009 BOUNDARIES 0 50 100 150 Miles INTERNATIONAL BOUNDARIES 30°E 35°E BULGARIA