Ukraine - Export Development Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. P6971-UA MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO ABOUT US DOLLARS 70 MILLION TO THE STATE EXPORT-IMPORT BANK OF UKRAINE WITH THE GUARANTEE OF UKRAINE FOR AN EXPORT DEVELOPMENT PROJECT October 25, 1996 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. CURRENCY EQUIVALENTS (as of September 30, 1996) Currency Unit = Hryvnia (previously Karbovanets) Hryvnia I = US$0.568 US$1 = 1.76 Hryvnia END PERIOD EXCHANGE RATES Karbovanets/Hryvnia per US$1 1994 1995 March 1996 June 1996 September 1996 108,367 179,600 186,900 179,300 1.76 WEIGHTS AND MEASURES Metric System ABBREVIATIONS AND ACRONYMS AGSECAL - Agricultural Sector Adjustment Loan BIS - Bank for International Settlements CAS - Country Assistance Strategy CEE - Central and Eastern Europe CIS - Confederation of Independent States EBRD - European Bank for Reconstruction and Development EDAL - Enterprise Development Adjustment Loan EDP - Export Development Project EDF - Export Development Fund ESW - Economic and Sector Work EU (TACIS) - European Union Program of Technical Assistance for the Commonwealth of Independent States EXIM - State Export-Import Bank of Ukraine FIDL - Financial Institutions Development Loan FTO - Foreign Trade Organization FSR - Financial Sector Review FSU - Former Soviet Union IAS - International Accounting Standards ICB - International Competitive Bidding IMF - International Monetary Fund LIBOR - London Interbank Offered Rate MOFER - Ministry of Foreign Economic Relations NBU - National Bank of Ukraine PMU - Project Management Unit SBA - Stand-by Arrangement SCL - Single Currency Loan SMEs - Small and Medium-Sized Enterprises STF - Systemic Transformation Facility (of the IMF) UCCI - Ukrainian Chamber of Commerce and Industry USSR - Union of Soviet Socialist Republics UKRAINE - FISCAL YEAR January I - December 31 FOR OFFICIAL USE ONLY UKRAINE Export Development Project Loan and Project Summary Borrower: State Export-Import Bank of Ukraine (EXIM) Guarantor: Ukraine Implementing Agency: EXIM Beneficiaries: EXIM and private and privatized Ukrainian exporters Poverty: Not applicable Amount: About US$70 million equivalent Terms: A Single Currency Loan consisting of two portions: US$60 million at the Bank's standard US$ LIBOR-based interest rate and DM15 million at the Bank's standard DM LIBOR-based interest rate; with a proposed 5 year grace period and a 17 year maturity. Commitment Fee: 0.75 percent on undisbursed credit balances, beginning 60 days after signing, less any waiver On-lending Terms: EXIM will pass the funds under the export technical assistance component of the proposed loan on to eligible exporters on a matching grant basis, and the funds under the credit line component in the form of sub-loans denominated in US$ or DM with maturities and market-based interest rates suitable to the sub-projects to be financed. The funds under the institutional development technical assistance component will be used by EXIM to finance a twinning arrangement with an experienced foreign EXIM Bank or other suitable institution(s) specialized in trade finance and promotion. Financing Plan: See Part m, Section F Financial Rate of Return Investment sub-projects should have a minimum financial and Debt Service Coverage Ratio: rate of return of 15 percent. All sub-projects should have a minimum debt service coverage ratio of 1:1.5. Staff Appraisal Report: 15909 UA Project ID Number: UA-PA-44851 Vice President: Johannes Linn, ECAVP Director: Basil G. Kavalsky, EC4DR Division Chief: Paul J. Siegelbaum, EC4EF Task Manager: Marie-Ren6e Bakker, EC4EF 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 widhout World Bank authorization.  MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE IBRD TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO UKRAINE FOR AN EXPORT DEVELOPMENT PROJECT 1. I submit for your approval the following memorandum and recommendation on a proposed loan to the State Export-Import Bank of Ukraine (EXIM) with the guarantee of Ukraine for the equivalent of about US$70 million to help finance an Export Development Project (EDP). The loan would be a Single Currency Loan (SCL) consisting of: US$60 million and DM15 million, payable in 17 (seventeen) years, including 5 (five) years of grace at the Bank's standard LIBOR-based variable interest rates for US$ and DM loans respectively. 2. Country/Sector Background. Ukraine became independent by the end of August 1991, achieving independence in economic policy for the first time. The first three years after independence were characterized by poor economic management and runaway inflation, rapidly increasing external debt, a massive across the board decline in formal economic activity, and a virtual collapse of exports, particularly sales to the Former Soviet Union (FSU). Energy problems played an important role in the decline since as a major importer of energy products, the country suffered a considerable terms of trade loss when Russian and other suppliers raised their supply prices to world market levels. The cumulative formal output decline between 1991 and 1994 was 59.3 percent, substantially bigger than the declines experienced in the Central and Eastern European (CEE) countries, and on a par with the experience in Russia. 3. However, in October 1994, a newly elected President announced a radical break from past economic policies and introduced a reform program designed to reduce inflation, improve living standards, and promote a sustainable recovery of production. Since then a tenuous stabilization has taken hold, inflation has fallen sharply, trade has been liberalized, as have most internal prices, and a process of tax reform to introduce a modem revenue base for the State has been undertaken. In a major departure from earlier years, the complicated dual exchange rate system in operation late 1993 and early 1994 was swept away and replaced by a relatively open foreign exchange regime, and most export barriers were removed. 4. In support of the reform program, the IMF in October 1994 approved a first purchase under its Systemic Transformation Facility (STF) of US$365 million equivalent, and two months later the World Bank approved a Rehabilitation Loan of US$500 million equivalent. The second purchase under the STF (for another US$365 million equivalent) and a Stand-by Arrangement (SBA) for the maximum 100 percent of quota or US$1,494 million equivalent were both approved by the IMF in April 1995. Ukraine made three purchases under the SBA equivalent to 54 percent of its quota. But due to policy slippage in the second half of 1995, the remaining amount of the SBA was not disbursed. On May 10, 1996 a new SBA for US$900 million equivalent was approved by the IMF Board and to date remains broadly on track. In September 1996, Ukraine successfully replaced its interim currency, the Karbovanets, with the Hryvnia. Meanwhile the World Bank recently approved adjustment loans in support of President Kuchma's reforms in the enterprise sector (the Enterprise Development Adjustment Loan--EDAL) and the agricultural sector (the Agricultural Sector Adjustment Loan--AGSECAL). 5. It is critical to the credibility of and continued support for the Government's reform efforts that the various stabilization and structural reform measures already taken result in visible and significant reversals of the negative output and income growth of recent years. Progress in this regard has so far been somewhat discouraging but, with the foundations of greater stability and privatization already laid, there are now good prospects for Ukraine following other transition economies into a period of positive and even high growth. The high growth scenario incorporated in the World Bank's Country Assistance -2- Strategy (CAS) discussed by the Board on June 27, 1996 during presentation of the EDAL anticipates that GDP will start to grow in late 1996 and grow thereafter at rates of between 4.5 and 6 percent per annum. The experience in countries further ahead on the path of reform, such as Poland, the Czech Republic and Hungary indicates that exports will have to play a key role in leading this recovery from the demand side. In fact, the early response to the substantial improvements in the policy environment of the past year and a half has been encouraging, especially where it concerns exports to non-FSU markets which grew by 18 percent in 1995.1 Sustained export growth of the order of 8 percent per annum could permit the external current account deficit to decline from the equivalent of an estimated 4.2 percent of GDP in 1995 to 2.0 percent in 1998 and to 1.8 percent by the end of the decade. This would mean that external financing requirements would remain in the region of US$2-2.5 billion per annum during the next two to three years. These amounts should be capable of being covered by sustained official flows, combined with an expected increase in private foreign capital flows in later years. The proposed project aims to provide the institutional and financial support necessary to sustain the process of export growth that has so recently gotten underway in response to the radical improvements in the policy environment put in place by the current Government. 6. Project Objectives. The main objective of the EDP is to develop Ukraine's emerging private sector export potential by supporting the production and marketing of goods, works and services for export in all sectors of the economy, and by developing the capacity of EXIM, through a comprehensive institutional development program, to provide an integrated package of information, technical assistance and finance services to private and privatized exporters. 7. Project Description. The project will provide: (i) export development technical assistance to existing and potential Ukrainian exporters (US$5.0 million) through an Export Development Fund--EDF, (ii) institutional development technical assistance to EXIM (US$2.5 million) in the form of a twinning arrangement with a successful foreign EXIM bank or other suitable institution(s) specialized in trade finance and promotion; and (iii) export oriented finance to private and privatized exporters (US$50 million and DM15 million). To allow a flexible use of funds across these three components, the project also contains a US$2.5 million unallocated reserve. 8. Total project cost is estimated at US$84 million equivalent (see Schedule A) and will be financed by a US$60 million and DM15 million LIBOR-based SCL for technical assistance and credit finance from the World Bank. EXIM will be the Borrower of the loan as well as the implementing agency for the project. The Government will provide a sovereign guarantee for the loan. The beneficiaries of the export development technical assistance and credit finance will be private and privatized exporters. The export technical assistance and credit allocation decisions will be taken by EXIM using predetermined eligibility criteria, which will essentially enable self-selection of qualified beneficiaries. The credit risk for sub-loans to exporters will be borne by EXIM. EXIM will use the institutional development technical assistance to finance the costs of the proposed twinning arrangement. 9. The World Bank loan will have a 17 year maturity with a 5 year grace period, and EXIM will therefore have the opportunity to revolve the loan funds several times. The loan will be a LIBOR-based SCL with a US$ component of approximately 85 percent and a DM component of approximately 15 percent, and the standard terms and conditions will apply. It is anticipated that EXIM will maintain compliance with a set of predetermined prudential ratios during the life of the project. 1 According to Ukrainian Ministry of Statistics data; the IMF, using counterpart trade statistics, estimates that the growth rate was 19 percent. -3- 10. The technical assistance for export development to private and privatized exporters (US$5.0 million) will be provided by EXIM as a 50 percent matching grant to finance half of all eligible expenditures, with recipient exporters funding the remaining 50 percent out of their own resources. EXIM will recover the cost of providing such grant assistance, as a business cost, through appropriate margins on the sub-loans to eligible exporters to be funded by the credit line. Based on expected strong demand for export finance and the projected disbursement schedule for both the technical assistance and the credit line components (see Schedule C), it is estimated that an on-lending margin of around 4 percent can be charged on the proposed credit line amount of about US$60 million equivalent to compensate EXIM for the debt service costs associated with the US$7.5 million technical assistance component. 11. A new dedicated Export Services Department has been created in EXIM, and will be responsible for managing the EDF. Adequate staffing for the department is in place. 12. In addition to technical assistance to exporters, the Bank's loan will also provide institutional development technical assistance to EXIM (US$2.5 million). This assistance will take the form of a twinning arrangement with an experienced foreign EXIM bank or other suitable institution(s) specialized in trade finance and promotion, and will aim to transform EXIM into a leading export support and financing institution in Ukraine by strengthening its capacities in strategic and technical areas and by providing support for EDP implementation. 13. All requests for credit financing (about US$60 million equivalent) will be evaluated by EXIM's existing Credit Department. EXIM's Credit Department will also be responsible for environmental screening and assessment of sub-projects. In order to perform these tasks, EXIM's Credit Department will be further strengthened under the proposed institutional development program. The foreign twinning partner(s), by providing a credit advisor, will also assist the department in appraising sub-projects to be financed under the EDP credit line, and preparing adequate sub-project documentation packages. 14. Project Implementation. The implementation of the EDP will be the responsibility of EXIM itself. Within EXIM, the implementation of the institutional development program will be the direct responsibility of the Management Board of EXIM headed by the Chairman. The implementation of the EDF and the credit line components of the project will be administered by a dedicated PMU set up within EXIM and staffed by EXIM personnel. The responsibilities of the PMU will include: (i) general administration of all documentation, information and actions related to transactions under the EDP, including operation of the Special Accounts and maintenance of the project accounts; (ii) providing assistance and pro-active advice to the EDF Division of EXIM and beneficiary exporters on all aspects of the EDF, including terms and conditions, procurement, and disbursement; (iii) providing similar assistance to the Credit Department of EXIM and prospective sub-borrowers on all aspects of the line of credit, including terms and conditions, procurement, disbursement and environmental rules; (iv) actively promoting and marketing the EDF and line of credit to exporters; (v) submitting to the World Bank those sub-loan proposals and procurement contracts requiring prior approval; (vi) monitoring, on an ex-post basis, the eligibility of beneficiaries, sub-loans, and procurement contracts below the free limit; (vii) carrying out periodic analysis of the EDF and credit line utilization, and the associated sub-project portfolios; and (viii) reporting to the World Bank and EXIM management on the progress of project implementation, as well as preparing the Project Completion Report. 15. Bank Group Experience in the Export Sector and Lessons Learnt. Export development projects have been undertaken by the World Bank in a number of countries, e.g. India, Mexico and Colombia, and a number of useful lessons have been learnt. These are: -4- * Provision of credit to the export sector can have a positive economic impact during the transition from close state control of financial markets to a liberalized policy environment; * an EXIM bank or a foreign trade bank is an appropriate focus for onlending, (e.g. EXIM in India, Bancomext in Mexico, Bancoldex in Colombia); * strengthening the capabilities of both enterprises and financial institutions in designing, implementing and appraising export development programs, and export oriented investments is vital for success; * effective coordination of loan financing and technical assistance is vital for the beneficiaries; * trade promotion funding and activity through matching grant funds and joint participation by enterprises and financial entities in trade promotion organizations is very important; and * grant funding helps enterprises' own efforts to begin or extend their markets through market surveys, travel to develop business contacts, and some testing and inspection; and is highly cost-effective when measured in terms of incremental exports. 16. The proposed EDP for Ukraine will incorporate these lessons by providing an integrated package of export oriented information, technical assistance and financial support services to private exporters, and by transforming EXIM into a dedicated and effective export support and financing institution through a comprehensive institution building effort with the assistance of an experienced foreign EXIM bank or other suitable institution(s) specialized in trade finance and promotion. 17. Credit line operations to support the private sector in CEE/FSU countries have also provided a number of useful lessons. These are: * structure: where the financial intermediary/intermediaries are identified in advance and limited in number, they should be the direct borrower(s) of the IBRD loan rather than the Government; * sub-loan maturity: the credit line should finance working capital as well as medium- to long-term investments without any minimum sub-loan maturity period; * SCL: availability of SCL terms along with flexible loan repayment options (e.g. 17 year term vs. bullet loans) increases the competitiveness of our loan product; * procurement: simplification of procurement rules, especially through the use of local commercial practices, is a very important contributor to the success of any credit line; and * technical assistance for banks and enterprises: provision of technical assistance to the financial intermediaries and to the enterprise sub-borrowers to assist in preparation of bankable sub-loan applications is critical for efficient and high-quality credit line utilization. -5- 18. Lessons learnt from previous Bank operations in Ukraine include the need to increase borrower commitment and project preparation and implementation efficiency, by focusing the lending operation as closely as possible on the implementing agency. 19. The design of the proposed EDP incorporates these lessons by directly lending to EXIM as the borrower and by providing SCL terms, flexible sub-loan maturities and working capital as well as investment finance. In addition, commercial practices are proposed as the main procurement methodology, and the project design incorporates technical assistance for both EXIM and private exporters. 20. Rationale for Bank Involvement. Macroeconomic Reasons for Export Promotion. Exports are a very important engine of growth in Ukraine. All CEE and other transition countries that have achieved positive growth rates have done so on the back of a strong and continuing surge of exports especially to Western markets. This should be no surprise: consumption will remain weak after the output drop and increasing fears of unemployment; private sector investment will remain low because of regulatory, tax and general policy uncertainty, and slow progress in privatization; and the Government itself will have to retrench under the impact of higher social expenditure and continuing difficulties in tax collection. This leaves exports as the primary engine of growth. 21. Experience in CEE and other transition economies confirms that, even though part of existing production capacity may be unusable (i.e., producing inferior products for which there are no markets), export growth has built predominantly on efforts to more effectively and efficiently use existing capacity. Thus, there is a clear case for policy intervention. Export promotion, through multiplier effects in the rest of the economy, is an obvious and legitimate intervention. However, if a recovery is to be sustainable, it will have to be private sector driven and based on profitable activities. The Government is in no position to subsidize the economy out of the crisis. 22. Microeconomic Reasons for Export Support. Private companies are mostly new in export markets. Even those with a past history as state enterprises do not have a strong Western orientation. In Ukraine's evolving legal environment credit relations are largely dependent on both parties knowing each other sufficiently to have faith in each other's interest in a continuing business relation and the associated intention to deliver on commitments. 23. Such problems are especially urgent across international boundaries. First, legal recourse, as a practical matter, is essentially unavailable in the case of payment conflicts, which greatly increases the importance of mutual trust in establishing credit relations. But the information gap that needs to be bridged to establish such relations is especially large between potential partners from different countries. This problem is exacerbated when the firms involved are new. This is one of the reasons why export financing merits special attention and usually special institutions. 24. The export sector is also the sector where the demand for financial services is most likely to pick up first. Consumer credit is virtually non-existent, and private investment is barely taking place: a situation which, if the recent history in CEE is of any guidance, will not change much for some time to come. Exports on the other hand will surge if proper policies are followed, creating an immediate demand for the associated financial services. 25. In most countries export financing institutions do a great deal more than export financing. In particular small companies have difficulty justifying the fixed costs of information gathering, promotion of name brand recognition, acquisition of a reputation as reliable supplier, and so on. A substantial part of such costs can be more efficiently delivered by a central agency since organizing it for many firms is -6- not much more expensive than organizing it for one firm. Examples are the setting up of a database with useful contacts in various regions of the world, provision of information on tax regimes, customs regulations and so on. Because of the non-exclusive nature of such services, substantial efficiency gains can be had by concentrating this type of activity in one place. EXIM would be a natural candidate because it already provides export oriented financial services, and because of its established name recognition. In fact, lessons learned from prior World Bank export development projects indicate that such activities are often the most successful in export development programs (see paragraphs 15-16 above). 26. In summary, a public sector financed intervention to jump-start a private sector based recovery in Ukraine is key to the sustainability of the still fragile reform process. Experience elsewhere suggests that exports are the only likely venue through which such a recovery can come about. This project will thus make a key contribution to consolidating the reform process and establishing the private sector as the dominant factor in Ukraine's economy 27. Links To Country Assistance Strategy. This project is consistent with the the Bank's country assistance strategy for Ukraine discussed by the Board on June 27, 1996 which is designed to support the development of the private and privatized enterprise sector. One important component of this strategy is the EDAL, which was approved by the Board on the same date. This loan extends the work on enterprise development initiated in the 1994 Rehabilitation Loan and is designed to expedite the completion of the mass privatization of medium and larger enterprises, and to facilitate further small enterprise privatization. In addition, the EDAL will provide post-privatization support to enterprises, by strengthening the main capital markets institutions and by facilitating the restructuring of privatized enterprises and improving governance. The EDAL will also address remaining issues in Ukraine's trade regime in order to encourage the external trade expansion upon which the success of Ukraine's overall reform program depends. 28. In 1995, Ukraine's exports of goods and non-factor services totalled over US$16 billion equivalent and imports were in excess of US$17 billion equivalent. These totals are expected to grow significantly during the next few years as reform proceeds. At the same time, an increasingly large part of trade will involve new and newly privatized enterprises, will be to Western and other non-FSU markets and will be arranged strictly on commercial terms. This new trade will need a volume and range of information, technical assistance financing services which does not exist at present but which the EDP is being designed to provide. Hence, the proposed project provides necessary support to the established reform program in the enterprise sector and specifically to the many newly privatized enterprises which will depend on export markets for their future survival and prosperity. 29. The EDP is also designed to contribute directly to the strategy for the financial sector as outlined in the World Bank's Financial Sector Review (FSR) of June 1995. This strategy seeks to speed up the differentiation between strong, well capitalized and well managed banks which need to achieve expansion, and banks which are financially and managerially weak and may need to be closed or down-sized. This will be achieved both by bottom-up direct institutional strengthening of individual banks or groups of banks, and through top-down pressures towards improved bank performance through improved regulation and supervision, and a better legal and accounting environment. 30. The bottom-up approach is already being pursued in the context of an EBRD line of credit for small- and medium-sized enterprises (SMEs) channeled through the most creditworthy private banks. A Financial Institutions Development Loan (FIDL), scheduled for Board presentation in fiscal year 1998, would complement this work both by extending the numbers of banks eligible for credit line participation, and by providing finance for larger potential sub-projects. As is the case with the EBRD operation, all banks seeking access to the World Bank's credit line will need to implement substantial institutional -7- strengthening both in terms of their capitalization and operational policies and procedures. As part of the preparation of the FIDL, grant funding has been mobilized to finance in-depth institution building support for two of Ukraine's largest banks (formerly state-owned in both cases) through twinning arrangements with reputable Western banks. 31. In line with the recommendations of the FSR, the top-down approach is being pursued through extensive technical assistance especially in the areas of National Bank of Ukraine (NBU) regulation and supervision of banks, accounting reform and the reform of collateral and bankruptcy law. For the moment these programs are being delivered mainly by other donors with the World Bank involved as a key player through the donor coordination meetings which it initiated in May 1995, through training initiatives and through other networking activities. The World Bank would take on a more direct role in these and other matters through the proposed Financial Sector Adjustment Loan (FSAL), scheduled for fiscal year 1998, which is aimed at residual questions about the structure and restructuring of the banking sector. 32. The EDP fits into this strategy as an important component of the bottom-up approach. EXIM is already specialized in trade finance, is reasonably well capitalized and benefits from an existing management team which is committed to turn the bank into a focused and competent export-import support and financing institution. By providing strategic direction and extensive technical assistance for institution building in the bank through twinning with an experienced foreign EXIM bank or other suitable institution(s), the EDP can ensure that this large and important bank becomes an important and positive element in the post-privatization reform agenda of Ukraine. The inclusion of the EDP in the lending program will ensure that three of the five large state and former state banks as well as the strongest private banks are all exposed to significant institutional strengthening via the bottom-up approach. 33. At the same time, because of its niche activity (export finance) and its virtual absence from the interbank market, EXIM is relatively isolated from problems elsewhere in the financial sector. Because of this there is no need to wait for progress in financial reform before this project can go ahead. While the availability of credit facilities will profit from financial sector restructuring, the EDP can already function well while the more general process of financial sector reform is still underway. 34. Agreed Actions. During negotiations, agreement was reached on the draft loan and sovereign guarantee documentation, including a dated covenant requiring EXIM to enter into a twinning arrangement with an experienced foreign EXIM bank or other suitable institution(s) specialized in trade finance and promotion. Prior to Board Presentation, the following actions were taken by the Borrower and the Guarantor, respectively: * EXIM and the Government signed an agency agreement, acceptable to the Bank, formalizing EXIM's agency lending function it performs on behalf of the Government; * the Government confirmed its agreement with the Terms of Reference for the institutional development program for EXIM; * EXIM provided written documentation to the Bank confirming that it is qualified, based on its year-end 1995 IAS audit report, to intermediate the loan funds; * EXIM arranged adequate staffing of its newly created Export Services Department which will administer the proposed export development technical assistance; and * EXIM set up a functioning PMU with a Program Manager, EDF specialist, credit specialist, and accountant/disbursement officer. 35. Environmental Aspects. Sub-projects financed under the EDP line of credit must undergo environmental screening to ensure their conformance with Ukrainian environmental legislation and - 8 - regulations and the World Bank's policy on environmental assessment. The sub-borrowers will be responsible for carrying out any environmental analysis and for confirming that the proposed sub-project complies with national/regional environmental guidelines, and for obtaining the necessary clearance from the appropriate licensing authorities. 36. EXIM, as part of its appraisal of sub-projects, will be responsible for environmental classification of sub-projects, and ensuring that each sub-loan proposal includes an evaluation of its environmental impact and clearance documentation from the appropriate licensing authorities. EXIM will also be responsible for monitoring that environmental remedies agreed under a sub-loan are indeed carried out by the sub-borrower. In order to assist EXIM with such environmental classification, an environmental manual will be provided by the World Bank. The manual will also contain a negative list of activities which cannot be financed by the line of credit. In order to meet the manual's requirements and to handle the environmental aspects of loan portfolio development and review, EXIM will need to have adequate expertise at its disposition. EXIM may externally contract such expertise and/or they may hire permanent specialist staff. 37. Program Objective Categories. This project relates directly to the Bank's objective to support the development of Ukrainian exports by the private sector. Currently, one of the biggest impediments to the growth of exports is the lack of sufficient knowhow in export marketing and promotion, and product development consistent with export demands, as well as the lack of export finance, especially for the private sector, to finance such targeted development. This project will provide the technical assistance as well as both short term working capital and medium to long term investment capital to potential and existing private exporters to alleviate these constraints. 38. Benefits. This project complements other World Bank projects in the enterprise and financial sectors by reinforcing Ukraine's stabilization efforts and structural reforms. The project will therefore have a number of economic benefits. Among these are: * by providing both critical and catalytic technical assistance and financing support to exporters in the short term, and institutional development support to EXIM for developing a strong financing and export services capability in the long term, the project will create a mechanism to boost the growth of Ukrainian exports on a sustained basis; * through the provision of export oriented technical assistance to enterprises, the project will increase the quality of information, technical and financial services required to improve the access of Ukrainian exporters to hard currency markets, thereby increasing the diversification of their export markets, reducing their dependence on FSU markets, and making a vital contribution to a faster rate of growth in hard currency earnings, an essential element in Ukraine's longer term macroeconomic stability and growth; * the project provides a single window packaged source of information, technical assistance and finance to private and privatized exporters, and therefore delivers a comprehensive and efficient solution to exporters' needs; this approach reduces confusion and delays in decision making by multiple agencies on assistance to the same exporter and improves the project's resource leverage and utilization in terms of generation of incremental exports. 39. Risks. In addition to the generic risk to the project of macro-economic instability, specific risks in this project are: -9- the state ownership of EXIM could leave it exposed to making non-commercial loans for political purposes; this risk will be mitigated by the incorporation of a module in the proposed institutional development program for EXIM to adopt a new charter and strengthen its corporate governance and by the use of tight eligibility criteria for sub-loans and sub-projects; and there could be a loss of reform commitment due to lack of political consensus and opposition among key constituencies of the old order; this could impact on the support for private sector led export development and result in a reversal of the liberalization of the trade regime and the relatively open foreign exchange regime; this risk is mitigated partly by developing an increasingly larger base of private and privatized enterprise in Ukraine in the context of the EDAL, thereby strengthening the private sector as a counter- acting force, and by specific contitionality for enterprise sector reform and tradc policy in this loan, and the operating environment for enterprises in Ukraine (e.g. the legal and regulatory framework and the tax regime) could continue to remain complex and subject to frequent change, thereby hampering successful and rapid enterprise development this risk is mitigated to some extent by the continued dialogue between the IMF, which is preparing for an Extended Fund Facility Arrangement, and the Bank about further structural reform measure to be taken in these areas and ongoing preparatory work for the Bank's planned legal and public sector reform operations. 40. Recommendation. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank and I recommend that the Executive Directors approve it. James D. Wolfensohn President by Caio K. Koch-Weser Attachments: Schedules A - F Washington, D.C. October 25, 1996  - 10 - SCHEDULE A UKRAINE EXPORT DEVELOPMENT PROJECT ESTIMATED COSTS AND FINANCING PLAN (US$ million equivalent) Component Local Foreign Total EDF (technical assistance for exporters) 2.5 7.5 10.0 Institutional Development Program for EXIM 0.5 2.5 3.0 Credit Finance for Exporters 9.0 57.0 66.0 Unallocated 1.3 3.7 5.0 Total 13.3 70.7 84.0 Financing Plan Local Foreign Total World Bank 4.9 65.1 70.0 Ukrainian Exporters 7.9 5.6 13.5 EXIM 0.5 -- 0.5 Total 13.3 70.7 84.0 - 11 - SCHEDULE B UKRAINE EXPORT DEVELOPMENT PROJECT SUMMARY OF PROPOSED PROCUREMENT ARRANGEMENTS (US$ MILLION EQUIVALENT) Procurement Method Not Bank Total Project Element ICB Other Financed Costs 1. EDF --- 10.0 --- 10.0 (5.0) (5.0) 2. Institutional Development --- 3.0 --- 3.0 Program for EXIM (2.5) (2.5) 3. Credit Finance for Exporters 10.0 56.0 --- 66.0 (10.0) (50.0) (60.0) 4. Unallocated 5.0 --- 5.0 (2.5) (2.5) Total 10.0 74.0 --- 84.0 (10.0) (60.0) (70.0) 1. Figures in parentheses are the respective amounts financed by the Bank loan. 2. "Other" procurement arrangements are expected to include goods and works procured under established commercial practices and direct contracting, and consultancy services procured under the standard World Bank Guidelines for Procurement of Consultants. - 12 - SCHEDULE C UKRAINE EXPoRT DEVELOPMENT PROJECT DISBURSEMENT BY CATEGORY OF EXPENDITURE Amount Percentage of Category (US$) (DM) Expenditures to be Financed EDF 5.0 For goods: 100% of foreign expenditures, 100% of local expenditures (ex-factory cost) and 80% of local expenditures for other items procured locally; For services: 100% Institutional Development 2.5 100% Program for EXIM Credit Finance for Exporters 50.0 15.0 For goods and works: 100% of foreign expenditures, 100% of local expenditures (ex- factory cost) and 80% of local expenditures for other items procured locally; For consultants services: 100% Unallocated 2.5 Total 60.0 15.0 ESTIMATED DISBURSEMENT SCHEDULE Bank Fiscal Year FY97 FT98 FY99 FY2000 FY2001 FY2002 Technical Assistance (EDF) --Annual disbursement 0.5 1.0 1.0 1.0 1.0 0.5 --Cumulative disbursement 0.5 1.5 2.5 3.5 4.5 5.0 Technical Assistance (Ins. Dev.) --Annual disbursement 0.6 1.3 0.6 --Cumulative disbursement 0.6 1.9 2.5 2.5 2.5 2.5 Credit Line --Annual disbursement 5.0 15.0 20.0 15.0 5.0 -- --Cumulative disbursement 5.0 20.0 40.0 55.0 60.0 60.0 Unallocated --Annual disbursement 0.0 0.0 1.0 1.0 0.5 0.0 --Cumulative disbursement 0.0 0.0 1.0 2.0 2.5 2.5 Total --Annual disbursement 6.1 17.3 22.6 17.0 6.5 0.5 --Cumulative disbursement 6.1 23.4 46.0 63.0 69.5 70.0 - 13 - SCHEDULE D UKRANE EXPORT DEVELOPMENT PROJECT TIMETABLE OF KEY PROJECT PROCESSING EVENTS (a) Time taken to prepare the project 7 months (identification to negotiations) (b) Prepared By: EXIM with Bank assistance (c) First Bank mission: March 1996 (d) Appraisal Mission departure: June 1996 (e) Negotiations: September 1996 (f) Planned date of effectiveness December 1996 (g) List of relevant PCRs and PPARs: Not Applicable The project was prepared by Marie-Rene6 Bakker, Financial Analyst, Enterprise and Finance Division, Country Department IV, Europe and Central Asia Region. - 14 - SCHEDULE E UKRAINE EXPORT DEVELOPMENT PROJECT Status of Bank Group Operations in Ukraine IBRD Loans and IDA Credits in the Operations Portfolio Difference Original amount in US$ between expected Project Loan or Fiscal millions and actual ID Credit No Year Borrower Purpose IBRD IDA ancellations Undisbursed disbursements' Number of Closed Loans/Credits: 1 Active Loans UA-PA-9113 L41030 1997 UKRAINE AGRIC. SECAL 300.00 300.00 UA-PA-34581 L39850 1996 UKRAINE HOUSING 17.00 17.00 UA-PA-35814 L40570 1996 UKRAINE ENTER. DEV. ADJUST. 310.00 210.00 -100.00 UA-PA-38820 L38650 1995 GOVT. OF UKRAINE HYDROPOWER REHAB. 114.00 113.81 19.17 UA-PA-44110 L40160 1996 GOVERNMENT OF UKRAINE COAL PILOT 15.81 15.81 UA-PA-44444 L40981 1997 UKRAINE ELECTRICITY MARKET 71.60 UA-PA-44444 L40980 1997 UKRAINE ELECTRICITY MARKET 245.40 245.40 UA-PA-45940 L40970 1997 UKRAINE SOCIAL PROTECT. SUPP 2.60 2.60 UA-PA-9106 L36140 1993 MINISTRY OF FINANCE, UKRA INSTITUTION BUILDING 27.00 22.64 21.74 UA-PA-9117 L38910 1995 GOVT. OF UKRAINE AGRIC. SEED DEVELOPM 32.00 32.00 17.26 TOTAL 1,135.41 0.00 0.00 959.26 -41.83 Active Loans Closed Loans Total Total disbursed (IBRD and IDA) 104.55 500.00 604.55 Of which repaid 0.00 0.00 0.00 Total now held by IBRD and IDA 1,135.41 500.00 1,635.41 Amount sold 0.00 0.00 0.00 Of which repaid 0.00 0.00 0.00 Total undisbursed 659.26 0.00 659.26 a. Intended disbursements to date minus actual disbursements to date as projected at appraisal. Note: Disbursement data are updated at the end of the first week of the month. Data: as of 1Q/21/96 Statement of IFC Investments Committed and Disbursed Portfolio As of 8/31/96 (In USDoHar Millions) Committed Disbursed I 11 IFC IFC FYApproval Company Loan Equity Quasi Partic Loan Equity Quasi Partic 1994 Ukraine VC Fund 0.00 2.00 0.00 0.00 0.00 1.50 0.00 0.00 Total Portfolio: 0.00 2.00 0.00 0.00 0.00 1.50 0.00 0.00 Approvals Pending Commitment Loan Equity Quasi Partic 1996 FUIB 10.00 6.50 0.00 0.00 1996 UKRAINE FUND II 0.00 1.50 0.00 0.00 Total Pending Commitment 10.00 8.00 0.00 0.00 - 15 - SCHEDULE F Ukraine at a glance Europe & Lower- POVERTY and SOCIAL Central middle. - Ukraine Asia Income Development diamond* Population mid-1994 (millions) 51.9 498 1,097 Life expectancy GNP per capita 1994 (USS) 1,570 2,430 1,680 GNP 1994 (billions USS) 81.5 1,209 1,843 Average annual growth, 1990-94 Population (%) 0.0 0.5 1.4 Labor force (%)1.6 GNP Gross per - - primary Most recent estimate (latest year available since 1989) capita enrollment Poverty: headcount index (% of population) Urban population (% of total population) 70 64 54 Life expectancy at birth (years) 68 69 67 Infant mortality (per 1,000 live births) 15 19 35 Child malnutrition (% of children under 5) .. .. .. Access to safe water Access to safe water (% of population) .. .. 78 Illiteracy (% of population age 15+) 2 Gross primary enrollment (% of school-age population) 87 97 104 Ukraine Male 87 97 105 Lower-middle-income group Female 87 97 101 KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1976 1985 1994 1995 Economic ratios GDP (billions US$) .. .. 90.1 80.1 Gross domestic investment/GDP . 27.3 8.8 8.9 Openness of economy Exports of goods and non-factor services/GDP . .. 63.2 47.2 Gross domestic savings/GDP .. 28.4 3.0 5.2 Gross national savings/GDP .. .. 2.7 3.9 Current account balance/GDP .. .. -6.1 -5.0 Savings I -- investment Interest payments/GDP .. .. 0.4 1.9 Total debt/GDP .. .. 24.6 28.7 Total debt service/exports .. .. 2.1 7.1 Present value of debtlGDP .. .. 6.9 Present value of debtlexports .. .. 36.3 .. Indebtedness 1975-84 1986-96 1994 1995 1996-04 (average annual growth) Ukraine GDP 3.5 -6.6 -26.7 -13.0 13.0 GNP per capita 3.1 -6.8 -26.3 -13.0 12.0 Lower-middle-income group Exports of goods and nfs .. .. .. 2.6 6.8 STRUCTURE of the ECONOMY (% of GDP) 1975 1985 1994 1995 Growth rates of output and Investment (%) Agriculture .. 19.3 16.3 17.0 40 Industry .. 45.6 42.5 40.6 2 Manufacturing .. 38.0 38.0 36.3 0 Services .. 35.2 34.9 36.9 -20 -40 Private consumption .. 53.7 77.2 77.4 General govemment consumption .. 17.9 19.8 17.5 Imports of goods and non-factor services .. .. 69.0 51.0 -G01 -6GDP (average annual growth) 197-84 1985-96 1994 1995 Growth ratet of exports and Imports (%) Agriculture .. -3.6 -5.7 -9.0 3 Industry .. -8.9 -31.1 -17.0 2 Manufacturing .. 2.2 Services .. -6.0 -34.1 -8.1 1 Private consumption .. -2.7 -20.0 -17.1 SO Si 92 s 4 as General government consumption .. -9.7 -24.8 -27.0 ' Gross domestic investment .. -18.6 -54.6 35.0 -2 Imports of goods and non-factor services .. .. .. -1.2 Gross national product 3.5 -8.6 -26.7 -13.6 -Exports -*-ImpDrit Note: 1995 data are preliminary estimates. Figures in Italics are for years other then those specified. The diamonds show four key indicators In the country (in bold) compared with its Income-group average. If data are missing, the diamond will be Incomplete. - 16 - Ukraine PRICES and GOVERNMENT FINANCE Domestic prices 1975 1985 1994 1995 Inflation %) (% change) 5" Consumer prices .. .. 891.1 376.0 4000 Implicit GDP deflator -0.5 -1.3 870.4 389.3 30D 2000 Government finance 0Of (% of GDP) Current revenue .. .. 44.3 40.9 a 0 9 - -293 - 95 Current budget balance .. .. -5.7 -2.0 Overall surplus/deficit .. .. -9.3 -5.6 - GDP def CPI TRADE 1975 1985 1994 1995 Export and Import levels (mill. US$) (millions USS) Total exports (fob) .. .. 11,818 12,380 2 Commodity 1 .. .. 3,337 3,516 Commodity 2 .. .. 485 511 15.OO Manufactures .. .. 2,365 2,419 Total imports (cif) .. .. 14,177 14,622 10.000 Food .. .. 429 431 Fuel and energy .. .. 7,342 7,373 5.oo Capital goods . .. 2,477 2,873 Export price Index (1987=100) . .. . o 9- a 4 es Import price index (1987=100) Terms of trade (1987-100) ..Exports. E Import BALANCE of PAYMENTS 1976 1985 1994 1995 Current account balance to GDP reio (%) (millions USS) Exports of goods and non-factor services .. .. 14,420 15,133 - Imports of goods and non-factor services .. .. 15,750 16,341 a 91 92 93 94 95 Resource balance .. .. -1,330 -1,208 -2 Net factor income .. .. -81 -563 Net current transfers .. .. -566 491 Current account balance, before official transfers .. .. -1,977 -2,262 Financing items (net) .. .. 1,694 101 Changes In net reserves .. .. 283 2,161 Memo: Reserves including gold (mill. USS) .. .. 646 1,117 Conversion rate (Ilocal/USS) .. 13,735.5 60,000.0 EXTERNAL DEBT and RESOURCE FLOWS (millions US$) 1975 1985 1993 1994 ComposItion of total debt, 1994 (mill. US$) Total debt outstanding and disbursed .. .. 3,738 5,613 G A C IBRD .. .. 0 102 418 1023e4 D IDA .. .. 0 0 F % Total debt service .. .. 199 304 8 IBRD .. .. 0 0 IDA .. .. 0 0 Composition of not resource flows Official grants .. .. 117 200 Official creditors .. .. 326 97 Private creditors .. .. 297 241 Foreign direct investment .. .. 200 90 Portfolio equity .. .. 0 0 E 3557 World Bank program Commitments .. .. 27 127 A - IBRD E - Bilateral Disbursements .. .. 0 102 B - IDA D- Other multilateral F - Private Principal repayments .. .. 0 0 C - IMF G - Short-term Net flows .. .. 0 102 Interest payments .. .. 0 0 Net transfers .. .. 0 102 International Economics Department 2/12/96 Note: Estimates for economies of the former Soviet Union are subject to more than the usual range of uncertainty.   IMAGIN G Repor+ No: P- -971 UA Type: MOP