Ukraine - Coal Pilot Project

Document of The World Bank Report No. 15351-UA STAFF APPRAISAL REPORT UKRAINE COAL PILOT PROJECT APRIL 20, 1996 Municipal and Social Services Division Country Department IV Europe and Central Asia Region  CURRENCY EQUIVALENTS (as of February 1996) Currency Unit = Karbovanets US$1 = 180,000 Krb WEIGHTS AND MEASURES Metric System ABBREVIATIONS AND ACRONYMS COM - Cabinet of Ministers ERR - Economic Rate of Return FSU - Former Soviet Union GDP - Gross Domestic Product GOU - Government of Ukraine IFC - International Finance Corporation JSC - Joint Stock Company MCI - Ministry of Coal Industry M&E - Monitoring and Evaluation MOE - Ministry of Economy MOF - Ministry of Finance NCB - National Competitive Bidding PSC - Project Steering Committee SA - Special Account SOE - Statement of Expenditure UDKR - Ukrainian State Company for Restructuring Coal Industry Enterprises UKRAINE - FISCAL YEAR January 1 - December 31  STAFF APPRAISAL REPORT UERALNE COAL PILOT PROJECT CONTENTS LOAN AND PROJECT SUMMARY ......................................... i I. REFORM OF THE COAL SECTOR ................. ..1..................... A. Economic and Sectoral Background ........................ 1 B. The Government's Reform Program ........................ 2 C. Possible Operations in the Coal Sector ....................... 3 II. SECTORAL ISSUES AFFECTING MITIGATION ..... .................. 4 A. The Coal Industry in a Changing Region ..................... 4 B. Technical Issues ..................................... 5 C. Divestiture of Social Infrastructure ......................... 7 D. Labor Issues ....................................... 8 E. Social Protection ................................... 11 F. Budgetary Support .................................. 11 G. The Need for Effective Public Participation ................... 12 III. PROJECT DESCRIPTION, COSTS ESTIMATES, AND FINANCING ................ 13 A. Objectives ....................................... 13 B. Selection Criteria ................................... 13 C. Costs and Financing Plan .............................. 14 D. Project Components ................................. 17 1. Mitigation of Mine Closure ......................... ... 17 2. Social Mitigation ............................... ... 19 3. Social Infrastructure Divestiture and Heating Subsidy ........ ... 27 4. Institutional Strengthening and Job Counselling ............... 28 5. Technical Services .............................. ... 29 E. The Project's Impact on Local Governments .................. 30 F. On-lending Arrangements .............................. 32 IV. PROJECT IMPLEMENTATION AND INSTITUTIONAL ARRANGEMENTS ........ ... 32 A. Project Implementation Plan ............................ 32 1. The UDKR ...................................... 34 2. The Role of the Municipalities ....................... ... 34 3. Participatory Mechanisms and Evaluation ................... 36 B. Procurement and Disbursement .......................... 37 C. Accounting and Auditing .............................. 40 D. Supervision, Monitoring and Evaluation ..................... 40  ii V. ECONOMIC EVALUATION, BENEFITS AND RISKS .......................... 41 Economic and Fiscal Analysis of Mine Closures .................. 41 VI. AGREEMENTS AND RECOMMENDATIONS .............................. 45 ANNEXES 1. Protocol of Discussions between the GOU and the World Bank in London, January 16-19, 1996 on Reforms to the Coal Sector 2. Enactment of President of Ukraine on Coal Industry Restructuring 3. Pravda Mines -- Donetsk 4. Krasniy Oktyabr Mine -- Yenakievo 5. The Removskaya Mine -- Snezhnoye 6. Summary of Environmental Issues and Mitigation Options 7. Social Portrait of a Miner 8. At-Risk Populations 9. Impact on Municipal Budgets of Social Infrastructure Divestiture 10. Implementation Bar Chart 11. Order of Minister of Coal Industry Creating UDKR 12. U.K. Know-How Fund Terms of Reference for Assistance to UDKR 13. Estimated Disbursement Schedule 14. Supervision Plan 15. Cost-Benefit Tables 16. Role of UDKR, MCI, MOF, Oblast, and Municipalities 17. Terms of Reference for Social Impact Monitoring 18. Selected Documents Available in the Project File MAP IBRD No. 27804 This report is based on an appraisal mission in January 1996, consisting of: J. Balkind (task manager), S. Zeijlon (deputy task manager), K. Hunt (coal sector strategy), H. Hendriks (technical), A. Staszewicz (labor/implementation aspects), M. Glasser (municipal finance/public participation), B. McGean (social assessment), T. Cook (social assessment and stakeholder analysis), P. Bodnar (divestiture of social facilities), and G. Pilch (legal). The peer reviewers were A. Ewing (PSD) and J. Strongman (IEN). The Division Chief is T. Blinkhorn (EC4MS) and the Department Director is B. Kavalsky (EC4). Engineering analysis was provided by T. Hastelow (U.K.), labor analysis by B. Weston (U.K.) and environmental analysis by G. Stephenson and J. Korol (Canada). Ms. T. Kanterman provided staff assistant support. Organizations that participated in the project preparation include the Ukranian Ministry of Coal Industry, the Donetsk Coal Mining Research Institutes, the Donetsk Oblast Administration, and the three municipal and raion governments. The report draws on the Bank's sector report "Coal Industry Restructuring", (Report No. 15056- UA), which was discussed with the Government of Ukraine in January 1996 in London (concurrent with visits to British coal mines). The sector report was distributed to the Board in March 1996 and was disseminated in a Coal Conference, held in Kiev on April 11-12, 1996.  UKRAINE COAL PILOT PROJECT LOAN AND PROJECT SUMMARY Borrower: Ukraine Implementing Agencies: Ministry of Coal Industry (MCI); the Ukrainian State Company for Restructuring of Coal Industry Enterprises (UDKR); Donetsk Oblast; city administrations of Donetsk, Yenakievo, and Snezhnoye. Affected Parties: Employees of coal mines who are affected by the sector restructuring program. Poverty Category: The project includes measures to reduce poverty in affected areas, and to generate employment and income through a variety of measures, such as micro-credit and job creation. Amount: US$15.8 million equivalent Terms: Payable in 17 years, with 5 years grace at the Bank's standard variable rate. Commitment Fee: 0.75 % on undisbursed credit balances, beginning 60 days after signing, less any waiver. Onlending Terms: Loan proceeds would be passed on to the UDKR and the local governments on a grant basis, with the exception of the micro credit component which will be on-lent to individual borrowers at interest rates in accord with the Government's financial policy, taking into account the National Bank of Ukraine discount rate, the administrative costs and lending risk. The Government would carry the foreign exchange and credit risk. Project Objectives: The central objective is to mitigate the social and environmental consequences that arise from mine closures, as part of an overall Government restructuring program for the sector. The project seeks to: (i) test ways to implement mine closures safely, with due regard to technical, environmental, economic, financial and social aspects; (ii) ensure that mine workers are afforded opportunities to either transfer to other jobs in the sector or exit the industry with reasonable compensation and a choice of assistance for seeking other employment; (iii) transfer social assets to municipal management and support their rationalization, while helping to ensure that the most vulnerable groups are adequately protected in terms of access to services; and (iv) through monitoring and feedback, gain experience from the Pilot Project for subsequent operations.  ii Project Description: (a) Mitigation of physical closure (environmental mitigation, equipment and civil works); (b) social mitigation and re-employment support (social protection payments, coal distributions, job creation, and micro-credit subcomponents); social services support though the transfer of assets to the municipalities (housing, kindergartens, cultural facilities); institutional strengthening through support for the incremental operating costs of the UDKR; and technical services (including management of the mitigation program, feasibility studies for new investment, and social assessment and monitoring/evaluation). Financing Plan: Bank loan would finance 55 percent of total project costs; Government of Ukraine, 40 percent; and bilateral grants, 5 percent, for technical services (see Schedule A). Economic Rate of Return: Economic rate of return (ERR) ranges from 20 percent to 90 percent for the 3 mines, with an overall rate of 55 percent. Environmental Category B: Environmental Management Plan with site-specific mitigation measures would be prepared. Staff Appraisal Report 15351-UA Map: IBRD 27804 Project ID Number: UA-PA-441 10  UKRAINE COAL PILOT PROJECT STAFF APPRAISAL REPORT I. REFORM OF THE COAL SECTOR A. Economic and Sectoral Background 1.1 The coal industry is in deep crisis in Ukraine. Between 1990 and 1995, coal output decreased by about 50 percent to 80 million tons/year. The productivity of Ukrainian coal miners -- about 600 thousand workers employed directly in coal extraction -- is low, not only by international comparison but even by historical Ukrainian standards. In the 1980s, domestically produced coal covered about one-third of Ukraine's primary energy consumption, and was also one of Ukraine's major export commodities. Coal exports almost totally disappeared in 1995, and imported coal and other fuels captured a large share of the Ukrainian market as a result of high domestic coal prices, untimely delivery, and poor coal quality. 1.2 Like any extractive industry, the Ukrainian coal industry must close mines when reserves become exhausted. While a few mines have been closed in the past five years, this has not been done in any concerted manner because of concern about throwing large number of miners (and related service employees) out of work and depriving them of income and access to social services currently provided by the coal enterprises. But the delay has had its cost: as a result, a significant part of the coal industry is irreparably uneconomic. The resources required to keep these high cost mines in operation could have been better deployed for the full utilization and modernization of the capacity of lower cost mines that have a chance to remain competitive. 1.3 Due to high material, energy, and labor costs, the coal industry is unable to cover its production costs. In addition to producing coal, the mining companies also deliver services including pre-school education, housing, recreation, etc. Carrying the cost of these services further reduces the competitiveness of Ukrainian coal mines. Payment arrears accumulated by many of the large coal consumers further exacerbate financial difficulties, contributing to the inability of many mining enterprises to pay salaries. The capacity and the willingness of the state to subsidize coal production dropped to an all-time low by 1995, due to a general decline of budgetary revenues in a shrinking economy, and the recognition by policy makers that further large-scale production subsidies endangered the macroeconomic stabilization effort (see para 2.25). 1.4 In order to restore the competitiveness of the Ukrainian coal industry, average unit costs need to be reduced by at least 20 percent. This will require, among other things, the closure of at least 75 high cost mines over a period of 4-5 years (the closure of these mines itself will reduce the average unit cost by about 9 percent, with possible additional gains coming from the increased capacity utilization of remaining mines). However, the social and environmental impact of the mine closures needs careful mitigation measures because of the special historical and economic importance of the sector.  2 1.5 Few countries in the Former Soviet Union (FSU) or Eastern Europe have implemented a thorough restructuring of the coal sector, including price liberalization, market deregulation, closures of old mines, and modernization of plant and equipment in profitable mines, to provide a framework for competitive viability. Yet extractive industries need to close uneconomic operations on a regular basis so that the viable segments of the industry do not get drained by the unprofitable ones. In April 1995, the Government of Ukraine (GoU) took the courageous decision to begin restructuring the coal sector, initiating sectoral reforms, and starting a program of mine closures. Old, unsafe mines (about 40-70 in number) that have no economic future were targeted for closure, to free resources for the segments of the industry that have better economic prospects (about 50 such mines). However, since the mines to be closed -- like most enterprises in the FSU -- provide a range of social services, as well as significant regional employment, the program needed to tackle the social aspects, along with the technical aspects. In May 1995, the Government requested the Bank to assist in tackling these issues in an integrated manner. The Bank embarked on the necessary analysis to help design an approach that would help mitigate the social and environmental effects of mine closures. 1.6 The sector. The coal industry includes the following institutions: * the Ministry of Coal Industry (MCI); - 39 mining associations, of which 24 are engaged in coal production and 15 in related fields (3 in coal washing, 5 in mine construction and automation, 2 in mining equipment repair, 3 in ecological and geological research, 1 in designing experimental equipment, 1 specialized in shaft design and sinking); 3 244 mines, most of which are within the 23 production associations (each association controls 8 to 16 mines); e related social assets (i.e. schools, housing, health facilities) and transport organizations. B. The Government's Reform Program 1.7 On January 19, 1996, the Government of Ukraine, in discussions held in London (in conjunction with visits to British coal mines) laid out its reform program for the coal sector (Annex 1).' These reforms include: (a) Establishment of coal markets by providing enterprises the right to sell their coal at prices freely negotiated with customers; (b) Corporatization of viable coal mines while transferring the mines identified for closure to a newly created entity, Ukrainian State Company for Coal Restructuring Enterprises (UDKR), entrusted with the management of the mine closure process; 1/ The agreed measures build on several previously announced Government programs, such as the "Program for the Development of the Coal Mining Industry of Ukraine and its Social Sphere up to the Year 2005," and the list totalling 39 mines designated for closure beginning in 1995 and 1996, which was published in the Spring of 1995. The recent agreements represent a more thorough reform of policy, and more rapid introduction of needed measures, at lower cost, than the previous programs. This program was discussed with representatives from the mining industry as well as national and local government officials at a conference held in Kiev on April 10-12, 1996. A decree of the President on Coal Sector Restructuring is included as Annex 2.  3 (c) Closure of uneconomic mines with the aim of minimizing the technical cost and the time required for closure while taking into account the need to protect the environment and the livelihood of people affected by mine closures; (d) Transfer of social assets and liabilities from the mining industry to local governments; (e) Development and implementation of programs to support the generation of employment in regions or cities where major job losses occur as a result of mine closures and the rationalization of employment in remaining mines; (f) Elimination of cross-subsidies between mining enterprises and allowing enterprises to decide about the best use of their operating profits; and (g) Concentration of state support on covering the technical and social costs of mine closures while relying on the banking sector to provide funds for commercially viable investments. 1.8 These measures were incorporated in a Presidential Decree issued on February 10, 1996 (Annex 2). Consistent with the above program of reforms, several measures were taken in late 1995 and the beginning of 1996 that are crucial to the restructuring program. A new organization -- the Ukrainska Derzhavna Kompania z Restrukturizatsii Pidpriemstv Vulhilnoi Promislovennosti or Ukrainian State Company for Restructuring Coal Industry Enterprises (UDKR) -- was created to manage the closure process. The closure program would encompass technical, social, and organizational aspects, which UDKR would be responsible for handling, working closely with the relevant municipalities. 1.9 UDKR reports to MCI and is funded directly from the State budget. The "Charter" of this organization specifies that UDKR is required to close the mines as quickly and economically as practical, so that it does not become a subsidized coal production company, competing with the new joint stock companies (JSCs), which are intended to replace the coal production associations. 1.10 MCI's earlier plans for mine closure estimated the average time required for the closure of a mine at three years, with a range of up to 13 years. The experience of other countries that have closed uneconomic mines demonstrates that rapid closures with only a minimal recovery of old plant and machinery is the most cost-effective approach; normally, this process should take no more than 12-18 months. For the Pilot Project, the preparation of physical closure plans (by local design institutes) has been guided by the objective of cost minimization; other objectives such as job creation and ensuring the continuation of essential social services have been addressed through separate mechanisms in the project design. C. Possible Operations in the Coal Sector 1.11 To assist the Government in tackling the extensive problems facing the coal sector, the Bank prepared a sector study and is preparing three lending operations in FY96-98. These are the Coal Pilot Project, a Coal Restructuring Project, and a Coal Sector Adjustment Loan. 1.12 Coal Pilot Project. In view of the many complex, partly unresolved technical and social issues facing the policy makers in sector restructuring, the Bank and the Government agreed to begin  4 with a Pilot Project in which funding would be made available for mitigating the social and environmental impacts of the closure of three mines. The mines are: Pravda2, Krasniy Oktyabr, and Removskaya, all located in the heart of the coal mining region of eastern Ukraine (see map) and each reflecting different economic and social conditions. The three mines currently employ about 4,700 workers. The criteria for selection are discussed in para 3.2, while Annexes 3-5 present the profiles of the mines/towns. The project would give the Government valuable experience in implementing mitigation measures, enabling a stronger design of the subsequent projects. 1.13 Coal Restructuring Project. To reduce the large subsidies from the national budget to the coal sector, and to allow profiLable mines a chance to succeed, the Government decided to restructure the sector, using a diverse program that includes policy reforms, closure of uneconomic mines, social and institutional re-organization, and modernization of mines with strong economic prospects. The Restructuring Project, as currently envisaged, would include mitigation of the social and environmental impacts of the closure of more than 20 mines. The total costs of the Restructuring Project would be about $120 million, with a possible Bank loan of about $80 million. Scope and timing of the Restructuring Project will be influenced by progress in implementation of the Pilot Project. 1.14 Coal Sector Adjustment Loan. In parallel, the Government has requested assistance for a broader sectoral reform program, based on the action program elaborated in the Bank's sector report and summarized in the London Protocol. This Protocol draws on the Bank report "Ukraine: Restructuring the Coal Sector" which was distributed to the Board in March 1996. The Bank is working on preparation of a coal sector adjustment loan (SECAL) to support the sector reform program. II. SECTORAL ISSUES AFFECTING MITIGATION A. The Coal Industry in a Changing Region 2.1 Donetsk city, with a population of 1.2 million persons, is the capital of Donetsk Oblast (see map) and one of 23 oblasts in Ukraine. Donetsk is the center of the Donbas region, a densely populated industrial and mining belt measuring about two hundred kilometers across its north-south and east-west extensions. The Donbas used to be the principal iron and coal region of the Soviet Union, but the region is now in deep recession. Even before the break-up of the Soviet Union, investment had moved to the lower cost, open-pit mines in Russia and Kazakhstan. Nearly all mines in the Donbas region are deep seam mines, many of them 100 years old or more. In many mines, reserves are virtually depleted and production figures per worker are among the lowest in the world.3 2.2 The Donetsk Oblast has a population of 5.27 million persons. The regional economy's problems are typical of coal mining regions in other countries (U.K., France, Belgium, Poland to 2/ The full name of this mine group is: "Mine Named after the Newspaper Pravda." 3/ For similar reasons, there are also numerous unprofitable mines in the Dniepropetrovsk region in Central Ukraine, and, in the Lviv - Volyn region in Western Ukraine.  5 name a few). The oblast used to be a center of economic activity, and attracted labor and investment from across the former Soviet Union. However, the region has not kept pace with a dramatically changed economic environment, and both surplus labor and deteriorated plants now contribute to the region's economic ill-health. The coal mines are the most prominent illustration of the region's problems: (i) the sector is severely overmanned, (ii) the capital stock is dilapidated, and (iii) there is little new investment which could generate jobs elsewhere in the local economy. State enterprises dominate officially recorded production; yet it is the unofficial economy which is providing modest economic growth. 2.3 Regional economic development activities could help to reduce dependence on the coal sector, but substantial new investment is needed. A more diversified economy would be the best hedge against the ongoing contraction of the coal industry. Other regions in Ukraine are also struggling to cope with the adverse consequences of industrial contraction (e.g. Temopil, Lviv, and Odessa). These cities are taking an aggressive approach to marketing their regions nationally and internationally, to attract new investment. Similar measures to increase labor mobility and job- seeking could help stimulate regional and sectoral diversification in Donetsk (para 3.28). B. Technical Issues Physical closure 2.4 Mines close because of depletion of their mineral reserves or because the remaining reserves have become uneconomic as a result of deteriorating geological conditions and more competitive markets. Physical closure of an underground coal mine usually involves the following nine steps: (a) arresting underground development work which would prepare new mine panels for coal extraction; (b) mining out the prepared mine panels, if this low-cost operation can be economically justified; (c) recovering equipment and materials, if there is a market for them, and if the prices paid by buyers cover the costs of the recovery, including the extra cost of keeping the mine open longer; (d) sealing- off galleries and other underground workings to the extent required for protection of neighboring mines; (e) preparing the shafts for filling by removing obstructing installations; (f) filling the shafts with rock normally taken from the waste dump of the mine; (g) installing a safe cover made of reinforced concrete at the surface opening of the shafts; (h) dismantling and demolishing surface installations and buildings; and (i) cleaning-up the surface area. During and after the closing period, additional measures may be necessary to deal with gas and water emission from the mine. 2.5 In fast-track closure, extraction from prepared panels is not completed and recovery of equipment and materials is minimized, in order to shorten the time and lower the high fixed costs of mine ventilation, water pumping and general mine maintenance. At some mines, water pumping may need to be continued temporarily to prevent flooding of the neighboring mines. Rapid closure has been successfully applied in the U.K. and can be easily adopted in Ukrainian coal mines, from the technical point of view. Environmental Aspects 2.6 Environmental conditions (air and water quality primarily) in Ukraine's coal sector are similar to the situation in several other coal mining countries. For example, environmental conditions in the Donetsk area are less severe than in the North Bohemia coal field in the Czech Republic, the Katowice coal field in Poland, the Jharia coal field in India, and the Shanxi coal field in China, but  6 worse than in Germany, Belgium and Hungary today. The present environmental situation in the Donetsk coal fields is comparable to that which existed in the older underground coal fields of the U.S.A. and the U.K. during the 1950s-60s. 2.7 The Bank has begun to examine the environmental laws, regulations and procedures, and institutional capabilities in Ukraine with regard to closing of mines (the Pilot Project would expand this work, and would monitor the consistency of Ukraine environmental standards with institutional standards and their compliance). In closing mines, domestic design institutes mostly follow Ukrainian procedures applicable for environmental and safety aspects while the Government supervisory agencies, in theory, monitor the execution of environmentally acceptable closing plans (see below). In practice, the agencies are short-staffed and under-trained. 2.8 In the past four years, due to insufficient funds available for investment and operation, the environmental situation and safety conditions in the coal mining region have deteriorated markedly. For example, life expectancy in the coal fields for underground workers (who are all male; women work in occupations at the surface) is considered to be about ten years less than in other occupations in Ukraine. Accidents resulted in 340 miners having lost their lives in 1995 in on-site or underground mishaps. The three main environmental concerns are: (a) Contamination of ground and surface water due to on-going and past mining activities. The mines in the Donbas area produce an average of 3 m3 of waste water for every ton of coal produced. The salinity of this water ranges from as little as 30 mg/l to an environmentally hazardous 4,000 mg/l or more. Discharge of this water has raised salinity concentrations in some rivers to levels that severely limit use of the water for water supply or irrigation. In some cases mine water is utilized to dilute municipal waste water, including sewage, before disposal into the nearest river system; (b) Pyramidal piles of rock and waste material have formed at all underground mines. On the surface of some piles, combustible material is starting a smoldering fire through self-ignition. Noxious gases emitted may include carbon monoxide, hydrogen sulphide and nitrous oxides, creating a health hazard for local inhabitants living down- wind. Due to rain and erosion, rock masses may slide along the sides of the dump, endangering property or individuals; and (c) Atmospheric pollution. Gases from burning dumps are perhaps the worst contaminant. In addition, fine dust blown from waste and coal stock piles may result in high levels of particulates. 2.9 Annex 6 contains a summary of environmental issues, mitigation measures, and a guide for preparing an environmental management plan with site-specific mitigation measures. These plans will be completed in the first stage of implementation of the Pilot Project by August 1996. Besides the three issues discussed above, two other areas of concern are the surface strength of land above shallow mine workings, and the potential emission of methane gas from abandoned mines. Paras 3.11-3.14 discuss the project's environmental mitigation measures.  7 C. Divestiture of Social Infrastructure 2.10 The coal industry owns and operates a wide range of social infrastructure (kindergartens, houses, medical facilities, etc.). About 77,000 people (or about 8 percent of all employees) are engaged in the operation and maintenance of these assets. The average cost recovery from the beneficiaries of social services is only about 20 percent of actual cost, estimated with a range of 10-60 percent among production associations and variance according to the type of social assets. In 1995, after deducting contributions from the beneficiaries, the cost of operating and maintaining these assets was estimated to have totaled US$ 150 million, representing about 7 percent of total coal production costs. The continued provision of these services by the mines would: (i) continue to divert the attention of management from the key task of coal production; (ii) increase the cost of coal, thereby reducing the competitiveness of domestic coal mining industry; and (iii) maintain the existing inefficiencies in service provision. For these reasons, the Government decided to divest the social assets and transfer the liabilities to local governments with some budget support. 2.11 The two basic methods to be applied in the divestiture of social infrastructure are the transfer of the assets to local governments and privatization: (i) kindergartens would be transferred to local governmenmt, in the context of city-wide programs of rationalizing their utilization; (ii) summer camps, rest houses and vacation facilities would be privatized where possible; (iii) sport and cultural facilities would be transferred to local governments, to be privatized at a later stage; (iv) profilactoria (rest and recuperation facilities) and sanatoria would be rationalized and placed under existing medical facilities operated by the regional and central government; and (v) housing stock would be transferred to local governments, to be privatized later. Together with the housing stock, the infrastructure and staff of the maintenance organizations and utilities would be transferred to local organizations. 2.12 On November 6, 1995 the Cabinet of Ministers adopted a resolution concerning the transfer to "communal property" of enterprise housing stock.4 Under Ukraine's property laws, this transfer means that the housing should be owned and managed by the municipalities in which it is located. This policy is consistent with the recommendations above. Implementation of this policy will present challenges: since centrally mandated user charges for housing and communal services are still below production costs, municipalities will face increased operating deficits as they assume responsibility for coal enterprises' housing stock. Nevertheless, budgeted increases in cost recovery on housing, to between 60 and 80 percent of maintenance costs in 1996, will help alleviate this problem. 2.13 Another reason Ukrainian municipalities are reluctant to accept the transfer of mine-owned housing is that they do not want to inherit the obligation to renovate this housing, which like much of the rest of Ukraine's housing stock is long overdue for capital renovation. There is strong sentiment among both the mine managers and among the city administrations that the Government should provide for this overdue capital renovation in the context of the transfer from enterprises to municipalities. There is a parallel sentiment that the long housing waiting lists should be consolidated at the time of transfer. However, both the housing waiting lists and the overdue capital repairs stem from a chronic lack of capital funds for housing investments. Even if the Government wanted to use public funds to address these capital needs, the problems are not limited to the coal sector, and are not likely to be resolved quickly, considering Ukraine's current financial situation. It is generally 4/ Resolution No. 891 of the Cabinet of Ministers of November 6, 1995, 'On transfer of enterprise housing stock to communal property."  8 thought that housing privatization will need to proceed at its own pace, while specific interventions to help provide an enabling environment for a future private housing market could help speed up the process (e.g. the Ukraine Housing Loan, which was approved by the Board on March 14, 1996). D. Labor Issues 2.14 The closure of uneconomic mines and the need to reduce costs in all mines after the industry starts to operate competitively will significantly reduce the number of jobs available in coal extraction. Perhaps half of the workers directly employed in coal extraction may have to leave the industry over the next five years. Taking into account likely job reductions in other areas (e.g., washing plants, construction, and the social sphere), up to 300-400,000 workers may need to exit from the coal industry over the medium term. This number represents the largest restructuring programs ever attempted in Europe. This task is made more complicated by the high concentration of mining activities in the Donbas region. Furthermore, the country and the mining industry have to start this process in a period of extreme scarcity of financial resources and the lack of alternative employment. Additional problems are an inadequate incentive framework for private sector investment, lack of fiscal and policy decentralization (which would enable regional and local authorities to develop imaginative programs to deal with their region's specific needs), and a general lack of labor mobility. Table 2.1: Employees in Coal Extraction Employees in coal Extraction 1990 723,924 1991 722,331 1992 717,764 1993 716,564 1994 681,445 1995 619,826 Source: Ministry of Coal 2.15 Natural attrition from the industry has been high in the last five years. In 1990, about 1.2 million (on average) workers were employed in the coal industry. In 1995, total employment dropped to 1.0 million (on average). In the same period, total employment in coal extraction decreased by 14 percent from 724,000 to 620,000 (Table 2.1). Due to problems of chronic back-wages, aging mines, poor physical conditions and general low morale, people are leaving the mines -- the employable ones. Table 2.2 below shows the composition of the coal industry workforce in 1994 and 1995.  9 Table 2.2: Employees in the Coal Industry Averages for 1994-95 I ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~. . . . . . . . . ....... ..- Number of Employees 1994 1995 1995 to 1994 % Cbange Total in Production 809,642 741,064 -8.5 Coal Extraction 681,445 619,826 -9.0 Breakage face workers (inc.) 85,400 72,500 -15.1 Tunnellers 51,800 44,300 -14.5 Washing 26,920 24,567 -8.7 Bricketting 2,132 2,103 -1.4 Machine Building 67,485 62,541 -7.3 Construction 11,123 10,638 -4.4 Other 22,702 21,389 -5.8 Total in Non-Productive Sphere Services 115,900 109,400 -5.6 OVERALL TOTAL 925,542 850,464 -8.1 Source: Ministry of Coal Between 1994-95 total employment in the coal industry declined by 75,000 workers (on average) or 8.1 percent. In the same period, the number of employees working directly in coal production decreased by 8.5 percent or 68,578 workers (on average) . 2.16 In coal extraction, employment categories that experienced the greatest attrition/departures were breakage face-workers (15 percent) and tunnellers (14.5 percent). Typically, these two categories of miners include the largest number of young men under 40 years of age5. At the same time, the production workers employed in bricketting show the lowest exit rate at 1.4 percent. This group of workers is typically the smallest among the employees working directly in coal production. However, their production for household heating needs is in high demand. In services (the so-called "non-productive sphere") employment decreased at a rate of 5.6 percent (on average). 2.17 While there is a need for specific measures to mitigate the social impacts of restructuring, the design of the measures needs to take into account macroeconomic and fiscal realities. The Government can no longer afford to subsidize the industry by supporting money-losing mines. Old mines (of which there are more than seventy) are incurring losses of $3-5 million per year on average. This is a cost (direct or implicit) to the budget of some $300 million per year or about 0.5 percent of GDP. 2.18 Continued natural attrition should be the main method of job reduction. Based on the above employment statistics, it appears feasible that many face workers could be redeployed at other mines, 5/ Data on coal mines of Ukraine collected by Agency for Regional Development in Donetsk.  10 provided that new recruitment is halted. There are likely to be additional costs of transferring employees from one place of work to another, especially if the hiring mine is distant from the closing mine. 2.19 However, many surface workers, especially women, are likely to become redundant. The potential loss of employment in certain regions presents a fundamental concern. The most effective measures to counter this threat are those that promise to help, over time, restore economy-wide growth (i.e. further reduction of the budget deficit, monetary stability, liberalized trade regime, transparent, predictable legal and regulatory framework, and promotion of the private sector). State- imposed obstacles to labor mobility such as the propiska (a requirement that in order to reside in a location one needs to obtain a permit based on having a job) should be removed. These measures can help foster regional as well as national growth. 2.20 In the interim, special assistance efforts will be required to mitigate adverse labor and social impacts, especially in the coal regions. Among the options to facilitate the expansion of employment are: (a) public employment schemes to help the long-term unemployed; (b) cash incentives to firms to hire ex-miners; (c) provision of credit for new business ventures; and (d) retraining programs for displaced workers. Such measures would be essential, but it is also important to recognize that the communities surrounding old mines typically have a high proportion of older workers and pensioners. To the extent that they have been able, many of the younger people have left the area. Those remaining are usually the more risk-averse, and thus generally less marketable employees. 2.21 In order to maximize the effectiveness of retraining programs, the workers will be able to choose for themselves the kind of training they wish to receive, and to choose the kind of institution (state or private) from which they wish to receive the training. Vouchers would be issued to ex-mine workers (from the 3 mines under the Pilot Project) eligible for training. The vouchers would have value, and eligible workers could "spend" them at State-run programs at private firms or institutes. In effect, workers would "buy" the training they wanted. Both State and private schools would accept vouchers in payment for training, and they would then receive reimbursement from the Employment Fund. This would create competition among schools to offer programs that workers really want, and new providers of training programs are likely to emerge to help meet the demand. Those institutes that offer courses which trainees want, that teach courses well, and that help find jobs for trainees at the conclusion of the training courses, would grow and expand. 2.22 In the past, the State made projections about labor market needs, 5 or 8 years in advance and offered courses in professions that it believed would have been in demand in the coming year. This centralized "manpower planning" approach has not succeeded in other countries, and most countries outside the FSU and Eastern Europe have abandoned it. Experience shows that in a dynamic economy, the State is not capable of guessing correctly what professions will be in future demand. Individual workers making thousands of individual decisions can provide a dynamic economy with much greater flexibility than centralized State decisions. The private sector is likely to account for most future job growth in Ukraine, so the training that workers are likely to seek will be for jobs in the private sector, rather than in the state enterprise sector.  11 E. Social Protection 2.23 The mine workers and their unions have stressed the need for adequate provision for social protection of the workers. They believe any mine closure program must provide for coal distributions and payments for compensation of damage6 to be continued from the national budget, rather than from the associations or mines. The length of the mines' housing waiting lists (5 years on average) is such that most workers are not likely to receive apartments; yet workers are nearly all housed, often by doubling up. School facilities, profilactoria, sanatoria, and rest houses have traditionally been provided by the mining associates. Union leaders have expressed concern that if these facilities are transferred to municipal authorities without adequate planning, workers might no longer obtain access. 2.24 Up to one-third of the residents in some towns are pensioners. The retirement pensions for mine workers are paid from a fund maintained by the city, with revenues received from payroll deductions from mine enterprises. These revenues have essentially stopped, and some of the cities are out of money in their pension funds. They have been receiving help from the oblast level pension funds, but these too are being exhausted. Continuation of pension payments for retirees would therefore be an important social protection measure, but as part of the national system of pensions and social protection. As is often the case, older people on pensions and women appear to be among the most vulnerable groups. Women occupy primarily clerical and administrative jobs connected with the mines, and their reemployment possibilities are more limited. Another important feature of the social protection system is the delivery of free coal to workers and pensioners associated with a given mine. This heating subsidy is an important mitigation measure in the short-term. F. Budgetary Support 2.25 The support for the coal industry was equivalent to 8.3 percent of total budgetary expenditures, or about 4 percent of GDP in 1993, and 5.6 percent of budget expenditures or 3 percent of GDP in 1994 (without taking into account household price subsidies but including credit provided/guaranteed by the budget). In the revised budget adopted in mid-1995, Krb 20 trillion or US$ 130 million equivalent of production/investment subsidies were allocated to the coal industry, equivalent to less than 1 percent of GDP in 1995. 2.26 In view of the critical situation of the Ukrainian coal industry, most of the cost of restructuring has to be borne by the national budget. However, it is important to channel budgetary support in a way that minimizes the risk of distorting decisions about future production activities and investments. In other words, the market rather than the government should decide allocation of resources for coal production. This can be achieved if budgetary support is primarily aimed at relieving the industry of unproductive expenditures. 2.27 Budgetary resources that support the operation and maintenance of social infrastructure should be provided to the local governments. Assuming that (i) support from the central government budget is gradually reduced over time; and (ii) cost savings from rationalization and privatization proceeds are fully utilized to finance the rehabilitation of remaining assets, about US$130 million support from 6/ Under Ukrainian law, if an enterprise is liquidated, payment for damage to workers ("disability" payments) is to be continued by the legal successor, the association or its successor.  12 the central government needs to be budgeted for 1996, US$90 million for 1997, and US$45 million for 1998. Additional resources need to be provided to regions/cities where major job losses occur for the retraining of workers and the establishment of funds that facilitate job creation (credit lines and public employment programs). The necessary budgetary outlay for this purpose is estimated at US$20 million per year. 2.28 All other budgetary support for restructuring should be channeled through the UDKR. Assuming that, on average, about 15 mines will be closed annually in the 1996-2000 period, the budget of the UDKR should be about US$130 million per year, consisting of US$50 million per year to cover technical closure costs, US$15 million per year to cover environmental protection costs, US$15 million per year for payments to cover the cost of transferring employees from the closing mines to other mines, US$25 million per year for severance pay to workers who do not wish (or cannot be) to be transferred; and US$25 million per year for disability payments and the provision of coal to pensioners. The current Budget includes the following items for the coal industry: (i) Krb 51 trillion for technical reconstruction of the mines; (ii) Krb 27 trillion for mine closure and mitigation of the social problems; and (iii) Krb 25 trillion for divestiture of social assets (industry-wide, not only for the coal sector). This amounts to Krb 103 trillion or $570 million. G. The Need for Effective Public Participation 2.29 Participation by affected parties ("stakeholders") is critical to help plan, refine and implement the most effective strategy for closing individual mines and for restructuring the sector. Stakeholders include managers in the coal industry, mine workers and families, pensioners, municipalities, the Government of Ukraine, the UDKR, and political leaders at all levels. Each of these groups has a stake in the design and implementation of the restructuring efforts as well as the social and environmental impact. 2.30 Issues affecting coal mines and miners are politically very sensitive. For decades, miners of the Donbas region were the mainstay of Soviet labor. In recent years, with the independence from the Soviet Union and the shocks to the Ukrainian economy, the Donbas region went into severe recession. Workers were often unpaid for months at a time, which made the task of consultation even more difficult. 2.31 Over the past few years, there have been several labor marches on Kiev, organized by coal union management seeking higher wages, payment of back-wages, and indexation of wages. At times, these actions have resulted in the emission of credits for payment of back-wages. During a large strike in February 1996, stoppages occurred at about 100 mines. Wage payments continue to be late (34 months on average), although work stoppages have declined. 2.32 Although it is generally accepted that the mines slated for closure are at the end of their economic lives, until recently there has not been a clear view among the Ministry of Coal Industry and industry or the mine managers as to what should be done to offset the social impact of closure. In the absence of a clear sectoral strategy and an effective public information program, many workers believe that better management or new technologies will save their mines and thus their jobs. They find it difficult to accept that the problems with the mines are severe and systemic, and to accept the implication of this on their ability to keep their jobs.  13 2.33 Consultation with the miners and the unions has begun in earnest with the coal conference held in Kiev in April 1996, and several local meetings at the three locations included in the project. A number of union leaders are open-minded, realizing that change has to come. The Government is involving both the oblast and the municipal authorities closely, with a view to facilitating the effective transfer of social assets. 2.34 Those affected by the planned mine closures, including individual workers, unions, municipal officials, and mine managers, need to be involved in the planning and implementation phases. Lack of involvement and ownership could lead to misunderstanding and resistance. Thus, improving the two-way information flow is a priority. Experience in other countries has shown that mine managers and workers who have participated in designing the program, and feel some ownership of it, are likely to be more helpful in implementing it. Thus, the interested parties will be given full information, and will be encouraged to participate in the monitoring and evaluation of the Pilot Project as it is implemented. III. PROJECT DESCRIPTION, COSTS ESTIMATES, AND FINANCING A. Objectives 3.1 The central objective of the project is to mitigate the social and environmental consequences that arise from the Government's decision to close uneconomic coal mines, as part of Government's overall restructuring program for the coal sector. The project seeks to: (i) test ways to implement the Government's decision to close mines safely, with due regard to technical, environmental, economic, financial and social aspects; (ii) ensure that mine workers are afforded opportunities to either transfer to other jobs in the sector or exit the industry with reasonable compensation and a choice of assistance for seeking other employment; (iii) transfer social assets to municipal management; support their rationalization and help ensure that adequate social protection measures are put in place to support the most vulnerable affected people; and (iv) through monitoring and feedback, gain experience from the project for subsequent Bank assistance operations in the sector. B. Selection Criteria 3.2 The three mines for the pilot project were selected based upon the following criteria: the mines should present a mix of issues that the UDKR will face in closing other mines, i.e. simple versus complex; different parts of the coal basin with different mining technologies and coal markets; single industry town versus diverse town; and readiness of plans for closure. All three mines are uneconomic, each is located in the Donetsk Oblast (which provides administrative simplicity) and all three are considered by MCI and the Donetsk Oblast to be top priority for closure. The characteristics of the mines are summarized in Table 3.1 and are discussed in Annexes 3-5.  14 Table 3.1: Mine Characteristics PRAVDA KRASNIY OKTYABR REMOVSKAYA 1. Age Profile one of the oldest (about medium-age (opened in one of the younger mines 100 years) 1936) (opened in the late-1950s) 2. Coal Reserves only uneconomic no developed reserves no developed reserves reserves left 3. Production high ($50/ton) very high ($70/ton), high ($40 ton) low-grade Costs/Competitiveness steep seams coal 4. Number of Collieries multiple (three pits) single pit single pit 5. Surrounding nearby Donetsk - well mid-sized town (small small company mono Economy/Community (labor developed (other machine shops) industry (coal) town absorption potential) industries: metallurgy, machine building) 6. Technical Difficulty of multitude of small water pumping for none Closure abandoned shafts neighboring mines 7. How Long Has Mine Been recent several years recent Under Consideration for Closure 8. Size of Mine medium (1,928 workers) small-medium (1,485 small-medium (1300 workers) workers) C. Costs and Financing Plan 3.3 Table 3.2 summarizes the project costs. The financing plan (Table 3.3) shows that the proposed Bank loan of $15.8 million would finance 55 percent of total project costs estimated at $28.5 million; 100 % of foreign costs (of $2.4 million) and 51% of local costs. Proceeds of the loan would be passed onto the UDKR to handle the physical closure of mines, including measures to improve the surrounding environment. For the divestiture of social infrastructure, the funds would be passed on by the National Government (Ministry of Finance) via the Donetsk Oblast to the municipal administrations, upon certification of the incremental net operating costs of the transferred facilities. Counterpart funds would be provided by the national Government (for such items as meeting disability payments, retirement and other social benefits) and by the municipalities (in the form of support for social infrastructure). The Government's share of the total costs is estimated at 40 percent. Bilateral grants are being sought to fund the technical assistance components.  15 Table 3.2: Project Components and Estimated Costs (in $ millions) Millions of US$ % % Forex Base Local Foreign Total Cost A. Mitigation of Physical Closure 8.8 0.3 9.1 3 35 - environmenzal mitigation 2.0 2.0 - civil works 3.5 3.5 - equipment 0.3 0.3 0.6 - operating costs during closure 3.0 3.0 B. Social Mitigation 9.0 0.5 9.5 5 37 - severance payments 0.8 0.8 - old age pension benefits 0.7 0.7 - disability payments 2.6 2.6 - unemployment benefits 0.8 0.8 - reemployment support 2.4 2.4 - micro credit 1.5 0.5 2.0 - public works 0.2 0.2 C. Social asset Divestiture and Heating 4.8 4.8 0 19 - kindergartens 1.0 1.0 - sport, cultural facilities, and profilactoria 0.6 0.6 - housing and communal services 1.8 1.8 - heating subsidy (coal distributions) 1.4 1.4 D. UDKR Incremental Operating Expenses 0.9 0.9 0 3 E. Technical Services 1.6 1.6 100 6 - physical closure 0.1 0.1 - management of the UDKR 0.2 0.2 - retraining 0.1 0.1 - environment 0.2 0.2 - feasibility studies for ongoing mines 0.5 0.5 - regional economic development 0.2 0.2 - public information strategy 0.1 0.1 - social assessment 0.1 0.1 - workshops with affected parties 0.05 0.05 - monitoring and evaluation plan 0.05 0.05 - base costs 23.5 2.4 25.9 9 100 F. Contingencies 2.4 0.2 2.6 - price 0.8 0.1 0.9 - physical 1.6 0.1 1.7 TOTAL 25.9 2.6 28.5 9 Price contingencies include country inflation and exchange rate estimates.  16 Table 3.3: Summary Financing Plan (in $ millions) WB Government Loan of Ukraine Other Total A. Mitigation of physical closure 7.1 2.0 9.1 - environmental mitigation 2.0 2.0 - civil works 3.5' 3.5 - equipment 0.6 0.6 - operating costs during closure 1.0 2.0 3.0 B. Social Mitigation 4.6 4.9 9.5 - severance payments 0.8 0.8 - old age pension benefits 0.7 0.7 - disability payments 2.62 2.6 - unemployment benefits 0.8 0.8 - reemployment support 2.43 2.4 - micro credit 2.04 2.0 - public works 0.25 0.2 C. Social asset divestiture and heating 2.4 2.4 4.8 - kindergartens 0.5 0.5 1.0 - sport, cultural facilities, and profilactoria 0.3 0.3 0.6 - housing and communal services 0.9 0.9 1.8 - heating subsidy (coal distributions) 0.76 0.7 1.4 D. UDKR incremental operating expenses 0.3' 0.6 0.9 E. Technical Services 0.3 1.3 1.6 - physical closure 0.1 0.1 - management of the UDKR 0.28 0.2 - retraining 0.2 0.2 - environment 0.1 0.1 - feasibility studies for ongoing mines 0.3 0.2 0.5 - regional economic development 0.2 0.2 - public information strategy 0.1 0.1 social assessment 0.1 0.1 - workshops with affected parties 0.05 0.05 - monitoring and evaluation plan 0.05 0.05 Base Costs 14.7 9.9 1.3 25.9 F. Contingencies 1.1 1.5 2.6 TOTAL 15.8 11.4 1.3 28.5 % share (55.4) (40.0) (4.6) 100.0 1/ Excluding civil works to expand water pumping in neighboring mines. 2/ Disability payments of $400 per year per invalid (2,170 persons). 3/ $600 paid to: self-employed workers or their new employers. Assumed payments would cover 4,000 employees. 4/ Assumes 400 loans averaging $5,000 each. 5/ $70,000 per municipality for wages for public works for environmental improvements. 6/ Free coal distribution (6 tons per year at $36/ton) to approximately 4,850 eligible workers and 4,450 pensioners (9,300 persons in total). Bank disbursements on declining scale (see Table 4.3). 7/ Assumes a budget of $300,000 per year for 3 years, with Bank financing on a declining scale (see Table 4.3). Includes Ukrainian job counselors (3 people for 12 months) to be trained abroad. 8/ The UK Know How Fund has expressed strong interest to assist the UDKR's institutional program.  17 D. Project Components 3.4 There are five project components, which would serve as the basic framework for mitigation initiatives in subsequent sector operations requested by the Government. These are: 1 . Mitigation of Mine Closure (a) physical closure (b) environmental mitigation 2. Social mitigation 3. Social infrastructure divestiture 4. Institutional strengthening and job counselling 5. Technical assistance Each of these components is summarized below. 3.5 Closure Plan. The key aspects of the closure plans for the three mines are outlined in Box 4.1. These plans would include mitigation of physical, environmental and social aspects. Adoption of a specific plan for each mine would be a condition of disbursement for physical works at that mine (para 6.4 (i)). These aspects are discussed below. 1. Mitigation of Mine Closure A. Physical Closure 3.6 This component involves carrying out civil works and procurement of equipment to enable safe mine closures (including filling and capping of shafts, demolition of surface buildings, limited regrading, and pumping of water where necessary). 3.7 The three mines are simple with few technical closure problems and with low gas levels in the general body of mine air (0.3 to 0.5%). The shaft fill could be obtained from the spoil tips or processed rubble from the surface demolition. The shafts are 50-100 years old. All three mines have been poorly maintained. They have small and simple surface installations with no substantial structures. The winding gear and head stocks are made of brick and steel construction, and are similar in scale to those at the smallest mines in Western Europe. Little preparation work is required before filling and capping of the shafts. 3.8 The project will finance the purchase of equipment necessary to effect closure at the three mines, and an allowance for non-productive operation of support systems (e.g. pumps, ventilation, and shaft hoists) during the shaft preparation and filling period. 3.9 The physical mine closing would occur in four stages: Stage 1: The closure is designed. This step has been essentially completed for all three mines. Stage 2: Coal production is arrested and men and equipment (to the extent economically justified) are removed from underground. This stage is on-going. It ends on the closure date (full cessation of these activities).  18 Stage 3: Shafts are filled and capped, and surface buildings demolished. This stage begins immediately after the closure date and should be completed 6 months later. Stage 4: The environmental impact of the closure is monitored and further mitigated as required. This stage may include water and methane gas monitoring and re-shaping and revegitation of spoil heaps. There is no time limit to this stage. 3.10 The total cost of physical closure at the three mines is estimated at $9.1 million, which is about equal to what was incurred in the U.K., France, and Belgium ($3 million per mine). The estimates have been lowered from the original Ukrainian plans by adopting a "fast track" approach that does not provide for much salvage of dilapidated equipment and materials. Most of the machinery and rail equipment underground is in very poor condition and does not warrant being reclaimed. The main electrical machinery is serviceable and, if appropriate economically, will be salvaged and deployed in other mines. B. Environmental Mitigation 3.11 The project is rated "B". A check list of guidelines for preparation of the environmental mitigatior; plans for the mines has been formulated (Annex 6). These guidelines are broad in coverage and much of it could usefully apply to the sector as a whole. After approval of the physical closure plan by the Donetsk Oblast Department of Environment, an Enviromnental Management Plan (EMP) with site-specific mitigation measures would be prepared, with technical assistance to be financed by grant funding. The EMP will identify the site specific environmental issues associated with the physical closure plan, mitigating measures, and a monitoring program to assure compliance with the mitigation program. In addition, institutional responsibilities will be identified for implementation of both mitigation and inventory programs respectively, as well as associated costs. It has been estimated that US$100,000 would be required to implement the EMP, and this amount has been included in the project cost. Implementation of the physical closure plan is contingent upon Bank approval of the EMP. 3.12 The closure of the three mines should not increase the environmental problems of the coal fields, and would in fact avoid additional pollution associated with ongoing mine operations. Pertinent issues are: (a) safety risks posed by abandoned shafts and audits; (b) safety risks and visual annoyance posed by decrepit industrial structures on the mine's surface; (c) fumes from smoldering fires in one of the waste piles (at Removskaya mine in Snezhnoye); (d) safety risks from methane gas escaping from old mine workings (mainly at Krasniy Oktyabr mine in Yenakievo, though to a lesser degree also at Pravda mine in Donetsk); (e) possible land subsidence (minor shifts in land levels) after the mine's closure; (f) rock waste dumps occupy potentially usable land and are considered to be an eyesore; (g) the tailings pond from the washery at the Removskaya mine could have affected the surface and subsurface water quality; and (h) minor groundwater pollution may have occurred because of improper disposal of oil and grease from workshops associated with the mine. 3.13 At the Krasniy Oktyabr and the Pravda mines, there exists a limited risk of gas seepage from the abandoned mine workings to the surface after mine closure. The design institutes are aware of this risk and have carefully identified all possible areas where such seepage could occur. These areas will be monitored in the post-closure period. Should seepage occur, the safety risks can be mitigated by drilling gas release boreholes, in line with international practice.  19 3.14 The environmental management plans will provide, inter alia, for the following mitigation measures: all shafts and openings will be filled with rock and permanently sealed off at the surface; unsafe industrial surface structures will be levelled, and rubble and scrap removed; ground water will pumped; and the fire at Removskaya will be extinguished. After closure, the sites will be monitored for methane emissions and ground subsidence. Under the project, technical assistance will be provided for possible longer term environmental improvements, such as improving the slopes of terracones and examining whether the sites could be used for alterative purposes for future use, and for remediating any surface or ground-water impacts if needed. The costs of such mitigation measures would be borne by UDKR. 2. Social Mitigation 3.15 The social mitigation package under the project consists of the following measures: (a) Severance payments, pension payments. disability payments, unemployment benefits, and other social protection benefits to be provided by the GOU in accordance with current Ukrainian laws (see para 3.23); (b) Re-employment support would be offered for workers in closing mines (para 3.24 - 3.31); (c) Micro-credit funded by the Bank loan through an appropriate agency selected by the GOU on terms and conditions satisfactory to the Bank. The agency would make small sub-loans available to entrepreneurs, to be lent at interest rates that takes into account the National Bank of Ukraine discount rate. This program would be managed by a suitable agency in accordance with an agency agreement between the agency and the Government: the agency agreement would contain terms and conditions satisfactory to the Bank under which the agency would lend small loans to enterprises or individuals who present sound business plans for investment and working capital in the region of mine closures. Applicants for subloans could be former coal mine employees, as well as other persons in the area of the mining communities who are setting up small businesses (paras 3.32 - 3.38); (d) Public works. Assistance would be provided in carrying out a small public works program to be undertaken by the municipalities in which the three mines are located ($70,000 per city). Such works could include repair of roads, communal services, and environmental improvements at the project sites or the adjacent towns (Annexes 3-5 provide more information on site-specifics). During the Project Launch Workshop mission, the Donetsk Oblast (and the municipalities) is expected to submit a plan of the criteria for selection of the public works for enviromental improvements in the areas affected by the project. 3.16 In order to design the package, the profile of the workers had to be obtained. Mine workers fall into four main categories, though these could be further subdivided: * underground skilled workers who work the face of the coal seam;  20 * other underground workers, including tunnellers, drifters, transport and service personnel; * surface workers associated with the mine operation (technical and administrative); and * workers associated with other operations supported by the coal industry, such as housing, kindergartens, and other social infrastructure. 3.17 There is demand for some of the underground workers at other mines. The housing and kindergarten workers would be transferred to the municipalities, along with the social infrastructure they service, and thus would be employed for at least part of the time. Surface workers face the most difficulty in seeking new employment and many of them are women. They are engaged in office work and mine maintenance, but are not directly linked to production. 3.18 To arrive at an appropriate design for, and to estimate the cost of social mitigation measures, it was necessary to estimate the projected unemployment from the closure of the three pilot mines. To do this, the employees were disaggregated into four risk groups as shown in Table 3.4 and in Annex 8. The "highest risk" and "high risk" categories include the surface workers, divided according to occupation and reliance on a single income (women, single heads of households with children). The "at risk" and "at risk - mobile" categories include underground workers, divided according to occupation and perceived demand at other mines. Table 3.4: Unemployment Projections number of category number of aggregate employees % unemployed unemployed % unemployed MIDDLE CASE Highest risk 239 95% 227 High risk 1435 90% 1292 At risk 391 65% 254 At risk - mobile 2808 53% 1474 Total 4873 3247 66.6% BEST CASE Highest risk 239 90% 215 High risk 1435 85% 1220 At risk 391 40% 156 At risk - mobile 2808 20% 562 Total 4873 2153 44.2% MOST DIFFICULT Highest risk 239 100% 239 High risk 1435 95% 1363 At risk 391 90% 352 At risk - mobile 2808 85% 2387 Total 4873 4341 89.1% This table, taken from data/interviews at Removskaya mine, provides estimated unemployment during two years into the closure period.  21 3.19 Fifty-three interviews were conducted with workers in each of the four risk categories at each mine. In addition, interviews were conducted with local offices of the Employment Service, mine managers, labor unions, and local and regional government officials. 3.20 There is no clear consensus on how many workers will be able to find new jobs in the next two to three years. The scenarios presented in Table 3.4 represent a range of possible unemployment outcomes six months to two years after mine closure. It may be that the three mines in the pilot will correspond to some extent with the three risk scenarios presented: i.e. Donetsk (Pravda mine) is likely to be the best case, while Snezhnoye (Removskaya mine) is likely to be close to the most difficult case7. For the purpose of cost projections, the middle case was used. Close monitoring of re-employment outcomes during the Pilot Project will provide valuable information for planning subsequent operations. 3.21 A fundamental problem common to all FSU countries is the lack of labor mobility. This is particularly severe in the coal sector, where most of these workers are deeply identified with their community. They and members of their families have sometimes lived in these settlements and worked at the mines for generations. They are dependent on the mines not only for employment, but also for coal and other forms of social protection. Few of the workers have any clear idea as to how or where to look for a new job, let alone start any kind of small business. They have no real experience of a market economy, and little concept of alternatives. They hope that if the mines are closed, the Government will start new mines or some other enterprise to employ them. The towns of Yenakievo and Snezhnoye (60 - 100 km from Donetsk) are physically and economically remote, aggravating the lack of labor mobility. 3.22 Consequently, the most important feature in the project revolves around the social protection package for the workers. Measures are geared towards assisting affected workers to find alternative employment and meet their basic living needs. Thus, the package designed for the 3-mine Pilot goes well beyond the significance of only this project. It tests a model of how the balance between fiscal affordability and social justice could be achieved and handled in the future. 3.23 Under the project, all benefits due to workers under the law would be met by the Government. Redundant miners and other workers at the mines are entitled to the following benefits under the laws of Ukraine:8 7/ The city of Snezhnoye's economy is overwhelmingly dependent on its mines, including the Removskaya mine. The miries have historically employed generations of workers and multiple wage-earners in a single household. Snezhnoye is remote (2-hour ride from Donetsk) and has poor roads and occasional public transport between mine settlements surrounding the city. The manager at the Removskaya mine estimates that only 200 to 250 of his most skilled underground workers can be redeployed to other mines. By contrast, the city of Donetsk, where the Pravda mines are located, offers better prospects. Over the past 18 months, according to independent trade union officials at the mine, half the employees have left voluntarily. The director of the mine estimates that 45 to 50% of those remaining can be reabsorbed in the industry. At least 5 to 10% more will likely find work in or near Donetsk. The city of Yenakievo, where Krasniy Oktyabr is located, falls between these two extremes. It is a 90-minute ride from Donetsk and is more economically diverse than Snezhnoye. 8/ These benefits, in principle, are available to all workers who become unemployed. However, few are receiving them, according to official data.  22 * Severance Pay. For the first 3 months of unemployment, laid-off workers will receive severance pay at the rate equal to their previous monthly salary. The severance payments will commence on date of termination. * Unemployment Benefits. After the first 3 months of unemployment, those actively seeking work will receive unemployment benefits for 9 months. Unemployment benefits are equal to 75% of their average wage and reduced to 50% after the second 3 months of unemployment. Those laid-off miners with less than two years before retirement age, will receive unemployment benefits for 15 months. Unemployment benefits are covered from the national fund financed from a 2% payroll tax. The benefits are not paid to those with pension or other income exceeding the minimum wage. 3.24 Under the project, job creation incentives equivalent to expenditures of $600/worker will be included for ex-miners and other workers associated with the three mines who find jobs with private finns, or who undertake their own jobs through setting up new economic activities. The type of jobs that have been typically created in coal mining regions in other countries are construction, auto repair, electrical repairs, bakeries, small flour mills, etc. These jobs utilize skills found among miners and surface workers and, with some retraining, workers have proven to be able to find jobs. What is needed, however, is the active partnership of the Donetsk Oblast and the three municipalities in designing job creation schemes. The Oblast and the municipalities have agreed to jointly work out, with the help of UDKR, a job creation program for ex-mine workers. The project will test different approaches/solutions with the central premise that all jobs need to be: (i) competitive in the marketplace; (ii) outside existing state enterprises; and (iii) outside existing mines, as there is excess labor in those mines (other than face workers). 3.25 The job creation would take the form of re-employment support payments made directly to new or existing employers of ex-mine workers. Payments would be made to employers (not other mines) who hire workers who have been laid-off at the 3 mines, or those who have exited from those mines to launch self-employment activities, or who have undertaken training programs. 3.26 Annex 7 presents data obtained by the Agency for Regional Development and Social Studies of Donetsk; the report is entitled "Social Portrait of a Miner". It collaborates a similar report conducted by the Russian Institute of Comparative Labor Relations entitled "Residents of Miners' Settlements and Problems of Coal Sector Restructuring". Both reports show unemployment to be much higher than the number registered with the official Employment Service. Only a small percentage of those unemployed seem to seek work through official channels. Women appear to be much harder hit by unemployment than men, because they work primarily as middle managers, administrators, and accountants, rather than directly in the mines. While some miners can transfer to a new mine, administrative jobs do not usually transfer when a mine is closed.  Figure 3-1 Government of Ukraine Severance Pay, Unemployment Benefits, and Project Re-employment Support Program GOVERNMENT OF UKRAINE Month I ran equivalent to 3 months BANK LOAN Month 2 pay LOA Support for re-employment payments: Month 3 ............................. sequivalent to US$600 per job would be paid paid to: (i) workers from the 3 mines; Month 4 (ii) workers who have undertaken training in search of other jobs; (iii) new employers who Month 5 hire such workers; (iv) existing employers Month 6 ~~~~~~~~~~~~~~~~~who hire such workers. Month 7 paid for 9 month sJ \(xludes pensiones Month 8 Month 10 Month 10 Month 12 . .......... ... .  24 3.27 Only 4% of the Russian workers surveyed (and only 2% of the miners) indicated they would like to set up their own businesses. As revealed in rapid assessments recently done in Ukraine, this lack of entrepreneurial inclination is also typical of mine workers in Ukraine. It was a significant issue even in Great Britain, where the commercial and legal infrastructure to support small businesses is well-developed. The Russian survey showed that being in "business" carries a significant stigma to the miners (74% of those interviewed in Kiselovsk indicated they would never engage in business under any circumstances), especially among older people. This stigma, added to a lack of supporting infrastructure, poses a significant barrier to new business creation. 3.28 Job Creation Potential at the Regional Level. The project is focused upon the Donetsk Oblast for several reasons: (i) it is the traditional center of the donbas coal mining region; (ii) the Oblast ranks among the top in terms of small-scale privatizations achieved in 1995, as shown below, and is consequently seen as a region that will actively seek to absorb workers from the mining industry into other economic activities; and (iii) it is the location of more than a dozen coal mines that need to be closed over the next few years and therefore the Oblast Government has taken a pro-active stance in assisting the restructuring of the industry. 3.29 The ability of the regional economy to absorb employees who leave the coal industry or are made redundant through closings and consolidates, will be particularly dependent on the progress of reforms in the Donetsk, Lugansk, Volyn and Dniepropetrovsk oblasts, where most of the mines are located. Tables 3.5 and 3.6 below show the comparative experience of four oblasts (as well as nationally) in assisting privatizations and in attracting foreign investment. The number of privatized units has increased more rapidly and the pace quickened faster in the Donetsk oblast than in the three other oblasts mentioned. Table 3.5: Privatization Experience Number of Enterprises Established C Small-Scale Medium and Large-Scale 1995 1995 1993-95 National 13,100 3,121 3,962 Lugansk 399 106 139 Donetsk 1,780 349 430 Volyn 299 58 76 Dniepropetrovsk 1,198 243 251 3.30 Small scale businesses have been growing quite rapidly in the Donetsk region. At the end of 1993, there were 10,000 such units (defined as up to 200 employees for industry and 25 employees for non-industrial activities, and 15 employees in the case of retail trade) employing 134,700 people. By October 1995, the number of units had grown to 11,900 employing 130,000 persons (average number of employees equals 12).  25 Table 3.6: Foreign Investment city Number Or Eutexprises Volume d ilm)* Jan. 1995 Jan. 1996 Jan. 1994 Jan. 1995 Jan. 1996 National 2123 3842 219.4 483.5 750.1 Lugansk 45 61 15.5 19.1 23.2 Donetsk 142 169 5.7 60.7 69.8 Volyn 13 44 0.6 2.2 3.3 Dniepropetrovsk F 166 224 18.6 43.4 63.1 * Amounts show investment approvals, not implementation. A majority of these projects have yet to be completed. 3.31 Despite good progress in 1995, there is much scope to speed up both private sector development and privatization in Donetsk city and in the surrounding towns. Current policy does encourage the establishment of new businesses, and the Oblast Government has begun a campaign to stress that those previously engaged in coal mining could find alternative economic activities if micro credit were made available. The Oblast Government maintains a Market Relations Development Division within its Economic Department, one of whose functions is to assist small businesses in registration and start-up; it provides information on procedures and facilitates new ventures. 3.32 In Donetsk Oblast, as in most of Ukraine, one obstacle cited by people wishing to establish small businesses is that it is very difficult to comply with official registration procedures. Having done so, small firms find it virtually impossible to get credit. Tax rates can stifle reinvestment of eamings. One proven means of creating jobs and earnings for poor people, particularly women, is to facilitate micro-enterprise development. This can be done through provision of carefully supervised micro-credit, and by making the establishment of micro-enterprises a simple and fair procedure. 3.33 The Donetsk Oblast has developed a record of pro-active support or encouragement of private businesses. The Oblast plans to create "one-stop shops" where micro-businesses can quickly be registered, and basic information useful to businesses could be given out. Initially, three such "shops" would be established in the vicinity of the closing mines. Simplification of inspection procedures (such as for fire and health safety standards), and reduction of the required frequency of permit renewal is being undertaken in tandem. Currently, small commercial establishments can be subject to several inspections a month, and be required monthly to renew permits to sell certain products. To help meet the impact of closures, the three municipalities are all establishing "business- friendly environments" that could utilize the skills of ex-miners. 3.34 The Bank loan would help to cover the initial funding for micro-credit lending to small businesses and entrepreneurial activities in the project areas. The program would enable applicants to receive loans, if they provide business plans with sound financial prospects. Assistance in drawing up the business plans, and supervision of the loans, would be provided by a suitable lending agency. The business plans would not need to be as detailed as those used by the Business Development Office in Luhansk supported by IFC and the U.K. Know-How Fund for larger business loans.  26 Provision would be made for cross-fertilization between the Project's offices and the IFC/U.K. Know- How Fund office in Luhansk. The micro-credit loans would not be limited to ex-mine employees, but would be open to all applicants in the three local communities. 3.35 Criteria for Selecting a Suitable Micro-credit Agencv. Two possibilities exist for providing the micro-credit financing: (i) using a financial institution that already exists in Ukraine with experience in providing such credits; the institution might need a small amount of technical assistance to deliver such specialized operations; or (ii) using a non-governmental institution (NGO) with such experience. A few such NGOs are active in Ukraine (e.g Western NIS-Fund that is accredited to lend), but experience is limited and little has been lent in the small-scale area. The agency would need to asses the commercial and economic viability of applicants and be able to monitor the use of any credits. In some FSU countries, the NGOs have teamed up with partner banks to perform the financial transactions. 3.36 Whichever the type used, the microcredit agency would need to be able to demonstrate that it can meet the following performance standards: * a good financial standing as well as performance without losses or subsidies (i.e have a viable credit portfolio) and be able to extend loans at interest rates that cover the administrative and financial costs of credit; * capacity to do business planning, including provision of micro-credit services in the Donetsk Oblast and the marketing of such services; * capacity to expand its micro-credit services, including to maintain ability to supervise and check progress in making credit, appropriate system of operations, management operations system, financial flexibility and capacity to quickly make decisions on providing microfinancing; * experience in delivering small loans to small-scale businesses, especially new entrants, including providing credits on the basis of business plans, evaluation of cash flows, and project proposals, and using collateral (through partner banks if need be) to cover credit risk. 3.37 These criteria were discussed during negotiations. It was agreed that the interest rate payable by the individual borrowers should be determined in accordance with GOU's financial policy, and take into account the National Bank of Ukraine discount rate (currently 75 percent per annum, having been lowered from 90 percent on April 1, 1996 and 85 percent on April 8, 1996) and the administrative costs and lending risk. 3.38 Regarding the demand for credit, it is likely that over the three years of the project implementation, some 400 small loans of around $5,000 each could be extended, or an amount of $2 million. This has been included in the Bank loan amount and would be treated as seed capital for a revolving fund which over the life of the Bank loan could benefit many more than the initial 400 sub-  27 borrowers (assuming sub-loan maturities of say 3 years). Other terms and conditions of the on- lending, and selection criteria, would be developed in conjuction with the selection of the fiscal agent. Conclusion of a satisfactory Fiscal Agency Agreement, as well as agreement on eligibility criteria, would be a condition of disbursement of this component of the Bank loan (para 6.4 (iii)). 3. Social Infrastructure Divestiture and Heating Subsidy 3.39 Divestiture of social infrastructure would involve financing of additional expenses incurred by municipalities for taking over operation and maintenance of housing, kindergartens and other social assets from the three closing mines. Such expenditures would be supported by the Bank loan (under the Project) on a declining scale over the next three years. For the first year, the support would be 75% of net expenditures, for the second year 50%, and for the third year 25%. Annex 9 shows the financial data for the social facilities at the 3 mines and the impact on the three municipal budgets in question. 3.40 The estimated financing for the housing component by the Bank loan (under the Project) is approximately $0.9 million under a three year sliding scale. Housing waiting lists of the mines to be closed would be merged with the housing waiting lists of the appropriate municipal authorities (the cities of Yenakievo and Snezhnoye and the Proletarsky Raion of Donetsk). 3.41 The project would include financing for a portion of the operating costs of the nine kindergartens, cultural facilities, sports facilities, and profilactoria that are currently operated by the three mines in the Pilot Project. These are considered essential services to the community and should continue to operate during the transitional period. Under the Project, and in accord with national policy, the social facilities would be transferred to the municipalities, who will have full responsibility for their operation and maintenance. There is an evident scope for making these facilities more efficient with higher enrollment rates (fewer facilities). The project would finance a sliding scale of current outlays (75 percent of net operating costs less user fees in the first year, 50 percent in the second year, and 25 percent in the third year). The municipalities will need to implement a program of rationalization to reduce the operating costs and achieve greater cost recovery and to bring the transferred social facilities in line with municipal standards. The estimated total financing for the other social infrastructure is approximately $300,000, under the same three year sliding scale. 3.42 For the towns of Yenakievo and Snezhnoye, the city administration would be responsible for transferred social assets. For the city of Donetsk, which is divided into raions, the Proletarsky Raion would be responsible (except for housing, which would be managed by the city of Donetsk). The Govermnent would reimburse these municipal authorities for a portion of their increased operating costs resulting from this transfer (less revenues from user fees). The declining reimbursement scale provides time and incentive for: (i) rationalization of operations; and (ii) increases in user fees to cost- recovery levels (taking into account the Government's targeted housing subsidy program and other programs for assisting the most disadvantaged segments of the population). A condition of disbursement will be that the Government will conclude a Subsidiary Grant Agreement with the Donetsk Oblast, which would include procedures to transfer the social facilities to the three municipalities (para 6.4 (iv)). 3.43 Heating Subsidy. For many years the mining communities and pensioners have received free coal (6 tons a year delivered to the homes four times during the year) to heat their houses. The coal comes from the producing mines, which are now being closed. Interviews conducted by the Bank in the homes of affected parties revealed that the areas of most concern were: (i) jobs, (ii) the houses  28 they live in; and (iii) the ability to heat houses in very cold winters.9 Few of the houses have any district heating and depend entirely on coal for heat and cooking fuel. Consequently, as one of the critical social mitigation measures, the project includes provision for the UDKR to provide a heating subsidy by procuring 6 tons of coal per family and delivering it to the affected parties. As shown in Table 3.3, the workers and pensioners (who currently also receive the coal) number 9,300 persons (4,850 persons currently working at the 3 mines, and 4,450 pensioners also receiving the coal subsidy). 3.44 The coal distributions under the project would take place in accordance with operational guidelines to be adopted by the UDKR. It is expected that the UDKR will distribute the coal to each person who fits the following criteria: an employee, pensioner, disabled former employee, or member of the immediate family of a former employee who was killed in a mining accident at one of the three project mines; in the case of an employee, such employee is not re-employed by another coal mine; and continuing to live in the same residence in the same municipality as before the mnine closure, said residence being one where burning coal provides the only form of heat. At the end of the first year, the subsidy will be reviewed as to the viability of converting it to cash, or phasing it out. 3.45 The funding of the coal distribution program would be on a declining basis, in the same formula as used for the kindergartens, i.e. (75, 50 and 25 percent the first three years). Criteria to evaluate the continued need for the subsidy would be: (i) the ability of the UDKR to handle the coal deliveries; (ii) the cost of the coal provided; and (iii) whether the coal was effectively delivered to the families and used appropriately (i.e. not resold). The alternative of "cashing out" the mitigation measure i.e. letting farnilies buy their own coal if funding were provided, would be studied. Project implementation would include spot checks to monitor progress in this area. The UDKR would include the costs of coal purchases and delivery in its annual operating budget. 4. Institutional Strengthening and Job Counselling 3.46 The Bank loan would support the incremental operating costs of the UDKR, on a declining basis. This is discussed in paras 4.1 - 4.4. To assist in the job search and to provide advice as to where openings might exist, job counsellors to be recruited by the UDKR would help miners and surface workers to find jobs at other mines or to secure alternative employment opportunities. Grant funds (e.g. from Canada) are being sought for this component. The counsellors would be initially trained abroad and would be stationed at each of the closing mines for a period of six to twelve months.'" The counsellor would serve as a type of ombudsman and would be available for daily consultation with miners, related workers, and their families on such issues as where are there alternative job possibilities (in the mines or other industries), what is the housing situation there, and is there availability of kindergartens and other social services. Grievances that workers may have about the process could be brought to the attention of the counsellors, who would refer them to UDKR management. 9/ Interviewees all said "we will freeze to death without coal supply and funds to buy the coal." 10/ A recent Bank study on several countries in Eastern Europe (Hungary, Poland) has shown that in OECD countries, job placement services have been two to four times as cost-effective as retraining of workers shed through industrial restructuring. Germany, on the other hand, has had good experience with re-training workers from former East Germany. The various findings point to the need for careful monitoring and fine-tuning of both types of assistance. For this and other reasons, close monitoring will be done under the Pilot Project.  29 5. Technical Services 3.47 Technical services for the following subcomponents would be provided under the project": (a) Mitigation of physical closure. Assistance in contracting and implementing works for physical closure would be provided. The U.K. Know-How Fund has expressed strong interest in supporting UDKR's institutional program (Annex 12). (b) Management of UDKR. Consultant services would be provided to the UDKR to assist establishment and initiation of operations, including project implementation, accounting, budgeting and auditing systems (U.K. Know-How Fund, as above). (c) Retraining Programs. Assistance in preparing and delivering retraining programs centered around new job skills for competitive markets would be provided. Emphasis would be on voucher-based training that encourages individual choice (paras 2.21 - 2.22). (d) Environment. Assistance in preparing and implementing plans for environmental mitigation would be provided. (e) Feasibility studies for investments to increase productivitv of viable mines. The sector restructuring program includes possible investment into profitable mines to make them more viable. Modernization and rationalization of existing mine operations is needed so that they can remain competitive. Assistance in preparing and implementing studies for investments, which would support such modernization/rationalization of viable mines would be provided. The studies would be prepared by the mines, with the assistance of Ukrainian and international experts. Up to six mines would be involved. The mines would be analyzed to see if the possible investments would promise sound economic and financial returns, in light of the remaining economic life of the mine, the suitability of the mine to expand its operations, and the management capacity. (f) Regional economic development activities would identify the Donbas region's potential and help it to compete for new private investment. A diversified economy is the best hedge against the ongoing contraction of the coal industry. Technical assistance would be used to help establish local economic development offices and prepare strategies for each of the cities affected by mine closures. (g) Public information strategy. A strategically phased public information program would be collaboratively designed and implemented by the GOU through the UDKR and II/ As indicated, bilateral grants are being sought for several of these technical services components.  30 local groups. The strategy would entail information dissemination and outreach, including national, regional, oblast, raion, and local mine levels.'2 (h) Social assessment. Building on the first phase of social assessment, there is a need for a second phase, multi-disciplinary social assessment which addresses issues of poverty, gender (i.e. impacts on woman and children), health and nutrition, and values, attitudes, and outlooks of the mine community (i.e. by adapting a successful coal miners' survey conducted in Russia). The 2-3 month assessment will attempt to combine rapid qualitative and more quantitative survey methodologies, aimed at gathering both secondary and primary data from the communities facing immnediate closure. If possible, investigation of the status of those workers previously laid-off or who left voluntarily from both the mining and other enterprises will be carried out. Quantitative household surveys would establish necessary baseline data from which to monitor and evaluate changes once the pilot mines close. (i) Consultation and participation of affected parties. In order to engage and learn from the affected workers in the Pilot mines, a process of consultation and participation will be initiated at an appropriate stage in each pilot mine through facilitated on-site meetings of affected parties (workers, their families, other stakeholders). These discussions will offer a forum for information-sharing, review and deternination of social protection and mitigation options, design of monitorable indicators, and the establishment of representative participation committees or advisory panels as long- term mechanisms for ongoing project monitoring and evaluation. (j) Monitoring and evaluation. One of the most important elements of the Pilot Project involves setting up of a monitoring and evaluation (M&E) system which would directly inform about project implementation in the pilot phase, and would influence design and implementation decisions for the planned subsequent projects. The M&E program needs to be tailored to two levels: (i) for project as a whole, and (ii) for each mine. A process of participatory monitoring would be carried out by representatives of affected parties, including workers, municipalities, the UDKR, the Ministry of Coal Industry, and possibly an outside party such as an NGO. E. The Project's Impact on Local Govermnents 3.48 Local governments in Ukraine are in the process of a major transition. Their responsibilities are increasing as revenues decrease. This project takes place against the backdrop of two major changes in national policy, both of which are still. in the process of being implemented. The first is that the Soviet-era network of enterprise-supported social infrastructure is being transferred to municipal authorities in all sectors. In the case of the coal industry specifically, a Presidential Decree dated February 7, 1996 provides that enterprise-owned social assets will be transferred to municipal ownership during 1996 and the first half of 1997. These transfers, in the aggregate, will require L2/At the national level, GOU has already announced publicly its intention to close 92 mines, and the Cabinet of Ministers has signed a decree committing its support for: a) the closing of the three Donetsk Oblast mines and b) the Bank-assisted Pilot Project to mitigate the social and environmental consequences of the three closures. At the mine level, information needs to be conmmunicated more fully to the workers.  31 significant additional budget support for the municipalities. The Project will provide such support, on a declining basis, but only for the social assets associated with the three pilot mines. 3.49 The second national policy change in process is that charges to residents (owners and renters alike) for housing and communal services are being systematically raised to cost recovery levels. They have already risen from approximately 5% of operating costs to 60% of operating costs in less than two years, and are tentatively planned to cover 100% of costs by the end of 1996. This dramatic increase is offset for the poor by a new program of needs-based subsidies which is intended to limit housing expenses to 15% of family income. 3.50 The Project's impact on the three municipalities is summarized below and in Annex 9.13 Because the coal mines in question are not paying significant taxes today, the cities do not expect a direct impact on their revenues from the mines' closure. In the long run, there could be some negative impact on personal income tax revenues (approximately 1 % of the city's revenues in Snezhnoye, which is the worst case), although all three cities report receiving little or no direct revenues from these mines today. And there will be a small but measurable increase in expenditures as the social assets are transferred to the municipalities. Without the mitigation funding provided by the project, the impact on the municipal budgets, based on 1995 costs, expressed in US dollars, is as follows: Proletarsky Raion'4 Yenakievo Snezhnoye (US Dollars) Mine's social asset costs 47,370 407,800 414,173 Municipal Budget 6,151,667 10,274,187 5,919,247 Mine/Municipal proportion 0.8% 4.0% 7.0% With mitigation funding provided by the project, the impact of the transfer of these social assets as a percentage of the municipal budget is less, as follows: Year 1 0.2% 1.0% 1.8% Year 2 0.4% 2.0% 3.5% Year 3 0.6% 3.0% 5.3% 3.51 The financial impacts on the cities of these three mine's divestiture of social infrastructure is trivial in comparison to the likely impact of the two national policies discussed above. If the national policy for full-cost recovery of housing and communal services is implemented as expected, over half of the asset transfer's impact on city budgets is eliminated. If the national policy for transfer of all enterprise assets, or even all coal enterprise assets is implemented, the impact on municipal budgets from these pilot asset transfers is dwarfed, and significant resources beyond the scope of this Project will be required from the national budget. In the larger picture, this merely amounts to a change in 13/ As shown in Annex 9, two scenarios are presented for Snezhnoye and Yenakievo, one assuming no change in user charges for housing and communal services, and one assuming the Government's policy of increasing such charges to cost- recovery level is implemented. For the Proletarsky Raion of Donetsk, only one scenario is presented, as the Raion will not be affected by the housing transfer. 14/ Note that the housing associated with the Pravda mines will be transferred to the City of Donetsk, rather than the Lion, and is not included in these figures.  32 channels, since these assets were historically supported from the national budget, through the enterprise channel. F. On-lending Arrangements 3.52 The on-lending arrangements are as follows: (a) The Bank would sign a Loan Agreement with Ukraine; (b) The Bank would sign Project Aereements with the UDKR and with the Donetsk Oblast. The arrangements between the Donetsk Oblast and the three municipalities would be governed by Participating City Agreements. Each agreement would outline implementation procedures and requirements; and (c) The Government of Ukraine would pass the proceeds of the loan on a grant basis to the UDKR and to the Donetsk Oblast through Subsidiary Grant Agreements; the Oblast will in turn pass the proceeds on to the three cities, on the same grant basis, through Participatory City Agreements. IV. PROJECT IMPLEMENTATION AND INSTITUTIONAL ARRANGEMENTS A. Project Implementation Plan 4.1 Responsibilities for project execution are summarized in Table 4.1. The detailed implementation steps are shown in Box 4.1 below. The main implementation responsibility is with the UDKR. Overall project oversight and policy coordination will be handled by a Project Steering Committee (PSC) comprised of representatives of MCI, the Donetsk Oblast, the three municipalities and the Ministry of Economy and Cabinet of Ministers who will meet periodically to review progress on the project and to resolve outstanding issues. Management of social infrastructure will be carried out by the local administrations (the city administration for the cities of Yenakievo and Snezhnoye, and the district administration for the Proletarsky rayon of the city of Donetsk). Respective roles and functions of these entities are described below (diagrams depicting the organizational set-up and process are shown in Annex 16).  33 Box 4.1: KEY IMLEMENTATION SIEPS A. OVERALL P}OORAM 'provide short-term operadng funds and commit to long-term operating funds for UDKIt and agree in principle to closure budget (Ministry of Finance) *fmalize the UDKR charter *employ key staff of the UDKR (UDKR) *launch public information campaign with Coal Conference in April (UDKR/MCI) B. BEFORE EACH MINE CLOSURE *establish date (July 1996) to close each mine (MCI) *employ staff as necessary (UDKR) *develop closure plans, which include technicad, enviromnmental, social, labor, financial, and timing provisions MCI, UDXR, city, and institute), subject no objection by the WB *establish implementation manual and accoundng system in accordance with generally accepted accountng principes (UDfR) *obtain regulatory approvals required by Ukrainian law (environmental, social, labor, etc.) (MCIUDKR) *conclude sub-agreement between GOU and UDKR, subject to no objection from the WB *organize economic development/unemployment midgation program (JDKR) *employ and train UDKR employment counselor(s) (UDKR) 'organize transportation program (UDKR) *give notice to redeployable workers and those to be laid off (MCI) *prepare and execute agreement between mining association and city on transfer of social infrastructure (UDKR) *continue public infonnation program (UDKR) *conduct social assessmnent for each mine, including poverty, gender, and heal and nuttitio analyses. (MCI in collaboratioa with local entitites) 'conduct workshops with affected parties to explain menu of options (UDXKR) *develop project monitoring and evaluation plan (UDKR, MCI, municipalites, and othre affected parties) *establish advisory participation panel for monitoring and evaluation (UDIRKRmunicipalities) *award contracts to contractors selected (in accordance with WB procuretent rules) for closure and environmental mitigation (UDKR) *phase out coal production and recover underground equipment (if any) (MCI) C. ON DATE OF CLOSURE OF EACH MINE *cease all coal production and underground equipment recovery (MCI) *redeployable workers moved to new mines (MCI) spay severance to laid off workers (MCI) 'pay back-salaries (MCI) 'fonnally transfer mine to UDKR (MCI) *transfer fluds to UDKR accounts for closure expenditres (MOF) *MCI retains debts of mine *transfer social assets, equipment, and employees to municipalities (MCI) *merge mine's housing waiting list with city's (mnunicipalities) D. AFTER CLOSURE DATE OF EACH MINE *implement tedhnical closure and environmental mitigation (UDKR) *operate social infrastructure, record revenues and expenditures (municipalities) *submit quarterly accounts to UDKR for approval (municipalities) *after UDKR approval of accounts, reimburse municipalities' net expenditures for transfered social assets on declining scale (75%, 50%, 25%) by transfer to city (MOF) *distribute coal as heating subsidy (UDKR) *implement econtomic developmenutlunemployment mitigation program (UDKR) 'pay all social benefits due to workers from closed mines, including: pensions (MOF) disability (MCI), and unemployment (Ministry of Social Welfare) *nonitor and evaluate project implementation against project indicators, twice each year, with participation of affected panies (GOU,UDKR).  34 1. The UDKR 4.2 The Minister of Coal Industry established the basis for UDKR's creation by order dated January 1, 1996 (Annex 1 1). The UDKR was registered with the Donetsk City Executive Committee (certificate dated March 13, 1996). UDKR's Charter (Ustav) and staffing plan were approved by the Minister of Coal Industry on March 1, 1996. The primary objective of the UDKR is to provide practical and effective assistance to workers and businesses in the coal producing regions in order to stimulate job creation and promote economic regeneration. In order to meet this objective, the UDKR's role will be to encourage and support local initiatives which aim to provide economic restructuring and social development in areas affected by mine closures. Annex 12 shows a program of institutional support that the U.K. Know-How Fund plans to provide to UDKR. 4.3 The UDKR will assume responsibility for the actual closure of mines and for the social mitigation and heat subsidy program. Once fully staffed (the plan calls for 135 employees), the UDKR will begin the immediate task of establishing the local network of contacts to ensure the maximum contribution is made to the job creation, and economic regeneration objectives. In addition, the UDKR will be responsible for disbursement of all funds made available for workers' compensation, transfer benefits, redundancy, and the promotion of job creation and economic regeneration. 4.4 The UDKR will also undertake a program of public information designed to assure that all affected parties are aware of the overall restructuring context as well as specific mine closure activities. 2. The Role of the Municipalities 4.5 Housing and kindergartens would be transferred to the appropriate municipal authorities. For the cities of Yenakievo and Snezhnoye, this is the city administration. As mentioned, for the city of Donetsk, which is divided into raions, this is the Proletarsky Raion for kindergartens and other social assets, and the city of Donetsk for housing. The Government of Ukraine would reimburse these municipal authorities for a portion of their increased operating costs resulting from this transfer (less revenues from user fees). The reimbursement (financed by the Bank loan on a declining scale) provides time and incentive for (i) rationalization of operations; and (ii) increases in user fees to cost- recovery levels (paired with the Government's targeted housing subsidy program), thus facilitating sustainability of operations for the rationalized social assets. The cities would track their incremental operating costs for the transferred social infrastructure, and would certify the amounts to the UDKR. The UDKR would review these reports, and upon UDKR approval, the MoF would transfer the reimbursement directly to the municipal authorities. 4.6 Housing waiting lists of the mines to be closed would be merged with the housing waiting lists of the appropriate municipal authorities. 4.7 Electric substations owned by mines to be closed but serving existing housing would be transferred to the municipalities together with the housing they serve or to the appropriate local electric utility enterprise. 4.8 Other assets of the mines to be closed (profilactoria, sanitoria, rest houses, palaces of culture, clubs, etc.) would be transferred to the appropriate health or municipal authorities (the cities of Yenakievo and Snezhnoye and the Proletarsky Raion of Donetsk), except in the case of remote facilities, which should be privatized through auction as soon as possible.  35 UKRAINE COAL PILOT PROJECT Table 4.1: Responsibilities for Project Implementation Component Supervision Agency Implementing Agency or End-Beneficiary A. Mitigation of physical closure - environmental mitigation MCWUDKR Contractors - civil works UDKR Contractors - equipment UDKR Closing mines - operating costs during closure UDKR Local Suppliers (incl. Donbassenergo) B. Social Mitigation - severance payments MOF/UDKR Laid-off workers - old age pension benefits MOFIUDKR Pensioners - disability payments MOF/UDKR Disabled ex-workers - unemployment benefits MOF/MCI Laid-off workers - reemployment support UDKR/Donetsk Oblast Laid-off workers, new employers - public works Donetsk Oblast Municipalities - micro credit micro credit agency to be New businesses selected C. Social asset transfer - kindergartens MCI/MOF/Donetsk Oblast municipalities - sports, cultural facilities, and profilactoria MCI/MOF/Donetsk Oblast municipalities - housing and communal services MCI/MOF/Donetsk Oblast municipalities - heating subsidy UDKR Workers and pensioners D. UDKR incremental operating expenses UDKR UDKR E. Technical assistance - physical closure UDKR UDKR - management of the UDKR UDKR UDKR - retraining UDKR/Donetsk Oblast Workers - environment MCI/UDKR UDKR - feasibility studies for ongoing mines MCI Selected mines - regional economic development MCI/Donetsk Oblast Donetsk Oblast - public information strategy MCI/Donetsk Oblast Donetsk Oblast - social assessment UDKR Workers and Families - workshops with affected parties UDKR Ditto - monitoring and evaluation plan UDKR GoU/Bank Note: The UDKR would have the main responsibility for the project; the Donetsk Oblast and the municipalities would handle the disbursement of proceeds for dives.iture of social infrastructure and public works. The Donetsk Oblast would handle regional economic development, retraining and public information; an agency to be determined (tbd) would handle the micro-credit. The Ministry of Coal Industry would handle the feasibility studies.  36 3. Participatory Mechanisms and Evaluation 4.9 The two-fold challenge is (i) to get meaningful participation by affected parties in the Pilot Project, and (ii) to learn by doing, i.e. to use the Pilot Project as a tool for stakeholder analysis, monitoring, and evaluation so that the subsequent restructuring projects are well designed. 4.10 Beneficiary participation would be achieved through four mechanisms: (i) the establishment of participation panels at each of the three sites to monitor project implementation; (ii) the establishment of an overall Project Steering Committee (PSC) to provide policy guidance and to resolve outstanding issues; (iii) an ongoing public information strategy; and (iv) periodic social assessment work to identify the Project's impact at each site. 4.11 Each site-specific Participation Panel would be an advisory group to the UDKR; one Panel which would include representatives of: - each of the unions at the closing mine; - the local administration (city and if applicable, raion); - the local elected council (city and if applicable, raion); - the mine's managers; - several workers and family representatives; and - the local newspaper, television, or radio station. Each Participation Panel would be regularly informed by the UDKR about implementation progress, in order to provide (a) systematic infornation to, and consultation with key stakeholders; and (b) meaningful feedback to the UDKR and other decision makers. The three Participation Panels, would continue in existence during the life of the project, and would be convened as often as required. The Panels will prepare in tenns reports every six months. At the end of the project, a detailed report and debriefing of each panel will allow the Government and the Bank to evaluate the project as implemented against its design objectives. Each panel would be professionally facilitated and will be provided with training and substantive education in the issues. Because the Pilot Project would begin essentially immediately, it is anticipated that the greatest uses of the Participation Panels would be: (a) to allow the Government entities (national and local) and the World Bank to monitor and evaluate implementation, as it occurs at each site; and (b) to inform the design of the subsequent assistance operations. 4.12 The Project Steering Committee would include representatives of: the Cabinet of Ministers (CoM) or their designated representatives (e.g. Ministry of Economy, Ministry of Finance, Ministry of Social Protection); the Ministry of Coal Industry; the UDKR;  37 each of the unions (the official miners' union, the two independent miners' unions, and the "white collar" technical and administrative union); local administrations; Oblast Administration; and mine managers. The PSC would help to guide the UDKR on policy aspects and on resolving any major difficulties in the course of implementation. The PSC would also evaluate the project and formulate recommendations regarding next steps in the work of the UDKR. 4.13 The public information strategy would be developed by the PSC, the Government, and the Bank, and would be designed to keep the public at large and the citizens at each site fully informed about the status of the project, planned events, and the work of the Participation Panels and the PSC. Technical assistance would be provided as described earlier. Where appropriate, media representatives would be invited to meetings of the Participation Panels and the PSC. 4.14 Social assessment and survey work would be carried out by qualified Ukrainian institutions to determine and establish baseline information and expectations at the beginning of the project, as well as during and after the project's implementation. Technical assistance would be provided as described earlier. B. Procurement and Disbursement 4.15 Procurement under the Bank loan would cover: (i) civil works needed to support the civil works for physical closure and environmental mitigation out the physical closure and environmental mitigation; (ii) the purchase of auxiliary equipment needed to support the civil works for physical closure and environmental mitigation; and (iii) the hiring of consulting services. For all other activities financed under the proposed loap, such as the divestiture of social infrastructure, and re- employment support, no procurement arrangements are applicable. Given the small size of the contracts expected for physical closure and environmental mitigation and the fact that the works are geographically scattered and labor intensive, civil works will be procured following National Competitive Bidding (NCB) procedures acceptable to the Bank. Foreign firms are unlikely to be interested in these contracts but will not be excluded from participation. The relevant implementing agencies will use the Bank's regional sample bidding documents for NCB. Consultants would be appointed in accordance with the Bank Group's guidelines for the Use of Consultants (August 1991). For the feasibility studies, consultant services would be procured using short listing; for other technical assistance tasks, each of small value, a sole source basis would be used. Table 4.2 summarizes the procurement arrangements. All of these arrangements will be discussed in depth at the Project Launch Workshop in May 1996 (see para 4.25). 4.16 In Ukraine, like many other states of the former Soviet Union, there is no public procurement law at present. A country procurement strategy note is scheduled for 1997. Experience in competitive bidding is limited to a few projects financed by international organizations. 4.17 Procurement of mine operating costs during closure, social mitigation expenses, social assets transfer expenses and UDKR administrative expenses will be undertaken through a yearly operating budget program prepared by the implementing agency and approved by the Bank.  38 Table 4.2: Procurement Arrangements L ProDurement Mdsi Type of Expenditures National Other Not Bank- Total Competitive Financed Costs ______ ______ ______ _____ B idding _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ Works 6.0 - 6.0 (6.0) (6.0) Goods 0.7' 0.7 (0.7) (0.7) UDKR Incremental Operating 1.12 1.1 Costs (0.3) (0.3) Social Mitigation Expenses 8.53 8.5 (2.8) (-) (2.8) Sub-Loans 2.04 2.0 (2.0) (2.0) Social Assets Transfer 5 2 65 5.3 (2.6) (2.6) Consultant Services 0.36 1.3 1.6 0.3 (-) (0.3) Project Mines' Operating - 3.37 - 3.3 Costs during Closure (1.1) (1.1) Total 6.0 21.2 1.3 28.5 (6.0) (9.8) (-) (15.8) Note: Figures in parenthesis are the amounts to be financed by the Bank. 1/ International shopping for small equipment items and materials required for physical closure and environmental mitigation. 2/ Incremental operating expenses of UDKR, including cost of rent and utilities, salaries, office equipment and supplies, maintenance, communications and transportation (see Table 4.3 for disbursement percentages) of Bank-financed portion. 3/ Severance payments, old age pension, benefits, disability payments and re-employment support (see Table 4.3 for Bank- financed portion of disbursement percentage). 4/ Micro credits for eligible individuals and employers. A maximum value of $5,000 per contract, would be procured through usual commercial practices. 5/ Payments for operation and maintenance of housing, kindergartens, cultural and social facilities and heating subsidies (see Table 4.3 for disbursement percentage of Bank-financed portion). 6/ Consultants' services procured in accordance with the guidelines for the use of consultants. 7/ Utility, electricity and other operating costs after mining ceases, during the physical closure process, excluding salaries to regular staff and management (see Table 4.3 for disbursement percentage). Prior review. Contracts under NCB and for goods and works amounting to US$300,000 equivalent and more would be subject to prior review. All contracts for consulting firms amounting to US$100,000 and more, as well as all contracts for individual consultants amounting to US$50,000 and more would also be subject to the Bank's prior review. Terms of reference for all consulting services shall have a prior review by the Bank. 4.18 Loan proceeds are expected to be disbursed over a three-year period. The Bank's standard disbursement profiles do not provide a suitable basis for comparison, due to the special nature of this  39 project. The disbursement categories and the percentages of expenditures to be financed by the proposed loan are shown in Table 4.3. The disbursement schedule is shown in Annex 13. Table 4.3: Allocation of Bank Loan (in US$ million equivalent) Category Amount % of Expenditures to be Financed (see loan Agreement Schedule) Works 5.5 70% of total Goods 0.6 100 % of foreign expenditures 100 % of local expenditures (ex- factory cost) and 80% of local expenditures for other items produced locally Incremental Operating Costs 0.3 50% of expenditures during 1996-97 33% of expenditures during 1997-98 16% of expenditures during 1998-99 Social Mitigation Expenses and re- 2.6 100% employment support Sub-Loans 2.0 100% Social Assets Transfer and heating 2.4 75% of expenditures during 1996-97 subsidy 50% of expenditures during 1997-98 25% of expenditures during 1998-99 Consultant Services 0.3 100% Project Mines' Post-Closure 1.0 30% of total Expenses Unallocated 1.1 Total 15.8 * Net of local taxes and duties. Disbursement for works, incremental operating costs, social mitigation expenses, and social assets transfer will be undertaken based on a yearly operating budget program prepared by the implementing agency and approved by the Bank. 4.19 To facilitate disbursement, the Government would establish two separate Special Accounts (SAs) in commercial banks for the two main implementing bodies -- the UDKR and the Donetsk Oblast. The SAs would cover the Bank's share of expenses under the project. The Donetsk Oblast Special Account would cover the transfer of social assets. 4.20 An initial deposit of US$500,000 would be made available for the Special Account for UDKR upon Loan effectiveness. For the Donetsk Oblast Special Account, an initial deposit of US$200,000 would be made available. The Bank would replenish the Special Accounts upon receipt of satisfactory proof of incurred eligible expenses, accompanied by a bank statement and reconciliation of the Special Accounts. Payments for expenditures prior to the date of the Loan Agreement, except for  40 withdrawals, in aggregate amount not to exceed the equivalent of $1,500,000, may be made on account of payments made for expenditures before that date but after January 12, 1996 (creation of UDKR). 4.21 The UDKR would maintain the Special Accounts for loan-financed components and would keep them separately from any existing accounts. All disbursements would need to be fully documented except for all operating costs, social mitigation expenses, coal distributions, expenditures for goods and works under contracts costing less than $300,000 equivalent for incremental operating costs, and for expenditures of consultants' services under contracts costing less than (i) $100,000 for firms, and (ii) $50,000 equivalent for individuals, under such terms and conditions as the Bank shall specify by notice to the Borrower. 4.22 The Donetsk Oblast would maintain the Special Account for the social assets component and would keep it separately from any other existing accounts. Disbursements will be made against statement of expenditure (SOEs). The Donetsk Oblast would be responsible for preparing withdrawal applications. The documentation for withdrawals under SOEs will be retained at the Donetsk Oblast for review by Bank supervision missions and for regular and semi-annual audits. At the city and raion level detailed quarterly and yearly reports that itemize uses of funds would be kept. Quarterly Uses-of-Funds statements that are very specific in relation to social assets would help to clear various uses of the funds , and also help to separate them from municipalities' other activities. For example, for kindergartens, the quarterly Uses-of-Funds include payroll, food and day attendance. The yearly Uses-of-Funds reports would show utilities expenditures. The supervisory role would be managed by the Donetsk Oblast, which would spot-check the disbursements, and arrange audits of the expenditure as necessary. C. Accounting and Auditing 4.23 The UDKR and the Donetsk Oblast will maintain accounts for loan-financed components separate from any other existing accounts. They will maintain records of all receipts and disbursements of funds. Copies of these documents will be routinely submitted to the UDKR and to the Donetsk Oblast. Each project account will be audited separately on an annual basis by a firm of independent accountants acceptable to the World Bank. Audits will be made available to the World Bank by June 30 each year. The audits will include a separate opinion on the SOEs and each Special Account. These arrangements will be confirmed during negotiations. D. Supervision, Monitoring and Evaluation 4.24 Supervision, monitoring and evaluation of project implementation at the national level would be assigned to the PSC. The PSC would draw on the work of the Participation Panels. Monitoring and coordination of project implementation would be assigned to implementation advisors (UDKR employees) and the job counsellors at each mine. Consultants financed through the technical assistance component of the project will provide expert advice in procurement, financial management and beneficiary assessment. The UDKR will prepare a quarterly progress report on overall project implementation based on reports from the local governments. 4.25 Since the UDKR is a new body and the MCI has no experience in implementing Bank projects, the project will require substantial supervision by the Bank during its implementation. A project launch workshop is scheduled for May 1996. At negotiations, the Bank reached an  41 understanding with UDKR and the project municipalities on the critical actions to be taken by quarter and this will be discussed more fully at the project launch workshop. A formal mid-term implementation review is scheduled for the first half of 1997 whereby senior government officials and the Bank would undertake a comprehensive review of project implementation to date, especially on the labor and social mitigation package. Under the supervision of the PSC, the implementation advisor (U.K. Know-How Fund) and the job counsellors will coordinate with the UDKR and will prepare an evaluation report by March 1907. The report will be reviewed by the Bank and Government. In the subsequent year, supervision efforts may be reduced, depending on the success in the implementation process and accumulation of the relevant experience by local authorities. The supervision plan is shown in Annex 14. A bar chart of implementation steps at the mine level is shown in Annex 10. 4.26 Given the complexity of the project, and the importance of monitoring employment generation and labor movements, monitoring plan and performance indicators for the social components were agreed upon during negotiations. Annex 17 shows the terms of reference for social impact monitoring plus indicative monitoring indicators for the social aspects (indicators for the technical aspects are more routine). The information will be collected by UDKR in a timely manner for its own understanding of the impact of the social mitigation measures, and such information will be submitted quarterly to the Bank. V. ECONOMIC EVALUATION, BENEFITS AND RISKS 5.1 A full cost-benefit analysis for the three mine Pilot Project has been carried out. Annex 15 shows these calculations for each mine individually as well as consolidated for the Pilot Project. The cost and benefit cash flows have been discounted by 12% annually and they have been extended for a five years period after the project completion, i.e., up to the year 2003. Economic and Fiscal Analysis of Mine Closures 5.2 The net benefits in the long run of closing a mine depend upon: * the reduction in non-labor mining costs -- energy, pit props, other material inputs, and replacement equipment -- resulting from the fall or transfer of coal production plus the net increase in the value of output due to the redeployment of mine workers; * the cost of replacing the lost output from other mines or by importing coal or by the use of alternative fuels. These net benefits are set against the costs of closing the mine, allowing for the fact that many of these costs might, in any case, have been incurred at a later date when the mine's reserves are exhausted. 5.3 Usually, such calculations do not take into account the redistribution of income caused by the project or its impact on the labor market. However in this case, a fuller analysis was performed, estimating the impact of the mine closure on different groups within the economy. Table 5.1 below presents a more complete picture of the flows associated with two scenarios in which the mine continues to operate, and where it is closed immediately. Many of these items cancel out when  42 looking at the problem from the perspective of the economy as a whole, especially if some simplifying assumptions are made. In particular, by assuming that (a) coal prices are set equal to import parity plus transport and distribution costs; and (b) the marginal and average costs of transport and distribution for coal are approximately equal, the costs and benefits under each scenario may be summarized as: (a) Without project: Benefits: Locally produced coal delivered to consumers: Costs: Material inputs & replacement equipment (import cost); Wages of workers in alternative jobs (economic cost of labor); Maintenance and operation of social assets; Coal cleaning costs; Coal distribution and transport; and Future closure and mitigation costs. (b) With project: Benefits: Equivalent of imported coal delivered to consumers; and Value of extra output from redeployed miners: Costs: Coal imports + transport & distribution costs (=coal sales); Closure costs; Wages of workers in alternative jobs; Social mitigation cost (incl transfer of workers, free coal & special employment programs); Maintenance and operation of social assets; and Administration of closure program. In aggregate terms, the net benefit of implementing the project is, thus, equal to the difference between the benefits minus the costs under the with project and no project scenarios. The economic rate of return works out to 55% (ranging from 20% for Removskaya, 93% for Pravda and 65% for Krasniy Oktyabr). The ERRs are high because of the avoidance of continued future losses and subsidies. 5.4 The table also shows that the closure of a mine causes a substantial redistribution of income between different groups. Specifically, mine workers will be net losers if the sum of wages in alternative jobs plus severance, unemployment and social security payments is less than the wages that they currently receive from the mine. The payment of wages has often been delayed by many months, so the magnitude of this loss may be small or zero. High rates of voluntary tumover in the industry -- prompted by late payment of wages -- suggests that this may, indeed, be the case. On the other side, the Government budget is likely to gain because the fall in subsidies (after allowing for closure, social mitigation and other costs) will exceed any loss in revenue. However, in this context the Govermnent is simply the channel through which money is transferred from taxpayers -- other households -- to those who benefit from the continued operation of the mine. This means that the overall distributional impact of the project may be positive if the typical taxpayer or recipient of government transfers is less well-off than the typical recipient of mining subsidies. The key variable  43 is how many workers will find alternative jobs in the short- and long-term. In Table 3.4, estimates were presented about the likely magnitudes of those who might find employment versus those who might not, and in which risk categories. In the middle case, 66 percent would not find alternative jobs in the near term (two years), but over a longer term, the outlook would improve. The mitigation benefits provided for under this Pilot Project offer social protection to meet these concerns. Table 5.1: Costs and Benefits of Closing Mines in Ukraine (Pravda, Krasniy Oktyabr, and Removskaya) Agent Costs/Expenditures Benefits/Revenues A. Mine continues to operate Mining Material inputs (incl tax) Revenue from coal sales enterprise Equipment replacement (incl tax) Subsidies received by mine Labor costs Wages & benefits (incl free coal) Social security charges & taxes Coal cleaning costs Coal transport & distribution Taxes & royalties oni coal production Workers Wages in alternative jobs Wages & benefits from mine Rest of Import cost of material inputs Sales of material inputs (excl tax) economy Import cost of equipment Sales of equipment (excl tax) Marginal cost of transport & distribution services Sales of coal transport & distribution services Government Subsidies to mine Taxes, etc from coal production Future mine closure and social mitigation costs Taxes on material inputs, equipment, etc Social security charges & taxes B. Immediate mine closure Workers Wages in alternative jobs Severance, unemployment and social security payments Wages in alternative jobs Rest of Coal imports Revenue from coal sales economy Marginal cost for transport & distribution of Value of output produced by redeployed imported coal miners Wages paid to miners in alternative jobs Social security charges & taxes for new employses Government Mine closure costs Social security charges & taxes for new Social .-.itigation costs employees Transfer of workers to other mines Severance, unemployment and social security payments Costs of special employment programs Free coal for former mine workers Maintenance & operation of social assets Administration of closure program  44 5.5 Risks. There are several significant risks (hence the Bank felt it necessary to start with a Pilot Project): (i) the affected workers might not be able to find other jobs and thus the social mitigation measures as provided for in the Project might prove inadequate. * Approach: The Government has adopted a regional approach starting this Pilot Project through one Oblast. UDKR will mount specific monitoring/evaluation of job search progress; work closely with the job counsellors, and review whether the package of social mitigation measures will need to be modified as implementation proceeds. (ii) A second risk is that the disparate interest of workers, mine management and the Government could result in inaction and social dislocation. * Approach: The Government is mounting increased public discussions of the sector restructuring program. 7he PSC would review implementation very closely and Bank supervision should liaise intensively with the PSC. (iii) A third risk is that the UDKR could become ineffective as it attempts to handle the mine closure process, the social mitigation and the economic regeneration activities. & Approach: Substantial technical assistance will be provided by the U.K. Know-How Fund to assist in start-up and early operations. The Donetsk Oblast will assist in economic regeneration. 5.6 The risks of the Project are considerable. Yet, the Government has decided for very sound reasons to proceed with restructuring of the coal sector, including closure of unprofitable mines. There is little doubt that with mines being closed the miners and related workers (and their families) will be better off with the mitigation package as included in the project, than without it. In fact, in the half-dozen mine closures that have occurred over the past five years, there was no mitigation package to speak of, and the restructuring of the sector became delayed. The design of the project, with its mine-by-mine approach, allows the GoU and the Bank to review progress closely and "to leam by doing" in this challenging initiative of implementing a well-targeted social protection safety net. 5.7 The risks have also been reduced through careful project design, including such steps as: * provision of initial technical assistance to the UDKR and to design institutes (financed by the Japan PHRD); * increased consultations with stakeholders during Pilot Project preparation; * contracting of the physical closure of the mines; and * inclusion of detailed monitoring and evaluation mechanisms for inplementation of the Project.  45 VI. AGREEMENTS AND RECOMMENDATIONS 6.1 Prior to negotiations, the following actions were carried out: (i) the Government designated the three mines under the project as mines that will be closed (para 3.2). (ii) the Government registered the UDKR, appointed a chief executive, and approved UDKR's charter, including its operating and staffing plan (para 4.2);'5 6.2 The following agreements were reached during negotiations and are reflected in the Loan and Project Agreements and recorded in the Minutes: (i) the Government will establish the Project Steering Committee (para 4.1); (ii) a Charter for the UDKR, satisfactory to the Bank will be prepared for its operations (this has been done); (iii) the three participating cities/towns (Donetsk, Yenakievo, Snezhnoye) has taken over the social assets of the three mines pursuant to the Participating City Agreements (para 3.42 and Annex 9); (iv) obligations to affected workers (such as three months severance and disability payments) will be met (paras 3.23); (v) the eligibility criteria for micro-credit lending to be developed prior to disbursements (para 3.36); and (vi) the UDKR will collect and document information necessary for monitoring and evaluation; such information will be submitted every three months (para 4.26 and Annex 17). 6.3 The following are conditions of effectiveness: (i) that the Borrower will enter into the Subsidiary Agreement with the UDKR; and (ii) that the UDKR will be adequately staffed to carry out its role and its functions under the project. 6.4 Conditions of disbursement for their respective categories are: (i) adoption of a mine closure plan by the UDKR for each of the 3 mines, satisfactory to the Bank, including the environmental mitigation plan; 15/ MCI Decree No. 11, dated January 12, 1996; UDKR was registered on March 13, 1996. The charter (ustav) was approved by rt.e Minister of Coal Industry on March 1, 1996.  46 (ii) for the social mitigation package, the UDKR will prepare a manual or other documentation of the procedures for making and accounting for payments to affected parties, and for the heating subsidy (para 3.44). This would include details of required documentation for confirming the eligibility of recipients to receive social mitigation payments and the coal distributions (para 3.5 and Box 4.1); (iii) for the micro-credit component, execution of a satisfactory Fiscal Agency Agreement between the Borrower and the agency selected for carrying out the micro-credit lending. This should include appointment of the agency to appraise the micro-credits and supervise lending, including obtaining repayments from beneficiaries, application procedures, selection criteria, and terms and conditions of on-lending. The administration costs of the fiscal agent would be covered by a management fee out of proceeds from the subcomponent (para 3.35 - 3.38); and (iv) the Borrower will conclude a Subsidiary Agreement with the Donetsk Oblast which would include procedures to transfer the social facilities to the three municipalities (paras 3.39 - 3.42). 6.5 Subject to the above conditions, the proposed Coal Pilot Project is suitable for a loan to Ukraine of US$15.8 million for a period of 17 years, including five years grace at the Bank's standard variable interest rate.  UKRAINE COAL PILOT PROJECT ANNEXES   ANNEX I Page 1 of 2 PROTOCOL DISCUSSIONS BETWEEN REPRESENTATIVES OF THE GOVERNMENT OF UKRAINE AND THE WORLD BANK ON RESTRUCTURING THIE UKRAINIAN COAL INDUSTRY JANUARY 15-20, 1996, LONDON In view of the (i) need to increase the efficiency of the coal industry of Ukraine, promote competition, improve the profitability of enterprises, and speed up restructuring; and (ii) the commitment of the World Bank to actively support the achievement of these goals; Taking into account the experience of Great Britain, Hungary, Belgium; and France in the restructuring of their coal industries; and Considering a number of proposals prepared by the Ukrainian side and the World Bank; The delegations reached agreement on the need to implement the following measures: Establishment of coal markets by providing enterprises the right to sell all their coal at prices freely negotiated with customers. Corporatization of viable coal mines while transfering the mines identified for closure to a newly created ehltity, Ukrainian Coal Company, entrusted with the management of the mine closure process. Closure of uneconomic mines with the aim of minimizing the technical cost and the time required for closure while taking into account the need to protect the environment and the livelihood of people affected by mine closures. Transfer of social assets and liabilities from the mining industry to local governments. Development and implementation of programs to support the generation of employment in regions/cities where major job losses occur as a result of mine closures and the rationalization of employment in remaining mines. Elimination of cross-subsidies between mining enterprises and allowing enterprises to decide about the best use of their operating profits.  ANNEX 1 Page 2 of 2 Concentration of state support on covering the technical and social costs of mine closures while relying on the banking sector to provide funds for commercially viable investments. In order to assist Ukraine with the implementation of the above measures, the World Bank plans to provide loans for the coal sector in a total amount of US$ 300-400 million in the 1996-98 period. Within this amount, US$ 80-100 million is planned to be approved in 1996. The proceeds of these loans will be utilized to finance investments in the viable part of the coal industry, cover part of the costs of closing down uneconomic mines, assist local governrments in taking over social assets from mining companies, and mitigate the possible negative social consequences of restructuring. The World Bank is prepared to assist the Government of Ukraine in obtaining technical assistance from the UK Know How Fund and other donors for the restructuring of the coal industry. The World Bank is also prepared to assist Ukraine to obtain resources from the Global Environment Facility for the extraction and utilization of coalbed methane. The Ukrainian delegation would like to express its gratitude to the World Bank and the British Know How Fund for the outstanding organization of the meeting, and the very informative and useful visit to a number of British coal mines. For the Ukrainian delegation: For the World Bank: V. 1. Yevtukhov D. Lallement Vice-Pr Minister fq ECqI kVja iq1jqqto  ANNEX 2 Page 1 of 3 UKRAINE COAL PILOT PROJECT ENACTMENT OF THE PRESIDENT OF UKRAINE On Coal Industry Restructuring 1. With the aim of raising the efficiency of the coal industry of Ukraine, carrying out its restructuring under conditions of market reforms, creating a competitive environment and in accordance with point 7 of Article 24 and part two of Article 25 of the Constitutional Agreement between the President of Ukraine and the Verkhovna Rada of Ukraine "On Main Principles for the Organization and Functioning of State Power and Local Self-Government in the Period till the Adoption of the New Constitution of Ukraine," and Article 3 of the Law of Ukraine "On Privatization of State Enterprise Property", I decree: 2. Ministry of the Coal Industry of Ukraine shall undertake the following measures for the restructuring of the coal industry: o in the period of one month to set up state enterprises having the status of legal entity, on the basis of mines and other structural subdivisions, which do not have the status of legal entity and are part of the associations, trusts, or combines belonging to the sphere of management of the Ministry of the Coal Industry of Ukraine; o to ensure the separation of facilities from the coal extracting and coal washing state enterprises, the activity of which is not connected with the extraction and processing of coal; o by September 1, 1996 in coordination with the Ministry of Economy of Ukraine and the Antimonopoly Committee of Ukraine to carry out the corporatization of State enterprises, belonging to the sphere of management of the Ministry of the Coal Industry of Ukraine, in the procedure deternined by Enactment #210 of the President of Ukraine of June 15, 1993 "On Corporatization of Enterprises" (with amendments introduced by Enactments of the President of Ukraine, #354 of August 21, 1993, #580 of December 13, 1993 and #20 of January 22, 1994), transforming these enterprises into state open joint-stock companies, state joint-stock coal companies as well as establishing state holding companies in accordance with Enactment #224 of the President of Ukraine of May 11, 1994 "On Holding Companies, Set Up in the Process of Corporatization and Privatization." 3. Not subjected to corporatization shall be unprofitable state mining enterprises (or strip mines), to be closed in the established procedure, their property shall not be included in the authorized funds of state open-joint stock companies, state joint-stock coal companies and state holding companies being established in accordance with Article 1 of the present Enactment. The Ministry of the Coal Industry of Ukraine shall undertake measures for the leasing, privatization of unprofitable state  ANNEX 2 Page 2 of 3 mining enterprises (or strip mines) in the established procedure. In three months time the Ministry of the Coal Industry of Ukraine together with interested ministries, other central bodies of state executive power, Volyn, Donetsk, Zhytomyr, Kirovograd, Lugansk, Lviv and Cherkassy Regional State Administrations, shall work out and submit a state program on the closure of certain unprofitable state mining enterprises (or strip mines) to the Cabinet of Ministers of Ukraine, having envisaged, in part, measures for the social protection of the workers released in connection with the closure of such enterprises. 4. To establish that the administration of shares of state open joint-stock companies, state joint-stock coal companies, as well as state holding companies, established in accordance with Article 1 of the present Enactment, shall be carried out by an authorized persons appointed by the Ministry of the Coal Industry of Ukraine. By June 1, 1996 the Ministry of the Coal Industry of Ukraine with the participation of the Ministry of Economy of Ukraine and the State Property Fund of Ukraine shall work out and submit proposals as to the procedure for the administration of shares of state open joint- stock companies, state joint-stock coal companies, as well as state holding companies, established in accordance with Article 1 of the present Enactment. 5. Grant the right to state open joint-stock companies, state joint-stock coal companies, as well as state holding companies, established in accordance with Article 1 of the present Enactment, to independently sell their own products for contractual prices. The declaration of prices on such products on the domestic market of Ukraine shall be introduced only if the level of prices surpasses the level of prices on the world market. 6. A registration fee for the state registration of state enterprises, which are being established in accordance with paragraph two of Article 1 of the present Enactment, shall not be charged. 7. To establish that the social assets of enterprises, belonging to the sphere of management of the Ministry of the Coal Industry of Ukraine, shall be subjected to separation and transferred to the municipal ownership of corresponding administrative and territorial bodies. The Cabinet of Ministers of Ukraine, Volyn, Donetsk, Dnipropetrovsk, Zhytomyr, Kirovograd, Lugansk, Lviv and Cherkassy regional State Administrations shall undertake measures to ensure the stage by stage transfer of social assets, specified in the part one of this Article, to municipal ownership during 1996 and the first half of 1997. 8. Objects separated in accordance with paragraph three of Article 1 of the present Enactment, and whose activity is not connected with the extraction and processing of coal, shall be subjected to privatization according to the Legislation of Ukraine. 9. The Ministry of the Coal Industry of Ukraine together with the Ministry of Economy of Ukraine, the State Property Fund of Ukraine and the Antimonopoly Committee of Ukraine shall work out and submit to the Cabinet of Ministers of Ukraine proposals on reducing the list of state enterprises, belonging to the administrative sphere of the Ministry of the Coal Industry of Ukraine and are not subjected to privatization, for the further solution of the issue in the established procedure. 10. To establish that funds, received from the privatization of state property during the  ANNEX 2 Page 3 of 3 restructuring of the coal industry, shall be entered into the non-budget State Privatization Fund. After the reimbursement of costs, connected with privatization, the remaining funds shall be addressed to technical upgrade and supplementing the working capital of coal extracting and coal washing subjects of entrepreneurship, established in accordance with the present Enactment. 11. The Cabinet of Ministers of Ukraine shall undertake measures to introduce rental payments for coal in 1996, differentiated depending on the mining and geological conditions of the coal deposits. 12. To establish that restrictions, envisages in para. 23 and 25 of the Statute on Holding Companies, established during the process of corporatization and privatization, approved by Enactment #224 of the President of Ukraine of May 11, 1994, shall not apply to state holding companies, being established in accordance with the present Enactment. 13. The present Enactment shall go into force on the day it is signed. L. KUCHMA President of Ukraine Kyiv February 7, 1996 #116/96  ANNEX 3 Page 1 of 4 UKRAINE COAL PILOT PROJECT PRAVDA MINES - DONETSK 1. The Pravda mines are located in the Proletarsky Raion of the City of Donetsk. It is one of the oldest raions of the city, and is physically remote. The Proletarsky Raion includes several mines in addition to those in the Pravda group. All are older mines. The city as a whole has a relatively diversified economy, and thus the best chance of the three pilot cities to absorb coal workers in other sectors. Some two thousand workers are employed by the Pravda group, including miners, surface workers, managers, and others. The Proletarsky Raion is the largest raion in Donetsk, with a population of 138,000. Of these, 39,000 (28.26%) are pensioners. 1. Technical issues 2. Pravda Mine. This mine is located next to the city of Donetsk, in an area where coal mining began a century ago. Underground mine workings proceeded from the area where the coal seam reach the surface to increasing depth by a complex network of galleries and shafts. Production costs and the burden on the urban enviromnent have become so high that continuation of exploitation is no longer justified. The mine property includes land where mining ceased long ago but many small shafts, with partially unidentified location, were left behind unfilled. Those shafts now pose a safety risk and environmental nuisance. Their detection and proper filling is a key feature of the physical closing plan for this mine. Apart from this, the closing process of the Pravda mine is uncomplicated and low-cost. 2. Social Infrastructure The following assets are associated with the Pravda mines: - 148,500 square meters of housing, in 627 buildings, housing 9,842 people - one kindergarten, with 96 places, and an enrollment of 72 children' - one dormitory, with 40 places, housing 40 people - three cultural facilities, with a total capacity of 1,328 - two recreational bases (one on the Azov Sea of three cottages with 2 places each, and one 20 km. from the mine with 15 cottages with 8 places each) - one summer camp, that was apparently never actually opened 1/ A site visit found 12 children and 14 employees at the kindergarten.  ANNEX 3 Page 2 of 4 3. City officials plan to initially take on all of the social asset-related employees together with the social assets, but that they will be looking for opportunities to restructure to operate more efficiently. Proletarsky Raion officials are exploring means by which the cultural facilities and clubs can remain in operation after the mine closes. They are working on a plan to consolidate kindergartens for greater efficiency. City officials are concerned with practical aspects of the transfer, for instance at what level of local government the housing will be owned and operated. The City has appointed a special commission to document the condition of each house to be transferred to the City.2 4. Raion officials will be the ones responsible for operating the social assets, and are working with the City of Donetsk officials to arrive at joint solutions.3 City officials plan for local authorities to take over all of the social sphere from the Donetskugol Association, regardless of any particular mine closings. Under this scheme, housing would be transferred to the city level, while waiting lists for housing, kindergartens, and cultural facilities would be transferred to the raion level. 3. Labor Issues - breakdown by age - number of "disability" recipients - number of "retirement" recipients - other demographic informnation, as available) 5. Raion officials predict that half of the Pravda mine workers will retire. They would like a significant portion of the remaining workers to be employed over an extended closing period at the mines, and envision that the rest would go to other mines. Both City and Raion officials are concerned that a fast closing will throw a lot of people out of work. Miners consider their jobs to be prestigious, and psychologically resist entering service industries. The City would like to see surface facilities at the mines converted into small factories, although British experience suggests this is an inefficient approach. 4. Financial Impact 6. According to figures provided by the City Administration, total expenditures for upkeep of the 2/ This commission is to determine the amount of repairs needed to each house, and these calculations may serve as the basis for a claim by the City against the mining association or any available successor. 3/ From the City's point of view, they finance the operations of the City's raions through the city budget, and thus are the appropriate level to consider the financial impacts associated with increased operating costs. Under Ukraine's multi-level system, Oblast officials similarly feel that since they finance the cities' operations, they are the appropriate level to consider financial issues. However, because the methods by which each level judges how much to provide to lower levels are obscure, it is recommended that funding be provided to the operational level, whether that is the city or the raion, and not to supervisory levels.  ANNEX 3 Page 3 of 4 mining association's housing in the fourth quarter of 1995 were some 150 billion krb., and for 1996 are projected at some 678 billion krb. This is approximately $1.16 per square meter per year, and is generally consistent with figures from other cities for maintenance of older, detached housing.4 City officials report that the City generally maintains housing to a higher standard than the mine enterprises, although formerly this situation was reversed. 7. All of the Association's housing is planned to be transferred to municipal ownership in 1996. In general, mine-owned housing is separate, small houses, while the city owns and operates mostly apartments. At the overall unit operating cost of $1.16 per square meter, this implies some $173,000 in annual operating expenditures. However, the mining association separately calculated 24.029 billion krb in losses (net of user charges) for the Pravda housing in the first eight months of 1995. This comes to $1.35 per square meter, or approximately $200,000 per year in annual operating expenses. These two figures are close enough for the purposes of this scoping exercise, and it is pro- posed that we accept the latter figure. 8. In addition, based on calculations provided by the mining association, the city administration will incur some $42,450 in operating losses associated with Kindergarten #232. If all social infrastructure (including cultural and recreational facilities) were transferred, the mining association calculates the annual operating loss would be some $263,000. 9. The potential loss of tax revenues is not a large concern to the City of Donetsk, because the coal enterprises are not currently paying significant taxes, although they have a theoretical obligation to do so. Coal enterprises are engaged in the barter economy. Sometimes the City takes coal in lieu of taxes, but it is difficult because coal production has declined sharply and what there is needed most by power plants and other production enterprises. 10. Raion officials believe that if the Government or World Bank provides transitional funding to help offset these operating losses, it should be provided directly to the Raion. They suggest that funds be deposited into the Raion's account in the PromInvestBank. However, City officials believe the money should be deposited in the City's account, and not given to them through the national budget system. 5. Other Social Commnitments 11. About 990 people are on the Pravda mines' waiting list, and more than a thousand on the Raion waiting list, but Raion officials do not consider these numbers (or the waiting lists) meaningful. The average wait for an apartment in the raion is said to be 24 years. By the time a worker marries and becomes eligible to be on the list, he or she may very well not live long enough to get an apartment. Many people who have a legal right to be on the list have not bothered to register, because they don't expect to get housing from the official waiting lists. 4/ These figures are net expenses after contribution of user charges, which are now set at 30-35% of expenses for housing and co.amunal services, and are scheduled to increase to 60% by 1997. However, as prices have increased, non-payment rates have also. Donetsk officials estimate that 30-40% of residents do not pay on time and that 15-20% never pay. 35- 4055 of the housing in Donetsk has been privatized, but this. does not affect charges paid by residents.  ANNEX 3 Page 4 of 4 12. Formerly, a few apartments each year were built in the Raion for the Donetskugol Association, which gave money for apartment construction to the City of Donetsk. The city built housing and distributed it to various entities in proportion to the capital they had contributed. However, even this construction has stopped. Neither have apartments been built recently for the Raion's own waiting list, for people who do not work for one of the enterprises. The last people to receive apartments from the Raion list were people who had been waiting since 1976. At least half the people on the Raion list are pensioners. The only apartment distributions occur when a resident emigrates or dies without heirs. 13. Miners and retirees living in housing without central heating receive free coal, either 5.9 mt or 2.9 mt, depending on the quality of the coal.  ANNEX 4 Page 1 of 3 UKRAINE COAL PILOT PROJECT KRASNIY OKTYABR MINE - YENAKIEVO 1. The City of Yenakievo (pop. 183,200) is subordinated directly to Donetsk Oblast. It has no raions, and thus the city administration is the organ of local government which will assume re- sponsibility for maintenance and operation of housing, kindergartens, and other social infrastructure. It has a somewhat diversified economy, with relatively better mines and other industries (especially metallurgy) that provide some capacity to absorb redundant coal sector workers. 1. Technical Issues 2. This mine is located in the Central Donbas, where the coal seams are steeply inclined, mining conditions most difficult and production costs highest. Mine development and coal extraction have been stopped. The mine continues to pump water in order to protect neighboring mines from flooding. Since those mines are also uneconomic and have to be closed soon, a low-cost scheme for temporary continuation of water pumping from Krasniy Octyabr has been designed. The capital costs for this scheme have been included for financing under the proposed loan; the operating costs after completion of the project would be covered by UDKR until the neighboring mines are closed. Apart from the water pumping scheme, the closing process of the Krasniy Octyabr mine is uncomplicated and low-cost. 2. Social Infrastructure 3. The following social assets are associated with the Krasniy Oktyabr mine: - 46,000 square meters of housing - 3 boilers, with 2.7 km of heating pipe - 8.1 km of sewer mains - three kindergartens, with 320 places, and an enrollment of 256 children - one dormitory - one cultural facility, with a total capacity of 350 - two sport complexes 4. The housing associated with the Krasniy Oktyabr mine is a standard mining settlement, consisting mostly of one story detached houses and a few two story buildings. 60% have no communal services, such as water and sewer. This is typical of the housing in many mining settlements, and is considered considerably less desirable than multi-family apartment buildings, almost all of which have water, sewer, heating, and other utilities. The city is now considering a specific program to transfer these mine-owned houses to the city administration, and expect that this  ANNEX 4 Page 2 of 3 will be done, but know that this will mean an additional operating burden on their already strained city budget. Only 30% of the cost of providing housing and communal services is now covered by user charges. A single housing maintenance committee ("ZhEK") now serves both the Krasniy Profintern and Krasniy Oktyabr mines. 5. City housing officials would like to try to encourage residents of detached, one-story homes to privatize. However, as elsewhere in Ukraine, the legal obligation of the city or enterprise to completely renovate ("remont") housing prior to privatization is a barrier. At this point some 36% of the housing in the city as a whole has been privatized, but administrators believe this figure is much lower with the mine housing, which is older and in worse condition. 6. Three of the four kindergartens formerly associated with the Krasniy Oktyabr mine have been transferred to another mine (the Krasniy Profintern mine). One was apparently leased for business uses. These three or four kindergartens can be transferred to the city, adding to the city's existing 25 kindergartens. 7. The city has, at least in theory, merged all of the social infrastructure of the Krasniy Oktyabr mine with those of the Krasniy Profintern mine, including kindergartens, housing, palaces of culture, and even the housing waiting list. They believe they have already rationalized kindergarten operations to the extent possible, combining different kindergartens and closing those in deteriorated buildings. Children are enrolled where there is room, without regard to their parents' employment. The transfer of social assets from unprofitable mines to other mines, or to the city administration, is an ongoing process throughout the Donbas region. City officials feel that inter-mine transfers are not a real solution. It does not remove the costs from the industry, nor does it solve any problems more than temporarily since most of the mines in the area are threatened. 3. Labor Issues 8. The biggest single concern city officials expressed regarding the mine closure is the potential unemployment problem, especially for women. Some ten percent of mine workers are women which specific skills (clerical, personnel) that are not readily transferable to other mines (as they have sufficient surface workers). City officials believe that most underground workers can find jobs at other mines. They estimate that some three to four hundred people will not be able to find other employment. 4. Financial Impact 9. Apart from the increased burden from operating loss-making housing, city officials do not expect significant financial impacts from the closing of the Krasniy Oktyabr mine. City officials in Yenakievo do not expect their tax revenues to go down significantly when the Krasniy Oktyabr mine closes. They report that the city receives essentially no tax payments from the OrdzhonikidzeUgol, the mining association of which K.O. is a part. There is no revenue from value added tax (VAT) because there is no VAT on coal. The City receives no enterprise profit taxes because the enterprises are all loss-making. The only revenues the city does receive from the mining association are some payments on land and some payments for communal services. There may be some indirect lost  ANNEX 4 Page 3 of 3 individual income tax revenue from the three to four hundred workers who the city anticipates will not find other jobs. 10. The city owes significant debts which it cannot pay because of lack of revenues, and is owed significant debts by enterprises located in the city, including coal enterprises. 5. Other Social Commitments 11. The mine has a list of some 300 people who are theoretically entitled to housing. Those waiting the longest have been on the list since the list since the mid-1980s, and will not want to lose their place in line as they transfer to new jobs. The mine list is perceived as better than the city's own list, because the city's list has people who have been waiting since 1978.' Although city officials have theoretically moved people from the Krasniy Oktyabr waiting list to the Krasniy Profmtern mine list (a neighybouring mine). Overall, there are some 6,000 people on various city and enterprise waiting lists in Yenakievo, of whom approximately 2,000 are on the city's own list. 12. City officials expect to move the names of the Krasniy Oktyabr mine workers from the mine's list to the city's list when it closes. During the last three years, the mine has not built any new housing and has not paid the city to build any new housing. For the last two years, the city itself has built only some 4,000 square meters of housing per year. 1/ Those persons on the housing waiting lists are not homeless. They are living in crowded situations, with relatives, or in other situations that are recognized as inadequate.  ANNEX 5 Page 1 of 4 UIRAINE COAL PILOT PROJECT THE REMOVSKAYA MINE -- SNEZHNOYE 1. Like Yenakievo, the City of Snezhnoye (population 95,600) is a city of oblast subordination, and has no internal raions. Although the city is physically closer to Lugansk, it is part of the Donetsk oblast, and its economic life is integrated with the Donetsk oblast. The city grew out of a collection of settlements clustered around mines. Its housing is predominantly village-style cottages with a few low-rise multiple family units. The housing stock is the oldest of the three cities, and the city has the least diversified economy. There is little employment which is not related to the coal industry, and the other mines in the region are generally also old and provide little opportunity for absorbing redun- dant miners. This is the most remote of the three communities affected by the pilot project, and the most dependent on the mines. 2. The Removskaya mine has been in operation since the 1950s. The mine itself employs 1401 workers, of whom 939 work underground. Production has been decreasing, and mine managers are well aware that the mine has nearly exhausted its resources. 3. By contrast with Yenakievo, the older mines in Snezhnoye produce anthracite coal which is used only for heating homes and has little commercial value. The mines in Yenakievo produce coking coal, for which there is at least some demand. Snezhnoye administrators point out that the city of Yenakievo is a younger city with a more diverse industrial base, specifically the metallurgical factory located there. 1. Technical Issues 4. Removskaya Mine. This mine is located near the southern rim of the Donbas basin where anthracite coal prevails. A shrinking market for anthracite and depleted coal reserves require closing of this mine. The coal reserves originally planned for exploitation have been depleted years ago and the mine has been surviving by recovering coal, in an improvised way, from pillars left behind and by starting mining in a thinner coal seam at higher costs. These operations are not sustainable and the mine should therefore be stopped, even though its present production costs are not among the highest. From the viewpoint of physical closure, the Removskaya mine is the simplest of all three mines and is problem-free. 2. Social Infrastructure 5. The social assets associated with the Removskaya mine are shown in Table 1. The mine housing is old, and is disparagingly referred to as being 3 stories or less. In Ukraine, multi-family apartments are usually considered more desirable than detached "village-style" housing. Some of the City's housing dates from 1905, and has not been renovated since. It is generally not served with  ANNEX 5 Page 2 of 4 municipal gas lines or other communal services. 40% of the city's housing is connected to sewer lines, while the majority uses outhouses. 6. The Snezhnoye city administration has two ZhEks. One spends 80,000 krb annually per square meter for maintenance. The other spends 95,000 krb. By contrast, the mine ZhEK spends some 150,000 krb per square meter. City officials believe this is due to the dilapidated condition of mine housing, and the fact that it is inefficient single-family detached housing, not because it is maintained to a higher standard. The city administration has eight boilers serving its housing stock, while the mining association has 45 separate boilers to maintain for its housing. Because of these problems, and because it does not want to inherit the renovation responsibilities for this housing, the city administration is reluctant to take over the mine housing. 7. All of the housing is maintained officially on the books of the TorresAntrasit mining association as a whole. None is officially associated with a particular mine, though physically, it is. The TorresAntrasit association owns 406 thousand square meters of housing in Snezhnoye (some 1,700 houses), slightly less than a quarter of the city's total housing stock of 1,770 thousand square meters. Some 37% of the city's housing stock is reportedly privatized, and city officials believe the same percentage of mine housing has been privatized. 8. Each mine has its own electric substation which serves housing. These substations step down the voltage from the high levels used for transmission mains to levels suitable for domestic use. If the mines close, the city or the local electric enterprise will have to take over operation and maintenance of these substations. Transportation is a problem for kindergartens. People cannot send their children to kindergartens 5 to 10 kilometers away in another settlement. Because of distance, city officials do not see much opportunity for rationalizing kindergarten operations by combining operations. 9. As elsewhere in Ukraine, user charges cover perhaps 30% of the cost of providing housing and communal services, but the city's large population of pensioners pays only 10% of the normal rate, so the cost recovery problem is compounded by the aging population. 3. Labor Issues - face workers other underground workers surface workers associated with the mine 10. City officials are very concerned about employment opportunities for mine workers once the Removskaya mine is closed. Inevitably, they know, at least three other similar mines in the city will  ANNEX 5 Page 3 of 4 also have to close. Both city and mine officials feel that the right answer would be to establish a new enterprise, perhaps a manufacturing enterprise, at the mine site. 11. With four neighboring mines also slated for closure in the next 2-3 years, the city officials envision 10,000 potentially unemployed residents. The city of Snezhnoye grew out of a collection of eleven separate settlements surrounding specific mines. These sub-communities are 5 to 7 kilometers apart. The city is some 30 kilometers across. Each community was always more or less reliant on the mine for communal services, distribution of goods, and other municipal functions. The people living in the Removskaya region do not have good public transportation links to the rest of the city, let alone other cities in the area. Although the city is physically closer to Lugansk, its economic and transportation links are with Donetskaya oblast, of which it is a part. There is no train transportation for workers to get to jobs in Lugansk oblast or other regions. 12. Seven mines have already been closed in Snezhnoye, though their settlements remain. The Soviet-era policy when closing of mines was to plan new production at the site, but in fact this has not worked, and these isolated settlements are dilapidated. 13. Transportation is one of the biggest issues for this city. The city pays some 60 billion krb to a State enterprise for municipal bus service, since the Government requires cities to make up operating losses from transport services. But the losses result in part from the low levels at which the Government sets the fares, and are exacerbated by the fact that some 15 privileged categories of citizens pay no fares or only token amounts. 4. Financal Impact 14. As with other cities, the base-line financial condition of Snezhnoye is in poor condition. The city of Snezhnoye's 1995 budget was originally set at 980 billion krb ($5.4 million US dollars), but was reduced by the oblast to 580 billion krb. Of this, the city was supposed to receive some 330 billion krb in revenues, principally the so-called regulating revenues, and 250 billion krb in subsidies from the oblast. However, this budget does not correspond with reality. For example, at the time of our visit, the city of Snezhnoye owed suppliers some 108 billion krb in unpaid debts, principal among these some 40 billion krb for water service and some 45 billion krb for energy. Enterprises owed the city some 40 billion in unpaid taxes. 15. The city officials do not see a direct financial impact from the closing of the mines, because they receive few revenues from the mines. As previously mentioned, there is no VAT on coal. In the case of Snezhnoye, any enterprise profit taxes would be paid to the city of Torres, where the TorresAntrasit mining association is headquartered, rather than to the city of Snezhnoye where the mine is located. The city has been taking on more and more civic obligations from the mines as their financial picture has worsened, leaving the city in extreme financial distress. There is no money for solid waste disposal, drainage, or sanitation.  ANNEX 5 Page 4 of 4 5. Other Sodal Commitments 16. All municipal and enterprise lists in the city include some 4,500 people. 1,280 of these are on the city's list, 190 on the Voskhod mine list. Each mine maintains its own list. The people who have been on both the city's and the mine's list the longest have been waiting since 1978. 17. Until three years ago, each enterprise in the city gave the city money for housing construction. The city did the construction and assigned units in proportion to the capital contributed. But, as in Yenakievo, the enterprises have stopped paying these construction funds, and the city has stopped construction. At present, the only way for a person on the waiting list to get an apartment is if a resident leaves town or dies without an heir. 18. The mine is also supposed to fund "disability" payments worth 160 billion krb per year. Because the mine cannot pay, the TorresAntrasit Association has been making some payments, but the City says the Association is now 630 billion krb in arrears ($3.5 million U.S. dollars), and that figure is growing. City officials are concerned that if the mine is closed, there will be no payments made into the city's pension fund. The oblast, which had been making up the shortfall, has notified the city that after the end of 1995 they will be unable to help the city meet pension obligations. Pensioners are receiving 20% less than their entitlements, because of the shortfall in available funds. Roughly thirty percent of the 100,000 residents of Snezhnoye are pensioners. City officials were quite concerned about what mechanism can be set up to cover these recurring expenditures.  ANNEX 6 Page 1 of 11 SUMMARY OF ENVIRONMENTAL ISSUES AND MITIGATION OPTIONS Note: This table lists features, impacts and mitigation options which generally apply to closing of underground coal mines. Items relevant to the three mines under the pilot project are highlighted in italics. The purpose of this table is to provide a checklist for the preparation of the environmental Management Plan of the three mines. NEGATIVE ENVIRONMENTAL PHYSICAL FEATURES IMPACTS MITIGATION OPTIONS Terracones and Rock Piles Air Oualitv Air Oualitv Waste rock produced from the mine is dumped in Sulphur Oxides cone shaped piles. The pile may also contain coal, Particles timber, fabric and possibly scrap metal. Many of Methane * Extinguish heatings in waste piles. these waste piles have heated spontaneously and are Carbon Oxides burning with release of gases and smoke. Oxides of Nitrogen * Level terracones. Note: According to the Ukrainian design institutes, * Strong sulphurous odours. * Keep terracones and piles wet. only one terracone (at the Removskaya mine) is burning among all terracones and rock piles of the * Chemical reaction with sunlight creates ground * Supply air packs. three mines under the pilot project. level smog. * Move most susceptible members of community. * Harmful to human breathing especially asthmatics. * Encourage resistant plants and animals. * Can kill animal and plant life. * Develop greenhouse gas offsets. * Poor visibility for air and ground traffic. * Revegetate. * Contributes to potential for global climate change. * Aesthetics imnpaired.  ANNEX 6 Page 2 of 11 ,EOAIW E - - E i .Ni: V - 7 ! . E .: E - - ....:: - . N-.-M E E E :: E : :: . i, - E.:.E.:.:...i Termcones and Rock Pies Surface Water Ouslt Surface Water Ouallv Sulphur Acids * Determnine background surface watcr quaLi and Steep side slopes and various sizes of material leads to Alkaline Salts sources of swface water contamination. erodibility from rain and snow melt. Runoff contains Suspended Solids * Prevent water ruoff into surface streams. solids and possibly chemical contaminants. Heavy Metals * Collect and treat rnmoff. *Create ponds and lakes for untreatable runoff. * Reduced ability to support fish or other * Cover erodible areas. aquatic life. * Bury fines. * Bury and/or seal acidifying material. * Contamination risk for domestic water * Neutralize acids or alkealies. ........ ..supplies. * Treat water for domestic use. * Review current quality standards for mine water * Cumulative contamination of rivers, lakes released from settlement ponds. and ponds. * Monitor water quality and discharge rates. * Build bulrush water filter beds. * Develop streams and ponds for sport fishing. * Re-introduce fish and plants to streams and ponds. * Haul in water for human consutption.  ANNEX 6 Page 3 of 11 NEGATIVE ENVIRONMENTAL PHYSICAL FEATURES IMPACTS MITIGATION OPTIONS Terracones and Rock Piles Groundwater Quality Groundwater Quality (Cont'd) * Leachate could be introduced into the * Collect and treat leachate. The leachate produced by water infiltrating through groundwater flow system. the sites constitutes a potential source of groundwater * Monitor groundwater quality in the vicinity of contamination.. surface disturbances. * Restrict groundwater source development in regions highly susceptible to contamination.  ANNEX 6 Page 4 of 11 N 'EGATMVE ANION TL: l:E..:: :.:::::R::I: :-p fmE i: EAT: I:i: : M :: :.:: .... .. . : :. impR .... ....; ..:EE. :::::: PHYSICAL FE TURES IM~~~~.. ...p ACTS.. . .. MTGAON PT) Tailiines Ponds Surface Water Qualitv Surface Water Oualitv Sludge or waste water containing soil and rock fines Sulphur Acids * Determine background surface water quality and are produced from mines and preparation plants. Alkaline Salts sources of surface water contamination. Sludge is collected in settling ponds where the fines Suspended Solids * Prevent water runoff into surface streams. settle out. Water discharging from settling ponds Heavy Metals * Collect and treat runoff. carry and suspended solids and often chemical * Create ponds and lakes for untreatable runoff. contaminants. * Reduced ability to support fish or other * Cover erodible areas. aquatic life. * Bury fines. Bury and/or seal acidif*ig miaterial. Note: Water discharge from all three mines under the * Contamination risk of domestic water Neutralize acids or alkalies. pilot project (or, possibly, reduced in the case of the supplies. * Treat water for domestic use. Krasni Octiabr mine). * Review current quality standards for mine water * Cumulative contamination of rivers, lakes released from settlement ponds. and ponds. * Monitor water quality and discharge rates. * Build bulrush water filter beds. * Deterioration of surface waters produced by * Develop streams and ponds for sport fishing. decreased mine water release. The mine water may * Re-introduce fish and plants to streams and ponds. be less contaminated than surface water. * Haul in water for human consumption.  ANNEX 6 Page 5 of 11 --- .- --NEGATIVE ENVIRONMNTAL | PHYSICAL FEATURES IMPACTS.. MMGATION OPTIONS Tailinis Ponds Groundwater Oualitv Groundwater Ouality Cont'd) * Potential contamination of groundwater * Monitor groundwater quality in the vicinity of Sludge or waste water containing soil and rock fines resource caused by mining disruption of protective surface disturbances. are produced from mines and preparation plants. cover. Sludge is collected in settling ponds where the fines * Drain ponds and cap sludge in the settling ponds settle out. Water discharging from settling ponds * Rapid distribution of groundwater to reduce infiltration. carry chemical contaminants and suspended solids. contamination through mine workings. * Monitor for coliforms. Note: As water discharge from the three mines under * Prohibit domestic water wells in regions highly the pilot project is being, stopped, risk of groundwater susceptible to contamination. quality deterioration due to discharge from ponds is expected to disappear.  ANNEX 6 Page 6 of 11 ... ...... NSATIVE ENVIRONMENTAL. :::~;:PHYSICAL KEAMM1~S I .ACT MITIGATO PION Underground Workings Closed Safety and Air Quality Safety and Air Oualitv When underground workings are closed, methane gas Methane * Monitor risk zones for methane accumulation. may be trapped, groundwater can build up and subsidence or open pits can pose significant danger to * Risk of asphyxiation of people in conflned * If required, drill methane vent holes. humans and animals. spaces. Note: Risk of methane gas escaping from old mine * Risk of explosive conditions in depressions, workings exists mainly at the Krasni Octiabr mine underground cavities and basements of houses in risk and, to a lesser degree, at the Pravda mine. zones. Drilling and mining has produced openings which Surface Water Ouality Surface Water Ouality extend to surface and provide conduits for rapid transport of surface spills deep into the groundwater Alkalis * Improve surface drainage. flow system. Acids Metals Once a number of mines have been closed, mines Suspended Solids located at a higher elevation will discharge groundwater into the mines located at a lower * Leachate from abandoned tailings, wastes. elevation and cause them to flow to surface. * Loss of an industrial water source. Most of the groundwater previously pumped from an abandoned mine will spill over into operating mines. * Surface flooding caused by abandoned mine discharge. This impact will not occur until blocks of mining operations are closed.  ANNEX 6 Page 7 of 11 . . ........ ..........NE.A TIVEb ENVIRNMETAL.... PIHICAL EM A MIIGATION OPTIONS Underground Workinzs Clsed Groundwater Oualitv Groundwater Oualitv (Cont'd) Flooding * Decrease surface water infiltration rates for both The groundwater flow system near existing water Contaminants From Surface abandoned and operating mines by backflhling wells may change as water levels in the vicinity of the near surface mine workings and drill holes. mines recover. * Mine water spillovers from abandoned mines * Monitor groundwater recovery levels in into operating mines through interconnected workings. abandoned mine. * Abandon mines in blocks rather than individually. * Mine water spill over will place," an increasing water handling and treatment burden on the * Increase pumping capacity of adjacent mines. remaining operating mines. * Develop an alternate source of water for industries, (ie, wash plants) currently using mine * Current water supply systems could become water. more susceptible to contamination. * Identify water supply systems influenced by mining activity. * Monitor water quality of existing groundwater sources. * Continue some limited pumping at the mine to prevent contaminant movement toward existing systems. * Continue to pump the abandoned mine and continue to use the water treatment facilities. Safetv * Seal off underground cavities. * Prohibit entry to area.  ANNEX 6 Page 8 of 11 I NEGATIVE ENVTSMIRONTIONTATION PHYSICAL FEATURES IMPACT MTGATINOPIN Buildmnas and Structures Waste Materials/Safety Waste Materials/Safety Old and abandoned buildings are potential safety Waste Metals * Demolish all old and unused structures. hazards, may contain hazardous materials (PCB's, Waste Brick, Concrete, Asbestos oils, asbestos, acids, alkalies) and contain solid Waste Asphalt * Sort materials for reuse and sale. residues. * Hazardous structures. * Landfill inert waste. Note: The three mines under the pilot project have not been handling significant amounts of chemicals. * Hazardous wastes left after demolition. * Contain hazardous and toxic waste. The surface areas occupied by mine buildings such as * Solid wastes may occupy significant landfill * Maintain monitoring on highly contaminated sites. offices, work shops, warehouses etc., and handling volume. facilities, may have become contaminated with * Restrict access where conditions hazardous. accumulated spills and disposal of liquids. * Aesthetics.  ANNEX 6 Page 9 of 11 .NEGATIVE ENRONMENTAL PHYSICAL FEATURES IMPACTS MIGATION OPTONS Solid/Liquid Wastes and SolidlLiquid Wastes Solid/Liquid Wastes Surface Soils Oils * Prevent furdter additions of most deleterious Decommissioning and abandonment of industrial and Greases contaminants. commercial property normally includes quantities of Acids solid and liquid wastes (wood, metals, chemicals, Alkalies * Prevent oil spills and control waste oil disposal. plastics, construction materials). Often storage sites Chemicals contain large quantities of unidentified mixtures of oils Wood, Metals, Aggregates * Develop secondary uses for used petroleum and other liquids. Sewage lagoons may be included. Sewage liquids and sewage. Industrial areas are frequently contaminated over large * Soil contaminated with oils, chemicals. * Dispose coal washery fines in designated ponds. areas due to incremental pollution. Top soil may have * Leaching into groundwater and domestic been physically removed for development or has been supplies (health risk) - progressively eroded in both quantity and quality. * Storage of unidentWied materials. Note: The three mines under the pilot project have not been handling signficant amounts of chemicals.  ANNEX 6 Page 10 of 11 e :: : 7::: 7 7: : . :: 7:::: : . ::: i . 7 :: :: ::: :.:.... .. ... . . . . ..... ... ... :: . .. . .... . ::.: NE.ATIVB ENVIRONMENTAL : PHYSICAL FEATURES ~~~~~~~~IMACTS: MITIGATION.OTIN Solid/Liquid Wastes and Soil Reclamation Soil Reclamation Surface Soils (Cont'd) Degraded Topsoil * Recontour. Decommissioning and abandonment of industrial and Contaminated Subsoil commercial property normally includes quantities of Poor Soil Structure * Addition of organic mnatter. solid and liquid wastes (wood, metals, chemicals, plastics, construction materials). Often storage sites * Soil structure unable to sustain vegetation. * Revegetate. contain large quantities of unidentified mixtures of oils and other liquids. Sewage lagoons may be included. * Limitation or prevention of vegetation * Construct wind breaks. growth including agricultural crops. Industrial areas are frequently contaminated over large * Treat contaminants to neutralize. areas due to incremental pollution. Top soil may have * Recreation and aesthetic impairment. been physically removed for development or has been * Contain and seal off most severely contaminated progressively eroded in both quantity and quality. * Erodible slopes. soil. * Lost topsoil from wind and water erosion. * Irrigate to dilute contaminants. Note: The three mflines wader the pilot project have not been handling significant amounts of chemicals. * Add nutrients to overcome contaminant effects. * Treat sewage streams.  ANNEX 6 Page 11 of 11 NEGATIVE ENVIRONMENTAL PHYSICAL FEATURES IMPACTS | MITIGATION OPTIONS Tailing Piles Air/Water/Soil Air and Water The fine tailings from many years of mine operations Fines * Level and contour. are stored at site. Tailings piles may include topsoil, Metals overburden, underground dross and residue from coal Rock and Soil * Keep piles wet. separation and cleaning operations. * Wind erosion from exposed faces. * Cultivate and revegetate. Note: Only one of the three mines under the pilot project (Removskaya) had a coal washing plant. That * Water erosion of steeper slopes and fines. * Build wind breaks. plant had not a fine coal washing section (flotation) and has not been using chemical reagents. * Contributes to surface water quality * Create ponds for untreatable runoff. contamination. * Neutralize hazardous contaminants. * Reduces land surface available for productive use. Soi * Aesthetic disfigurement. * Cultivate. * Add organic material. * Build wind breaks. * Revegetate. Recoverable Material * Separate economically valuable materials. * Seek out uses/markets for valuable materials.  ANNEX 7 Page 1 of 3 UKRAINE COAL PILOT PROJECT Social Portrait of a Miner I. Background The study was conducted by the Agency for Regional Development and the Regional Service for Social Studies of Donetsk in December 1994. The purpose of the study was to investigate the social and economic conditions in the coal mining sector in the Donetskaya Oblast during the transition to the market economy. Data was collected in interviews with 635 coal mine employees living in the cities of Donetsk, Khartsizk, Shakhtarsk and Torrez. The figures below summarize occupations of the interviewees. Occupations of the interviewees Admin. Mgnm woikers team Engineers 4% 2% 12% Under grund Surface workers workers 70% 12% II. Findings * Attractiveness of the mining profession is high (50% of the interviewees take pride in their mining profession, compared with 34 % who said they are unsatisfied). * Reasons for changing careers to the coal mining sector For who entered from other industries, reasons for choosing jobs in the coal industry include: lack of other job opportunities in the region (43%), better wages (26%), preference for a mining specialty, and family tradition (12%). * Reasons for choosin8g car The respondents who started careers in the mining industry have mentioned the following reasons for choosing mining specialties: good wages (61 %), influence of relatives (20%) and friends (7%), location of a mine close to home (17%), early retirement (15%) and availability of an educational facility (10%).  ANNEX 7 Page 2 of 3 Reasons for Choosing a Career in Mining Influence of friends Education facility Early retirenrnt Close location Influence of relatives Good wages - V. 0 10 20 30 40 50 60 70 % of respondents * Working Conditions Working conditions in the mines are generally described by the employees as unsatisfactory (77 % of respondents rated equipment as poor and 44% rated labor safety as unsatisfactory). * Responsibility for the state of mines As shown below, 63 % of the respondents stated that the general manager bears direct responsibility for the state of mines, followed by the Government (35%) and the Mining Association (25%). However, respondents believe that the settlement of problems related to poor conditions should be initiated directly on the level of the mines. Responsibility for the State of Mines Miners Difficult to themselves answer Government 10% 3% 23% M ming Association 16% Oblast administration 6% Trade Unions 2% Director of the Mine 40% * Key factors for improvement of the mine performance Forceful managers (64%), imnplementation of new technologies (44%) and increasing the labor efficiency are rated as the key factors for improving performance of the mines. General managers of mines are trusted by employees, who believe that they have enough power to enact changes, being sufficiently backed by authorities and their own experience.  ANNEX 7 Page 3 of 3 Key Eactors for improvement of the mine performance Difficult to New Labor Other answer technologies efficiency 10% 28% 13% Privatization Forceful 4% manager 42% * Expectations of changes in the state of mines The majority of respondents expect no significant changes in the state of the mines. More than 20% of interviewees expect worsening of working conditions (22 % in the area of equipment, 21 % staffing, and 25 % - wages). * Mine Closure The closure of the mines is believed to be a doubtful if not remote possibility (only 14% of respondents believed that their mines might be closed in near future, while 68% stated that it seemed unlikely or completely improbable to them). * Attitude toward change of employment Miners feels themselves "held captive" by their jobs and coal mines. Still 56 % of those interviewed wish to change their jobs. - Evaluation of-Chances for finding other jobs 58% of the respondents did not believe that there were any chances to change their jobs. * Alternative occupations selected by respondents are depicted in the Figure below. 54% of interviewees could not choose an alternative occupation. Alternative jobs selected by respondents Farmer 6% Electrician Carpenter Salesman 5 % 2% 6% Auto mechanic 7% Construction worker DNo response 8% 12%  ANNEX 8 Page 1 of 2 UKRAINE COAL PILOT PROJECT AFFECTED AT-RISK POPULATIONS Survey Purpose A World Bank team of social scientists sought to identify the different groups of mine workers in terms of their vulnerability to adverse consequences from the pilot mine closures. The team used labor profile data, in-depth interviews and focus groups with above-ground and underground miners, miners' families, mine pensioners, trade union representatives and mine management. Survey Sample A total of 53 interviews were completed at the three mines included in the pilot project: Pravda mine; Krasny Oktyabr mine; and Removskaya mine. The respondent sample was selected by a trade union representative at each mine. The survey team received the full cooperation of the Oblast administration and the mine management at the three mine. Levels of risk The analysis revealed four levels of risk. The definitions of these levels were informed by answers of mine managers, trade union representatives and mine workers to two key questions: 1) Who will be hit the hardest by the mine closing? 2) Who will adapt best to the impacts of mine closure? Table 1 sununarizes these results. Table 1 Risk Profile Pravda Krauy Removskkaya Towal I__ - ,' . ... , : O ltyabr _ - , . , - ' ,: Highest Risk 183 56 0 239 5% High Risk 408 565 462 1435 29% At Risk 488 812 301 1601 33% At Risk- 830 130 638 1508 33% Mobile Total 4873  ANNEX 8 Page 2 of 2 Level One: Highest Risk A woman, alone, with children, with 70% or more of the family income derived mine wages. This person is clearly the most at risk of losing everything. L.N'. is 35 years old, and has lived in the community all her life. She has two school age daughters. Her ex-husband moved away and provides no child support. She has worked in the mine five years as an unskilled above ground worker and earns $32 a month in total family income, all of which comes from the mine. Her job will be one of the first to go and is not considered to be transferable to another mine. She is very worried about how she will take care of her children. Level Two: High Risk Other above - ground workers comprise this category. As a general observation, above ground workers are considered a highly vulnerable group of workers, not possessing particularly transferable skills. All women staff work above - ground, and 83 % of total number of above - ground workers (1389) are women; 17 % (285) are men. V. C. is 60 years old and has lived 60 years in this community. She has worked 30 years in the same mine. She currently works above-ground in the stockyard in an unskilled position. She and her husband have a monthly family income of $64, which includes their pensions. Their family income is closely tied to the mine and will be cut in half, to about $1 a day, when the mine closes. She is frightened when she thinks about it closing. No one will hire her. Level Three: At-risk Underground workers in the engineering and other professions comprise this group. They are the highest risk group of the underground workers. V. G. is a 40 year man who has worked 25 years in the mine. He is an electrician underground and earns $64 a month to support his wife and two school age children. He is totally dependent on the mine - his wife is unemployed and 100% of the family monthly income comes from the mine. He has no savings and worries that the mine closing is going to be a disaster for his family Level Four: At Risk but mobile Underground skilled workers (face miners, drifters, timberers/fitters and coat transport workers). These workers have the best chance of adjusting to a mine closing. They are potentially the most in demand for their skills and hence the most mobile O.Z., 38, has worked underground in the mine for 19 years, most recently handling explosives. 75% of his family income comes from the mine. His wife earns $18 a month working in the hospital and he is worried that the hospital will close if the mine closes. He earns $88 a month. He is worried about the future for his two sons - where will they work ? He has lived in the same community his whole life and does not want to leave for another job. His skills raise considerably his chances of getting a new job. "  ANNEX 9 Page 1 of 9 UKRAINE COAL PILOT PROJECT IMPACT ON MUNICIPAL BUDGETS 1. The social assets of the three mines set for closures comprise 238,500 sq. meter of housing, 8 kindergartens, 6 cultural facilities, 2 sports facilities and one profilactoria. Housing 2. The housing provided by the mines to its employees is managed by the mining associations and its cost is comprised in the mining associations balance sheet. The housing transfer of the three mines set for closures to the municipalities, will decrease the associations' housing cost as follows: Pravda mine's housing transfer will decrease 10 percent of the total housing of Donetskugol mining association, the Removskaya's mine housing will reduce 5 percent of the housing of Torezantratsit association and mine Krasniy Octyabr 11 percent of the housing of Octyabrugol associations. The attached tables show the percentage of housing to be transferred in relation to the existing housing in receiving cities. 3. The Pravda mine housing will be transferred to the communal property of the city of Donetsk which manages the housing funded by the city budget. The Proletarsky Raion administration where the Pravda mine is located has approval authority for the housing transfer but the housing is not funded by the Raion budget. Housing associated with the mine represents 1 percent of the Donetsk city housing. Kindergartens 4. Kindergartens owned by the mines are located in small rural settlements administratively attached to the cities; the kindergartern belonging to the mine is usually the only one in each settlement. These kindergartens provide services to all children of the community and some are open 24 hours daily. Fees are about Krb 600,000 per month (about $3.20 p.m.). Certain categories are exempt from paying fees (e.g. single, unemployed mothers). As a result of mine closures, it is expected that children's attendance will decrease by about 20 percent as parents who become unemployed choose to keep their children at home, rather than pay the monthly fees. Some cost reduction measures may be implemented by the municipalities such as discontinuing 24 hour service and reducing some personnel (currently the payroll accounts for one-third of costs; food accounts for one-third and utilities for one third). Cultural and Sport Facilities 5. Cultural and sport facilities owned and operated by the mines are the only of such facilities. The facilities comprise theaters, libraries, sports rooms and meeting rooms. These facilities and services could be restructured to increase community service and cost recovery.  ANNEX 9 Page 2 of 9 Profilactoria 6. The Removskaya mine profilactory has a capacity of 75 beds, and provides miners with preventive treatments for professional diseases during a stay of twelve to twenty four days. During the treatment miners continue to work in the mine while they return to the profilactory for lodging, food and treatment. The municipal health system does not provide such services. Profilactoria facilities may be rationalized by discontinuing food and lodging services once the mine closes, and moving medical treatments to the nearby municipal health clinic. The two floors building may be used for other purposes by the municipality. Transfer Cost 7. The attached tables show inventory and yearly recurrent cost of the three mines's social assets, as well as the total amount to be financed by the World Bank. The total recurrent costs amounts to US$ 1,114,844 and three years of financing in a declining basis of 75 , 50 and 25 percent will represent US$ 1,672,262. City of Snezhnoye 8. The comparison of 1995 municipal budget shows an increase in expenditures increase of 28 percent over the budgeted, which was covered by a treasury loan. The city's actual expenses for the year 1995 were US$ 5.9 million with the shift in line items budgeted expenditures showing a decrease in housing and an increase of expenses in education, health and culture. 9. The transfer of the social assets of Removskaya mine would represent an increase of 7 percent of the 1995 actual expenditures. Yenakievo 10. The comparison of 1995 municipal budget shows an increase of 18 percent of expenditure over the budgeted, which was mostly covered by a two-fold increase of profit tax, and 51 percent of wage tax. The city actual expenses for 1995 were US$ 10.3 million. 11. The transfer of the social assets Krasniy Octyabr mine would represent an increase of 4 percent of 1995 actual city's expenditures. Proletarsky Raion 12. The raion's actual expenditures are 87 percent over the budget with a shortfall of US$ 6,151 million. The education and culture facilities represent less than 1 percent of the 1995 actual expenditures.  ANNEX 9 Page 3 of 9 SNEZHNOYE SCENARIO 1: WITH CURRENT HOUSING DEFICIT 1996 AND BEYOND City of Snezhnoye Mine Ramovseyay Consolidated 1996 1997 1998 1999 1995 Municipal budget Social assets % to municipal expenditures Mlanned Actual Variance operating cost budget actual 1998 Assumptions Change in wage taxes 1449,8231 (849.8231 (849.623) (*49.6231 WB loan financing % Of social asset transfer 75.00% 50.00% 25.00% 0.00% Housing cost recovery no change no change no change no change Revenues VAT $276,347 $277.007 100% *277.007 $277,007 $277,007 $277,007 Profit tax $330,513 $657,593 199% *657.593 $657,593 $657,593 $657,593 Wage taxes $753,220 $1,035,800 138% $986,177 8986.177 8986,177 8986.177 Excise taxes $10,933 86.053 55% $6,053 $6,053 $6,053 $6,053 Land tax $350.51 3 8295.860 84% *295.860 $295,860 $295,860 $295,860 Other $757,147 8324.587 43% $324,587 8324.587 $324.587 $324,587 Subsidies $2,178,293 $2,178,293 100% $2,178,293 82,178.293 82,178.293 82.178.293 Treasury loan $0 $1,177,860 $1,177,860 $1,177,860 81.177.860 $1.1 77.860 WB loan $310,630 $207,087 $103,543 $0 Total $4,656,967 $ 5.953.053 128% $6,214,060 $6,110,517 $6,006,973 $5,903,430 Expenses Housing 8673.133 $558,647 83% $172,460 30.88% $731,007 8731.007 8731,007 8731.007 8731.007 Education $922,527 *1.757.940 191% *158,647 9.02% 81.916.687 81.916.587 $1,916,587 $1,916,587 $1,916,587 Culture $106,980 *151,827 142% $29,747 19.59% $181,573 $181,573 $181,573 $181,573 $181,573 Health 81,725.027 *2,205,907 128% $53,320 2.41% $2,262,227 82,262.227 $2,262,227 82.262.227 82.262,227 Other 81,229,300 *1.242.027 101% *1.242.027 $1,242,027 81.242.027 $1,242,027 81.242.027 Total $4,656,967 $5,919,247 127% *414,173 7.00% 86.333.420 *6.333.420 $6,333,420 $6,333,420 86.333,420 Shortfall/(Surplus) $119,360 *222.903 $326,447 8429.990 % shortfall (+) or surplus (- 2% 4% 5% 7% Exchange rate one US dollar - 150000 Krb.  ANNEX 9 Page 4 of 9 SNEZHNOYE SCENARIO 2: WITH FULL HOUSING COST RECOVERY 1997 AND BEYOND City of Snezhnoye Mine Removskaya Consolidated 1996 1997 1998 1999 1995 Municipal budget Social assets % to municipal expenditures Planned Actual Variance operating cost budget actual 1995 Assumptions Change in wage taxes ($49.623) ($49,623) (*49,623) ($49,623) WB loan financing % of social asset transfer 75.00% 50.00% 25.00% 0.00% Housing cost recovery 60.00% 100.00% 100.00% 100.00% Revenues VAT *276,347 *277,007 100% $277.007 $277,007 $277,007 S277,007 Profit tax $330,513 *657.593 199% *667.593 $667.593 $657,593 $657,593 Wage taxes $753,220 S1,035,800 138% $986,177 $986,177 $986,177 $986,177 Excise taxes *10,933 66,053 55% $6,053 $6,053 $6,053 $6,053 Land tax $350,513 $295,860 84% $295,860 $295,860 $295,860 0295,860 Other $757,147 $324,587 43% $324,587 *324,587 $324,587 $324,587 Subsidies $2,178,293 $2,178,293 100% *2,178,293 $2,178,293 $2,178,293 $2,178,293 Treasury loan $0 *1,177,860 $1,177,860 S1.177.860 $1,177,860 *1,177,860 WB loan $310,630 $207,087 $103,543 $0 Total $4,656,967 $5,953,053 128% *6,214,060 $6,110,517 *6,006,973 *5,903,430 Expenses Housing *673,133 t658,547 83% $172,460 30.88% S731,007 *292,403 $0 *0 $0 Education $922,527 *1,757,940 191% *158,647 9.02% $1,916,587 S1,916,587 S1.916,587 $1,916,587 $1,916,587 Culture $106,980 $151,827 142% *29,747 19.59% $181,573 $181,573 $181,573 $181,573 $181,573 Health $1,725,027 *2,208,907 128% $53,320 2.41% *2.262,227 *2,262,227 $2,262,227 *2.262.227 02,262,227 Other $1,229,300 *1,242,027 101% *1,242,027 S1,242,027 *1,242.027 *1.242,027 *1,242,027 Total *4.656.967 *5,919,247 127% *414,173 7.00% $6,333.420 *5,894,816 *5.602,413 *5,602,413 95,602,413 ShortfaflSurpkusj (*319,244) (*608,103) (*404,560) (*301,017) % shortfall (+1 or surpkus () -5% -8% -7% -5% Exchane rate one US dolr - 150000 Krb.  ANNEX 9 Page 5 of 9 YENAKIEVO SCENARIO 1: WITH CURRENT HOUSING DEFICIT 1996 AND BEYOND Yenakievo Mine Krasnay Oktyabr Consolidated 1996 1997 1998 1999 1995 Municipal budget Social assets % to municipal expenditures Planned Actual Variance operating cost budget actual 1995 Assumptions Chanige in wage taxes (56,070) (56.070) (56.070) (56,070) WB loan financing % of social asset transfer 75.00% 50.00% 25.00% 0.00% Housing cost recovery no change no change no change no change Revenues VAT $1,169,007 $1,396,133 119% $1,396,133 $1,396,133 $1,396,133 $1,396,133 Profit tax $905,487 $2,217,320 245% $2,217,320 $2,217,320 $2,217,320 $2,217,320 Wage taxes $1,382,060 $2,091,633 151% $2,035,564 $2,035,564 $2,035,564 $2,035,584 Excise taxes $26,360 $12,907 49% $12.907 $12,907 $12.90? $12.90? Land tax $1,529,960 $1,739,587 114% $1,739,587 $1,739,587 $1,739,587 $1,739.58? Other $1,784,127 $875,913 49% $875,913 $875,913 $875,913 $875,913 Subsidies $1,940,693 $1,940,693 100% $1,940,693 $1,940,693 $1,940,693 $1,940,693 Treasury loan WB loan $305,845 $203,897 $101,948 $0 Total $8,737,693 $10,274.18? 118% $10,523,962 $10,422,014 $10,320,065 $10.21 8,117 Expenses Housing $1,365,360 $198,413 14.53% $1,583,773 $1,563,773 $1,563,773 $1,563,773 $1,563,773 Education $2,774,030 $121,680 4.39% $2,895,710 $2,895,710 $2,895,710 $2,895,710 $2,895,710 Cutture $410,967 $87,700 21.34% $498,667 $498,667 $498,667 $498,667 $498,667 Health $4,726,126 $4,726,126 $4,726,126 $4,726,126 $4,726,126 $4,726,126 Other $997,703 $997,703 $997,703 $997,703 $997,703 $997,703 Total $8,737,693 $10,274,187 118% $407,793 3,97% 410,681,980 $10,681,980 $10,681,980 $10,681,980 $10,681,980 Shortfall/(Surplus) $158,018 $259,966 $361,915 $463,863 % shortfall (+) or surplus (- 2% 2% 4% 5%  ANNEX 9 Page 6 of 9 YENAKIEVO SCENARIO 2: WITH FULL HOUSING COST RECOVERY 1997 AND BEYOND Yenakievo Mine Krasniy Oktyabr Consolidated 1996 1997 1998 1999 1995 Municipal budget Social assets % to municipal expenditures Planned Actual Variance operating cost budget actual 1995 Assumptions Change in wage taxes (56.070) (56,070) (56,070) j56,070) WB loan financing % of social asset transfer 75.00% 50.00% 25.00% 0.00% Housing cost recovery 60.00% 100.00% 100.00% 100.00% Revenues VAT $1,169,007 81,396,133 119% $1,396,133 $1,396,133 $1,396,133 $1,396,133 Profit tax *905.487 $2,217,320 245% *2,217.320 *2,217,320 $2.217,320 $2,217,320 Wage taxes $1,382,060 $2,091,633 151% $2,035,564 *2,035.564 S2,035,564 $2,035,564 Excise taxes $26,360 *12,907 49% *12,907 S12,907 $12,907 $12,907 Land tax $1,529,960 $1,739,587 114% $1,739,587 *1,739,587 $1,739,587 $1,739,587 Other $1,784,127 0875,913 49% $875,913 $875,913 $875,913 $875,913 Subsidies $1,940,693 $1,940,693 100% *1,940.693 $1,940,693 $1,940,693 $1,940,693 Treasury loan WO loan $305,845 $203,897 $101,948 $0 Total $8,737,693 S10,274.187 118% *10,523,962 S10.422,014 *10.320,065 *10,218,117 Expenses Housing $1,365,360 $198,413 14.53% $1,563,773 $625,509 $0 $0 *0 Education $2,774,030 $121,680 4.39% *2,895,710 *2,895,710 $2,895,710 $2,895,710 $2,895,710 Culture $410,967 *87.700 21.34% *498,667 *498,667 *498,667 *498.667 *498,667 Health *4,726.126 *4.726,126 $4,726.126 S4,726,126 *4.726.126 *4.726.126 Other S997.703 t997,703 $997,703 S997,703 *997,703 $997,703 Total $8,737,693 $10,274,187 118% $407,793 3.97% $10,681,980 $9,743,716 $9,118,207 $9,118,207 *9,118.207 Shortfall(Surplus) (*780.2461 ($1.303,8071 ($1,201,8591 (*1.099,910) % shortfall (+) or surplus -) -7% -13% -12% -11%  ANNEX 9 Page 7 of 9 PROLETARSIKY RtAION SCENARIO - SINGLE SCENARIO (NO HOUSING) Proletaraky Raion Mine Pravda Consolidated 1996 1997 1998 1999 1995 Muniicipal budget Social assets % to municipal expenditures Mlanned Actual Variance operating coat budget actual 1995 Assupton Change in wage taxes (*33.808) 1*33.808) (*33,808) (*33,808) WS loan financing % of social asset transfer 75.00% 50.00% 25.00% 0.00% Housing cost recovery nle rnle n/a Wea