Ukraine - Second Enterprise Development Adjustment Loan Project

Report No. PID6109 Project Name Ukraine - Second Enterprise Development Adjustment Loan Region Europe and Central Asia Sector Enterprise Sector Project ID UAPE49502 Borrower Government of Ukraine Implementing Agency Ministry of Economy of Ukraine Date This PID Prepared February 4, 1998 Appraisal Date November, 1997 Board Date March 31, 1998 Country and Sector Background 1. In late 1994, Ukraine embarked on an ambitious and comprehensive economic reform program. This followed the election of President Kuchma in July, 1994 and his call for a radical break from the past in economic policies. The reform program has been supported by several quick disbursing loans from the IMF and World Bank, including a first Enterprise Development Adjustment Loan (EDAL) which was approved in mid-1996. The program includes stabilization and structural measures aimed at maintaining a low rate of inflation and promoting sustainable economic recovery. Early measures included the lifting of most price controls, unification of the exchange rate, sharp reductions in subsidies on bread and public utilities and the adjustment of energy prices to full cost recovery levels and the initiation of a privatization program. Later measures now being supported by the Bank and IMF include further reduction of the fiscal deficit, limited growth in the money supply, continued positive real interest rates, maintaining a liberal trade regime, financial sector reforms, tax reform, reduction of the regulatory burden on enterprises, streamlining of the public administration to make it more market friendly and the completion of mass privatization and the individual privatization of large strategic enterprises. 2. The mass privatization program which has been at the core of the economic reforms will include the privatization of 9,500 medium and large enterprises by late 1998 by a combination of methods including public auction for registered and tradable paper certificates which have already been widely used by the population. Secondary markets are already encouraging the transfer of share ownership after mass privatization and the mechanisms and regulations that have already been created to ensure adequate supervision of the capital markets will be further consolidated. Objectives 3. The main objectives of the Sector Adjustment Loan are to support the privatization, capital markets development , bankruptcy and accounting reform and deregulation programs. Other objectives are to: (i) provide foreign exchange for the purchase of critical imports and (ii) support the development  of the foreign exchange markets. Description 4. The loan will provide quick disbursing funds in three equal tranches of $100 million each in return for the implementation of policy and institutional reforms. The conditions include: - completion of a mass privatization program of 9,500 medium/large enterprises including numerical targets for privatization of grain marketing and distribution enterprises and large enterprises - creation of transparent procedures for case-by-case privatization for large strategic enterprises followed by implementation of a number of transactions - consolidation of the regulatory and institutional framework for capital markets, including strengthening the role of the Securities and Stock Markets Commission and self-regulatory organizations for market participants, improvement of the transparency of the markets, improvements to taxation of the markets and support for the development of clearing and settlement infrastructure - implementation of international accounting and audit standards for the enterprise sector and development of professional accounting capacity - implementation of a workable bankruptcy process to facilitate enterprise restructuring and exit and more productive use of underutilized assets --simplification of the business licensing and registration processes and creation of mechanisms to consult with the private sector and to review continuously any new legislation and ensure that it does not impose an undue regulatory burden on enterprises 5. All components are mutually supportive in their encouragement for the enterprise privatization and post-privatization restructuring processes. Financing 6. The cost of the adjustment operation is $300 million. Grant funds already identified in principle from other donors will finance TA associated with the program. Implementation 7. Implementation of the policy reforms has already begun since loan preparation began in early 1997. The Ministry of Economy will be the coordinating agency with general supervisory responsibility but other agencies will also be involved in implementation including the State Property Fund, Securities and Stock Markets Commission (SSMC), Ministry of Finance, National Bank of Ukraine, Bankruptcy Agency, and the Committee for Entrepreneurship. Sustainability 8. The main objectives of the loan are to bring to completion the primary stages of transformation in the ownership structure and management of - 2 -  Ukrainian enterprises, to accelerate the development of the private sector through deregulation measures, to capital markets infrastructure that will serve Ukraine indefinitely in the future, to promote the use of International Accounting Standards which will improve enterprise accountability and financial discipline and to create a modern bankruptcy process which will promote further restructuring of the enterprise sector. By definition these objectives are to bring about sustainable change. Lessons Learned from Past Operations in the Country/Sector 9. The experience of previous adjustment loans supporting enterprise reform, including the Rehabilitation Loan and the first EDAL, has shown that well designed policy conditionality can bring about dramatic reforms that were previously unobtainable, particularly when acting closely alongside grant financed technical assistance from other donors. Very close cooperation has been and will continue to be maintained with the other donors during loan execution. The major donors have expressed their strong support for the project concept. Experience has also shown that Ukraine is unlikely to wish to borrow large amounts for TA and is likely to be able to mobilize substantial grant funds for this purpose. For these reasons no Bank-financed TA is proposed Poverty Category 10. N/A Environmental Aspects Environmental Data Specify environmental category; indicate whether an indigenous peoples plan or resettlement plan will possibly be developed. 11. The loan will have no direct environmental impact and is therefore a category C operation. Program Objective Categories 12. The proposed project strongly supports the Bank's program objective of development of a policy framework conducive to fiscal and macroeconomic stability, and to private sector development Contact Point: Bernard Drum The World Bank 1818 H Street, N.W. Washington, D.C. 20433 Telephone No. (202)473-6032 Fax No. (202) 522-0005 Note: This is information on an evolving project. Certain activities and/or components may not be included in the final project. Processed by the InfoShop week ending March 20, 1998. - 3 -