Ukraine - Second Enterprise Development Adjustment Loan

 ICRR 10575 Report Number : ICRR10575 ICR Review Operations Evaluation Department 1. Project Data : Date Posted : 05/03/2000 PROJ ID : P049502 OEDID: OEDID : L4390 Appraisal Actual Project Name : Second Enterprise US$M ) Project Costs (US$M) NA NA Development Adjustment Loan Country : Ukraine Loan/ US$M ) Loan /Credit (US$M) 300 300 Sector, Major Sect .: Industrial Adjustment , US$M ) Cofinancing (US$M) None None Industry L/C Number : L4390 FY ) Board Approval (FY) 99 Partners involved : None Closing Date 06/30/1999 06/30/1999 Prepared by : Reviewed by : Group Manager : Group : Donald Keesing Alice Galenson Ruben Lamdany OEDCR 2. Project Objectives and Components a. Objectives The loan supported structural reforms to address the weaknesses in Ukraine ’s enterprise sector and create an enabling environment for business and private sector development . In addition, it provided foreign exchange for the purchase of critical imports and to support the development of foreign exchange markets . b. Components The key reforms supported by the loan were completion of a mass privatization program of 9,500 medium and large enterprises that had started at the beginning of 1995, as well as the continuation of individual privatizations of large attractive enterprises; consolidation of the legislative framework and institutions to regulate the capital markets, along with an effective trading, depository, and clearing and settlement infrastructure; implementation of international accounting and auditing standards throughout the enterprise sector; implementation of an effective modern bankruptcy process; and simplification and acceleration of the processes for private business licensing, registration and inspections, and the institutionalization of deregulation processes including public /private consultative mechanisms. c. Comments on Project Cost, Financing and Dates The loan consisted of three tranches of $ 100 million each. The project was completed on schedule . 3. Achievement of Relevant Objectives : On almost all fronts, the project was an outstanding success, meeting its many objectives, although the overall result was only a slow transformation of the private sector . At least 70 percent of the equity of over 9500 medium/large enterprises and 40 percent of the equity of 100 large enterprises was transferred to private ownership . Progress was made in the privatization of grain elevators and unfinished construction sites . Capital market activity at commercial banks has been separated from regular operations, enterprise shares were transferred to independent registrars, all brokers and registrars have become members of self -regulatory organizations, a new depository and clearance system for corporate securities was initialized, and disclosure of information on publicly traded companies became more transparent. A law on accounting reform was passed, providing for a national accounting system in compliance with international accounting standards, and graduate programs in accounting were initiated . A law on bankruptcy was passed, providing for adequate and transparent procedures for insolvent enterprises . The deregulation objectives were broadly accomplished, although the number of "license-like" permits, warrants and certificates required by enterprises continues to rise . 4. Significant Outcomes /Impacts : The project helped put Ukraine ’s medium and large enterprises and private sector into a realistic accounting, auditing and regulation system . Prices had already been made realistic in previous reforms, leaving a very large proportion of enterprises unprofitable and at risk . Nearly all elements of a market economy with majority private ownership had been created, but firms were reluctant to resort to some of the new institutions, such as the bankruptcy procedures, and control, if not ownership, of firms was still often in the hands of their former managers . Nevertheless, by the end of the project the private sector had a majority of the output and employment in the economy (even without counting the large unrecorded informal sector ). 5. Significant Shortcomings (including non -compliance with safeguard policies ): The most significant shortcomings were in the case by case privatization of large attractive firms, where rules were created that made them unattractive to investors; only three of these firms have been privatized, out of 13 privatizations initiated. (Loan conditionality was technically fulfilled .) Moreover, political considerations and vested interests have slowed the expected transformation of the private sector . 6. Ratings : ICR OED Review Reason for Disagreement /Comments Outcome : Satisfactory Satisfactory Institutional Dev .: Negligible Substantial The environment for enterprise development/privatization was significantly improved. Sustainability : Likely Likely Signs of wavering appeared after the last disbursement, but the Bank and other donors are working with the government to prevent backtracking. Bank Performance : Satisfactory Highly Satisfactory Implementation was highly satisfactory, and a close look at the project documents, conditions, design and other features shows no shortcomings except in the area of large attractive projects, where it is clear that resistance was expected all along. Supervision from the Resident Mission was excellent. Borrower Perf .: Satisfactory Satisfactory Quality of ICR : Satisfactory 7. Lessons of Broad Applicability : When a government is committed at high levels, despite divisions within itself, to a well designed reform program, and has strong, well coordinated support from the donor community, it can move forward quickly to implement the program. However, it would have been useful to involve participants from a greater variety of political spheres to encourage greater cooperation between the Government and Parliament . 8. Audit Recommended? Yes No Why? Audit is underway in cluster with EDAL I and Intensive Learning ICR for EDAL 1 9. Comments on Quality of ICR : This is a well written ICR, covering the project and its individual aspects thoroughly . It gives a sense of what was not accomplished, and the resistance encountered, as well as the broadly satisfactory results . However, it does not provide certain information about the project, i .e. dates for tranche release.