Ukraine - Coal Pilot Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No: 22302 IMPLEMENTATION COMPLETION REPORT (CPL-40160) ONA LOAN IN THE AMOUNT OF US$15.81 MILLION TO UKRAINE FOR A COAL PILOT PROJECT 06/25/2001 This document has a restricted distribution and may be used by recipients only in the perforrnance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS (Exchange Rate Effective April 2001) Currency Unit = UAH UAH 1 = US$ 0.18 US$ 1 = UAH 5.5 FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS CSSMP Coal Sector social Mitigation Project DFID Department for International Development, UK DOA Donetsk Oblast Administration Donbass Coal mining region in Eastern Ukraine ICR Implementation Completion Report MCI Ministry of Coal Industry (now merged into Ministry of Fuel and Energy) MoF Ministry of Finance SAR Staff Appraisal Report UAH Ukrainian Hryvnia UDKR Ukrainian abbreviation for Ukrainian State Company for Coal Sector Restructuring Vice President: Johannes F. Linn Country Director: Luca Barbone Sector Manager: A. David Craig Task Team Leader/Task Manager: Heinz Hendriks  FOR OFFICIAL USE ONLY UKRAE COAL PILOT PROJECT CONTENTS Page No. 1. Project Data 1 2. Principal Performance Ratings 1 3. Assessment of Development Objective and Design, and of Quality at Entry 2 4. Achievement of Objective and Outputs 3 5. Major Factors Affecting Implementation and Outcome 5 6. Sustainability 6 7. Bank and Borrower Performance 6 8. Lessons Learned 7 9. Partner Comments 8 10. Additional Information 9 Annex 1. Key Performance Indicators/Log Frame Matrix 10 Annex 2. Project Costs and Financing 11 Annex 3. Economic Costs and Benefits 14 Annex 4. Bank Inputs 15 Annex 5. Ratings for Achievement of Objectives/Outputs of Components 16 Annex 6. Ratings of Bank and Borrower Performance 17 Annex 7. List of Supporting Documents 18 Annex 8. Borrower's Comments 19 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.   Project ID: P044 110 Project Name: COAL PILOT Team Leader: Heinz Hendriks TL Unit: CMNPO ICR Type: Core ICR Report Date: June 26, 2001 1. Project Data Name: COAL PILOT L/C/TF Number: CPL-40160 CountryIDepartment: UKRAINE Region: Europe and Central Asia Region Sector/subsector. NN - Mining & Other Extractive KEY DATES Original Revised/Actual PCD: 12/15/1995 Effective: 05/31/1996 08/28/1996 Appraisal. 02/26/1996 MTR: 03/31/1997 12/01/1997 Approval: 05/16/1996 Closing: 12/31/1999 12/31/2000 Borrower/lmplementing Agency: GOVERNMENT OF UKRAINE/UDKR/DOA Other Partners: Ministry of Finance, Donugikombank, UK Know How Fund STAFF Current At Appraisal Vice President: Johannes F. Linn Johannes F. Linn Country Manager: Luca Barbone Paul J. Siegelbaum Sector Manager: A. David Craig Thomas Blinkhom Team Leader at ICR. Heinz Hendriks Jeffrey Balkind ICR Primary Author: Heinz Hendriks 2. Principal Performance Ratings (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=Highly Unlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible) Outcome: S Sustainabilitv: L Institutional Development Impact: H Bank Performance: S Borrower Peeformance: S QAG (if available) ICR Quality at Entry: S Project at Risk at Any Time: No  3. Assessment of Development Objective and Design, and of Quality at Entry 3.1 Original Objective: 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. The objectives were clear and important for the country, the sector and the Bank's Country Assistance Strategy. While responsive to development priorities and borrower circumstances, the project was also complex and risky. The complexity was deternined by the involvement of two ministries (Ministry of Coal Industry (MCI) and Ministry of Finance (MoF)), a special agency for mine closures (UDKR) and the Donetsk Oblast Administration (DOA). The riskiness was determined by the contentiousness of mine closures and the possibility of social and political unrest in the Donbass, Ukraine's once proud coal mining region. It was for these reasons that the project was designed as a pilot operation, focusing on the closure of three Donbass mines (all located in Donetsk Oblast), with the overall goal to demonstrate the feasibility of closing mines in a socially and environmentally acceptable manner. While the Bank deemed the pilot approach necessary, the Ukrainian Government would have been ready to immediately embark on a larger restructuring program covering more mines. The Bank supported the larger restructuring program with the Coal SECAL, following the successful start of the Coal Pilot Project. 3.2 Revised Objective: The development objective has not been revised. 3.3 Original Components: The project consisted of five components: 3 Mitigation of Physical Mine Closure. This component provided for environmental mitigation, civil works, equipment and operation of the mine's infrastructure during the period of physical closure works. * Social Mitigation. This component provided for severance payments, old age pension benefits, disability payments, unemployment benefits, reemployment support, micro-credit and public works. * Social Infrastructure Divestiture and Heating Subsidy. This component provided financial support for: (i) the transfer of mining settlements' housing and communal infrastructure (kindergartens and sport, cultural and health facilities) from mine to municipal ownership; and (ii) supply of free coal to families of ex-miners and pensioners of the closed mines. * Institutional Strengthening. This component provided for the financing of incremental operating costs of UDKR. * Technical Services. This component provided for technical assistance, training and studies. The components were closely related to achieving the objectives and to the capacity of the implementing agencies. They took into account relevant lessons learned in prior projects in the country and the sector. The social mitigation component took into account priorities of miners from the pilot mines, but was at the same time kept adaptable to changing needs and test results. 3.4 Revised Components: -2 -  The components have not been revised. However, the Loan Agreement was amended three times. The amendments covered reallocation of funds, an extension of public works in the Donetsk Oblast, and the financing of audits and installation of a project monitoring system at MoF. Given the requirement for a flexible approach in a pilot operation of this nature, these amendments were considered minor and did not require a revision of the basic project components. 3.5 Quality at Entry: The ICR rating for quality at entry is Satisfactory. The project objectives were consistent with the CAS and government priorities. The project was designed to move ahead fast, on a pilot basis, with implementing one of the most difficult tasks in one of the most difficult sectors. The later amendments to the Loan Agreement did not reflect a poor entry design, but were a necessary consequence of operating in the project's and the sector's environment. The preparation and design of the project involved close cooperation with stakeholders and the selection of a few key areas for action while maintaining the flexibility to adapt to changing situations, thus contributing to the achievement of the ultimate project goal, i.e., a demonstration that the closure of mines in the Donbass is feasible in a socially and environmentally acceptable way. 4. Achievement of Objective and Outputs 4.1 Outcome/achievement of objective: The underlying central development objective of this pilot project was the demonstration, on a pilot basis of three selected Donbass mines, that the closure of mines in Ukraine is feasible in a socially and environmentally acceptable way. This overall objective has been achieved and the outcome rating is therefore Satisfactory. The three mines have been physically closed and its workers have been laid off, in line with Ukrainian legislation and the project's provisions. The ex-mine sites do not pose safety or health risks. Ex-miners who did not find altemative employment have been compensated fairly. The previously mine-owned social assets have been transferred to municipalities. There has been no social or polital unrest triggered by mine closures. The different agencies involved in implementing the project cooperated well. The pilot project did provide the positive experience needed for a larger follow-on project. 4.2 Outputs by components: Mitigation of Physical Mine Closure. At the three pilot mines, 20 shafts and inclines have been filled and sealed. More than 380,000 cubic meters of decrepit industrial building space has been demolished and the rubble has been deposited in an environmentally acceptable way. About 4,500 tons of steel were recovered and recycled. More than 260,000 square meters of previously industrial land have been reclaimed and are now available for new altemative use. The output of the component is rated Satisfactory. Social Mitigation. Severance payments, paid by the Government of Ukraine through UDKR, have been received by 2,570 entitled persons from the three pilot mines. Disability payments have been made to about 2,800 persons. Two social surveys, carried out at mid-term and towards the end of the project, showed that unemployed ex-miners and mine pensioners do generally receive unemployment benefits and pensions on time and in full. The surveys also showed that new employment in the formal economy is hard to find; however, they showed too that many people have developed their own survival strategies to cope with the loss of their previous workplace in an acceptable way. The project provided subsidies for the reemployment of more than 1,000 ex-mine workers, micro-credits for 12 projects that involved 180 new jobs, and temporary employment for 684 ex-miners who participated in 111 public works projects that have been socially and environmentally very useful. The projects included repair and maintenance of public housing, schools, hospitals, roads, street lighting, sewage systems and parks. Based on the result of the social surveys, the overall output of the component is still rated Satisfactory. Social Infrastructure Divestiture and Heating Subsidy. As part of the pilot project, 982 houses with - 3 -  256,300 square meters of living space were transferred. In addition, 7 kindergartens were transferred and 4 town halls. About 5,500 entitled persons received free coal. The output of the component is rated Satisfactory. Institutional Strengthening. As part of the project preparation, UDKR was created in early 1996 as a new state company for mine closures. At the start of the project, the project contributed to the refurbishment of UDKR's offices in a rented building and to the purchase of office equipment. Creation of the company and support for its operation were timely and have proven to be crucial for project implementation. The output of the component is rated Satisfactory. Technical Services. Limited ad hoc technical assistance was provided to UDKR as needed. Following an amendment of the loan agreement, consultant services for the supervision of social mitigation projects, installation of a financial management system and independent financial audits were provided to MoF as part of the project. The output of the component is rated Satisfactory. 4.3 Net Present Value/Economic rate of return: The net present value of the incremental economic benefit of the project was estimated at $26 million at appraisal and the project's economic rate of return was estimated at 55%. The recalculated net present value is $21 million and the economic rate of return is 47%. The recalculation is based on the assumption that social mitigation costs are higher than estimated at appraisal, while the creation of new employment is progressing slower (Annex 3). 4.4 Financial rate of return: Because the project is not dealing with a revenue earning entity, no financial return was calculated. However, the project's positive net impact on the national budget was estimated at $59 million (in present value terms calculated over a 12-year post-project period with a discount factor of 10%). A reestimation under the pessimistic assumption that the costs of disability payments and free coal supplies stay at about twice the level assumed at appraisal, shows that the positive impact on the budget would still be $43 million. 4.5 Institutional development impact: The project had a significant institutional development impact through the creation of UDKR. This agency initially was created specifically for the project, as a result of close cooperation between the Government and the Bank's project preparation team. Very soon after its creation, UDKR was mandated by the Government to close a significant number of mines, in parallel with the three pilot mines. To date, UDKR has received more than 80 mines for closure, of which more than half have completed all works for physical closure. In parallel to the physical closure, UDKR has been, and still is, also responsible for the payment of statutory social benefits to laid-off workers and their families. These benefits include severance payments, disability payments, free coal and unemployment benefits during the second year of unemployment. Despite budget shortages, UDKR has been the key to assure a fair minimum flow of social payments to the affected population and thus became the backbone for the Government's continued program of mine closures in a socially acceptable way. Through preparation and supervision work, supported by interviews, social assessments and workshops, the project contributed greatly to build understanding and consensus for the need of mine closures as an essential part of coal sector restructuring. Before the project, mine closures were a very sensitive issue that was not discussed; but today, the topic is discussed in an open and constructive way among the various stakeholders that include the Ministries of Fuel and Energy, Finance, Economy, Labor, the coal industry, regional administrations and labor and community representatives. These discussions and the lessons of the -4 -  project resulted in the identification of strengthened institutional arrangements for a larger follow-on project in the form of the proposed Coal Sector Social Mitigation Project. 5. Major Factors Affecting Implementation and Outcome 5.1 Factors outside the control of governnment or implementing agency: There have been no major events clearly outside the control of government or implementing agencies that negatively (or positively) affected the project. While social and political unrest in the Donbass area, with repercussions on the project, has been a possible risk to the project, such event did not occur. The poor business environment in Ukraine not only hampered the creation of small businesses but also facilitated fraud in the application of micro-credits and employment subsidies, two social mitigation measures of the project. While the business environment in general is not outside the control of the Government, its improvement is a long-term endeavor, far beyond the scope of this project. Local businessmen and management of the participating bank (Donuglkombank) colluded in a misuse of micro-credit funds. As soon as discovered, MoF as the supervising agency, stopped the micro-credit program, reimbursed the Bank, and launched a Government investigation. Some employment subsidies have been granted to laid-off miners who produced faked certificates of self-employment. As soon as discovered, UDKR as the implementing agency for employment subsidies, stopped disbursements to self-employed ex-miners and tightened the rules and controls of the scheme (to such an extend that thereafter no more employment subsidies were disbursed). While the occurrence of the incidents is a serious matter and regrettable, the damage control has been working well and the impact on the overall implementation of the project and achievement of its central objective has been minimal. Both, the Bank and the implementing agencies, took immediate action. No further misuse of funds occurred after the incidents. The Bank's performance in supervision and the implementing agencies' performance have therefore been rated Satisfactory. 5.2 Factors generally subject to government control: Established regulations and procedures have not always facilitated efficient mine closures. There are too many regulations and legal instruments (including orders and decisions) at various levels of the Government (President's Office, Cabinet of Ministers, line ministries), often general and ambiguous, in some cases even contradictory. Some outdated regulations of the Soviet era, including mine safety rules, have been a hindrance to fast and cost-efficient mine closures. In public, the Govemment has been largely silent on coal sector reform. Even when faced with false and damaging media reports, the Government did normally not come forward with coherent public information on coal sector restructuring and explanations of the rationale. Insufficient public information and involvement of local stakeholders by the Government raised questions about its selection of the pilot mines that, although answered in the end, may have resulted in avoidable delays and dissatisfaction. Poor public information conveyed the sense of incoherent reform policy and may have favored political opposition to coal sector reform. A key role in preparation and supervision of mine closures has been allocated to the Government's design institutes. While the technical knowledge and capacity of these institutes is appreciated, they also exercised bureaucratic power with a negative impact on time and costs of mine closures. In particular, their outdated approach to cost estimates (using centrally prescribed standards, sometimes even applied without field inspections, which then occasionally resulted in plans that did not correctly reflect the existence of buildings on the mine site) caused avoidable debates and contract amendments with civil works contractors. -5 -  Although MCI has full control over the design institutes, it chose not to redefine the design institutes' role or change its working practices. The expansion of water pumping in neighboring mines has delayed the physical closure of the pilot mines (the expansion is necessary to deal with an increased influx of water as a result of stopping pumping at the closing mines). The expansion was the responsibility of the affected mining associations or companies under order of MCI. Limited state funding was the most often cited reason for delays, but MCI could have lessened the impact by clearer instructions and priority setting. 5.3 Factors generally subject to implementing agency control: Initially, the Bank's contribution to the financing of operating and maintenance costs of transferred social assets from closed mines was not disbursed because the borrower did not pay its part of the costs. Dissatisfaction with the status of social assets was found in a social assessment conducted in 1997. Later during project implementation, payments improved and the situation became better. MoF could have avoided signing a fiscal agency agreement with Donuglkombank for carrying out the micro-credit scheme, in particular since the Bank had cautioned about the poor financial standing of Donuglkombank. However, MoF gave in to political pressures and the apparently genuine dedication of Donuglkombank to the objectives of the micro-credit scheme. 5.4 Costs andfinancing: Although the actual project costs stayed slightly below the appraisal estimate (US$28.0 million actual vs. US$28.5 million at appraisal), some further savings in the costs of physical mine closure could have been possible if MCI had put a higher financing priority on the expansion of water pumping in neighboring mines and if it had intervened more rigorously with mining associations and design institutes, thus shortening the time for physical closure works and thereby reducing in particular the expenses for operating the mine's infrastructure (mainly ventilation and water pumping) during the period of closure. There have been significant shifts in expenses for mitigating the social impact.While the expenses for statutory social benefits (in particular disability payments) and for free coal were nearly twice as high as originally estimated, expenses for new employment creation stayed below estimates. The increased expenses for statutory benefits are largely due to incorrect estimates of payment arrears at the time of appraisal and the lower expenses for new employment creation are a reflection of the poor business environment for creation of new small enterprises and limited employment opportunities in the the formal sector. Nevertheless, unemployment growth was limited due to a relatively large number of miners benefitting from retirement, transfer to other mines or work in the informal sector. 6. Sustainability 6.1 Rationale for sustainability rating: The Likely rating has been given on the basis that: (a) the project achieved its objective of demonstrating that mine closures are feasible in a socially and environmentally acceptable manner; and (b) the Coal SECAL has already demonstrated successfully the larger application of the results of the Coal Pilot Project. Each closure of a highly uneconomic mine is an achievement that brings the coal sector closer to sustainability. Full sustainability of the sector is only reached once all uneconomic mines have been closed or restructured and no more state subsidies are flowing into the sector. The project was a successful first step to embark on that route. 6.2 Transition arrangement to regular operations: Facilitated by the positive experience of this project, many more mines have been closed by UDKR and in - 6 -  that sense the transition to 'regular operation' has been made. However, mine closures are still very risky and can go off-track politically at any time. Flexibility and adaptability as demonstrated under the pilot project should therefore be maintained for future mine closure operations. 7. Bank and Borrower Performance Bank 7.1 Lending: The Bank lending performance is regarded as Satisfactory, despite significant changes in disbursements during the implementation of the project. The Bank's preparation of the project included extensive consultation with stakeholders and, while putting the focus on the jointly identified essential social mitigation measures, still maintained sufficient flexibility to successfully cope with the nonpredictable and imperfect environment of the pilot task. The project was among the Bank's best disbursing operations in Ukraine. It moved ahead fast even in the beginning, largely by concentrating on those activities that were ready for disbursement, while working on the fulfillment of disbursement conditions that were put in place for more complex tasks. 7.2 Supervision: The supervision perfonnance of the Bank is rated Satisfactory. Supervision was greatly facilitated by the active involvement of the Kiev Resident Mission in following-up with different Government branches and agencies. Except for the first missions, supervision benefitted from the synergy made possible by combined missions with the Coal SECAL. Amendments to the loan agreement were promptly made when needed. 7.3 Overall Bank performance. The overall performance of the Bank is assessed as Satisfactory. Borrower 7.4 Preparation: The Borrower's performance in preparing the project is regarded as Satisfactory, despite shortcomings in public information and communication with local stakeholders. During project preparation, the selection of the pilot mines changed (Removskaya instead of Voskhod mine) and at some point it was uncertain whether the Government could and would carry through its closure decision regarding the Pravda mine. The fact that the Government held to its decision despite significant local resistance, speaks very favorably for the Government's conmiitment to coal sector restructuring and the project. 7.5 Government implementation performance: For the most part, Government implementation performance was Satisfactory, despite the shortcomings by MCI in managing the water pumping capacity expansion in neighboring mines and possible shortcomings of MoF in selecting Donuglkombank as the fiscal agency for micro-credits. 7.6 Implementing Agency: The performance of the implementing agencies is rated Satisfactory. UDKR, the main implementing agency, performed remarkably well under the constraints and political attacks it had to deal with. DOA, aside from initial shortcomings in contributing to the costs of social assets transfers, cooperated very well and demonstrated, during the course of the project, very good supervision and financial management of its two components, public works and social assets transfer. MoF, as supervising agency for micro-credits, acted promptly and correctly when improprieties in the use of funds became apparent. In addition, MoF was always very cooperative in implementing all project components and contributed positively to the success of the project. 7.7 Overall Borrower performance: -7 -  The overall peifoimance of the Borrower is assessed as Satisfactory. 8. Lessons Learned Gefneral lessons: * A pilot operation can be very useful to set in motion a major restructuring program. The Coal Pilot 0roject contributed greatly to the advancement of coal sector restructuring in Ukraine, together with the (almost) parallel Coal SECAL. The lessons from the pilot project were incorporated in the restructured SECAL. Although the launching of the Coal SECAL did not wait for results from the Coal Pilot Project, the mere fact that the pilot closure of mines could be successfully set in motion was sufficient to trigger an accelerated mine closure program and thus substantially reduce the drain from the national budget for the operation of uneconomic mines. * A flexible approach can keep a difficult project moving. In deviation from the normal best practice, the Coal Pilot Project had several disbursement conditions for different components, allowing fast processing and early effectiveness of the loan, thus enabling the national economy to reap the benefits of fast restructuring. Also, when it became evident during implementation that micro-credits and employment subsidies were not effective social mitigation measures at this time in Ukraine, the funds were shifted to public works which, beside the positive temporary employment, had additional social benefits for the local public and, through the goodwill created, contributed to keeping the pace of mine closures. * Piloting can lead to a new product. Triggered by the difficulties encountered in financing social assets .ransfe.E and the need to provide incentives for such transfers and improve conditions in communities with closed mines, the Bank's supervision team, in close cooperation with DOA and MoF, developed the Municipal Credit Line, which was successfully implemented under the Coal SECAL. The basic features of the Credit Line are that municipalities which have accepted social assets have access, subject to agreed rules, to the Credit Line for non-commercial projects of their choice. The credits are issued by MoF and guaranteed by DOA. Lessons specifically for mine closure projects: * The agency for mine closures should be tailored to country circumstances. The creation of UDKR has been a key to the success of the project. While normally the functions of physical mine closure and social mitigation are vested in two separate agencies, in this case their combination within in UDKR has been very successful. Weak institutional capacities, the special historic role of Donbass miners and the determination of the Government to move ahead fast with the closing of mines, all made the chosen model for UDKR perfectly acceptable and workable. In fact, UDKR's being in charge of statutory social benefits for miners greatly contributed to the relatively smooth implementation of mine closures.