Announcement of World Bank Extends United States One Hundred Twenty Million Dollars for First Guarantee to Ukraine on March 18, 1997

World Bank Extends US$120 Million for First Guarantee to Ukraine Contact: Sevda Eris (202) 473-3847 Fax: (202) 522-3362 WASHINGTON, March 18, 1997The World Bank today approved a partial risk guarantee of US$120 million to support a Pre-Export Guarantee Facility (PGF) established by the Government of Ukraine. The PGF will encourage foreign investors to finance the working capital or fixed capital requirements of Ukrainian agricultural enterprises, agro-processing enterprises, and private distributors. Because Ukraines food and agricultural sector could significantly improve overall economic growth, the government has placed a high priority on accelerating the countrys transformation to an efficient, market-based agricultural system. By providing credible guarantees against risks associated with perceived political uncertainty, the Bank-supported Pre-Export Guarantee Facility will not only complement the Government of Ukraines agricultural reform program, but will also enhance the countrys transition to a market economy by: " Helping the private sector to channel its resources to commercially viable enterprises and transactions; " Supporting short- to medium-term finance for working capital and investment in the production of exportable agricultural sector goods without creating long-term debt for the government; " Assisting Ukrainian agricultural enterprises to build links with foreign partners, thereby diversifying their supply sources and improving their market access; " Restoring employment and commercially viable production for export in the short-term, while reforms are taking hold; " Fostering the introduction of increasingly sophisticated trade finance mechanisms into the Ukrainian market; and " Establishing a track record of policy stability, thereby improving Ukraines reputation in foreign financial markets. The Guarantee Administration Unit (GAU), an independent entity established by the government, will sell guarantee contracts against government performance and political force majeure risks, back-stopped by a World Bank guarantee. These contracts will be sold on a first-come, first- served basis to foreign input suppliers, trading companies, or financial institutions that finance the provision of inputs to local Ukrainian enterprises. Through a foreign agent bank to be hired by the GAU, this facility will support the government's claims payment obligations up to $120 million of GAU guarantee contracts outstanding at any given time. A typical pre-export transaction eligible for support under the PGF would include the following characteristics: " Basic Structure: a foreign (i) trading company, (ii) input supply company, or (iii) commercial bank would provide financing for working capital inputs required for the production of exports by a local enterprise; " Eligible Local Enterprises: all agricultural sector customers would be eligible, provided that the foreign financier of the transaction would be prepared to bear the performance risk of doing business with that enterprise and that the supplying distributor is a private firm; " Tenor: will (i) match the production cycle and (ii) provide private loans with a maximum maturity of three years; and " Marketing Arrangements: Although many input suppliers and trading companies will market their output outside the former Soviet Union (FSU), some input suppliers and trading companies have expressed interest in marketing their output in the FSU. Thus, in addition to financing the provision of much needed working capital, these input suppliers would also help Ukrainian enterprises restore traditional trading relationships that were ruptured by the break-up of the Soviet Union. Agriculture Sector Background Ukraine has traditionally been a net exporter of agricultural products and a net importer of such agricultural inputs as pesticides, herbicides, fertilizers, and fuel. In the recent past, however, the Government of Ukraine had restricted agricultural exports in an unsuccessful attempt to reduce domestic food prices. These restrictions have now been removed, enabling agricultural producers to benefit form their comparative advantage and restore trade linkages needed to finance imported inputs. Unfortunately, the perceived government performance risk of doing business in Ukraine has deterred input producers and distributors, trading companies, and commercial lenders from financing commercially viable input supply transactions as well as fixed investments in agro-processing and agricultural storage and handling. The Bank-assisted Pre-Export Guarantee Facility is designed to protect foreign input suppliers and lenders against a specific list of government performance risks, thereby increasing the potential flow of short and medium-term private finance for agricultural inputs and fixed investments. The PGF will enhance a number of important reforms the government has already introduced including, food price liberalization, reduction of state procurement of agricultural products, and removal of agricultural export quotas. These initial reforms were supported by the Banks US$500 million Rehabilitation Loan of December 1994. More recently, in October 1996, the Bank also approved an Agriculture Sector Adjustment Loan of US$300 million to support sectoral and trade reforms designed to increase competition and encourage private ownership of investment in land and other agricultural assets. The PGF will complement the reforms supported by the Agricultural Sector Adjustment Loan and strengthen the Government of Ukraines commitment to fostering the development of private agricultural transactions. A guarantee fee of 25 basis points p.a. will be payable semi-annually in advance by the Government of Ukraine on the US$120 million World Bank Pre-Export Guarantee Facility. Since Ukraine joined the World Bank in September 1992, Bank commitments total approximately US$2 billion for twelve projects, in addition, to this partial risk guarantee of US$120 million.