Ukraine - Housing Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No.17966 PROJECT COMPLETION NOTE UKRAINE HOUSING PROJECT (LOAN 3985-UA) June 4, 1998 Infrastructure Unit Europe and Central Asia Region [Ihis document has a restricted distribution and may be used by recipoents only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS (as of April 1998) Currency Unit Hrivnya 1 IAH = US$2.04 US$1 UAH 0.490 WEIGHTS AND MEASURES Metric System UKRAINE'S FISCAL YEAR January 1 - December 31 Vice President: Johannes Linn, ECAVP Country Director: Paul Siegelbaum, ECC 11 Team Leader: Yoshine Uchimura, ECSIN Sector Leader: Margret Thalwitz, ECSIN Others: Basil Kavalsky, Director, EC4 Thomas Blinkhorn, Chief, EC4MS  FOR OFFICIAL USE ONLY UKRAINE HOUSING PROJECT (Loan 3985-UA) TABLE OF CONTENTS Introduction.1 Project Objectives and Description ..............................1 Loan Signing and Effectiveness ..............................2 Reasons for Termination. 2 Lessons Learned. 2 Annex 1: Project Costs and Financing Plan ..............................4 Annex 2: Bank Resources: Staff Inputs ..............................5 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.  UKRAINE HOUSING PROJECT (Loan 3985-UA) 1. This Project Completion Note is for the Housing Project in Ukraine, for which a loan of US$17.0 million equivalent was approved on March 14, 1996. The loan did not become effective and was terminated on September 25, 1997. Introduction 2. In 1993, the housing sector in Ukraine had started the gradual process of transformation from central planning and government control to a market based system. The Law on Privatization of State Housing in Ukraine was passed in 1992 and becamne operational in early 1993. Following the start of housing privatization, a market for real estate, although limited, was slowly emerging in the urban areas. The Bank's housing sector strategy was to support and accelerate the development of this embryonic housing market through a pilot project targeted to reform oriented cities in Ukraine. 3. Initial discussions on developing a housing project were held with the Government in 1993. The cities of Kharkiv, Lviv and Odesa were selected as project cities because of their interest in attempting alternative, market based approaches to housing provision. The project was appraised in June/July 1995, negotiated in January 1996 and approved by the Board in March 1996. Project Objectives and Description 4. The Housing Project was designed to support the development of a housing market in Ukraine by: (a) completing and selling municipal apartments to city residents; (b) promoting formation of homeowners associations and resident take-over of the management and maintenance of their buildings; (c) encouraging the growth of private housing developers through access to land with infrastructure for housing construction and building regulation simplification; and (d) furthering housing reforrn through policy studies. 5. The project was to be carried out over a three year period and consisted of the following components: a) Housing Completion (US$16.7 million of which US$14.3 million is incremental): Completion of unfinished city housing stock for sales to private households in Lviv and Odesa; b) Land Development (US$10.0 million of which US$6.6 million is incremental): Provision of off-site infrastructure to develop serviced land for sale to private developers for housing construction in Kharkiv and Lviv; and  2 c) Technical Assistance (US$1.2 million): Financing for housing policy and land and building regulation studies and consultancies and training to assist with the project implementation both at the national and local levels. The total project cost was estimated to be US$27.9 million equivalent, excluding local taxes but including cost of works already completed by the city administrations on buildings and sites to be financed under the project. A Bank loan of US$17.0 million financed 61% of total project cost net of taxes (55% of costs including taxes) or 93% of the foreign costs and 42% of local costs. 6. The project cities (Kharkiv, Lviv and Odesa) were to be responsible for implementation of the housing completion and land development components. US$16.7 million of the Bank loan (excluding US$300,000 retained by the national government for technical assistance) was to be onlent by the national government to the three project cities in US dollars on the Bank's terms and conditions with a spread of 1% to cover the administrative costs and risk. The allocation of the Bank loan among the three project cities was as follows: (a) Kharkiv, US$1.5 million; (b) Lviv, US$7.6 million; and (c) Odesa, US$7.6 million. Loan Signing and Effectiveness 7. Lack of familiarity with Bank operations and the lengthy approval process in the Government resulted in delays in loan signing and meeting project specific conditions of project effectiveness. It took until December 1996 for the Government to obtain the necessary clearances to sign the loan agreement. In addition to the standard effectiveness conditions outlined in the General Conditions, the loan agreement included the following project specific conditions of effectiveness: (a) execution of subsidiary loan agreements between the Ministry of Finance and two out of the three project cities; and (b) establishment of city project executing units in two out of the three participating cities. It took the Bank and the Ministry of Finance several iterations to develop subsidiary loan agreements satisfactory to the Bank. Further delays were incurred in obtaining the legal opinion on the loan agreement, project agreements and subsidiary loan agreements. The cities proceeded to establish their project executing units. Reasons for Termination 8. The Bank extended the deadline for loan effectiveness twice to accommodate these delays. At the time of the second extension in June 1997, the Bank notified the Government of the Bank's policy to cancel loans which do not become effective within 18 months from Board approval. The Bank then set the deadline for loan effectiveness for September 14, 1997, or 18 months from the date of Board approval, March 14, 1996. 9. The loan agreement was submitted to the Ukrainian Parliament for ratification as required under Ukrainian law but Parliament failed to do so. While the process for  3 submitting the loan agreement to the Parliament was initiated in early 1997, right after loan signing, a formal vote was not taken until September 18, 1997. The parties opposed to the Government voted en block against the loan agreement and the Government was not able to muster sufficient support to overcome this opposition. The Bank notified the Government on loan termination on September 25, 1997. Lessons Learned 10. The experience under this project reflects the difficulty of developing lending operations at the sub-national government level in a transition economy with a new borrower such as Ukraine, which is not familiar with Bank operations, and where the executive branch does not enjoy full cooperation of the legislature. The project was designed as a small pilot to attempt market oriented approaches to housing provision while minimizing the risk associated with an uncertain economic outlook which constrained peoples' ability to afford new housing and the capacity of the cities to incur debt and manage a Bank project. While the project cities were keen to proceed with the project, there was not commensurate enthusiasm at the national level since the national government did not benefit directly from the project and the loan was small. Similarly, the legislature did not consider this project a high priority because of its size and limited number of beneficiary cities. Follow up with some legislators indicated that they did not necessarily oppose the project design but were lukewarm in their support since the project only benefited Kharkiv, Lviv and Odesa. The Bank did not adequately gauge the legislators' interest in and support for the project. 11. The introduction of learning and innovation loans and adaptable lending will assist the Bank and the Government overcome some of the constraints faced in the Housing Project. A learning and innovation loan would allow the Bank and the Government to pilot novel approaches as a basis for designing larger interventions. An adaptable loan will allow the Bank and the Government to agree to a relatively ambitious project over a multi-year timeframe but start with a smaller, more manageable intervention in a limited number of cities. A larger program, especially one that leaves open the possibility of expanding the number of participating cities in the latter stages, should generate more interest and support both within the executive and the legislative branches of government.  4 ANNEX 1 UKRAINE HOUSING PROJECT ESTIMATED COSTS AND FINANCING PLAN Millions of US$ Forex Base Cost Local Foreign Total Project Costs Housing Completion 5.8 4.8 10.6 45 46 Land Development 2.8 2.2 5.0 45 22 Sunk Costs 5.9 - 5.9 - 26 Technical Assistance 0.2 1.0 1.2 80 5 Base Costs (in April 1995 prices) 14.7 8.0 22.7 35 100 Physical Contingencies 1.3 1.0 2.3 45 10 Price Contingencies 1.5 1.4 2.9 47 12 Total Project Costs 17.5 10.4 27.9 36 123 Financing Plan World Bank 7.4 9.6 17.0 City Governments 10.1 0.8 10.9 Total Financing 17.5 10.4 27.9  5 ANNEX 2 BANK RESOURCES: STAFF INPUTS Planned Revised Actual Stage of project cycle Weeks US$ Weeks US$ Weeks US$ ('OOOs) ('OO0s) ('OOOs) Preparation to n.a. n.a. - - 125.3 407.4 Appraisal Appraisal n.a. n.a. , - 50.8 165.6 Negotiations through 8.0 28.5 - - 9.0 17.4 Board approval Supervision 62.2 111.9 - - 48.8 63.4 Completion 2.0 - - 0.6 2.0 Total n.a. n.a. - - 234.5 655.8 Note: Plan figures not available prior to FY96