Ukraine - Enterprise Development Adjustment Loan Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No: 20421 IMPLEMENTATION COMPLETION REPORT (40570) ONA LOAN IN THE AMOUNT OF US$ 310 MILLION TO THE UKRAINE FOR AN ENTERPRISE DEVELOPMENT ADJUSTMENT LOAN June 28, 2000 Private and Financial Sector Development Department Europe and Central Asia 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.  CURRENCY EQUIVALENTS (Exchange Rate Effective June 2000) Currency Unit = Ukrainian Hyrvnia (UAH) 1 UAH = US$ 0.184 US$ I = 5.437 UAH FISCAL YEAR July 1, 1999- June 30, 2000 ABBREVIATIONS AND ACRONYMS CAS Country Assistance Strategy EDAL Enterprise Development Adjustment Loan EU European Union IMF International Monetary Fund GDP Gross Domestic Product GOU Govermnent of Ukraine MOE Ministry of Economy PIU Project Implementation Unit PSD Private Sector Development SER Special Export Regime SRO Self Regulatory Organization SPF State Property Fund of Ukraine SSMC State Securities and Stock Market Commission TA Technical Assistance UAH Ukrainian Hyrvnia UCER Ukrainian Center for Enteprise Restructuring and Private Sector Development USAID United States Agency for International Development Vice President: Johannes Linn Country Manager/Director: Luca Barbone Sector Manager/Director: Ira Lieberman Task Team Leader/Task Manager: Vladimir KreaciclRagini Dalal  FOR OFFICIAL USE ONLY UKRAINE ENTERPRISE DEVELOPMENT ADJUSTMENT LOAN 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 4 5. Major Factors Affecting Implementation and Outcome 7 6. Sustainability 8 7. Bank and Borrower Performance 9 8. Lessons Learned 10 9. Partner Comments 10 10. Additional Information 11 Annex 1. Key Performance Indicators/Log Frame Matrix 12 Annex 2. Project Costs and Financing 13 Annex 3. Economic Costs and Benefits 15 Annex 4. Bank Inputs 16 Annex 5. Ratings for Achievement of Objectives/Outputs of Components 18 Annex 6. Ratings of Bank and Borrower Performance 19 Annex 7. List of Supporting Documents 20 Annex 8. Beneficiary Survey Results 21 Annex 9. Stakeholder Workshop Results 31 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization.   Projct ID: P035814 Project Name: ENTER. DEV. ADJUST. Team Leader: Vladimir G. Kreacic TL Unit: ECSPF ICR Type: Intensive Learning Model (ILA) of ICR Report Date: April 24, 2000 1. Project Data Name: ENTER. DEV. ADJUST. L/C/TFNumber: 40570 Country/Department: UKRAINE Region: Europe and Central Asia Region Sector/subsector: BP - Privatization; FK - Capital Markets Development; MT - Trade Policy Reform KEY DATES Original Revised/Actual PCD: 03/29/95 Effective: 07/18/96 07/18/96 Appraisal: 05/02/96 MTR: 12/01/97 02/10/98 Approval: 06/27/96 Closing: 12/31/99 12/31/2000 Borrower/lImplementing Agency: UKRAINE/STATE PROPERTY FUND OF UKRAINE Other Partners: State Securities and Stock Market Commission, Ministry of Economy, Ministry of Finance STAFF Current At Appraisal Vice President: Johannes Linn Johannes Linn Country Manager: Luca Barbone Wafik Grais Sector Manager: Ira Lieberman Paul Siegelbaum Team Leader at ICR: Ragini Praful Dalal Bernard Drum ICR Primary Author: Ragini Praful Dalal 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 Sustainability: L Institutional Development Impact: SU Bank Performance: S Borrower Performance: S QAG (if available) ICR Quality at Entry: S Project at Risk at Any Time: Yes  3. Assessment of Development Objective and Design, and of Quality at Entry 3.1 Original Objective: The main objective of the Enterprise Development Adjustment Loan (EDAL) was to support the Government of Ukraine's (GoU) privatization, post-privatization restructuring, capital markets development, and trade and price liberalization programs. Other objectives were to provide foreign exchange for the purchase of critical imports and to support the development of the foreign exchange markets. The loan had two components. The first consisted of US$ 300 million balance of payments support in three tranches. The second was a Technical Assistance (TA) component of US$10 million. The main policy conditionality relating to the first component included: (i) streamlining the methodology for mass privatization of medium and large enterprises; (ii) privatization of 5000 of these enterprises; (iii) beginning the case by case privatization of very large enterprises; (iv) completion of the small scale privatization program; (v) creation of a Securities and Stock Market Commission (SSMC) and regulatory framework governing the capital markets including self-regulatory organizations (SRO); and (vi) eliminating trade barriers and price restrictions on imports and exports and eliminating domestic price controls. The TA component provided two types of support. The first included assistance to the State Property Fund of Ukraine (SPF), as the main counterpart on the EDAL, to build capacity and facilitate the implementation of the policy reforms that were the conditions of the adjustment component. The second included support for the creation of the professional associations necessary in a market economy, the implementation of demonstration cases of post-privatization enterprise restructuring, the implementation of bankruptcy and liquidation pilots, the training of enterprise managers, and the creation of a commercial database of the enterprise sector. The EDAL was prepared in 1995 and approved by the Board in June 1996. This was a time when Ukraine, a newly independent country, was in the early stages of the process of transforming its economy from a centrally planned system to a market-oriented one. In late 1994, a newly elected Government announced a radical break from past economic policies and outlined a program aimed at reducing inflation, improving living standards, and promoting a sustainable recovery. The GoU began to lay the foundations for macroeconomic stabilization and structural reforms; the legal basis for privatization was put in place; and initial steps were taken in areas such as land reform and restructuring of the energy sector. In support of the Government's economic program, an IMF-supported stabilization program which entailed tight fiscal and monetary policies was agreed. The Government's immediate economic reform priorities included consolidating the stabilization process and restoring growth. In order for this to occur, it was necessary to create an environment that fostered the rapid growth of Ukraine's private enterprise sector and enhance its ability to export goods. The resumption of economic growth in Ukraine depended on successful stabilization and acceleration of structural reforms aimed at promoting and sustaining both a dynamic private sector and improved living standards. The GoU's four-pronged reform agenda included the need to promote private sector activity, the need to restructure the public sector recasting it in a supportive role, the need to ensure the social sustainability of the transition, and the need to ensure environmental sustainability. At that time, the Bank responded to these needs by supporting a wide range of programs aimed at reducing Govemment intervention in the economy, developing competitive markets, and introducing elements of a social safety net through a series of adjustment loans in the social, enterprise, agricultural, and energy sectors. EDAL was the first of such Bank interventions in the enterprise sector, and in response to the priorities outlined by the GoU, focused on privatization, capital markets development, and trade and price liberalization. The relative success of the EDAL and the Government's increasingly urgent need for balance of payments support led to the Second EDAL which was approved by the Board in September 1998, and fully disbursed in nine months. The EDAL was part of a coordinated and focused package of donor assistance to Ukraine and was instrumental in catalyzing privatization, capital markets development, and trade and price liberalization in Ukraine. An important aim of the Bank's Country Assistance Strategy (CAS) at that time was to support the expansion of the private sector as the main producer of goods and services in industry, commerce, and agriculture. The adjustment portion of the EDAL promoted the enabling environment and set in place the framework for the development of the private sector in Ukraine. The post-privatization - 2 -  restructuring supported by the TA component of the EDAL began to assist enterprises and managers in implernenting the changes supported by the policy reforms at the micro-level. The project developed a cadre of reformers both in the counterpart agencies working on loan implementation as well as at the regional level in the oblasts where the TA component was being implemented. This not only had important capacity building effects, but created the foundation for further Bank and donor work in private sector development. Bank-IMF financing paved the way for other donors as well as gave Ukraine access to the intemational capital markets. 3.2 Revised Objective: Loan objective was not revised. 3.3 Original Components: Component: The loan contained an adjustment component that provided balance of payments support to the budget. Cost: US$300 million The reform program supported by the adjustment component included the implementation of a privatization program for 5,000 medium and large enterprises; the acceleration of privatization of small scale enterprises; the creation of a legislative framework and institutions to regulate the new capital markets, including a Securities and Stock Market Commission (SSMC) and a self-regulatory organization (SRO) for market intermediaries; and trade and price liberalization. Component: The loan also contained a TA Component which focused on facilitating the implementation of the policy reforms supported by the adjustment component through demonstration cases, training, support to SROs, and post-privatization support to the enterprise sector Cost: US$10 million The reform program supported by the TA component included sub-components in the areas of development of professional associations, manager training, enterprise restructuring, creation of a database of Ukrainian companies, pilot bankruptcy transactions, and support to the State Property Fund of Ukraine (SPF) in preparing its privatization program as well as building capacity to implement the above)-mentioned programs. The design of both components was clearly linked to the objectives described above. The loan focused on the Government's highest economy-wide priorities, i.e. deepening and accelerating the privatization and post-privatization restructuring processes for enterprises throughout Ukraine, promoting the rapid development of capital markets, and maintaining a competitive trade and price environment within which all enterprises operated. The EDAL built on and deepened the trade and price liberalization measures and enterprise reforms initiated in early 1995 by the Bank's Rehabilitation Loan. The EDAL supported, through policy conditionality, the full implementation and extension of these pro-competition and ownership reforms and moved to the critical next stages. The capital markets development conditionality built directly on the recommendations from the Bank's Financial Sector Review of 1995, and began the process of developing truly functional capital markets in Ukraine. EDAL design drew on the important lessons learned from the Russian and Central and Eastern European experience, i.e. that there was a need to increase the efficiency of mass privatization by assisting enterprises and managers to operate within the new framework once it was in place, and concurrently develop capital markets legislation, institutions, and infrastructure. 3.4 Revised Components: The US$300 million adjustment component was not revised. Small revisions were made to the US$10 million TA component to refine it to the situation on the ground at the time of implementation. Outputs from the TA component are discussed in detail in Section 4.2. -3-  3.5 Quality at Entry: The Quality at Entry is rated as Satisfactory. Given the situation in Ukraine in 1995-96, the CAS priorities described above, as well as the lessons of experience already available from neighboring countries in the region, it was clear that project objectives were realistic, took into account the urgency of the reforms, and took advantage of newly appointed leadership in the GoU that was committed and reform-minded. There was no Quality at Entry assessment done by the Quality Assurance Group on this loan. 4. Achievement of Objective and Outputs 4.1 Outcome/achievement of objective: The project outcome is assessed as Satisfactory. When the EDAL was designed, the primary objective had been to move the mass privatization program forward. This objective was clearly reached and the ambitious privatization targets of the loan were fully met by the Government. Similarly, great strides were taken in the development of capital markets and trade and price liberalization as described in Section 4.2 below. The TA component was the first Bank intervention at the enterprise level and a recent survey of the participating enterprise managers confirmed that this program was highly successful. Detailed feedback from the beneficiary survey and subsequent stakeholders workshop that were part of the Intensive Learning ICR exercise can be found in Annexes Eight and Nine. The TA component has not only begun to show enterprises how to operate in a market economy, but it has created a lobby for reform at the regional level. While much remains to be done at the regional level in the area of post-privatization restructuring, the TA component can be considered a significant step in the right direction. All three tranches of the Loan disbursed in slightly more than one year. Certain conditions were waived for the following reasons: * elimination of import quality certification: The main aim of this condition was to ensure the removal of any barriers to trade that the existing import quality certification process caused. It became clear, however, that Ukraine had been making progress in harmonizing its import quality certification process with that of its major trading partners with a view to becoming a full member of the World Trade Organization. It was agreed that time was needed for this harmonization to occur and for bilateral agreements to be signed. The Bank continued to monitor and require satisfactory progress in this area. Future assistance included intensive TA as well as assistance under the Bank's Public Administration Reform Loan. * elimination of all export duties: Despite several proposals made by the Government to Parliament on the elimination of export duties on live animals and skins, Parliament repeatedly refused to approve this measure. Given satisfactory progress on other aspects of the program, and given the fact that this condition remained a condition in the Agricultural Sector Adjustment Loan (AgSecal), this condition was waived from the EDAL program. * removal of indicative prices on all commodities except those covered by voluntary export restraints, anti-dumping investigations, and intemational contingent agreements: The GoU removed indicative prices on metals and scraps, however, indicative prices on animal skins could not be removed until export duties on those products were eliminated. Given satisfactory progress on all other aspects of the program, and given the fact that this condition remained a condition in the AgSecal, this condition was waived from the EDAL program The successful completion of the EDAL program led to a Second EDAL in 1998 which expanded the successes on privatization and capital markets development and supported bankruptcy reform, accounting reform, and deregulation. The objectives of the EDAL program can, therefore, be considered to have been broadly accomplished. With the completion of the Second EDAL in 1999, it is now possible to judge the success of Ukraine's transition in the area of private sector development over the past five years. Significant strides were made with both EDAL programs in transferring ownership from the public to private sector and beginning to build the foundation for a market economy following decades of Communism in Ukraine. Creating an -4 -  enabling environment for business and private sector development were the larger objectives of both loans which now seem to have proved more difficult to accomplish. While the GoU fulfilled the majority of the conditions on EDAL I and all the conditions on EDAL II, the expected transformation of the private sector has been slower to occur. Both EDALs played a critical role in helping Ukraine begin to develop as a market economy by creating primary ownership changes and beginning to put in place the enabling legall and institutional environment for the next stage of development. Both programs organized and focused Government and donor commitment in this process. Political considerations and vested interests, however, prohibited moving the reform program beyond this point. Thus, while the objectives of the EDAL program were achieved, its sustainability can be questioned. The Bank's Private Sector Development (PSD) team is addressing this issue by focusing current programs on enterprise level assistance in the regions of Ukraine in order to train Ukrainian enterprise managers and local consultants; create a demonstration effect from successfully restructured enterprises; and build a constituency for reform from the bottom up. In this regard, the TA component of the EDAL was critical in laying the foundation. While the initial lack of Government commitment to this component led to significant delays in its implementation, once the GoU was on board, the component began to progress swiftly. This not only ensured that economic reforms were trickling down, but created demand for the PSD Loan going forward. The Bank is also proposing a Programmatic Adjustment Loan which will aim to address the major constraints in the enabling environment for private enterprise development. 4.2 Ouitputs by components: Adjuistment component (Macro Policies/Private Sector Development) Privatization: Standard enterprise preparation (for privatization) documents were prepared by the SPF and a network of over 1000 bidding centers was established. Mass privatization was implemented in 5000 medium and large scale enterprises with at least 52 percent coming from the agro-industrial comiplex. By mid-September 1997, the Govemment was ahead of the program with over 6200 enterprises privatized. Furthermore, the Cabinet of Ministers approved a list of ten large monopoly enterprises for privatization, and a streamlined methodology for privatizing agro-industrial enterprises was implemented. The outputs for this component are rated as Satisfactory. Nevertheless, there were significant problems which emerged from the Mass Privatization program, including insider control in many of the privatized enterprises, making it more difficult to motivate fundamental corporate restructuring. Also, case-by-case privatization of large enterprises failed to materialize due to lack of political support in the country, largely focused in the Parliament, for this process. Capital Markets: The SSMC was created, its Commissioners elected, and its key departments staffed. Resolutions were passed and Laws enacted that ensured the unobstructed transfer of enterprise share registries to private and independent registrars, and created a sound base for organized and transparent securities markets. Professional associations (SROs) were created and registered, and the Securities Cornmission passed a resolution requiring compulsory membership of capital markets participants in SROs. Licenses of professional market participants who did not comply with the resolution were later revoked. A Depository System for Securities was also made operational and an open joint stock conmpany was created to provide depository services. The Securities Commission began licensing custodians for securities. The outputs for this component are rated as Satisfactory. Nevertheless, the nascent capital market has not fully taken on its expected role due to the slowly developing supply of publicly traded shares and lack of market liquidity. Trade and Price Liberalization: The Special Export Regime (SER) was neutralized by the issuance of a Cabinet of Ministers Resolution which extended the right to export commodities subject to the SER to all enterprises. The GoU also effectively eliminated the registration of export contracts by issuing a resolution which stated that registration was solely for statistical purposes and could not be used to refuse permission to export. This resolution also simplified and decentralized the registration process. Controls on domestic prices, trade mark-ups, and profit margins for goods classified as "artificial monopolies" were eliminated and price regulation and inspection were limited to a specific list of goods and services. Nevertheless, the outputs for this component are rated Unsatisfactory. Conditions were waived on this component because the political situation in Ukraine did not allow the Government to secure Parliamentary approval for them, and they still remained as part of AgSecal conditionality. The tensions between the Government and Parliament as well as the central privatization/capital markets -5-  development focus of this loan suggested that these were not battles that could be won under the rubric of the EDAL. However, these conditions were also subsequently waived from the AgSecal and though the Government continues to try to obtain Parliamentary approval to rescind the export duties and the indicative prices, they have not yet been successful. In fact, in 1999, Parliament imposed a further export duty and indicative price on sunflower seeds, and the Government's attempt to have these and the live animals and skins duties rescinded in March-April 2000 were once again unsuccessful. TA component (Private Sector DevelopmentlInstitutional Development) The output for this component is rated as Satisfactory. While outputs were Unsatisfactory when the component was first launched, once it began to be implemented in eamest, outputs were more than Satisfactory. A breakdown of outputs by each sub-component of the TA component follows. Feedback from beneficiaries of the TA component can be found in Annexes Eight and Nine. * Low Cost Restructuring, Parts I and 11: Low Cost restructuring of nineteen enterprises took place with strong participation and training of Ukrainian consultants, who were team leaders in many of the later restructuring exercises. Ukrainian consultants were trained in preparation for the PSD Loan in restructuring centers in Moldova and Georgia (that were successfully operating as a result of earlier Bank projects) and then given intensive on-the-job training in some of the Low Cost enterprises. Small and medium sized enterprises were selected, primarily in light industries such as food canning and processing, hosiery, confectionery, electrical parts. Diagnostics were done on each enterprise, restructuring plans were developed, and the implementation phase is currently underway. Many enterprises were able to increase the volume of production, implement internal reorganizations and marketing strategies, increase profit, and some have begun discussions with potential foreign partners. Managers presented the diagnostic and their restructuring plans to the oblast administrations and to other enterprises involved in the program. US$3.2 million. - Model Restructuring: An intensive restructuring exercise was carried out for one large Ukrainian enterprise specializing in machine building. Consultants carried out an extensive diagnostic exercise and produced a plan of short and long term restructuring options. Training in finance, marketing, and new technologies was carried out for management. A new sales plan was developed, the costing structure was improved, production (energy) costs were reduced, production units were reorganized, and a marketing department was created which developed a marketing strategy for the company. US$900,000. - Bankruptcy and lquidation: Two pilot restructuring exercises were conducted. In one case, an industrial park was created and revenue was generated by leasing space to other businesses in the community. Management was trained in accounting and a public relations campaign disseminated information about the industrial park model. In the second case, financial restructuring of debts took place and business lines were readjusted to reflect the highest profit areas. Negotiations and agreements with each of the company's creditors were achieved. US$950,000. * Management Training: Nearly 700 managers and some government officials were trained in two- and five-day courses in restructuring, turn-around management, and lessons leamed from cases in nearby countries. Three modules of training ranging from beginning to advanced were offered over a period of six mcnths. The training contributed significantly to raising demand for restructuring assistance and some managers subsequently paid for the continuation of the training program. US$950,000. * Commercial Database: A database of information on Ukrainian privatized and private enterprises was developed. A joint-venture is in the process of being created between a foreign and Ukrainian partner that will maintain the database and disseminate information about Ukrainian companies. A benchmarking database is in the process of being prepared which will include benchmarking information (i.e., cost structure, financing, markets) from Western enterprises that are comparable to the Ukrainian enterprises restructured in the Low Cost exercise. US$450,000. * Methodological and Technical Assistance to the SPF: Consultants worked with the SPF to develop the privatization program for 2000, maintained the SPF website, and provided support to the SPF Information Technology Department to maintain professional information on enterprises. US$250,000. * Professional Associations: Ten professional associations were given grants of US$95,000 each to carry out activities such as conferences in their issue areas, marketing and membership brochures, -6 -  training of trainers in their issue area, establishing links with foreign associations, and lobbying the Government. Associations supported included associations of financial analysts, management consultants, accountants, and insurance intermediaries. Operational costs of associations were not lunded. US$950,000. * Strengthening SPF: Consultants prepared an analysis of the foreign investment environment in lJkraine and potential foreign investors. Fifteen strategic Ukrainian enterprises will be prepared and promoted abroad. Ukrainian consultants will work with foreign consultants in each of these enterprises. A conference planned for September 2000 will convene major portfolio investors to present the enterprises. US$800,000. In adidition, support was provided to the Ukrainian Center for Post Privatization Support to monitor the enterprise restructuring work, and to the Project Implementation Unit (PIU) to establish and operationalize itself. Details are available in Section 4.5. 4.3 Net Present Value/Economic rate of return: Not calculated. 4.4 Financial rate of return: Not calculated. 4.5 Institutional development impact: The adjustment component of the EDAL created a critical cadre of individuals that worked to develop and implement the policy conditionality. This developed institutional capacity in the GoU and feedback fromr the beneficiary survey suggests that the EDAL program was the basis for the GoU's privatization program. This working group of government officials in the SPF, the SSMC, the MoE, and MoF became the foundation for further programs in private sector development. The PIU in the SPF coordinated the TA component. Significant capacity was built within this unit to work with enterprises, managers, and government officials on enterprise restructuring and private sector development as well as to manage World Bank financing. The PIU subsequently expanded into a non-profit entity called the Ukrainian Center for Enterprise Restructuring and Private Sector Development (UCER) and today has established four regional centers, and has a cadre of over 90 consultants who are experts in restructuring and turn-around management working in over 25 enterprises throughout the country. 5. Major Factors Affecting Implementation and Outcome 5.1 Factors outside the control of government or implementing agency: The early 1990s were tumultuous years in Ukraine. The country was newly independent and in many ways, the Government was struggling to manage a nation that was defining its national identity. There were many fractious voices and groups and this made it particularly difficult for the Government to focus on economic reform. "Managing" independence and balancing national identity with the relationship with Russia, a major trade partner for Ukraine, was critical at this time. The GoU perhaps understood the need for economic reform and private sector development, but many competing issues made it difficult to focus entirely on this process. 5.2 Factors generally subject to government control: Leonid Kuchma was elected President in late 1994 and the EDAL was prepared at a time that was viewed as a window of opportunity for reform in Ukraine. However, the Government had to contend with a primarily Left-dominated Parliament that essentially blocked economic reforms. It was particularly difficult to create a lobby for reform as most of the country was ideologically torn between representatives of the old system who adjusted to the transition and began to collect rents from the new environment, and those who supported the transparent relationships characterizing a market economy. While the Govemment had it in its power to carry out many of the reforms proposed in the EDAL, this -7 -  tension between pro- and anti-reform forces as well as between the Government and Parliament made it difficult to move quickly with reforms. 5.3 Factors generally subject to implementing agency control: It was clear that the Government was not initially committed to the TA component. This was largely due to the fact that the Chairman of the SPF, who had championed the EDAL effort, had been removed from office. Nearly one year was lost in the bureaucratic difficulties faced by the PIU as they were unable to get the relevant permits and clearances and the Special Account was frozen multiple times. The first head of the PIU was not committed to overcoming these difficulties and it was unclear whether she took all the necessary steps to move the component forward. While having senior level Government support for the TA component would clearly have made it easier to implement, it seemed the PIU had the access to getting this support if an effort had been made. After repeated communications from the Bank, the Vice Prime Minister appointed one of his advisors to head the PIU. Subsequently, the component has progressed impressively well with almost no hurdles. 5.4 Costs and financing: Three tranches of US$1 00 million each were disbursed, and US$7.5 million of the US$10 million TA component has been disbursed. The remaining funds are expected to disburse by project closing in December 2000. Significant delays in implementing the TA component are explained in Section 5.3. The project was expected to close on December 31, 1999, but due to delays on the TA component, it is now expected to close on December 31, 2000. Detailed cost figures can be found in Annexes 2 and 4. 6. Sustainability 61 Rationale for sustainability rating: The specific conditions in Ukraine make sustainability hard to predict. If considered in isolation, most of the outcomes of the loan were delivered in a satisfactory and timely fashion. However, questions about the larger enabling environment for private sector development as well as lack of reforms in other sectors of the economy (i.e., administrative reform, pension reform, financial sector reforms, energy sector reform) will influence the long term sustainability of the loan. Nevertheless, sustainability has been rated as "Likely". The rationale for this rating is based on the fact that the project established a basis for the future development of the private sector by creating a large number of privatized enterprises, assisting enterprises and managers to operate in a market economy, creating and regulating the capital markets, and beginning the process of trade and price liberalization. The main objective of the project was to accelerate and embed the transformation in the ownership structure and management of Ukrainian enterprises, to accelerate the development of the private sector in Ukraine, and to create capital markets infrastructure to serve Ukraine indefinitely in the future. These objectives were unquestionably and irreversibly achieved and by definition brought about sustainable change. As mentioned above, this project paved the way for the Second EDAL and the development of the Bank's PSD Loan. The Second EDAL not only built on the privatization and capital markets development components of the First EDAL, but it also advanced the development of bankruptcy mechanisms, established the basis for intemational accounting standards to enterprises, and made the entry of new businesses easier through the adoption of a simplified registration process. The TA component paved the way for the Bank's PSD Loan which seeks to restructure enterprises and train Ukrainian managers and consultants throughout Ukraine. As explained above, the PIU expanded and has become the UCER which carries on projects throughout Ukraine. 6 2 Transition arrangement to regular operations: As discussed above, the adjustment portion of the First EDAL was built upon through the Second EDAL, which has now disbursed fully. The PSD Loan, currently under preparation, will build on the TA component. The PIU (now called UCER) will implement the PSD Loan, and has expanded its activities -8 -  and capacity as discussed above. 7. Bank and Borrower Performance Bank 7. 1 Lending: The Bank's performance in lending is assessed as satisfactory. The Bank's preparation of the project involved close coordination with multiple Government counterparts and exemplary coordination with donor agencies active in the enterprise sector in Ukraine. The EDAL program put the Bank in a leadership role in donor coordination with Bank policy conditionality providing the leverage for many other programs in the PSD area. For example, the adjustment component included ambitious privatization targets to be fulfilled, and USAID played a critical role in the actual implementation of the privatization program through their financing of auction centers. EDAL conditions were developed after extensive consultation with the Government, examination of the lessons learned from similar programs in the region, and as part of a package of enterprise sector assistance programs from the entire donor community. The loan was processed on a reasonably timely schedule in order to address the GoU's balance of payments needs as well as to advance the agenda for reform in the enterprise sector in Ukraine. The Loan was fully disbursed slightly over a year after effectiveness. Bank missions visited Kyiv nearly every eight weeks during the preparatory phases of the Loan. 7.2 Suipervision: The Bank's performance in supervision is assessed as satisfactory. Strong coordination with donors on the ground as well as preparatory missions for the Second EDAL allowed for a strong supervision effort on the Bank's part. Constant supervision of the TA component meant that adjustments were made to reflect the changing situation and personalities on the ground. There was daily contact with the PIU and the Bank was intimately involved in the development of the TA component over time. Bank missions visited Kyiv nearly every four weeks during the launch and early implementation of the TA component. Waivers on the conditions of the adjustment were given with the realization of the risks, accornplishments, and the political realities at the time. 7.3 Overall Bank performance: Overall Bank performance is assessed as satisfactory. Borrower 7.4 P'reparation: The Borrower's performance in lending is assessed as satisfactory. There was close cooperation at the time of preparation between the Government and the Bank, and the leadership and vision provided by the main counterpart in the SPF ensured that the program that was developed was appropriate to Ukraine's needs. Representatives from all the counterpart agencies were involved in the preparation of the loan. 7.5 Government implementation performance: The Government's implementation performance is assessed as satisfactory due to the reasons outlined in Section 4. Nearly all the key conditions of the loan were fulfilled. Eventually, the GoU delivered by assigning committed project counterparts who were able to deliver the program. 7.6 Implementing Agency: The Implementing Agency's performance is assessed as satisfactory due to the reasons outlined in Section 5.3. While there were substantial delays and the initial performance of the PIU was unsatisfactory, once there was Government commitment and new PIU leadership, the implementation of the TA component improved significantly. The PIU is today entirely committed to the TA component and the Lupcoming PSD Loan. 7.7 Overall Borrower performance: The overall performance of the Government during the EDAL program is assessed as satisfactory. -9-  Having the experience of the Second EDAL already available, however, leads to questions. While the conditions were fulfilled and reforms did take place, in some sense, Govemment completion of both EDAL programs was linked to the urgency of the need for balance of payments support. This was particularly true with the Second EDAL as this was a time of economic crisis. Once the leverage of the Second EDAL's last disbursement was gone, however, signs of wavering appeared and it was necessary to continue working with the GoU to prevent backtracking. Two remaining areas of significant concern are: (i) continuing reluctance to implement a transparent case-by-case privatization; and (ii) on-going state intervention in the operations of privatized firms largely aimed at extracting rents and thereby stifling growth and the development of the sector. The proposed Programmatic Adjustment Loan would be intended to address some of the most critical constraints to the business environment and provide additional impetus to case-by-case privatization and bankruptcy. In the immediate future, further attempts to backtrack cannot be excluded and additional efforts may be required to sustain the impact of EDAL II. It is hoped that the new reform-minded Government, elected in November 1999, will prevent any such reversals. While this does not directly affect the Borrower performance rating on the First EDAL, it must, nevertheless, influence our judgment. 8. Lessons Learned Adjustment with Technical Assistance The experience of the EDAL showed that in transition economies, the results from policy reforms are far enhanced if they are accompanied by TA. While the policy reforms supported by the adjustment component are critical for setting the framework, the TA is instrumental in training key players in how to operate in the new environment. Given the uniqueness of the situation in the transition economies and the relatively short history of Bank programs in this part of the world, the TA component allowed for low cost experimentation, particularly with sensitive issues like bankruptcy of enterprises. It also created a demonstration effect and created a lobby for reform at the regional level and throughout the country. The feedback received from the work being done on the ground also improved the supervision of subsequent tranches on the adjustment component because it clarified the operational issues created by the imposition of or lack of policy reforms. Broad based support from the counterpart One of the key problems with the EDAL TA component (and also some stages of the Second EDAL) was that the Government official who had championed both loans was removed from his position as head of the SPF. This created a situation in which there was no accountability for the program and it became very difficult to make any progress. Frequent changes in the leadership at the SPF did not facilitate the situation. Had a broader base of support been built, the success of the program would not have been so closely linked to one person. Recognizing the difficulty of finding many such counterparts as well as the hierarchical nature of the Ukrainian system, it is, nevertheless, the objective of future programs in the PSD area to not only build support throughout the Government but also with NGOs, business associations, and major political parties. 9. Partner Comments (a) Borrower/implementing agency: The GoU and the PIU provided detailed comments on the project in written form. These documents are in the project files and are available upon request. Overall, the GoU rated the EDAL project a success saying that "it is difficult to overestimate the effects of the EDAL program in highlighting the advantages of a market economy in Ukraine and introducing market capital know-how". According to the GoU, the EDAL program began in Ukraine at the time that economic reform was proceeding at a sluggish pace. The reasons for this include the contradictory and inconsistent nature of national legislation for entrepreneurial activities; a poorly developed stock market infrastructure; obsolete accounting standards; and an ineffective bankruptcy system. Today, the successful outcomes of the EDAL program include a critical mass of privatized enterprises in Ukraine that have irreversibly embedded property reform; the involvement of Ukrainian citizens in the privatization process giving them first hand experience in a market economy; the development of a transparent and well-functioning stock market infrastructure; and the liberalization of foreign trade activities. As a result of the EDAL program, important achievements - 10 -  were made in the areas of macreconomic policy reform, the introduction of appropriate legislation, and significant institutional development within the counterpart state agencies as well as in the enterprise sector. The EDAL program also created capacity within the GoU by creating a local body that had the expertise to work with enterprises as well as with donor agencies involved in enterprise reform. In assessing factors that affected project implementation, the GoU noted that while the Bank's conditionalities helped enforce and provide support for the Government's reform program, the contentious relationship with Parliament often made it difficult for the GoU to deliver these reforms. Furthermore, the Government itself was not able to put in place certain legislation and reforms which diluted the effects of the EDAL program. For example, in some cases, the GoU continued a protectionist policy towards enterprises (i.e. due to vested interests and Soviet era relationships) which inhibited the development of a true competitive environment. The lack of coordination between the Govemment and the Parliament as well as among different Government agencies; the continual reshuffling of Government officials; the delays in adoption of critical legislation (i.e., the Law on the SPF and the State Privatization Program for 1996) all negatively effected the implementation of the EDAL program. The GoU rated Bank performance as "fairly successful". The project addressed issues of critical importance for the development of the private sector in Ukraine, and was prepared with good cooperation between the GoU and the Bank. However, the GoU recommended that future projects involve a detailed action plan agreed between the Bank and the relevant implementing state agencies on the steps to be taken for the actual implementation of the agreed reforms. Furthermore, the GoU noted that far greater involvement from the Bank's Resident Office in Kyiv would have been most helpful particularly in the early stages of the project when Ukraine was a relatively new Borrower with little experience in World Bank procedures and practices. The GoU also felt that the Bank needed to be more understanding of the political and institutional constraints on the Ukrainian side when formulating policy conditions or making demands that had to be met prior to the release of financing. The! key lesson learned as stated by the GoU was the need in future to work with the Bank to develop a joint strategy for reform in the proposed sector and building consensus with all key players before moving ahead with specific loans or operations. (b) Cofinanciers: Not applicable. (c) Other partners (NGOs/private sector): Not applicable. 10. Additional Information A detailed list of additional available documentation on the project can be found in Annex Seven. - 11 -  Annex 1. Key Performance Indicators/Log Frame Matrix Outcome I Impact Indicators: A more competitive and better functioning All indicators listed in this table were Same as projected in last PSR for all market economy environment in Ukraine, projected in the PSR, and were either part of indicators listed in this table. with critical supporting functions in place policy conditions to be fufilled or an integral part of the TA component. Well functioning, transparent capital markets with relevant support structures in place A critical mass of restructured enterprses creating a demonstration effect; development of a capacity to provide post-privatization support to enterprises Enhanced import and export trade and domestic price liberalization promoting a competitive environment Output Indicators: 5000 enterprises privatized All indicators listed in this table were Same as projected in last PSR for all projected in the PSR, and were either part of indicators listed in this table. policy conditions to be fulfilled or an integral part of the TA component. Streamlined procedures for privatization of mediumAarge enterprises implemented Securties and Stock Market Commission created Depository System for securities operationalized Professional Associations/SROs created, with compulsory membership from capital markets participants 20 enterprises restructured, 2 pilot bankruptcy restructuring exercises 700 managers trained Database of information on privatized enterprises created End of project - 12 -  Annex 2. Project Costs and Financing Project Cost by Component (in US$ million equivalent) Adjustment Component 300.00 300.00 too Technical Assistance Component 10.00 10.00 100 Total Baseline Cost 310.00 310.00 Total Project Costs 310.00 310.00 Total Financing Required 310.00 310.00 Project Costs by Procurement Arrangements (Appraisal Estimate) (US$ million equivalent) 1. Works 0.00 0.00 0.00 0.00 0.00 (0.00) (0.00) (0.00) (0.00) (0.00) 2. Goods 0.00 0.00 1.00 0.00 1.00 (0.00) (0.00) (1.00) (0.00) (1.00) 3. Services 0.00 0.00 9.00 0.00 9.00 (0.00) (0.00) (9.00) _ 0.00) (9.00) 4. Miscellaneous 0.00 0.00 0.00 0.00 0.00 (0.00) (0.00) 0.00 0.00) (0.00) 5. Miscellaneous 0.00 0.00 0.00 0.00 0.00 (0.00) (0.00) (0.00) (0.00) (0.00) 6. Miscellaneous 0.00 0.00 0.00 0.00 0.00 (0.00) (0.00) (0.00) (0.00) (0.00) Total 0.00 0.00 10.00 0.00 10.00 (0.00) (0.00) (10.00) (0.00) (10.00) Project Costs by Procurement Arrangements (Actual/Latest Estimate) (US$ million equivalent) 1. Works 0.00 0.00 0.00 0.00 0.00 (0.00) (0.00) (0.00) (0.00) (0.00) 2. Goods 0.00 0.00 0.02 0.00 0.02 (0.00) (0.00) (0.02) (0.00) (0.02) 3. Services 0.00 0.00 9.78 0.00 9.78 (0.00) (0.00) (9.78) (0.00) (9.78) 4. Miscellaneous 0.00 0.00 0.20 0.00 0.20 3___________________ - (0.00) (0.00) (0.20) (0.00) (0.20) - 13-  S. Miscellaneous 0.00 0.00 0.00 0.00 0.00 (0.00) (0.00) (0.00) (0.00) (0.00) 6. Miscellaneous 0.00 0.00 0.00 0.00 0.00 (0.00) (0.00) (0.00) (0.00) (0.00) Total 0.00 0.00 10.00 0.00 10.00 (0.00) (0.00) (10.00) (0.00) (10.00) Miscellaneous shall read as "Operating Costs" expenditures under category 1(c) " Figures in parenthesis are the amounts to be financed by the Bank Loan. All costs include contingencies. 2' Includes civil works and goods to be procured through national shopping, consulting services, services of contracted staff of the project management office, training, technical assistance services, and incremental operating costs related to (i) managing the project, and (ii) re-lending project funds to local government units. Project Financing by Cornponent (in US$ million equlvalent) Adjustment Component 300.00 300.00 100.0 0.0 0.0 Technical Assistance 10.00 1 0.00 100.0 0.0 0.0 Component 0.0 0.0 0.0 -14 -  Annex 3: Economic Costs and Benefits Not applicable. -15 -  Annex 4. Bank Inputs (a) Missions: Stage of Project Cycle No. of Persons and Specialty Performac Rating (e.g. 2 Economists, I FMS, etc.) Implementation Development Month/Year Count Specialty Progress Objective Identification/Preparation May 1995 6 PSD Specialists, Capital Markets Specialist, Operations Officers July 1995 1 PSD Specialist September 1995 6 PSD Specialists, Capital Markets Specialist, Operations Officers December 1995 2 PSD Specialists Appraisal/Negotiation March 1996 2 PSD Specialists May 1996:Negotiations June 1996 3 PSD Specialists, Operations Officer Supervision October 1996 6 PSD Specialists, Capital S S Markets Specialist, Operations Officers November 1996 1 PSD Specialist S S January 1997 6 PSD Specialists, Capital Markets S S Specialist, Operations Officers April 1997 2 PSD Specialists S S June 1997 3 PSD Specialists S S November 1997 2 PSD Specialist, Operations S S Officer January 1998 1 PSD Specialist S S March, June, September, 2 PSD Specialist, Operations November 1998 Officer February, June, October 2 PSD Specialist, Operations S S 1999 Officer ICR April 2000 3 PSD Specialists, Operations S S Officer - 16-  (b) Staff: Stage of Project Cycle ActualLatest Estimate No. Staff weeks US$ (,OQO) ][dentification/Preparation 111.9 361 Appraisal/Negotiation 16.1 49.7 Supervision 80.5 268.8 ICR 13.9 43.1 Total 222.4 722.6 - 17 -  Annex 5. Ratings for Achievement of Objectives/Outputs of Components (H=High, SU=Substantial, M=Modest, N=Negligible, NA=Not Applicable) Rating O Macro policies OH OSU*M ON ONA F. Sector Policies U Physical O Financial O Institutional Development O H * SU O M O N O NA O Environmental Social ai Poverty Reduction F] Gender Cl Other (Please specify) E Private sector development O I O SU * M O N O NA L Public sector management O Other (Please specify) - 18-  Annex 6. Ratings of Bank and Borrower Performance (H'S=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HU=Highly Unsatisfactory) 61 Bank performance Rating