CPSCR Review Independent Evaluation Group

Transcription

1 1. CPS Data Country: Ukraine CPS Year: FY08 FY11 CPS Period: FY 08 FY 11 CPSCR Review Period: FY 08 FY 11 Date of this review: February 9, Executive Summary i. This review examines the implementation of the FY08-11 Ukraine Country Partnership Strategy (CPS) of FY08 and the CPS Progress Report (CPSPR) of FY10, and evaluates the CPS Completion Report (CPSCR). The strategy was joint between IBRD, IFC and MIGA and this review covers the program of the three institutions. ii. The World Bank Group (WBG) strategy, as updated by the CPSPR to take into account the global financial crisis, was grouped around two pillars. Under Pillar 1, restoring economic growth and improving competitiveness, the WBG strategy supported improving the business climate and invigorating private investment and trade; rehabilitating the banking sector and strengthening financial markets; bolstering energy security and improving energy efficiency; and promoting an export led recovery. Under Pillar 2, public finance and public sector reform and improved service delivery, the WBG strategy provided support to implement a fiscal reform consistent with a stable and sustained recovery; improve efficiency in service delivery; and improve governance and accountability. iii. IEG rates overall outcome of the WBG s strategy as moderately unsatisfactory. On Pillar 1, Ukraine made some progress in cadastre and land titling, company inspections and operating permits, and this progress did not translate into an improvement in the country s overall weak business environment. Ukraine succeeded in averting some of the critical aspects of its financial crisis, including the run on banks. Ukraine, though, has yet to address most of the fundamental aspects of the crisis. Some diversification of energy sources took place with the modest increase in hydropower, but the economy remains heavily dependent on imported gas. Ukraine became a member of WTO and its growth in exports contributed to rebound in GDP. Meanwhile, most legal changes to improve the business environment have yet to be implemented to have an impact. Also, no progress was made in strengthening financial markets, or in redressing the quasi-fiscal deficit stemming from energy and heating subsidies. Similarly, the cost of exporting attributable to energy efficiency and transport infrastructure has increased, according to some indicators. On Pillar 2, Ukraine made some progress in the administration of social assistance benefits, but targeting of these benefits did not improve. In piloted areas, Ukraine s teachers were able to cover more students. Yet, the country did not adopt needed reforms in the budgeting of schools and hospitals, nor did utilities and municipalities improve their financial performance. Ukraine s PEFA ratings improved with MTEF implementation, the new procurement law, the reduction of tax arrears, and introduction of risk-based audit. However, Ukraine s broad governance indicators did not improve. More importantly, in the difficult circumstances of political uncertainty and little ownership, Ukraine did not adopt the fiscal reforms necessary for medium-term fiscal stability and sustainability. iv. IEG concurs with the lessons of the CPSCR, and underscores two additional points. First, with political uncertainty and frequent changes in governments, the timely use of the CPSPR to update the objectives of the strategy and adapt them to the new political environment appears essential just as the CPSPR was used to adapt the WBG strategy to the global financial crisis, another exogenous development. For instance, several aspects of the approach to energy in the WBG strategy appeared CPSCR Reviewed by: Peer Reviewed by: CASCR Review Coordinator Shoghik Hovhannisyan, Consultant, IEGCC Surajit Goswami, Consultant, IEGCC Michael Lav, Consultant, IEGCC Albert Martinez, Consultant, IEGCC Jaime Jaramillo-Vallejo, Lead Economist, IEGCC

2 2 to have lost the necessary political backing and objectives could have been revised. Second, the WBG could align its strategy more closely with that of the country, to avoid weak ownership from becoming an obstacle to effectiveness. This appears to have been the case with the emphasis on the efficiency of service delivery, which was differed from Ukraine s focus on the quality of the services. 3. WBG Strategy Summary Overview of CPS Relevance: Country Context: 1. After growing at an annual average rate of 7.5 percent, Ukraine faced a severe triple crisis in late 2008, which led to negative growth of 14.8 percent in First, the contraction in global demand led to an 80 percent fall in steel prices, affecting a sector that accounts for 40 percent of total exports and 15 percent of GDP. Second, weaker exports combined with a sharp increase in capital outflows to trigger a balance of payments crisis. Third, the banking system, which was already frail, faced a financial crisis. As a consequence of these shocks, the fiscal stance weakened, leading to a tripling of public debt from a low level of 12.4 percent of GDP in 2007 to 39.5 percent in The government, which accounts for about 40 percent of GDP and more than half of total employment according to 2004 data, reacted quickly and the economy returned to positive GDP growth of 4.2 percent in In addition, as a result of government s crisis-response measures, the banking system has stabilized, and external arrears and sovereign default were avoided. At the same time, political instability complicated policy-making and contributed to the delays in structural and institutional reforms. 2. The Ukrainian Government s strategy for the period of has been laid out in the Stability, Competitiveness and Improved Livelihoods State Program of Economic and Social Development. The key priorities of the strategy include: (1) improving living standards and poverty reduction, including through pension reform; (2) promoting innovation and structural change, including through greater energy security and efficiency, better infrastructure, and building Ukraine s transit potential; (3) promoting trade, by creating an efficient export structure and extending cooperation with EU; (4) fostering investment through tax and budget reform, financial market development, and state-owned enterprises (SOE) management improvement; (5) promoting small and medium enterprises (SME) and reducing cost of doing business; and (6) improving quality of public services. Objectives of the WBG Strategy: 3. The WBG strategy, as updated by the CPSPR to take into account the global financial crisis, was laid out around two pillars. Under Pillar 1, restoring economic growth and improving competitiveness, the WBG strategy supported improving the business climate and invigorating private investment and trade; rehabilitating the banking sector and strengthening financial markets; bolstering energy security and improving energy efficiency; and promoting an export-led recovery. Under Pillar 2, public finance and public sector reform and improved service delivery, the WBG strategy provided support to implement a fiscal reform consistent with a stable and sustained recovery; improve efficiency in service delivery; and improve governance and accountability. Relevance of the WBG Strategy: 4. The WBG strategy was relevant and addressed some of the key challenges faced by Ukraine. The WBG strategy was mostly aligned with Ukraine s own, with one notable exception while Ukraine focused on improving the quality of public services, the WBG strategy emphasized their

3 3 efficiency. The WBG strategy left aside other areas of interest for Ukraine, which have been longstanding challenges, such as improving the management of SOEs. The WBG strategy was revised in the CPSPR to support Ukraine in its efforts to address the impact of the global financial crisis. 5. Overall, the WBG strategy had objectives that were defined very broadly. While WBG interventions fell well within the realm of the objectives, some operations had a very narrow focus and could hardly contribute in a significant way to the higher-order objectives of the strategy. In some cases, the gap was made wider by low government ownership, delays in project implementation, and unsteady implementation of some structural reforms. Relevance of IFC Program: 6. IFC s support to Ukraine was mostly pro-cyclical, short in volume at the time of the economic slowdown and expanded when the economy had rebounded. In a different dimension, IFC responded to the market when investing in expanding the capacity for retail and wholesale, including gasoline stations. IFC s strategy focused a significant part of its support investments and advisory services, on the agricultural sector, addressing the needs of the small farmers. Reflecting governance concerns, IFC withdrew from municipality finance, including financing of public infrastructure (such as in transportation). Relevance of MIGA Program: 7. With the prevailing political uncertainty, of the presence of three pre-cps MIGA guarantees plus a new one provided support to investments in financial institutions (where IFC had invested in the pre-cps period). There was an additional pre-cps guarantee in manufacturing. However, MIGA s explorative efforts in agribusiness, capital markets or infrastructure, which were foreseen in the CPS, did not bear fruit. 8. Risk Identification and Mitigation: As acknowledged by the CPSCR, risks in implementation as well as in political economy were appropriately identified in the CPS, but, in retrospect, the mitigation measures foreseen fell short from what was needed to deal with the risks that materialized. The potential impact of these risks was underestimated, and the capacity of the government to respond overestimated. In the case of implementation risks, mitigation measures appear to have missed the flaws the design and project readiness that became evident subsequently. In the case of the political economy risks, the CPSPR appropriately emphasized the risky political context and the uncertainties surrounding the adoption of reforms. However, the mitigation measures fell short of what was needed to bring about the expected major reforms and structural changes. A more operative way of adapting the objectives to a more challenging political environment would have been warranted. Overview of CPS Implementation: Lending and Investments: 9. IBRD approved financing for US$ 2,250 million in 9 operations during the CPS period in the form of investment lending and development policy loans. Total planned lending was US$ 4,373.0 million. The difference was accounted for by six operations that were dropped and two that slipped to future fiscal years. Under Pillar 1, restoring economic growth and improving competitiveness, IBRD delivered 7 projects, including DPL II, DPL III, Programmatic Rehabilitation Loan 1, Power Transmission Project, Hydropower Rehabilitation Additional Financing Project, and Road Improvement and Safety Project. Also, the IBRD intended to provide assistance through an Energy Efficiency Project for which, however, the loan and guarantee agreements were signed in June Under Pillar 2, public finance and public sector reform and improving service delivery, IBRD provided

4 4 support through DPL II, DPL III, and the Urban Infrastructure and Public Finance Modernization projects. IBRD continued implementing 11 previously approved projects. 10. IBRD portfolio performance improved significantly during the CPS period with the share of commitments at risk declining from 60 percent in 2008 to 0 in This compares with 9.4 percent of commitments at risk in ECA and 13.9 percent of commitments at risk globally across all client countries. This progress reflected concerted efforts on the part of both Ukraine and IBRD to undertake joint measures and to monitor progress quarterly, as noted by the CPSCR. Of five projects that were evaluated by IEG over the review period, two were rated moderately satisfactory or better in terms of development outcome. 11. Nineteen IFC investment projects were in operation at inception of the review period, for US$506 million of net commitment. IFC had developed a sizeable investment portfolio in the pre-cps period, which was maintained during FY During the review period, IFC committed another US$933 million for twenty-six projects, US$220 million of which was committed during the crisis years of FY These projects targeted mortgages, trade financing, credit to SMEs, and small farmers, as well as financing of existing IFC clients. 12. The performance of IFC operations evaluated by IEG followed sectoral lines. In general, financial sector projects did not perform well, while non-financial sector projects were successful. Investee financial sector institutions had problems maintaining sound currency matching of their portfolios and keeping nonperforming loans in check. These problems appear to predate the crisis of FY08-09; of two commercial bank investments evaluated by IEG, one was found to have unsatisfactory front-end work. For the nonfinancial IFC portfolio, the institutions concerned were generally successful in increasing revenues and cutting costs during the review period. 13. MIGA guarantees covered five operations for a maximum gross issuance of US$1,007 million. The operations covered financial institutions and manufacturing. The financial institutions in turn covered leasing and commercial banking, including microfinance. Analytic and Advisory Activities and Services: 14. IBRD delivered most of its planned analytic and advisory activities (AAA). IBRD delivered 15 pieces of ESW, eight of which were not planned, as well as 22 technical assistance, nine of which were not planned. IBRD dropped or postponed five pieces of AAA, as Ukraine s interests changed. Showing flexibility, IBRD moved fast with unplanned AAA in response to the global financial crisis and the food crisis. IBRD s AAA was aligned with Ukraine s demand and with the lending program. 15. Approved before the CPS, IFC had three large advisory services projects, amounting to over US$14 million of total funds that are still active at the end of the review period. Improving the Business Enabling Environment was the focus of one of these projects, while the other two are to improve financial and insurance services to farmers. During the CPS period, IFC brought into stream another US$11 million of advisory services through four large projects, focusing on financing cleaner production and residential energy efficiency. Partnerships and Development Partner Coordination: 16. Coordination across multilateral institutions, including the IMF, EBRD, EU, and OECD, has evolved productively. In particular, there was good coordination in response to the global financial crisis with the IMF and other partners, as well as with the EU in governance, providing support to stabilize the banking system, address underlying vulnerabilities, rebuild confidence, improve governance, and reinforce social protection.

5 5 Safeguards and Fiduciary Issues: 17. There were no safeguard issues brought to the Inspection Panel s attention regarding Ukraine during the CPS period. IEG is not aware of any fiduciary issues in the WBG portfolio. Overview of Achievement by Objective: Pillar 1: Restoring Economic Growth and Improving Competitiveness 18. Under this pillar, the WBG strategy was to improve the business climate and invigorate private investment and trade; rehabilitate the banking sector and strengthen financial markets; ensure energy security and improve energy efficiency; and reduce costs of trade to support export led recovery. 19. Improve business climate and invigorate private investment and trade. As measured in the balance of payments, private capital flows as a percent of GDP declined from 10.5 percent of GDP in 2007 to 7.3 percent in 2010, while foreign direct investment also declined from 6.9 percent of GDP to 4.7 percent over the same period. These broad trends suggest that there were no significant improvements in Ukraine s business climate during the CPS period. Indeed, the Global Competitiveness Index (GCI) of the World Economic Forum (WEF) remained stable at 4.0 over 7.0 between and Nevertheless, the Basic Requirements sub-index of the GCI, which reflects the quality of institutions, infrastructure, macroeconomic environment, and health and primary education, improved slightly from 4.1 to 4.2 over the same period. On a related dimension, the International Property Rights Index, prepared by a conglomerate of international think tanks, remained unchanged at 4.0 over 10.0 between 2008 and The dismal progress in these indicators happened despite some progress in the number of individual rural land titles issued from around 6.5 million in 2006 to 6.8 in IBRD support was provided through DPL II, DPL III, the State Tax Service Modernization Project, and the Rural Land Titling and Cadastre Project. This lending portfolio was assisted by two AAA tasks, including a Country Economic Memorandum and the Corporate Sector Restructuring TA. In addition, IFC provided advisory services on the business enabling environment. The WBG interventions focused primarily in promoting the following legislation: the joint stock company law, the law on the cadastre, the law on the control of entrepreneurial activity, the law on the permit system, and the law on inspections. Beyond the changes in the legal texts, which by themselves do not bring about results, IBRD support for implementation had some impact in cadaster and land titling, and, together with IFC, in reducing the number of companies subject to inspections as well as the time it takes to obtain the yearly operating permits. The general business environment, however, remained weak and without improvement during the CPS period, suggesting that the legal changes lacked the relevance or the implementation to bring about significant results. 21. Rehabilitate the banking sector and strengthen financial markets. The National Bank of Ukraine (NBU) has made some progress in addressing the banking system crisis that had begun before the global financial crisis. The NBU relaxed reserve requirements and provided emergency liquidity assistance amounting to 2.7 percent of GDP to the banking system. In addition, the NBU tripled deposit insurance coverage (to UAH 150,000), and prohibited the early redemption of time deposits. Since the fall of 2008, NBU has intervened around 30 banks that had deficient capital, revoking licences and putting into liquidation 19 of them. Moreover, the government recapitalized three banks that were regarded as systemic risks. Notwithstanding progress, several challenges remain to be addressed in tackling the banking system crisis, including the disposition of troubled assets, bank resolution rules, accounting standards and disclosure, and the exit of the state from intervened banks. On the stock market front, the Development Index of WEF declined slightly from 2.7 out of 7.0 in 2008 to 2.6 in 2011, suggesting that no progress was made in

6 6 strengthening financial markets. 22. At the micro level, IFC s investments in the financial sector faced the same challenges as the rest of the sector. Efforts on vehicle leasing and microfinance were slowed or halted by the crisis, and remain so. As for MIGA, all of its contract enterprises in the financial sector were also IFC investees, suffering the challenges of the sector s crisis. 23. IBRD, in close collaboration with the IMF, delivered its support through the Programmatic Rehabilitation Loan 1, and by AAA including: (i) Capital Market TA Partnership Program, (ii) two Accounting and Auditing ROSC Follow-up TAs, and (iii) an FSAP Update. IFC provided minor advisory services to some of its financial sector investees, and, raising concerns about conflict of interest, to the NBU on rules that affected its investees. MIGA provided one guarantee in the financial sector, but did not support, as planned in the CPS, any investments for capital market transactions. 24. Ensure energy security and improve energy efficiency. There was no improvement in energy efficiency in Ukraine. Although energy consumption decreased by 10 percent between 2008 and 2010, the decline was proportional to the drop in GDP. These developments reflect, for the most part, highly subsidized energy tariffs (covering at most a third of the import prices) that have led to an increase of the quasi-fiscal deficit in the gas sector from 1.0 percent of GDP in 2006 to 2.7 percent in In addition, Ukraine s energy security was shaken in 2009, when Naftogaz (NG) had to renegotiate its gas contract with Russia s Gazprom, its sole supplier, with less subsidized prices and after the repayment of NZ s outstanding debt. On a different front, Ukraine managed to diversify its energy sources somewhat by increasing its installed capacity for hydropower by 98.5 MW in 2011 less than half of the CPS target of 225 MW. 25. Despite the dismal progress in energy security and efficiency, Ukraine moved on the regulatory front harmonizing with the EU, including by joining the Community s Energy Treaty in Moreover, a draft electricity law is being considered. 26. IBRD supported the energy sector through DPL II, DPL III, the Power Transmission Project, and additional financing for the Hydropower Rehabilitation Project. Too recent to have had any impact, in June 2011, IBRD approved the Energy Efficiency Project. In the AAA front, IBRD provided a Gas Market Note and Coal Policy Note update TA. 27. IFC maintained its investments in the electricity sector, despite a testing regulatory environment. However, IFC did not pursue a dialogue with the government to address these regulatory framework issues. As for advisory services, IFC s projects in these areas are relatively new and it is too-early to assess their impact. 28. Reduce costs of trade to support an export led recovery. Ukraine became a member of the World Trade Organization (WTO) in May of In addition, Ukraine s exports played a key role in the rebound of economic activity, as their share of GDP grew from 44.8 percent in 2007 to 50.2 percent in Export growth reflected higher volumes in food, fuel, ores and metals. The share of manufactures in merchandise exports, however, declined from 74.5 percent in 2007 to 64.6 percent in Meanwhile, for this same period, the World Development Indicators report that the cost to export a container increased from US$1,375 to US$1,865, while number of days to export remained at 30. The WBG efforts to reduce the cost of trade within its strategy were meant to address issues stemming from energy efficiency and transportation infrastructure. 29. IBRD support included the Road Improvement and Safety Project, Export Development II Project, DPL II, DPL III, and Country Economic Memorandum ESW. The DPL II was instrumental in Ukraine becoming a member of WTO. Also, IBRD disbursed $US 120 million of credit line to provide medium and long-term working capital and investment finance to Ukrainian private exporting

7 7 enterprises. IBRD, however, dropped the work on modernizing Ukraine s railway system. 30. IFC continued its support of various investees that export part of their output and which focus on agriculture and meat production. In addition, recently IFC approved an investment meant to work on deeper draft berths to handle larger container vessels. 31. IEG rates the achievement of the outcome of the WBG support under Pillar 1 as moderately unsatisfactory. Ukraine made limited progress in cadaster and land titling, company inspections and operating permits, but this progress did not translate in an improvement in the country s overall weak business environment. Ukraine also made some progress in averting the critical aspects of its financial crisis, including the run on banks, but has yet to address most of the fundamental aspects of the crisis. Some diversification of energy sources took place with the modest increase in hydropower, but the economy remains heavily dependent on imported gas. Ukraine became a member of WTO and its growth in exports contributed to rebound in GDP. Meanwhile, most legal changes to improve the business environment have yet to be implemented to become effective. Also, no progress was made in strengthening financial markets, or in redressing the quasi-fiscal deficit stemming from energy and heating subsidies. Similarly, the cost of exporting seems to have increased, according to some indicators. Pillar 2: Public Finance and Public Sector Reform and Improved Service Delivery 32. Under this pillar, the WBG strategy was to support fiscal reform to secure stability and enable a sustained recovery; improving efficiency in service delivery; and improving governance and accountability. 33. Fiscal reform to secure stability and enable a sustained recovery. The WBG strategy focused on eliminating tax exemptions, increasing excise taxes, limiting the pay-a-you-go pension deficit to below 1 percent of GDP, and reducing the quasi-fiscal deficit brought about by subsidies in gas and heating. In the difficult circumstances of political uncertainty and little ownership Ukraine did not undertake the fiscal reforms foreseen by the WBG strategy. Moreover, the pension reform that was part of Ukraine s own strategy did not materialize, and pension related expenditures rose from under 15 percent of GDP in 2007 to 18 percent in Gas prices were increased once, by 35 percent in late 2008, but later reduced for some specific industries in Heating tariffs remained broadly unchanged during the CPS period. 34. IBRD supported the fiscal reforms through DPL II and DPL III. Also, IBRD provided assistance through a Public Finance Review. 35. Improve efficiency in service delivery. The WBG focused on improving the administration and targeting of social assistance benefits, strengthening the budget system for schools and hospitals, improving the financial performance of utilities, and improving the quality of municipal services in selected municipalities. There were some improvements in the administration of social assistance benefits, with the application processing time falling to one third and the number of benefits processed per month per staff increasing albeit by less than targeted. However, there was no improvement in targeting, with the share of non poor families among beneficiaries still remaining high- 55 percent, as in In the education and health sectors, the reforms, which envisaged introducing school budgeting on a per capita basis and global budgeting for hospitals, did not materialize. In six piloted rural areas, Ukraine s teachers were able to cover more students, and the student/teacher ratio, which is one of the lowest in the world, moved from a baseline of 8.4 students per teacher in 2008 to 9.0 in There was no progress in financial performance of utilities and physical and operational capacity in services of selected municipalities. 36. IBRD supported the service delivery reforms through the Social Assistance System

8 8 Modernization Project, the Equal Access to Quality Education Project, the Urban Infrastructure Project, the Lviv Water and Wastewater Project, and DPL II and DPL III. This financial support was complemented by several AAAs, including the Public Finance Review II, the HD Policy TA and the Pension Reform and Capital Market TA Partnership Program. 37. Improve governance and accountability. The governance related indicators weakened over the CPS period according to various data sources. The score for Institutions provided by the World Economic Forum as a sub-index for the GCI, worsened from 3.3 out of 7.0 in to 3.08 in Also, the Legal and Political Environment sub-index of the Intellectual Property Right Index declined from 3.7 over 10 in 2008 to 3.5 in The ratings by the Public Expenditure and Accountability (PEFA) Program show some progress, although weak on auditing and by less than envisaged in the WBG strategy. The rating of multi-year perspective in fiscal planning improved from C to C+ between 2006 and 2010, mainly reflecting improved implementation of the medium term expenditure framework. The public procurement rating rose from D+ to C+ based on enactment of a new procurement law in July The rating on the predictability in the availability of funds for commitment of expenditures increased from D+ to C+. The rating for the effectiveness of tax collections improved to C+ up from D+. In addition, Ukraine reduced tax arrears as a share of total taxes from 18% in 2006 to 5.7% in However, there were no improvements in the PEFA ratings on scope, nature and follow up of external audit. The main areas of improvement have been reduced tax arrears as a share of total taxes from 18% in 2006 to 5.7% in 2010, and introduction of risk-based audit. Beyond public financial management, in the education sector, Ukraine launched the international assessment Tests in Mathematics and Science Study (TIMSS) in 2007 and the National External Assessment in In addition, four industrial municipalities have adopted the human health risk assessment methodology. 39. IBRD, in collaboration with the EU, provided assistance through the State Tax Service Modernization Project, the Development of State Statistics System for Monitoring Social & Economic Transformation Project, the Public Finance Modernization, DPLs II and III, and the Equal Access to Quality Education. Also, there were several AAAs, including the Public Finances Review II, the Health and Demography ESW, and the Zaporizhzhia Environmental TA. In addition, IDF support was provided through the Legal Framework and Enhancing Institutional Capacity for Environmental Permitting ESW. 40. IEG rates the outcome of the WBG s strategy under Pillar 2 as moderately unsatisfactory. Ukraine made some progress in the administration of social assistance benefits, but targeting of these benefits did not improve. In piloted areas, Ukraine had a slight increase in the student/teacher ratio, but did not adopt needed reforms in the budgeting of schools and hospitals nor did utilities and municipalities improve their financial performance. Ukraine s PEFA ratings improved with the MTEF implementation, the new procurement law, the reduction of tax arrears, and introduction of risk-based audit. However, Ukraine s broad governance indicators did not improve. More importantly, in the difficult circumstances of political uncertainty and little ownership, Ukraine did not adopt the fiscal reforms necessary for medium-term fiscal stability and sustainability. Achievement of CPS objectives Objectives Pillar I: Restoring Economic Growth and Improving Competitiveness Pillar II: Public Finance and Public Sector Reform and Improved Service Delivery IEG Rating Moderately Unsatisfactory Moderately Unsatisfactory

9 9 4. Overall IEG Assessment Overall Outcome: IBRD Performance: IFC Performance: MIGA Performance Moderately Unsatisfactory Satisfactory Moderately Satisfactory Moderately Satisfactory Overall outcome: 41. IEG rates overall outcome of the WBG s strategy as moderately unsatisfactory. On Pillar 1, Ukraine made some progress in cadastre and land titling, company inspections and operating permits, and this progress did not translate into an improvement in the country s overall weak business environment. Ukraine succeeded in averting some of the critical aspects of its financial crisis, including the run on banks. Ukraine, though, has yet to address most of the fundamental aspects of the crisis. Some diversification of energy sources took place with the modest increase in hydropower, but the economy remains heavily dependent on imported gas. Ukraine became a member of WTO and its growth in exports contributed to rebound in GDP. Meanwhile, most legal changes to improve the business environment have yet to be implemented to have an impact. Also, no progress was made in strengthening financial markets, or in redressing the quasi-fiscal deficit stemming from energy and heating subsidies. Similarly, the cost of exporting attributable to energy efficiency and transport infrastructure has increased, according to some indicators. On Pillar 2, Ukraine made some progress in the administration of social assistance benefits, but targeting of these benefits did not improve. In piloted areas, Ukraine s teachers were able to cover more students. Yet, the country did not adopt needed reforms in the budgeting of schools and hospitals, nor did utilities and municipalities improve their financial performance. Ukraine s PEFA ratings improved with MTEF implementation, the new procurement law, the reduction of tax arrears, and introduction of risk-based audit. However, Ukraine s broad governance indicators did not improve. More importantly, in the difficult circumstances of political uncertainty and little ownership, Ukraine did not adopt the fiscal reforms necessary for medium-term fiscal stability and sustainability. IBRD Performance: 42. IEG rates IBRD s performance as satisfactory. IBRD was quick to react to help Ukraine face the global financial crisis, and it did so in close collaboration with the IMF. IBRD s strategy was aligned with Ukraine s own for the most part, with the exception of the area of service delivery, where Ukraine focused on the quality of services and IBRD on efficiency. IBRD chose the best avenues to provide support to Ukraine, given the difficult political environment, and was effective in delivering AAA as needed. IBRD s collaboration with the IMF, the EU and other development partners was instrumental in enhancing the effectiveness of its interventions. Moreover, the performance of IBRD s portfolio in Ukraine improved significantly, with no commitments at risk in While the results framework had some shortcomings, and the CPSPR could have been used to bring objectives to a more realistic level, IEG acknowledges that the overall performance was solid given the very trying political and economic environment. IFC Performance: 43. IEG rates performance of IFC as moderately satisfactory. The programs were relevant to the CPS objectives, and at the project level, particularly for non-financial investees. investees seem to have followed the general deterioration of the system during the crisis, suggesting that better front-end work would be warranted for this sector, as noted in IEG evaluations of commercial bank

10 10 investees. IFC s interventions at the policy level were few and less effective than expected. IFC s advisories to the NBU on rules that affected its financial sector investees raises concerns of possible conflicts of interest. MIGA Performance: 44. IEG rates performance of MIGA as moderately satisfactory. MIGA was satisfied with a set of operations defined before the crisis, which was dominated by IFC investees in the financial sector. However, MIGA provided just a small guarantee to a European financial sector investee. The avenues of new business laid out in the CPS do not seem to have been pursued such as seems to have been the case in capital markets. Investees from non-traditional countries, such as Russia or countries from Asia did not benefit from MIGA s support. 5. Assessment of CPS Completion Report 45. The CPSCR provides a comprehensive description of the WBG strategy implementation. Also, there is an extended discussion of the findings and lessons learned. However, the CPSCR does not provide enough information on whether the assistance achieved its objectives and focuses mostly on narrowly defined outcomes in the results framework. 6. Findings and Lessons 46. IEG concurs with the lessons of the CPSCR, and underscores two additional points. First, with political uncertainty and frequent changes in governments, the timely use of the CPSPR to update the objectives of the strategy and adapt them to the new political environment appears essential just as the CPSPR was used to adapt the WBG strategy to the global financial crisis, another exogenous development. For instance, several aspects of the approach to energy in the WBG strategy appeared to have lost the necessary political backing and objectives could have been revised. Second, the WBG could align its strategy more closely with that of the country, to avoid weak ownership from becoming an obstacle to effectiveness. This appears to have been the case with the emphasis on the efficiency of service delivery, which was differed from Ukraine s focus on the quality of the services.

11 11 Annex Table 1a: Annex Table 1b: Annex Table 2: Annex Table 3a: Annex Table 3b: Annex Table 4: Annex Table 5: Annex Table 6: Planned and Actual Lending, FY08-11 Trust Funds, FY08-11 Planned and Actual Analytical and Advisory Work, FY08-11 IEG Project Ratings for Ukraine, FY08-11 IEG Project Ratings for Ukraine and Comparators, FY08-11 Portfolio Status for Ukraine and Comparators, FY08-11 IBRD/IDA Net Disbursements and Charges Summary Report for Ukraine (in US$) Total Net Disbursements of Official Development Assistance and Official Aid, (in US$ million) Annex Table 7: Economic and Social Indicators for Ukraine and Comparators, Annex Table 8: Annex Table 9: Annex Table 10: Ukraine Millennium Development Goals List of IFC s investments in Ukraine that were active during FY08-11 (US$ 000) List of IFC s Large Advisory Services (above US$2 million) in Ukraine, FY08-11 Annex Table 11: List of MIGA s Operations in Ukraine, FY08-11 (US$ 000) Annex Table 12: Summary of Achievements of the CPS Objectives

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13 13 Annex Table 1a: Planned and Actual Lending, FY08-11 Project ID Programmed projects Proposed FY Approval FY Proposed Amount Approved Amount P Power Transmission Project P DPL II Judicial System Support Project 2008 Dropped P Public Finance Modernization Project P Roads and Safety Improvement Project P Urban Infrastructure Municipal Infrastructure Development (Euro 2012) 2009 Dropped P DPL III Power Transmission II 2009 Dropped Social Insurance Administration Project 2009 Dropped P Programmatic Rehabilitation Loan P Hydropower Rehabilitation -- Additional financing Railway Modernization Reform project 2011 Dropped P Programmatic Rehabilitation Loan Moved to FY P Development Policy Loan Dropped P Second Export Development project AF 2011 Moved to FY P Energy Efficiency project Total Programmed projects CAS FY , ,250.0 Non-programmed projects NA Total projects CAS FY , ,250.0 Project ID Approval FY Closing FY Proposed Amount Approved Amount Ongoing projects P Lviv Water and Wastewater Project P Social Investment Fund Project P Tuberculosis and HIV/AIDS Control Project P State Tax Service Modernization Project (APL #1) 2003 Active 40.0 P Rural Land Titling & Cadastre Development Project 2003 Active P Development of State Statistics System for Monitoring Social & Economic Transformation Project 2004 Active 32.0 P Equal Access to Quality Education in Ukraine Project P Hydropower Rehabilitation Project 2005 Active P Social Assistance System Modernization Project 2006 Active 99.4 P Access to Services Project P Second Export Development Project 2007 Active Total ongoing projects CAS FY Source: Ukraine Country 2008 CPS, 2010 CPSPR and WB Business Warehouse Table 2a.1, 2a.4 and 2a.7 as of 12/23/2011.

14 14 Annex Table 1b: Trust Funds, FY08-11 Project ID Project Approval FY Closing FY Approved Amount P Auditing Road Infrastructure Projects 2006 Active 476,000.0 IDF P P Alchevsk Steel Mill Revamping and Modernization Reform of Legal Framework and Enhancing Institutional Capacity for Environmental Permitting in Ukraine Product Line 2006 Active 14,958, Carbon Offset ,000.0 IDF P UA FSD/PSD Advis Services TA 2006 Active 1,828,500.0 P Hydropower Rehabilitation Proto-Carbon Finance Project Recipient Executed Activities 2007 Active 6,976,475.0 Carbon Offset Total FY ,684,805.1 Source: Ukraine Country 2008 CPS, 2010 CPSPR and Client Connection as of 12/23/2011.

15 15 Annex Table 2: Planned and Actual Analytical and Advisory Work, FY08-11 Project ID Proposed FY Delivered to Client FY Output Type Economic and Sector Work Planned (CAS FY08-11) Public Finance Review 2 P Report FSAP Update P Report ESMAP: Thermal Power Piant Rehabilitation P Report Agricultural Policy Notes P Policy Note Labor Demand and Skills Relevance P Report Strengthening Demand for good governance P Report Country Economic Memorandum - Growth & Competitiveness P Report Improving Efficiency and Accountability in the HD sectors (in SAP Measuring Governance in Health and Education) P Forwarded to FY12 Non-planned Impact of FTA with the EU on Agriculture Sector P Policy Note Ukraine's Response to Global Food Crisis P Policy Note Competitiveness of Bioenergy Production in Ukraine P Policy Note FSAP Update Ukraine P Report SOE Oversight P Report Health and Demography P Report ESMAP: Affordable Gas-Fired District Heating in Eastern Europe P Report Ukraine DB Sub-National P Report Technical Assistance Planned (CAS FY08-11) Private Sector TA Dialogue (linked to KE & Comp TA) 2008 Dropped Client Document Review Kyoto TA 2008 Dropped Knowledge Economy - Competitiveness Dialogue P "How-To" Guidance GAC-Strengthening Demand for Good Governance P "How-To" Guidance International Emissions Trading Institutions and Pilot Green P Investment Schemes TA "How-To" Guidance Sector Dialogue P "How-To" Guidance Environmental Protection TA (Zaporizhia) P "How-To" Guidance Accounting and Auditing ROSC Follow-up TA P "How-To" Guidance Sector TA Dialogue P Client Document Review Strengthening demand for good governance P "How-To" Guidance P Report Institutional Development Plan Capital Market TA Partnership Program 2008 People s Voice TA P Model/Survey Housing & Municipal Utilities P Knowledge-Sharing Forum Gas Market Note and Coal Policy Note update P "How-To" Guidance HD Policy AAA P "How-To" Guidance District Heating AAA- Belarus & Ukraine P Forwarded to FY12 Report PFM TA (linked to Dutch TF on cap bud and PFM) P Forwarded to FY12 Advisory Services Document Non-planned HD Sector TA P "How-To" Guidance Corporate Finance Reporting P "How-To" Guidance Environmental Protection TA 2 P "How-To" Guidance CTF Investment Plan P Client Document Review ROSC Follow Up TA P "How-To" Guidance HD Policy AAA P "How-To" Guidance Risk and Vulnerability Assessment Project - Ukraine P "How-To" Guidance PTAFTA P "How-To" Guidance Corporate Restructuring Resolution P "How-To" Guidance Source: Ukraine Country 2008 CPS, 2010 CPSPR and WB Business Warehouse Table ESW/TA as of 12/23/2011.

16 16 Annex Table 3a: IEG Project Ratings for Ukraine, FY08-11 Exit FY Project ID Project Name Total Evaluated (US$M) IEG Outcome IEG Risk to Development Outcome * 2008 P LVIV Water/Ww 24.0 Satisfactory Moderate 2008 P SIF 50.2 Moderately Unsatisfactory Moderate 2008 P DPL Moderately Satisfactory Significant 2010 P TB/AIDS Cntrl 24.8 Unsatisfactory Significant 2010 P Acc To Fin Servs (Apl 1) 5.8 Unsatisfactory High Source: WB Business Warehouse Table 4a.5 and 4a.6 as of as of 12/23/2011. * With IEG new methodology for evaluating projects, institutional development impact and sustainability are no longer rated separately. Annex Table 3b: IEG Project Ratings for Ukraine and Comparators, FY08-11 Region Total Evaluated ($M) Total Evaluated (No) Outcome % Sat ($) Outcome % Sat (No) RDO % Moderate or Lower ($) * RDO % Moderate or Lower (No) * Ukraine Russia Kazakhstan Poland ECA 6, World Bank 32, Source: WB Business Warehouse Table 4a.5 and 4a.6 as of as of 12/23/2011. * With IEG new methodology for evaluating projects, institutional development impact and sustainability are no longer rated separately.

17 17 Annex Table 4: Portfolio Status for Ukraine and Comparators, FY08-11 Fiscal year Russia # Proj # Proj At Risk % At Risk Net Comm Amt 1,676 1,297 1, Comm At Risk % Commit at Risk Kazakhstan Poland Ukraine ECA World # Proj # Proj At Risk % At Risk Net Comm Amt 618 2,598 3,663 2,666 Comm At Risk % Commit at Risk # Proj # Proj At Risk % At Risk Net Comm Amt 736 1,764 1,795 1,578 Comm At Risk % Commit at Risk # Proj # Proj At Risk % At Risk Net Comm Amt 1,209 1,431 1,430 1,573 Comm At Risk % Commit at Risk # Proj # Proj At Risk % At Risk Net Comm Amt 18,027 21,455 24,446 22,650 Comm At Risk 2,266 3,469 4,360 2,117 % Commit at Risk # Proj 1,832 1,925 1,990 2,059 # Proj At Risk % At Risk Net Comm Amt 110, , , ,755 Comm At Risk 18,968 20,859 28,963 23,850 % Commit at Risk Source: WB Business Warehouse Table 3a.4 as of 12/23/2011.

18 18 Annex Table 5: IBRD/IDA Net Disbursements and Charges Summary Report for Ukraine (in US$) FY Disb. Amt. Repay Amt. Net Amt. Charges Fees Net Transfer ,731, ,788, ,943, ,105, ,582, ,255, ,701, ,748, ,953, ,261, ,923, ,768, Total ( ) 497,613, ,754, ,859, ,065, ,062, ,730, ,977, ,665, ,688, ,445, , ,977, ,711,024, ,956, ,067, ,878, ,413, ,776,747.0 Source: WB Loan Kiosk, Net Disbursement and Charges Report as of 12/23/2011.

19 19 Annex Table 6: Total Net Disbursements of Official Development Assistance and Official Aid, (in US$ million) Donor Bilaterals Austria Belgium Canada Denmark Finland France Germany Greece Ireland Italy Japan Korea Luxembourg Netherlands Norway Portugal Spain Sweden Switzerland United Kingdom United States DAC Countries, Total Czech Republic Hungary Iceland Israel Poland Slovak Republic Slovenia Thailand Turkey United Arab Emirates Other Partner Countries, Total Non-DAC Countries, Total Multilaterals EBRD GEF GAVI Global Fund IAEA UNAIDS UNDP UNECE UNFPA UNHCR UNICEF UNTA EU Institutions Multilateral Agencies, Total All Partners, Total , Source: OECD DAC Online database, Table 2a. Destination of Official Development Assistance and Official Aid - Disbursements, as of 12/23/2011.

20 20 Annex Table 7: Economic and Social Indicators for Ukraine and Comparators, Series Name Ukraine Ukraine Russia Kazakhstan Poland ECA World Growth and Inflation GDP growth (annual %) GDP per capita growth (annual %) GNI per capita, PPP (current international $) 7, , , , , , , , ,831.6 GNI, Atlas method (current US$ million) 148, , , , ,366, , , ,711, ,985,944.0 Inflation, consumer prices (annual %) Composition of GDP (%) Agriculture, value added (% of GDP) Industry, value added (% of GDP) Services, etc., value added (% of GDP) Gross fixed capital formation (% of GDP) Gross domestic savings (% of GDP) External Accounts Exports of goods and services (% of GDP) Imports of goods and services (% of GDP) Current account balance (% of GDP) External debt, total (% of GNI) Total debt service (% of GNI) Total reserves in months of imports Fiscal Accounts /1 Revenue (% of GDP) Total Expenditure (% of GDP) Overall Balance (% of GDP) Public Sector Gross Debt (% of GDP) Social Indicators Health Life expectancy at birth, total (years) Immunization, DPT (% of children ages months) Improved sanitation facilities (% of population with access) Improved water source (% of population with access) Mortality rate, infant (per 1,000 live births) Population Population, total (in million) ,763.7 Population growth (annual %) Urban population (% of total) Education School enrollment, preprimary (% gross) School enrollment, primary (% gross) School enrollment, secondary (% gross) / IMF. Ukraine: Article IV Consultations Years. Source: WB World Development Indicators (DATE update) for all indicators excluding those noted.