Document ofThe 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 DepartmentEurope and Central Asia

This document has a restricted distribution and may be used by recipients only in the performance of theirofficial duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

(Exchange Rate Effective June 2000)

Currency Unit = Ukrainian Hyrvnia (UAH)1 UAH = US$ 0.184

US$ I = 5.437 UAH

FISCAL YEARJuly 1, 1999- June 30, 2000

ABBREVIATIONS AND ACRONYMS

CAS Country Assistance StrategyEDAL Enterprise Development Adjustment LoanEU European UnionIMF International Monetary FundGDP Gross Domestic ProductGOU Govermnent of UkraineMOE Ministry of EconomyPIU Project Implementation UnitPSD Private Sector DevelopmentSER Special Export RegimeSRO Self Regulatory OrganizationSPF State Property Fund of UkraineSSMC State Securities and Stock Market CommissionTA Technical AssistanceUAH Ukrainian HyrvniaUCER Ukrainian Center for Enteprise Restructuring and Private Sector DevelopmentUSAID United States Agency for International Development

Vice President: Johannes LinnCountry Manager/Director: Luca Barbone

Sector Manager/Director: Ira LiebermanTask Team Leader/Task Manager: Vladimir KreaciclRagini Dalal

FOR OFFICIAL USE ONLY

UKRAINEENTERPRISE DEVELOPMENT ADJUSTMENT LOAN

CONTENTS

Page No.1. Project Data 12. Principal Performance Ratings 13. Assessment of Development Objective and Design, and of Quality at Entry 24. Achievement of Objective and Outputs 45. Major Factors Affecting Implementation and Outcome 76. Sustainability 87. Bank and Borrower Performance 98. Lessons Learned 109. Partner Comments 1010. Additional Information 11Annex 1. Key Performance Indicators/Log Frame Matrix 12Annex 2. Project Costs and Financing 13Annex 3. Economic Costs and Benefits 15Annex 4. Bank Inputs 16Annex 5. Ratings for Achievement of Objectives/Outputs of Components 18Annex 6. Ratings of Bank and Borrower Performance 19Annex 7. List of Supporting Documents 20Annex 8. Beneficiary Survey Results 21Annex 9. Stakeholder Workshop Results 31

This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not be otherwise disclosed withoutWorld Bank authorization.

Projct ID: P035814 Project Name: ENTER. DEV. ADJUST.Team Leader: Vladimir G. Kreacic TL Unit: ECSPFICR Type: Intensive Learning Model (ILA) of ICR Report Date: April 24, 2000

1. Project Data

Name: ENTER. DEV. ADJUST. L/C/TFNumber: 40570Country/Department: UKRAINE Region: Europe and Central

Asia RegionSector/subsector: BP - Privatization; FK - Capital Markets

Development; MT - Trade Policy Reform

KEY DATESOriginal Revised/Actual

PCD: 03/29/95 Effective: 07/18/96 07/18/96Appraisal: 05/02/96 MTR: 12/01/97 02/10/98Approval: 06/27/96 Closing: 12/31/99 12/31/2000

Borrower/lImplementing Agency: UKRAINE/STATE PROPERTY FUND OF UKRAINEOther Partners: State Securities and Stock Market Commission, Ministry of Economy, Ministry of

Finance

STAFF Current At AppraisalVice President: Johannes Linn Johannes LinnCountry Manager: Luca Barbone Wafik GraisSector Manager: Ira Lieberman Paul SiegelbaumTeam Leader at ICR: Ragini Praful Dalal Bernard DrumICR Primary Author: Ragini Praful Dalal

2. Principal Performance Ratings

(HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L-Likely, UN=Unlikely, HUN=HighlyUnlikely, 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) ICRQuality 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 theGovernment of Ukraine's (GoU) privatization, post-privatization restructuring, capital marketsdevelopment, and trade and price liberalization programs. Other objectives were to provide foreignexchange for the purchase of critical imports and to support the development of the foreign exchangemarkets. The loan had two components. The first consisted of US$ 300 million balance of paymentssupport 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 methodologyfor 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 scaleprivatization program; (v) creation of a Securities and Stock Market Commission (SSMC) and regulatoryframework governing the capital markets including self-regulatory organizations (SRO); and (vi)eliminating trade barriers and price restrictions on imports and exports and eliminating domestic pricecontrols.

The TA component provided two types of support. The first included assistance to the State PropertyFund of Ukraine (SPF), as the main counterpart on the EDAL, to build capacity and facilitate theimplementation of the policy reforms that were the conditions of the adjustment component. The secondincluded support for the creation of the professional associations necessary in a market economy, theimplementation of demonstration cases of post-privatization enterprise restructuring, the implementationof bankruptcy and liquidation pilots, the training of enterprise managers, and the creation of acommercial database of the enterprise sector.

The EDAL was prepared in 1995 and approved by the Board in June 1996. This was a time whenUkraine, a newly independent country, was in the early stages of the process of transforming its economyfrom a centrally planned system to a market-oriented one. In late 1994, a newly elected Governmentannounced a radical break from past economic policies and outlined a program aimed at reducinginflation, improving living standards, and promoting a sustainable recovery. The GoU began to lay thefoundations for macroeconomic stabilization and structural reforms; the legal basis for privatization wasput in place; and initial steps were taken in areas such as land reform and restructuring of the energysector. In support of the Government's economic program, an IMF-supported stabilization programwhich entailed tight fiscal and monetary policies was agreed. The Government's immediate economicreform priorities included consolidating the stabilization process and restoring growth. In order for this tooccur, it was necessary to create an environment that fostered the rapid growth of Ukraine's privateenterprise sector and enhance its ability to export goods. The resumption of economic growth in Ukrainedepended on successful stabilization and acceleration of structural reforms aimed at promoting andsustaining both a dynamic private sector and improved living standards. The GoU's four-pronged reformagenda included the need to promote private sector activity, the need to restructure the public sectorrecasting it in a supportive role, the need to ensure the social sustainability of the transition, and the needto ensure environmental sustainability. At that time, the Bank responded to these needs by supporting awide range of programs aimed at reducing Govemment intervention in the economy, developingcompetitive markets, and introducing elements of a social safety net through a series of adjustmentloans in the social, enterprise, agricultural, and energy sectors. EDAL was the first of such Bankinterventions in the enterprise sector, and in response to the priorities outlined by the GoU, focused onprivatization, capital markets development, and trade and price liberalization. The relative success ofthe EDAL and the Government's increasingly urgent need for balance of payments support led to theSecond 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 wasinstrumental in catalyzing privatization, capital markets development, and trade and price liberalization inUkraine. An important aim of the Bank's Country Assistance Strategy (CAS) at that time was to supportthe 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 inplace the framework for the development of the private sector in Ukraine. The post-privatization

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restructuring supported by the TA component of the EDAL began to assist enterprises and managers inimplernenting the changes supported by the policy reforms at the micro-level. The project developed acadre of reformers both in the counterpart agencies working on loan implementation as well as at theregional level in the oblasts where the TA component was being implemented. This not only hadimportant capacity building effects, but created the foundation for further Bank and donor work in privatesector development. Bank-IMF financing paved the way for other donors as well as gave Ukraine accessto 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 paymentssupport to the budget.

Cost: US$300 million

The reform program supported by the adjustment component included the implementation of aprivatization program for 5,000 medium and large enterprises; the acceleration of privatization of smallscale enterprises; the creation of a legislative framework and institutions to regulate the new capitalmarkets, 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 theimplementation of the policy reforms supported by the adjustment component through demonstrationcases, 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 ofdevelopment of professional associations, manager training, enterprise restructuring, creation of adatabase of Ukrainian companies, pilot bankruptcy transactions, and support to the State Property Fundof Ukraine (SPF) in preparing its privatization program as well as building capacity to implement theabove)-mentioned programs.

The design of both components was clearly linked to the objectives described above. The loan focusedon the Government's highest economy-wide priorities, i.e. deepening and accelerating the privatizationand post-privatization restructuring processes for enterprises throughout Ukraine, promoting the rapiddevelopment of capital markets, and maintaining a competitive trade and price environment within whichall enterprises operated. The EDAL built on and deepened the trade and price liberalization measuresand 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 andownership reforms and moved to the critical next stages. The capital markets developmentconditionality 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 onthe important lessons learned from the Russian and Central and Eastern European experience, i.e. thatthere was a need to increase the efficiency of mass privatization by assisting enterprises and managersto operate within the new framework once it was in place, and concurrently develop capital marketslegislation, institutions, and infrastructure.

3.4 Revised Components:The US$300 million adjustment component was not revised. Small revisions were made to the US$10million TA component to refine it to the situation on the ground at the time of implementation. Outputsfrom the TA component are discussed in detail in Section 4.2.

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3.5 Quality at Entry:The Quality at Entry is rated as Satisfactory. Given the situation in Ukraine in 1995-96, the CASpriorities described above, as well as the lessons of experience already available from neighboringcountries in the region, it was clear that project objectives were realistic, took into account the urgency ofthe reforms, and took advantage of newly appointed leadership in the GoU that was committed andreform-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 objectivehad been to move the mass privatization program forward. This objective was clearly reached and theambitious privatization targets of the loan were fully met by the Government. Similarly, great strideswere taken in the development of capital markets and trade and price liberalization as described inSection 4.2 below. The TA component was the first Bank intervention at the enterprise level and arecent survey of the participating enterprise managers confirmed that this program was highlysuccessful. Detailed feedback from the beneficiary survey and subsequent stakeholders workshop thatwere part of the Intensive Learning ICR exercise can be found in Annexes Eight and Nine. The TAcomponent has not only begun to show enterprises how to operate in a market economy, but it hascreated a lobby for reform at the regional level. While much remains to be done at the regional level inthe area of post-privatization restructuring, the TA component can be considered a significant step in theright direction.

All three tranches of the Loan disbursed in slightly more than one year. Certain conditions were waivedfor 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 certificationprocess with that of its major trading partners with a view to becoming a full member of the WorldTrade Organization. It was agreed that time was needed for this harmonization to occur and forbilateral agreements to be signed. The Bank continued to monitor and require satisfactory progressin this area. Future assistance included intensive TA as well as assistance under the Bank's PublicAdministration Reform Loan.

* elimination of all export duties: Despite several proposals made by the Government to Parliament onthe elimination of export duties on live animals and skins, Parliament repeatedly refused to approvethis measure. Given satisfactory progress on other aspects of the program, and given the fact thatthis condition remained a condition in the Agricultural Sector Adjustment Loan (AgSecal), thiscondition 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 indicativeprices on metals and scraps, however, indicative prices on animal skins could not be removed untilexport duties on those products were eliminated. Given satisfactory progress on all other aspects ofthe program, and given the fact that this condition remained a condition in the AgSecal, thiscondition was waived from the EDAL program

The successful completion of the EDAL program led to a Second EDAL in 1998 which expanded thesuccesses on privatization and capital markets development and supported bankruptcy reform,accounting reform, and deregulation. The objectives of the EDAL program can, therefore, be consideredto have been broadly accomplished.

With the completion of the Second EDAL in 1999, it is now possible to judge the success of Ukraine'stransition in the area of private sector development over the past five years. Significant strides weremade with both EDAL programs in transferring ownership from the public to private sector and beginningto build the foundation for a market economy following decades of Communism in Ukraine. Creating an

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enabling environment for business and private sector development were the larger objectives of bothloans which now seem to have proved more difficult to accomplish. While the GoU fulfilled the majorityof the conditions on EDAL I and all the conditions on EDAL II, the expected transformation of the privatesector has been slower to occur. Both EDALs played a critical role in helping Ukraine begin to developas a market economy by creating primary ownership changes and beginning to put in place the enablinglegall and institutional environment for the next stage of development. Both programs organized andfocused Government and donor commitment in this process. Political considerations and vestedinterests, however, prohibited moving the reform program beyond this point. Thus, while the objectivesof the EDAL program were achieved, its sustainability can be questioned. The Bank's Private SectorDevelopment (PSD) team is addressing this issue by focusing current programs on enterprise levelassistance in the regions of Ukraine in order to train Ukrainian enterprise managers and localconsultants; create a demonstration effect from successfully restructured enterprises; and build aconstituency for reform from the bottom up. In this regard, the TA component of the EDAL was critical inlaying the foundation. While the initial lack of Government commitment to this component led tosignificant delays in its implementation, once the GoU was on board, the component began to progressswiftly. This not only ensured that economic reforms were trickling down, but created demand for thePSD Loan going forward. The Bank is also proposing a Programmatic Adjustment Loan which will aim toaddress 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 SPFand a network of over 1000 bidding centers was established. Mass privatization was implemented in5000 medium and large scale enterprises with at least 52 percent coming from the agro-industrialcomiplex. By mid-September 1997, the Govemment was ahead of the program with over 6200enterprises privatized. Furthermore, the Cabinet of Ministers approved a list of ten large monopolyenterprises for privatization, and a streamlined methodology for privatizing agro-industrial enterpriseswas implemented. The outputs for this component are rated as Satisfactory. Nevertheless, there weresignificant problems which emerged from the Mass Privatization program, including insider control inmany of the privatized enterprises, making it more difficult to motivate fundamental corporaterestructuring. Also, case-by-case privatization of large enterprises failed to materialize due to lack ofpolitical 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 shareregistries to private and independent registrars, and created a sound base for organized and transparentsecurities markets. Professional associations (SROs) were created and registered, and the SecuritiesCornmission passed a resolution requiring compulsory membership of capital markets participants inSROs. Licenses of professional market participants who did not comply with the resolution were laterrevoked. A Depository System for Securities was also made operational and an open joint stockconmpany was created to provide depository services. The Securities Commission began licensingcustodians for securities. The outputs for this component are rated as Satisfactory. Nevertheless, thenascent capital market has not fully taken on its expected role due to the slowly developing supply ofpublicly traded shares and lack of market liquidity.

Trade and Price Liberalization: The Special Export Regime (SER) was neutralized by the issuance of aCabinet of Ministers Resolution which extended the right to export commodities subject to the SER to allenterprises. The GoU also effectively eliminated the registration of export contracts by issuing aresolution which stated that registration was solely for statistical purposes and could not be used torefuse 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 "artificialmonopolies" were eliminated and price regulation and inspection were limited to a specific list of goodsand services. Nevertheless, the outputs for this component are rated Unsatisfactory. Conditions werewaived on this component because the political situation in Ukraine did not allow the Government tosecure Parliamentary approval for them, and they still remained as part of AgSecal conditionality. Thetensions between the Government and Parliament as well as the central privatization/capital markets

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development focus of this loan suggested that these were not battles that could be won under the rubricof the EDAL. However, these conditions were also subsequently waived from the AgSecal and thoughthe Government continues to try to obtain Parliamentary approval to rescind the export duties and theindicative prices, they have not yet been successful. In fact, in 1999, Parliament imposed a furtherexport duty and indicative price on sunflower seeds, and the Government's attempt to have these andthe 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 thecomponent was first launched, once it began to be implemented in eamest, outputs were more thanSatisfactory. A breakdown of outputs by each sub-component of the TA component follows. Feedbackfrom 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 withstrong participation and training of Ukrainian consultants, who were team leaders in many of the laterrestructuring exercises. Ukrainian consultants were trained in preparation for the PSD Loan inrestructuring centers in Moldova and Georgia (that were successfully operating as a result of earlierBank 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 canningand processing, hosiery, confectionery, electrical parts. Diagnostics were done on each enterprise,restructuring plans were developed, and the implementation phase is currently underway. Manyenterprises were able to increase the volume of production, implement internal reorganizations andmarketing strategies, increase profit, and some have begun discussions with potential foreignpartners. Managers presented the diagnostic and their restructuring plans to the oblastadministrations and to other enterprises involved in the program. US$3.2 million.

- Model Restructuring: An intensive restructuring exercise was carried out for one large Ukrainianenterprise specializing in machine building. Consultants carried out an extensive diagnostic exerciseand produced a plan of short and long term restructuring options. Training in finance, marketing, andnew technologies was carried out for management. A new sales plan was developed, the costingstructure 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, anindustrial park was created and revenue was generated by leasing space to other businesses in thecommunity. Management was trained in accounting and a public relations campaign disseminatedinformation about the industrial park model. In the second case, financial restructuring of debts tookplace and business lines were readjusted to reflect the highest profit areas. Negotiations andagreements 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 innearby countries. Three modules of training ranging from beginning to advanced were offered overa period of six mcnths. The training contributed significantly to raising demand for restructuringassistance 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 enterpriseswas developed. A joint-venture is in the process of being created between a foreign and Ukrainianpartner that will maintain the database and disseminate information about Ukrainian companies. Abenchmarking database is in the process of being prepared which will include benchmarkinginformation (i.e., cost structure, financing, markets) from Western enterprises that are comparable tothe Ukrainian enterprises restructured in the Low Cost exercise. US$450,000.

* Methodological and Technical Assistance to the SPF: Consultants worked with the SPF to developthe privatization program for 2000, maintained the SPF website, and provided support to the SPFInformation Technology Department to maintain professional information on enterprises.US$250,000.

* Professional Associations: Ten professional associations were given grants of US$95,000 each tocarry out activities such as conferences in their issue areas, marketing and membership brochures,

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training of trainers in their issue area, establishing links with foreign associations, and lobbying theGovernment. Associations supported included associations of financial analysts, managementconsultants, accountants, and insurance intermediaries. Operational costs of associations were notlunded. US$950,000.

* Strengthening SPF: Consultants prepared an analysis of the foreign investment environment inlJkraine and potential foreign investors. Fifteen strategic Ukrainian enterprises will be prepared andpromoted abroad. Ukrainian consultants will work with foreign consultants in each of theseenterprises. A conference planned for September 2000 will convene major portfolio investors topresent the enterprises. US$800,000.

In adidition, support was provided to the Ukrainian Center for Post Privatization Support to monitor theenterprise restructuring work, and to the Project Implementation Unit (PIU) to establish andoperationalize 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 developand implement the policy conditionality. This developed institutional capacity in the GoU and feedbackfromr the beneficiary survey suggests that the EDAL program was the basis for the GoU's privatizationprogram. This working group of government officials in the SPF, the SSMC, the MoE, and MoF becamethe 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 workwith enterprises, managers, and government officials on enterprise restructuring and private sectordevelopment as well as to manage World Bank financing. The PIU subsequently expanded into anon-profit entity called the Ukrainian Center for Enterprise Restructuring and Private SectorDevelopment (UCER) and today has established four regional centers, and has a cadre of over 90consultants who are experts in restructuring and turn-around management working in over 25 enterprisesthroughout 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 manyways, the Government was struggling to manage a nation that was defining its national identity. Therewere many fractious voices and groups and this made it particularly difficult for the Government to focuson economic reform. "Managing" independence and balancing national identity with the relationship withRussia, a major trade partner for Ukraine, was critical at this time. The GoU perhaps understood theneed for economic reform and private sector development, but many competing issues made it difficultto 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 wasviewed as a window of opportunity for reform in Ukraine. However, the Government had to contend witha primarily Left-dominated Parliament that essentially blocked economic reforms. It was particularlydifficult to create a lobby for reform as most of the country was ideologically torn betweenrepresentatives of the old system who adjusted to the transition and began to collect rents from the newenvironment, 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

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tension between pro- and anti-reform forces as well as between the Government and Parliament made itdifficult 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 dueto the fact that the Chairman of the SPF, who had championed the EDAL effort, had been removed fromoffice. Nearly one year was lost in the bureaucratic difficulties faced by the PIU as they were unable toget the relevant permits and clearances and the Special Account was frozen multiple times. The firsthead of the PIU was not committed to overcoming these difficulties and it was unclear whether she tookall the necessary steps to move the component forward. While having senior level Government supportfor the TA component would clearly have made it easier to implement, it seemed the PIU had the accessto getting this support if an effort had been made. After repeated communications from the Bank, theVice Prime Minister appointed one of his advisors to head the PIU. Subsequently, the component hasprogressed 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 TAcomponent has been disbursed. The remaining funds are expected to disburse by project closing inDecember 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 isnow 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 ofthe outcomes of the loan were delivered in a satisfactory and timely fashion. However, questions aboutthe larger enabling environment for private sector development as well as lack of reforms in othersectors of the economy (i.e., administrative reform, pension reform, financial sector reforms, energysector 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 factthat the project established a basis for the future development of the private sector by creating a largenumber 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 ownershipstructure and management of Ukrainian enterprises, to accelerate the development of the private sectorin Ukraine, and to create capital markets infrastructure to serve Ukraine indefinitely in the future. Theseobjectives were unquestionably and irreversibly achieved and by definition brought about sustainablechange.

As mentioned above, this project paved the way for the Second EDAL and the development of theBank's PSD Loan. The Second EDAL not only built on the privatization and capital marketsdevelopment components of the First EDAL, but it also advanced the development of bankruptcymechanisms, established the basis for intemational accounting standards to enterprises, and made theentry 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 andtrain Ukrainian managers and consultants throughout Ukraine. As explained above, the PIU expandedand 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 TAcomponent. The PIU (now called UCER) will implement the PSD Loan, and has expanded its activities

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and capacity as discussed above.

7. Bank and Borrower Performance

Bank7. 1 Lending:The Bank's performance in lending is assessed as satisfactory. The Bank's preparation of the projectinvolved close coordination with multiple Government counterparts and exemplary coordination withdonor agencies active in the enterprise sector in Ukraine. The EDAL program put the Bank in aleadership role in donor coordination with Bank policy conditionality providing the leverage for manyother programs in the PSD area. For example, the adjustment component included ambitiousprivatization targets to be fulfilled, and USAID played a critical role in the actual implementation of theprivatization program through their financing of auction centers. EDAL conditions were developed afterextensive consultation with the Government, examination of the lessons learned from similar programsin the region, and as part of a package of enterprise sector assistance programs from the entire donorcommunity. The loan was processed on a reasonably timely schedule in order to address the GoU'sbalance of payments needs as well as to advance the agenda for reform in the enterprise sector inUkraine. The Loan was fully disbursed slightly over a year after effectiveness. Bank missions visitedKyiv 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 onthe ground as well as preparatory missions for the Second EDAL allowed for a strong supervision efforton the Bank's part. Constant supervision of the TA component meant that adjustments were made toreflect the changing situation and personalities on the ground. There was daily contact with the PIU andthe Bank was intimately involved in the development of the TA component over time. Bank missionsvisited 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.

Borrower7.4 P'reparation:The Borrower's performance in lending is assessed as satisfactory. There was close cooperation at thetime of preparation between the Government and the Bank, and the leadership and vision provided bythe main counterpart in the SPF ensured that the program that was developed was appropriate toUkraine's needs. Representatives from all the counterpart agencies were involved in the preparation ofthe loan.

7.5 Government implementation performance:The Government's implementation performance is assessed as satisfactory due to the reasons outlinedin Section 4. Nearly all the key conditions of the loan were fulfilled. Eventually, the GoU delivered byassigning 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 inSection 5.3. While there were substantial delays and the initial performance of the PIU wasunsatisfactory, once there was Government commitment and new PIU leadership, the implementation ofthe TA component improved significantly. The PIU is today entirely committed to the TA component andthe Lupcoming PSD Loan.

7.7 Overall Borrower performance:The overall performance of the Government during the EDAL program is assessed as satisfactory.

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Having the experience of the Second EDAL already available, however, leads to questions. While theconditions were fulfilled and reforms did take place, in some sense, Govemment completion of bothEDAL programs was linked to the urgency of the need for balance of payments support. This wasparticularly true with the Second EDAL as this was a time of economic crisis. Once the leverage of theSecond EDAL's last disbursement was gone, however, signs of wavering appeared and it was necessaryto continue working with the GoU to prevent backtracking. Two remaining areas of significant concernare: (i) continuing reluctance to implement a transparent case-by-case privatization; and (ii) on-goingstate intervention in the operations of privatized firms largely aimed at extracting rents and therebystifling growth and the development of the sector. The proposed Programmatic Adjustment Loan wouldbe intended to address some of the most critical constraints to the business environment and provideadditional impetus to case-by-case privatization and bankruptcy. In the immediate future, furtherattempts to backtrack cannot be excluded and additional efforts may be required to sustain the impact ofEDAL II. It is hoped that the new reform-minded Government, elected in November 1999, will preventany such reversals. While this does not directly affect the Borrower performance rating on the FirstEDAL, it must, nevertheless, influence our judgment.

8. Lessons Learned

Adjustment with Technical AssistanceThe experience of the EDAL showed that in transition economies, the results from policy reforms are farenhanced if they are accompanied by TA. While the policy reforms supported by the adjustmentcomponent are critical for setting the framework, the TA is instrumental in training key players in how tooperate in the new environment. Given the uniqueness of the situation in the transition economies andthe relatively short history of Bank programs in this part of the world, the TA component allowed for lowcost experimentation, particularly with sensitive issues like bankruptcy of enterprises. It also created ademonstration 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 ofsubsequent tranches on the adjustment component because it clarified the operational issues created bythe imposition of or lack of policy reforms.

Broad based support from the counterpartOne of the key problems with the EDAL TA component (and also some stages of the Second EDAL) wasthat the Government official who had championed both loans was removed from his position as head ofthe SPF. This created a situation in which there was no accountability for the program and it becamevery difficult to make any progress. Frequent changes in the leadership at the SPF did not facilitate thesituation. Had a broader base of support been built, the success of the program would not have been soclosely linked to one person. Recognizing the difficulty of finding many such counterparts as well as thehierarchical nature of the Ukrainian system, it is, nevertheless, the objective of future programs in thePSD area to not only build support throughout the Government but also with NGOs, businessassociations, 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 arein the project files and are available upon request. Overall, the GoU rated the EDAL project a successsaying that "it is difficult to overestimate the effects of the EDAL program in highlighting the advantagesof a market economy in Ukraine and introducing market capital know-how". According to the GoU, theEDAL 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 forentrepreneurial activities; a poorly developed stock market infrastructure; obsolete accounting standards;and an ineffective bankruptcy system. Today, the successful outcomes of the EDAL program include acritical mass of privatized enterprises in Ukraine that have irreversibly embedded property reform; theinvolvement of Ukrainian citizens in the privatization process giving them first hand experience in amarket economy; the development of a transparent and well-functioning stock market infrastructure; andthe liberalization of foreign trade activities. As a result of the EDAL program, important achievements

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were made in the areas of macreconomic policy reform, the introduction of appropriate legislation, andsignificant institutional development within the counterpart state agencies as well as in the enterprisesector. The EDAL program also created capacity within the GoU by creating a local body that had theexpertise 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'sconditionalities helped enforce and provide support for the Government's reform program, thecontentious 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 whichdiluted the effects of the EDAL program. For example, in some cases, the GoU continued a protectionistpolicy towards enterprises (i.e. due to vested interests and Soviet era relationships) which inhibited thedevelopment of a true competitive environment. The lack of coordination between the Govemment andthe Parliament as well as among different Government agencies; the continual reshuffling ofGovernment officials; the delays in adoption of critical legislation (i.e., the Law on the SPF and the StatePrivatization 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 criticalimportance for the development of the private sector in Ukraine, and was prepared with goodcooperation between the GoU and the Bank. However, the GoU recommended that future projectsinvolve a detailed action plan agreed between the Bank and the relevant implementing state agencies onthe steps to be taken for the actual implementation of the agreed reforms. Furthermore, the GoU notedthat far greater involvement from the Bank's Resident Office in Kyiv would have been most helpfulparticularly in the early stages of the project when Ukraine was a relatively new Borrower with littleexperience in World Bank procedures and practices. The GoU also felt that the Bank needed to be moreunderstanding of the political and institutional constraints on the Ukrainian side when formulating policyconditions 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 ajoint strategy for reform in the proposed sector and building consensus with all key players before movingahead 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.

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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 allmarket 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 marketswith relevant support structures in placeA critical mass of restructured enterprsescreating a demonstration effect; developmentof a capacity to provide post-privatizationsupport to enterprisesEnhanced import and export trade anddomestic price liberalization promoting acompetitive environment

Output Indicators:

5000 enterprises privatized All indicators listed in this table were Same as projected in last PSR for allprojected in the PSR, and were either part of indicators listed in this table.policy conditions to be fulfilled or an integralpart of the TA component.

Streamlined procedures for privatization ofmediumAarge enterprises implementedSecurties and Stock Market CommissioncreatedDepository System for securitiesoperationalizedProfessional Associations/SROs created,with compulsory membership from capitalmarkets participants20 enterprises restructured, 2 pilotbankruptcy restructuring exercises700 managers trainedDatabase of information on privatizedenterprises created

End of project

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Annex 2. Project Costs and Financing

Project Cost by Component (in US$ million equivalent)

Adjustment Component 300.00 300.00 tooTechnical Assistance Component 10.00 10.00 100

Total Baseline Cost 310.00 310.00

Total Project Costs 310.00 310.00Total 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 0.203___________________ - (0.00) (0.00) (0.20) (0.00) (0.20)

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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 contractedstaff 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 0.0Component

0.0 0.0 0.0

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Annex 3: Economic Costs and Benefits

Not applicable.

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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 DevelopmentMonth/Year Count Specialty Progress Objective

Identification/PreparationMay 1995 6 PSD Specialists, Capital

Markets Specialist,Operations Officers

July 1995 1 PSD SpecialistSeptember 1995 6 PSD Specialists, Capital

Markets Specialist,Operations Officers

December 1995 2 PSD Specialists

Appraisal/NegotiationMarch 1996 2 PSD Specialists

May 1996:NegotiationsJune 1996 3 PSD Specialists, Operations

Officer

SupervisionOctober 1996 6 PSD Specialists, Capital S S

Markets Specialist,Operations Officers

November 1996 1 PSD Specialist S SJanuary 1997 6 PSD Specialists, Capital Markets S S

Specialist, Operations OfficersApril 1997 2 PSD Specialists S SJune 1997 3 PSD Specialists S SNovember 1997 2 PSD Specialist, Operations S S

OfficerJanuary 1998 1 PSD Specialist S SMarch, June, September, 2 PSD Specialist, OperationsNovember 1998 OfficerFebruary, June, October 2 PSD Specialist, Operations S S1999 Officer

ICRApril 2000 3 PSD Specialists, Operations S S

Officer

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(b) Staff:

Stage of Project Cycle ActualLatest EstimateNo. Staff weeks US$ (,OQO)

][dentification/Preparation 111.9 361Appraisal/Negotiation 16.1 49.7Supervision 80.5 268.8ICR 13.9 43.1Total 222.4 722.6

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Annex 5. Ratings for Achievement of Objectives/Outputs of Components(H=High, SU=Substantial, M=Modest, N=Negligible, NA=Not Applicable)

RatingO Macro policies OH OSU*M ON ONA

F. Sector PoliciesU PhysicalO FinancialO Institutional Development O H * SU O M O N O NA

O Environmental

Socialai Poverty ReductionF] Gender

Cl Other (Please specify)E Private sector development O I O SU * M O N O NAL Public sector managementO Other (Please specify)

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Annex 6. Ratings of Bank and Borrower Performance

(H'S=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HU=Highly Unsatisfactory)

61 Bank performance Rating

• Lending OHS*S OU OHU? Supervision OHS OS OU OHUZ Overall OHS OS O U O HU

6.2 Borrower performance Rating

N Preparation OHS *S O U O HUN Government implementation performance O HS * S 0 U 0 HUN Implementation agency performance OHS OS 0 U OHUM Overall OHS *S 0 U O HU

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Annex 7. List of Supporting Documents

President's ReportMemorandum on Enterprise Sector Development PolicyTranche Release MemosLoan AgreementRelevant Back-to-Office ReportsRelevant Project Supervision ReportsEnglish and Ukrainian Language Versions of Borrower Contribution to the ICRResponses to Beneficiary Surveys for adjustment and TA componentsDetailed summary of Stakeholder Workshop

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An nex 8. Beneficiary Survey Results

As part of the Intensive Learning ICR exercise, the Bank team undertook surveys of theIbeneficiaries of both the adjustment and TA components of the EDAL. The objective of thesurvey was to assess the success of the program as well as focus on lessons learned. Onesurvey was developed targeting the counterpart agencies on the adjustment component while asecond survey was prepared for the enterprises, managers, and professional associations thatwere the beneficiaries of the TA component.

Overall, the counterpart agencies surveyed said the EDAL had been critical to Ukraine'stransition and noted that it has been the basis for the Government's privatization program, andcreated a core group working on these issues. Scme of those surveyed felt that the policyconditionalities, objectives, and end goals of projects needed to be clearer and more focused.On the TA component, the majority of those surveyed found the assistance they had receivedto be very helpful and felt that one of the most important outcomes had been the changing ofthe mentality of participants. Most called for further assistance, particularly enterprises whorequested financing after successful completion of the restructuring and training programs.Beneficiaries surveyed overwhelmingly noted that Governmental regulations, inspections,taxation, as well as corruption and crime were the critical remaining problems in the businessenvironment. Detailed survey responses have been summarized below.

Beneficiary Survey of Adjustment Component:A specially designed questionnaire was sent to the Ministry of Economy (ME), the Ministry ofFinance (MF), the State Property Fund (SPF) and the State Securities and Stock MarketCommission (SSMC). All the agencies responded to the questionnaire. A summary of theirresponses can be found below.

1. What is your opinion of the contribution of the World Bank EDAL project for the overalleconomic development of the country:(Rating 1= None, 2=Minor, 3=Moderate, 4=Major)

1 2 3 4

1 Increase in overall efficiency of the economy MF ME

2 Reduction of unemployment ME,MF

3 Improvement of trade opportunities ME MF

4 Increase in exports ME MF

5 Improvement in confidence in markets ME,MF

6 Improved markets in technical help for firms ME,M F

7 Improved World Bank input to policy making for the MF MEenterprise sector

8 Positive spill-over on the economy ME,

MF

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9 More efficient capital markets ME MF,SSMC

10 Other (please list) Improvement of the legislative MEframework, especially in the deregulationmethodology

2. Do you believe that the privatization/liberalization program supported by the EDAL couldhave succeeded without the World Bank's assistance?

LikelyUnlikely MF, ME, SSMC

3. Based on your experience, how would you describe?(Rating 1-5: 1=very poor, 2=poor, 3=acceptable, 4=good, 5=very good)

1 2 3 4

1 Timeliness and effectiveness of MF SSMCintervention, support and advice ME

2 Project overall design SSMCMF, ME

Relevance of World Bank advice MF SSMCME

4 Efficiency of World Bank supervision ME SSMCMF

5 Procurement procedures ME

n X'pJ?aisal procedures ME

7 Period incurred from project preparation SSMC MFintil final approval ME

I e Quickness of delivery of assistance SSMC MEMF

4. In you, opir,ion what were the main constraints to more efficient project implementation?Please list up to 5 important factors

a. lneffective perforr'ance of the state agencies which participated in the implementation ofthe project - MF

b. Inconsistency of legislation - MEc. Out-of-date accounting standards - MEd. Protectionist policy of the Government towards state-owned enterprises - MEe. Unrealistic evaluation of enterprise assets - ME

5. What would you suggest to be done to improve future operations?Please list:

a. Conditionalities need to be formulated more clearly and in a more focused way so that

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their interpretation is clear. This would avoid future disagreement with the World Bank on theirfulfillment. - SSMCb. Maximum achievement of the project's goals - MEc. Clearer direction and end goal of the project. - MEe. More active involvement of the regions of Ukraine - MEf. More active participation of NGOs in the project - ME

6. Please rank the importance of remaining problems in business sector environment inUkraine(Rating 1= None, 2=Minor, 3=Moderate, 4=Major)

1 2 3 4

1 Regulations for starting new business MF ME, SSMCSPF

2 Regulation on foreign trade, customs ME MF

3 Labor regulation MF ME

4 Lack of strong and independent business ME, SPFassociations MF

5 Difficult access to credit ME, MFSPF

6 Large amount of credit going to inefficient SOE's MF MEand privatized companies

7 High interest rates ME, MF

8 High tax burden SPF ME, MFSSMC

9 Tax administration, inspections ME, MF

10 Price controls ME, MF

11 Efficiency of the judiciary ME, MF

12 Unexpected and frequent changes in ME MF,Government's rules, laws and policies SPF

13 Crime ME, MF

14 Corruption MF, MESPF

15 Inflation ME,MFSPF

16 Inflation and Price Instability MF ME

17 Standards and Certification Regulation MF ME,SPF

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Beneficiary Survey of TA component:A specially designed questionnaire was sent to seventeen enterprises that received technicalassistance under the EDAL. Fourteen enterprises responded to the questionnaire. A summaryof their responses can be found below.

GENERAL INFORMATIONToday 3 years ago

1. Company Size: # of full-time employees (average): 1068 1418# of part-time employees (average): 343 364

2. Year of Start-up: From 1871 to 1994

3. Industry: ManufacturingLight Industry 29%Machinery 43%Wood processing 21%Medical glass vessels 7%

4. Please specify your enterprise's leading products or services (up to 3) and the percent oftotal sales they represent:

1% Sales for Leading Product I. Sales for Second Product I% Sales for Third ProductToday 51 17 133 Years Ago 49 17 10

5. Location of management: Zhitomir, Khmelnitsky, Volyn, Kherson, and Chernovtsy

6. Does your firm export? (specify % of total sales)

Today 7 companies - up to 52% of total sales3 Years Ago 9 companies - up to 41% of total sales

7. Sales to State Sector? (specify % of total sales)

Today 6 companies - up to 70% of total sales3 Years Ago 6 companies - up to 80% of total sales

8. What is the legal organization of this company?

Today Joint Stock Company3 Years Ago Joint Stock Company

9. Which of the following best describes the overall control of your firm, where control meansmaking major decisions conceming the enterprise's direction?

Most firms that responded said they are controlled by their Board of Directors or by managerstoday. Three Years Ago, most firms were controlled by a combination of the Board of directors,managers, and the Government

10. Does your firm have holdings or operations in other countries? No

11. How was your firm established? Privatization of a state-owned firm

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12. Regarding your firm's major product line, how many competitors do you face in yourmarkets?

Today a) none b) 3 or fewer 36% c) many (more than 3) 64%3 Years Ago a) none 8% b) 3 or fewer 23% c) many (more than 3) 69%

13. Which of the following would you define as your leading competitor?NOW 3 Years Ago

a. Domestic SMEs 21% 7%b. Domestic large private companies 21% 21%c. Foreign firm producing in domestic market 10% 10%d. State-owned enterprises 3%e. Micro-enterprses/informal sector 14% 14%f. Legal imports 10% 10%g. Smuggled goods 21% 25%h. My firm has no competitors 3% 10%

EVALUATION OF PROJECT SERVICES

14. Please rate the contribution of the project to the improvement of the operational efficiencyof your company:(Rating 1-4: 1=No Impact, 2=Minor, 3=Moderate, 4=Major Impact

1 2 3 4

1 Increase in sales 33% 33% 34%

2 Increase in profitability 9% 18% 45% 28%

3 Increase in exports 18% 18% 36% 28%

4 Increase in employment 45% 18% 37%

5 Improvement in procurement policies and procedures 20% 50% 30%

6 Accounting practices 10% 45% 45%

7 Identifying and attracting potential foreign investors for 25% 25% 33% 17%joint-ventures

8 Improve formulation and implementation of corporate 18% 45% 37%

strategy

9 Better marketing and export promotion 8% 69% 23%

10 Diversification of activities 30% 20% 50%

11 Entering new sectors 9% 27% 18% 37%

12 Entering new foreign markets 9% 45% 9% 27%

13 Other (please list)

14 Legal consultancy =

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15 Optimization of the number of employees 1

16 Improvement of the management information system 1

17 Attraction of domestic investors 1

18 Optimization of the products assortment 1

19 Decrease in barter 1

15. The most direct effects of the project were in increase of sales, increase of exports, anddecreasing liability.

16. When considering the assistance provided by the project, did you explore otherpossibilities?

Yes. Examples:a. Market expansionb. Creation of an industrial parkC. Improvement of financial positiond. Introduction of financial management systeme. Improving enterprise governancef. Optimizing employmentg. Developing new marketsh. Export financingi. Attracting foreign investorsj. Debt restructuringk. Cost analysis1. Technologym. Increase Salesn. New accounting systemo. Improving Cash flow

17. Do you believe that your enterprise could have succeeded without the World Bank'sassistance?

Likely 25%Unlikely 75%

18. How would you describe your relationship with the consultant?(Rating 1-5: Poor-deficient-good-vefy good-excellent)

1 2 3 4 5

1 Staff knowledgeable and helpful in providing advice 31% 46% 23%and guidance in the application of procedures

2 Consistency of advice and guidance 14% 64% 22%

3 Accessibility and responsiveness of senior staff on 23% 62% 15%matters of importance

4 Appropriate recommendations for action to correct 43% 36% 21%problems

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Responsiveness with a reasonable short time I I | 29% 50% 21%

19. How would you describe your relationship with the project implementation unit?(Rating 1-5: Poor-deficient-good-very good-excellent)

1 2 3 4 5

1 Staff knowledgeable and helpful in providing advice 46% 31% 23%and guidance in the application of procedures

:2 Consistency of advice and guidance 23% 62% 15%

3 Accessibility and responsiveness of senior staff on 54% 38% 8%matters of importance

4 Appropriate recommendations for action to correct 8% 38% 38% 16%problems

5 Responsiveness with a reasonable short time 46% 38% 16%

20. Based on your experience, how would you describe?(Rating 1-5: 1=very poor, 2=poor, 3=acceptable, 4=good, 5=very good)

1 2 3 4 5

I Relations with technical assistance body 33% 67%

2 Timeliness and effectiveness of intervention, support 8% 84% 8%and advice

3 Project overall design 17% 41% 42%

4 Relevance of World Bank advice 8% 23% 69%

5 Efficiency of World Bank supervision 67% 33%

6 Procurement procedures 14% 29% 43% 14%

7 Appraisal procedures 38% 50% 12%

8 Period incurred from project application until final 17% 33% 50%approval

9 Quickness delivery of assistance 70% 30%

21. In your opinion what were the main constraints to more efficient project implementation?Please list up to 5 important factors

a. lack of working capitalb. imperfect taxation system and tax burden

-27 -

c. inappropriate legislationd. lack of market knowledgee. short period for project implementationf. lack of Western technical expertsg. insufficient technical or sectoral base of consultants' knowledgeh. insufficient information supporti. lack of foreign investorsj. high interest ratek. inflation and price instability1. old equipmentm. absence of quality raw materialsn. poor product designo. unequal treatment for businessesp. absence of support to local producersq. insufficient computer technologyr. large liabilitiess. expensive sources of financingt. threat that the shares could be bought upu. conflicts among staffv. policy environment not conducivew. insufficient accounting proceduresx. mentalityy. poorly qualified managersz. low purchasing power

22. Average time from presenting project application to first assistance: 3.4 months.

23. What would you suggest to be done to improve future operations ?Please list:

a. sales increaseb. corporate governance changesc. reduction of costsd. new information systeme. intemational accounting standardsf. improving marketing activityg. use of flat tax for small businessesh. development of new job description and incentive systemi. set up of wholesale shopsj. creation of a trade markk. utilization of unproductive assets1. export increasem. employment increasen. search for foreign investorso. improving the organizational structurep. creation of joint venturesq. computerization of financial systemsr. reducing barters. creation of business-parkt. efficient utilization of productive assets

24. What is in your opinion the contribution of the World Bank EDAL project for the overalleconomic development of the country:(Rating I= None, 2=Minor, 3=Moderate, 4=Major)

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1 2 3 4

. Increase in overall efficiency of the economy 31% 31% 38%

2 Reduction of unemployment 17% 17% 42% 24%

3 Improvement of trade opportunities 83% 17%

4 Increase in exports 8% 77% 15%

5 Improvement in confidence in markets, 10% 50% 40%private sector by public

6 Improved markets in technical help for firms 20% 50% 30%

7 Improved World Bank input to policy making for 25% 33% 42%the enterprise sector

8 Improved abilities to present sound business plans 8% 64% 28%

9 Positive spill-over on the economy 10% 50% 40%

25. Please rank the importance of remaining problems in business sector environment inUkraine(Rating 1= None, 2=Minor, 3=Moderate, 4=Major)

1 2 3 4

1 Regulations for starting new business 17% 17% 33% 33%

2 Regulation on foreign trade, customs 23% 15% 62%

3 Labor regulation 15% 31% 23% 31%

4 Lack of strong and independent business 10% 90%associations

5 Difficult access to credit 15% 15% 31% 39%

6 Large amount of credit going to inefficient SOE's 17% 17% 25% 41%and privatized companies

7 High interest rates 100%

8 High tax burden 100%

9 Tax administration, inspections 7% 21% 72%

10 Price controls 15% 23% 47% 15%

11 Efficiency of the judiciary 23% 23% 23% 31%

12 Unexpected and often changes in Governments 7% 93%rules, laws and policies I

- 29 -

13 Crime 8% 8% 42% 42%

14 Corruption 8% 23% 69%

15 Inflation 8% 38% 54%

16 Inflation and Price Instability 7% 29% 64%

17 Standards and Certification Regulation 7% 7% 43% 43%

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Anniex 9. Stakeholder Workshop Results

As part of the Intensive Leaming ICR exercise, the Bank team undertook a stakeholder workshop withthe beneficiaries of both the adjustment and TA components of the EDAL. The stakeholders workshopincluded two sessions. A morning session was held with the counterpart Governmental agenciesinvolved in the adjustment portion of the loan. An afternoon session focused on the TA component andinvolved beneficiary enterprise directors, managers who had received training, and professionalassociations. Lessons leamed were discussed, the EDAL was evaluated, and suggestions were given forfuture loans in the PSD area. What follows below is a summary of comments made in both sessions.

Adjustment Component1. Victor lvchenko, SSMC:EDAL I transferred to Ukraine modem know-how on the development of a stock market. During thisproject, the WB showed the benefits of market approaches to economic development. However, it wouldhave been useful if the objectives of the project had been laid out more concretely as it is difficult toevaluate the achievement of general objectives. It would also have been useful if the project descriptionhad clearly demonstrated how implementation of its individual specific objectives contributed to a changein the overall picture. PR activity is crucial for the project. If we inform citizens in a language theyunderstand, we would enjoy more public support.

2. Valentina Golovinskaya, MOE:The training and TA component of the EDAL was highly valuable. The WB should also considerextending lending on soft terms to enterprises.

3. Pavel Kolesnik, MOE:EDAL led to progress in the sphere of deregulation. In particular, registration procedures were simplified,the number of licensed activities were reduced, and the number of tax inspections were reduced. Thenext project should pay even more attention to deregulation of the economy.

4. Valeriy Parhomenko, MOF:Future projects need to continue to work in the area of modernizing accounting, particularly the practicalimplementation of new accounting standards. Efforts at the macro and micro levels need to becoordinated.

5. Alexey Shepitko, SPF:The EDAL helped to transfer former state owned enterprises to real owners by giving the GoU specificprivatization requirements. The next project should envisage assistance in promoting Ukrainianenterprises abroad and making them known to potential foreign investors. This will require developingfinancial reports in accordance to international standards.

6. Andrey Stepanenko, SSMC:The crucial things that are needed by Ukrainian restructured enterprises are PR and capital. The nextproJect should focus on disseminating information about Ukrainian enterprises in a professional manner.

7. Miroslav Illyinsky, MOE:EDAL I and EDAL 11 acted as catalysts for structural reform. During the implementation of these twoprograms, efficient working groups and teams of experts were created. They helped to developinstitutional capacity in the GoU and this experience was used in drafting the Government's newprivatization program. In the next project, greater attention should be paid to the regions. There shouldbe a clear delineation of the objectives and the expected results of technical assistance.

TA component1. Vitally Kovtiukh, Ukrainian Association of Investment Business, Kiev:EDAL I funding helped the Association to actively participate in developing and drafting new laws. Inparticular, under the EDAL funding, the Foundation of Legislative Initiatives was founded. However, theSSMC failed to delegate some of its functions to relevant professional associations, and this limited our

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efficiency. Associations require more funding if they are to carry out their functions.

2. Vasiliy Darkov, Association of professional Insurance brokers of Ukraine, Kiev:In future projects, the GoU should provide more support to those implementing the project. An actionplan and some organizational details need to be clearly worked out together with the participants of theproject at the preparatory stage. With the help of EDAL I, an official market of insurance brokers wascreated in Ukraine. The Association became the only member from the CIS to affiliate with the foreignprofessional insurance broker association known as BIPAR. Recommendations: Impose less limitationson ways that project funds can be spent. Hold regular (every 6 months) meetings of project participantsto discuss progress and share experience in the way we are doing in this workshop.

3. Zahar Gorlovskiy, Electromash, Kherson (provided written notes):Due to the EDAL project, company revenues in 1999 grew 33.2 percent which led to a significantreduction in costs. We developed and started introducing new management, accounting, and financialaccounting procedures. We need more assistance in developing quality business plans to attract foreigninvestors and establish contacts with potential foreign partners. We would also like the consultants tocontinue their work in the enterprise and focus on the implementation of their recommendations.Enterprises, which have received restructuring and advice from donor projects and achieved practicalresults, should have the opportunity to receive credits from the World Bank on soft terms. In particular,we need support in introducing new accounting standards. In general, further stages of the projectshould concentrate on achieving practical results that are clearly linked to enterprise performance. Ourcompany's experts are now sharing their experience and the lessons they have learned with otherenterprises in the region.

4. Dmitriy Kadelnik, Kvartz, Chemovtsy:Micro-level assistance to enterprises should be paralleled with promoting changes at the macro level,particularly with regard to relevant legislation. Our critical needs include upgrading the HR capacity ofenterprises and training of our employees. Success stories need to be developed and duplicated at othercompanies. Enterprises require consulting advice on a short-term basis to resolve specific problems.Consulting advice should be followed up by giving the enterprise access to investment resources.

5. lina Kulinskaya, Mal'va, Chemovtsy:The project should have started earlier as Ukraine lost time in the first years of transition. Consultantsare well theoretically briefed but practical recommendations need to be worked out together with theenterprise management. It would be most helpful to have consultants with sectoral expertise as well.The project managed to change the mentality of people.

6. Valentina Karduba, Nadia, Chemovtsy:Restructuring is a continual process which needs the support of professional consultants at all stages,and we would like to continue our work with the consultants.

7. Victoria Melnik, Professional Association of Registrators and Depositaries, Kiev:The project helped to upgrade the professional knowledge of registrars and depositaries. However, a lotof project money was lost because the dollars of funding had to be exchanged into hyrvna and wereceived this money shortly after the financial crisis of 1998. There are also too many limitations in theproject on the ways the funding can be used.

8. Alla Savchenko, Federation of Professional Accountants and Auditors, Kiev:Under the project we launched a full-scale training of trainers process to teach International AccountingStandards to enterprises.

9. Valeriy Shepel, Ukrainian Center for Enterprise Restructuring, Kiev:Due to the project, we trained a number of consultants that are now working with various enterprises. Wemanaged to change the mentality of people. Assistance at the micro level is crucial as it helps to buildinvestor confidence.

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10. Olga Tripolskaya, Ukrainian Association of the Investment Business, Kiev:A joint training program for middle managers and enterprise owners (who take strategic decisions) wouldbe very useful. Special training is needed in ways to raise capital through the stock market. Enterprisesneed to publish more professionally prepared financial information (annual report) to attract domesticfinancing.

11. Joseph Kotliar, Vzutex, Khmelnitsky:The project helped to create a critical mass of market oriented people at our enterprise. The key targetgroup for training and support is middle management, who are the ones who move things forward. Theassistance offered by the project at the micro level should be supported by promoting relevant changesin legislation.

12. Galina Yeremenko, Intemational Center for Privatization, Investment and Management, Kiev:Further training programs should be more focused, i.e. in the sectoral areas that concem enterprisemanagers and this training should be very practically-oriented. Advanced training should be orientedtowards solutions for specific problems at enterprises. Associations should receive further funding tohelp enterprises to implement the restructuring plans developed under EDAL 1. A nation wide system ofprofessional training of managers from all types of enterprises should be developed in Ukraine.Companies should receive special funding to pay for professional training and consuHtancy, since free orcheap services are not usually appreciated. A special system of training of trainers in the regions needsto be developed. Training in business specific areas has become increasingly important: training ineconomics and accounting is not enough.

13. Pavel Parkhomenko, Kation, Khmelnitsky:Enterprises need assistance in working with the GoU's tax authorities. Special companies providingbusiness information and giving access to foreign sources of information should be launched in theregions. This will help enterprises to promote themselves and find business links abroad.

14. Sergey Bushuyev, Ukrainian Project Management Association, Kiev:The project helped to develop and upgrade the system of project management training and education inUkraine, including Masters and PhD programs, to Western standards.

15. Victor Gorin, Khimmash, Korostyshev:The project helped our enterprise to achieve real growth and liquidity. In particular, we introduced newenergy saving technologies. Further projects should consider introducing support in ISO 9000certification.

16. Alla Dontsova, Kyiany, Kiev:The project helped to change the mentality of our employees and to introduce modern planningtechniques. The training component should be expanded and as many employees as possible should betrained, especially in practical business, so that a cadre of trained employees exist in any givenenterprise.

17. Andrey Kuvshinov, F.A. Service, Kiev:EDAL I helped to introduce professional standards of financial analysis. In future, a national certificationsystem for professional accountants, financial analysts, and lawyers needs to be introduced in Ukraine.The next project should address the problem of raising financing, particularly short-term financing.Several success stories should be developed and disseminated.

18. Sergey Kostachkin, Tent, Cherkassy:EDAL I helped to introduce modem management and planning techniques. In future, more attentionshould be given to the training of middle management, as there is still a gap between the level of theprofessional qualifications of top leaders and their middle management.

19. Nadezhda Deyneka, Textile Factory, Khmelnitsky:The consultants acted as catalysts of change at our enterprise. All enterprises undergoing the

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restructuring exercise should share their experiences and unite to solve problems.

20. Boris Kuzminsky, Ukraina, Zhitomir:The project changed the mentality of the people involved. We introduced modern marketing, accounting,promotional activities, and personnel training. World Bank projects would be even more efficient ifassistance to enterprises was paralleled with regulatory reforms at the macro-level. Future projectsshould work with the GoU to ensure that businesses in Ukraine can be run transparently and allbusinesses are subject to the same rules and regulations (i.e. remove customs and other preferentialtreatment).

21. Vladimir Koguy, Lviv Tooling Factory, Lviv:The project changed the mentality of people and helped to upgrade the image of the company. Webecame attractive to foreign investors.

22. Gennadiy Kott, Elektroizmeritel, Zhitomir:The project helped us to optimize production and learn initial business planning principles. We would liketo continue working with the consultants to focus on the implementation of the restructuring plan theydesigned. In order to increase the effect of the project, the World Bank should lobby the Government toliberalize the tax system in Ukraine.

23. Vladimir Shepel, Federation of Professional Accountants and Auditors, Kiev:The project helped to change the mentality of civil servants. The WB should render more support toNGOs so they can become a force capable of solving national problems, lobbying, and initiating newdevelopments.

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