ICR00003501
Public Disclosure Authorized
IMPLEMENTATION COMPLETION AND RESULTS REPORT
(IBRD -4836-UA AND 8089-UA)
ON
LOANS
Public Disclosure Authorized IN THE AMOUNT OF US$304.5 MILLION
TO THE
JOINT STOCK COMPANY “THE STATE EXPORT-IMPORT BANK OF UKRAINE”
WITH THE GUARANTEE OF THE GOVERNMENT OF UKRAINE
FOR A
SECOND EXPORT DEVELOPMENT PROJECT
Public Disclosure Authorized JUNE 2015
Public Disclosure Authorized Finance and Markets Global Practice Europe and Central Asia Region 2
CURRENCY EQUIVALENTS
(Exchange Rate Effective May 18, 2015)
Currency Unit UAH 1.00 = USD 0.0449 USD 1.00 = UAH 22.2472
FISCAL YEAR 2015
ABBREVIATIONS AND ACRONYMS
AF Additional Financing CAR Capital Adequacy Ratio CAS Country Assistance Strategy CPS Country Partnership Strategy EDP2 Second Export Development Project EU European Union FIL Financial Intermediary Loan GDP Gross Domestic Product GOU Government of Ukraine IBRD International Bank for Reconstruction and Development ICB International Competitive Bidding ICR Implementation Completion and Results Report IFI International Financial Institution IFRS International Financial Reporting Standards ISR Implementation Status Report IT Information Technology M&E Monitoring and Evaluation MOF Ministry of Finance NPL Non-performing Loan PAD Project Appraisal Document PDO Project Development Objectives PBs Participating Banks PIU Project Implementation Unit ROA Return on Assets ROE Return on Equity UAH Ukrainian Hryvnia UAS Ukrainian Accounting Standards UEB Joint Stock Company The State Export Import Bank of Ukraine USD United States Dollar
Vice President: Laura Tuck Country Director: Qimiao Fan Global Practice Manager: Aurora Ferrari Project Team Leader (at closure): Alexander Pankov ICR Team Leader: Colleen Mascenik
3
Ukraine Second Export Development Project
Contents
Overview Tables 4
Main Report 1. Project Context, Development Objectives and Design 9 1.1 Context at Appraisal 9 1.2 Original PDO and Key Indicators 11 1.3 Revised PDO 11 1.4 Main Beneficiaries 12 1.5 Original Components 12 1.6 Revised Components 13 1.7 Other Significant Changes 13
2. Key Factors Affecting Implementation and Outcomes 13 2.1 Project Preparation, Design and Quality at Entry 13 2.2 Implementation 15 2.3 Monitoring and Evaluation Design, Implementation and Utilization 19 2.4 Safeguard and Fiduciary Compliance 20 2.5 Post-Completion Operation/Next Phase 21
3. Assessment of Outcomes 21 3.1 Relevance of Objectives, Design and Implementation 21 3.2 Efficacy for Achievement of PDO 22 3.3 Efficacy of PDO 24 3.4 Overall Performance Rating 26 3.5 Overarching Themes, Other Outcomes, and Impacts 27 3.6 Other Unintended Outcomes and Impacts 28 3.7 Summary Findings of Beneficiary Survey 28
4. Assessment of Risk to Development Outcome 28 5. Assessment of Bank and Borrower Performance 29 5.1 Bank Performance 29 5.2 Borrower Performance 30 6. Lessons Learned 31 7. Comments on Issues Raise by Borrowers, IA 32
Annex 1. Additional Information 34 Annex 2. Project Costs and Financing 38 Annex 3. Outputs by Component 39 Annex 4. Beneficiary Enterprise Survey Results 40 Annex 5. Bank Lending and Implementation Support 44 Annex 6. Summary of Borrower’s ICR 46
4
A. Basic information Country Ukraine Project Name Second Export Development Project Project ID P095203 L/C/TF Number(s) IBRD-48360, IBRD- 80890 ICR Date April 29, 2015 ICR Type Core ICR Lending instrument FIL Borrower Joint Stock Company The State Export Import Bank of Ukraine Original Total USD 154.50 M Disbursed Amount USD 304.5 M Commitment Revised Amount USD 304.5 M Environmental Category: F, Financial Intermediary Assessment Implementing Agencies: Joint Stock Company The State Export Import Bank of Ukraine Cofinanciers and Other External Partners:
B. Key Dates Process Date Process Date Concept Review 7/14/2005 Appraisal 3/10/2006 Board Approval 7/27/2006 Effectiveness 3/20/2007 Project Restructuring 5/29/2009 Board Approval of 8/25/2011 Additional Financing Project Restructuring 10/24/2011 Original Closing 12/31/2011 Revised Closing 12/31/2014
C. Ratings Summary C.1 Performance Rating by ICR Outcomes Satisfactory Risk to Development Outcome Substantial Bank Performance Satisfactory Borrower Performance Satisfactory
C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings Quality at Entry Satisfactory Government Moderately Satisfactory Quality of Satisfactory Implementing Satisfactory Supervision Agency/Agencies Overall Bank Satisfactory Overall Borrower Satisfactory Performance Performance
5
C.3 Quality at Entry and Implementation Performance Indicators Implementation Indicators QAG Assessments Rating Performance (if any) Potential Problem No N/A Project at any time (Yes/No) Problem Project at No N/A any time (Yes/No) DO rating before Satisfactory Closing/Inactive status
D. Sector and Theme Codes Original Actual Sector Code (as % of total Bank financing) Banking 100 100
Theme Code (as % of Bank financing) Original Actual Export development and competitiveness 50 50 International financial standards and systems 25 25 Other private sector development 25 25
E. Bank Staff Positions At ICR At Approval Vice President Laura Tuck Shigeo Katsu Country Director Qimiao Fan Paul Bermingham Sector Manager Aurora Ferrari Gerardo Corrochano Project Team Leader Alexander Pankov Lalit Raina ICR Team Leader Colleen Mascenik
F. Results Framework Analysis
Project Development Objective (from Project Appraisal Document) The project’s development objective was to serve as a catalyst to support export and real sector growth in Ukraine during the EDP2 implementation period and beyond by a) providing medium- and long-term working capital and investment finance to private exporting enterprises to assist the Guarantor’s private exporting sector; and (b) further improving the ability of the banking sector through development of intermediation by expanding private financial institutions’ lending products.
Revised Project Development Objectives (as approved by original approving authority) N/A
6
(a) PDO Indicator(s)1 Indicator Baseline Value Original Target Formally Actual Value Value (from Revised Target Achieved at approval Values Completion or documents) Target Years Indicator 1. Volume of Bank lending cumulatively disbursed Value 0 USD154.5 mln USD304.5 mln USD304.5mln2 Date achieved 3/20/2007 6/30/2011 12/31/2014 12/31/2014 Comments (incl. Fully achieved: This project disbursed 100% of Bank financing by project % achievement) closing. Indicator 2. Outstanding loan portfolio Value 0 USD150 mln USD300 mln USD278.78 mln3 Date achieved 3/20/2007 6/30/2011 12/31/2014 12/31/2014 Comments (incl. Fully achieved: gross loan portfolio was USD300mln, fully disbursed less % achievement) front end fees. Due to repayments, the outstanding portfolio at project closing is USD 278.78mln. Indicator 3. Portfolio-at-risk of the Borrower Value 0% 0 2.00% Date achieved 12/31/2006 12/31/2014 12/31/2014 Comments (incl. Partially achieved: During most of the implementation period, EDP2 % achievement) portfolio achieved target of zero non-performing loans4. At end-2014 there were 2% of EDP2 outstanding loans categorized as portfolio-at-risk according to IFRS. Banks were taking more conservative approaches in 2H2014, although it is possible that repayment problems may become evident in 1H2015. Indicator 4. Financial sustainability of the Borrower (ROA) Value 2.34 1.00 -10.38 Date achieved 12/31/2006 12/31/2014 12/31/2014 Comments (incl. Not achieved: Due to prolonged financial and economic crisis in Ukraine, % achievement) banking system’s profitability has been under pressure. However, UEB’s ROA that was slightly stronger than the system’s average during most of implementation period, but finished 2014 worse than system average.5
1 Indicators for volume of lending disbursed, outstanding loan portfolio, and range of financial intermediaries’ participation were revised upon approval of Additional Financing on 8/25/2011. 2 Last disbursement from the Loan account (in amount of USD3,887,024.10) was done within grace period, on January 6, 2015. Indicator 1 includes: financing to exporters, IBRD front-end fees & UEB institutional development. 3 The outstanding loan portfolio is net of repayments by beneficiary enterprises. 4 In 2011 and 2013, by volume there were 0% NPLs in all three categories (Sub-standard, doubtful and loss), in 2012 there were 0.8% sub-standard and zero in other categories. 5 UEB’s ROA exceeded system average during most of recent years: Ukrexim’s ROA was 0.18, 0.17 and 0.22 percent at year-end 2011, 2012 and 2013, respectively. By comparison, the average for the banking sector during the same years was -0.76, 0.45, and 0.12. The system’s average ROA at end-2014 was -4.07. 7
(b) Intermediate Outcome Indicator(s) Indicator Baseline Value Original Target Formally Actual Value Value (from Revised Target Achieved at approval Values Completion or documents) Target Years Indicator 1. Export multiplier: Incremental average aggregate annual exports generated (measured over 3 years for all sub-borrowers) / total credit line disbursed Value 0 1.7-2.0 2.78 Date achieved 3/20/2007 12/31/2014 12/31/2014 Comments (incl. Fully achieved: Export multiplier exceeded target at end-2014 and during % achievement) most of the project implementation period, fell within target value range. In 2011 it was 1.76, in 2012 it was 2.02, and in 2013 it was 2.69, exceeding the target. It is important to consider these positive export dynamics against the overall country background: due to economic contraction in 2014, Russia’s restrictions on imports from Ukraine, and impact of conflict, Ukraine’s overall export revenues contracted by 37% in 2014. Indicator 2. Range of financial intermediaries’ participation: Number of PBs participating in EDP2 and their individual and combined market shares (revised under Additional Financing as: Increasing share of number of subprojects and amounts disbursed through PBs participating in EDP2 / total number of sub projects and total credit line disbursed) Value 100% wholesale 70% wholesale 40% wholesale PBs financed lending initially lending through lending through 41.79% of planned. PBs / 30% retail PBs / 60% retail projects by lending by UEB lending by UEB number and was set as target was set as the 46.68% by at Additional revised target value. Financing. ratio as of 11/15/2013. Date achieved 3/20/2007 6/30/2011 12/31/2014 Comments (incl. Fully achieved: Besides UEB, 6 financial institutions participated in EDP2. % achievement) The proportion of lending through PBs varied during project implementation, and was as high as 67% in 2011, but declined by the closing date in 2014 due to the worsening banking sector crisis. Indicator 3. Number of beneficiary enterprises Value 0 25 50 50 Date achieved 3/20/2007 6/30/2011 12/31/2014 12/31/2014 Comments (incl. Fully achieved: The project provided 67 working capital and investment % achievement) sub-loans to 50 beneficiary enterprises.
Indicator 4. Percentage of female employees (average) of beneficiary enterprises Value 0 No target No target 39 Date achieved 3/20/2007 12/31/2014 Comments (incl. At project’s closing, the percentage of female employees at active % achievement) beneficiary enterprises was 39%. This value varied throughout the project lifetime between 35-45%.
8
G. Ratings of Project Performance in ISRs No. Date ISR Archived DO IP Actual Disbursements (USD millions) 1 9/2/2007 Satisfactory Satisfactory 1.52 2 10/2/2008 Satisfactory Satisfactory 29.97 3 3/15/2009 Satisfactory Satisfactory 61.3 4 12/5/2009 Satisfactory Satisfactory 78.10 5 4/12/2010 Satisfactory Satisfactory 107.20 6 1/1/2011 Satisfactory Satisfactory 124.79 7 7/12/2011 Satisfactory Moderately 130.15 Satisfactory 8 1/22/2012 Satisfactory Satisfactory 145.93 9 8/12/2012 Satisfactory Satisfactory 164.88 10 2/5/2013 Satisfactory Satisfactory 173.66 11 8/17/2013 Satisfactory Satisfactory 191.18 12 2/11/2014 Satisfactory Moderately 218.82 Satisfactory 13 9/22/2014 Satisfactory Satisfactory 238.1 14 12/22/2014 Satisfactory Satisfactory 290.6* *Amount of disbursement as at 12/22/2014. On 12/30/2014 USD10 million was disbursed. On 01/06/2015 USD3.9 million was disbursed.
H. Restructuring (if any)
The project has been restructured twice and the project closing date was extended at the time of the additional financing. The first project restructuring occurred in May 2009, with regional vice president’s approval to allow for direct lending by the Borrower/Implementing Agency, UEB, as a response to the impact of severe economic and financial crisis that hit Ukraine in 2008. In August 2011, additional financing of USD150 million was approved by the WB Board of Directors, and the closing date extended to December 31, 2014. In October 2011, the project was restructured to reallocate USD1.1 million of unallocated loan proceeds towards UEB’s credit line (USD 0.7 million) and institutional strengthening component (USD 0.4 million).
I. Disbursement Profile
9
1. Project Context, Development Objectives and Design
The Second Export Development Project (EDP2) for which this implementation completion report is prepared has been restructured and complemented with additional financing during project implementation in response to market conditions. The original project was approved by the World Bank Board in July 2006, and designed as a follow-up operation to the previous Export Development Project (EDP1) which was approved ten years before. EDP2 consisted in a USD154.5 million credit line, backed by the Bank’s variable spread US Dollar loan of 20 years of maturity, including a 5-year grace period, and guaranteed by the Ukrainian government, to Export Import Bank of Ukraine (UEB), a state-owned foreign trade and development bank, for further on-lending to eligible exporters, via participating financial intermediaries. In May 2009, in response to the severe effect of 2008 financial crisis on the Ukrainian banking system, the EDP2 project was restructured to allow UEB to lend directly to exporters. In August 2011, the World Bank Board approved additional financing in the amount of USD150 million to UEB for on-lending to eligible exporters, both directly and through eligible financial intermediaries.
At project closing in December 2014, the project had fully disbursed the combined loan amount of USD304.5 million. The project provided access to longer-term finance to 50 private exporting enterprises under the original EDP2 loan and the additional financing. Over eight years, EDP2 built up the project implementation and risk management capacity of the largest export lender in Ukraine, UEB, and enhanced six participating banks’ capacity for enterprise lending, such that some of the PBs became stronger and attracted additional foreign funding. Most of the participating enterprises grew in revenues and employment, or out-performed the overall enterprise sector during the two crisis periods.
1.1 Context at Appraisal
Country and Sector Background
The preparation of the Second Export Development Project took place against the background of initially rapid, then slowing, export-led economic growth, as Ukraine rebounded from the massive economic downturn of the 1990s. GDP growth that had accelerated to 12.1 percent in 2004 had slowed down to 2.4 percent in 2005, but growth was nevertheless robust over the 5-year period. Exports grew nearly 40 percent in 2004 and increased further in 2005, fueled mainly by metals and chemicals.
Despite rapid economic growth, Ukraine’s export base was too narrow and concentrated on CIS markets. The metal sector, which generated most export revenues, had limited capacity for further expansion, given the outdated capital assets and technologies and subsidized energy supplies distorting the market and inhibiting innovation. Further, the Ukrainian steel sector, which exported almost 80 percent of its production in 2004, was facing a decline in world steel prices, as well as rising costs of raw materials and transportation. Around half of Ukraine’s trade at the time of project appraisal was with CIS countries. Oil and gas imports from Russia represented 80 percent of total imports: energy inputs for Ukraine’s steel and chemical production capacity were primarily sourced from one country. More generally, Russia represented the largest overall trading partner (other less significant partners were Germany, Italy, and China).
10
Banking Sector
The banking sector, which dominated the financial system (then and now), was seen to play an important potential role to catalyze investment and sustainable growth for exporting enterprises; but the sector faced some serious structural challenges. The sector was characterized by a large number of small, undercapitalized banks. There were 165 operating banks in Ukraine at the end of 2005, with the average asset size of USD267.6 million. The share of foreign banks had increased by 2005 to 19.5 percent and was expected to grow further. Only the top 12 banks had balance sheet capital above USD100 million and accounted for more than 47.6 percent of total capital in the banking sector. In addition, the use of modern risk management approaches, technology and skills for lending to new borrowers and market segments was fairly limited, and governance in the sector was weak, due to the dominance of oligarchical business groups. At the time of project design, it was seen that there were a few sound and strong financial institutions, among them Ukreximbank, and the aim was to leverage that strength and try to make some improvements in the funding and risk management approaches of a few others, albeit within the limited frame of the relatively small line of credit. The importance of supporting Ukraine’s real economy, strengthening exporters and creating jobs, was a critical priority worth taking this risk.
Rationale for Bank Assistance
Against this background, during the period of 1996-2005, the Bank played an active role in policy dialogue and technical assistance to support the needs of the growing economy as well as address weaknesses and constraints in the performance of the domestic financial sector. In November 1996, the Bank Board approved the First Export Development Project (EDP1, P044851) in the amount of USD84 million, which was implemented successfully until closing in June 2004. The project aimed to develop Ukraine's emerging private sector export potential and increase the capacity of the UEB through a comprehensive institutional development program. The project included a line of credit and technical assistance components for exporters and UEB. The project had a positive impact on promoting exporting enterprises’ growth and development, on spurring more financial intermediation, and on building up implementation capacity in the form of a professional PIU and initial IT infrastructure at UEB, and formed the building blocks for EDP2.
The Bank’s program also included other policy-based and investment operations supporting the Government in strengthening the financial sector and addressing the financing needs of real sector In particular, multi-sector Development Program Loan series (P079316, P096389) focused on a range of policy issues including protection of property rights and improving investment climate; and Access to Financial Services Project (P076553) aimed to provide long-term finance through eligible commercial banks to rural small and medium-sized enterprises.6 In this context, EDP2 was designed to build on the successful track record of EDP1 and continue facilitating export growth by improving access to medium- and long-term finance for private exporting companies. The Bank could not resolve deep structural problems in the banking sector through its technical assistance, however. Policy engagement with the central bank was only periodically strong, and the latter’s lack of independence and resistance to dialogue and reform at many times limited the impact that the Bank could aim to achieve through any one intervention.
The project design was consistent with the Country Assistance Strategy for Ukraine during FY06-FY09, the first pillar of which was sustaining economic growth and improving
6 The design flaws and failure to disburse of the latter project described in Section 6—Lessons Learned. 11
competitiveness, including by providing access to long-term credit. The CAS’s key priorities for the medium-term included completing the banking and financial sector reforms and filling the gap in accessing credit facilities. At a higher-level, the project also aimed to catalyze faster private sector growth and job creation, supported by a healthier and more developed financial system. The cross-cutting governance theme was also incorporated into the project’s reporting, procurement, and safeguards requirements.
1.2 Original Project Development Objectives (PDO) and Key Indicators (as approved)
The original project development objective (PDO) was to (a) provide medium- and long-term working capital and investment finance to private exporting enterprises to assist the Guarantor’s private exporting sector; and (b) further improve the ability of the banking sector through development of intermediation by expanding private financial institutions’ lending products. The following Results Indicators were selected to monitor the PDOs: • Volume of Bank lending cumulatively disbursed; • Outstanding loan portfolio; • Portfolio-at-risk of the Borrower; • Financial sustainability of the Borrower (ROA).
Other key indicators for measuring project outcomes were: • Export multiplier: Incremental average aggregate annual exports generated (measured over 3 years for all sub-borrowers) / total credit line disbursed; • Range of financial intermediaries’ participation: Number of Participating Banks (PBs) participating in EDP2 and their individual and combined market shares • Sub-loan performance indicators: Decreasing amount of non-performing sub-loans and leases; Interest and/or principal defaults / total amount of sub-loans and leases disbursed. • At the beneficiary level, the number of project beneficiaries, and the share of female beneficiaries.7
These indicators were intended to be monitored through regular reporting by the Borrower/ Implementing Agency, and through statutory project supervision missions. It was envisaged that reporting under the EDP2 would be done through quarterly progress reports, with the reports specifically distinguishing project transactions of the two types of financial intermediaries—UEB and PBs.
1.3 Revised PDO (as approved by original approving authority) and Key Indicators, and reasons/justification
There were no changes to the PDO, at the time of the project restructurings or the Additional Financing (AF).
At the time of the AF, the results framework was revised to better capture the project’s outcomes. The intermediate outcome indicator related to the Range of Financial Intermediaries’ Participation was revised to more effectively measure the contribution of financial intermediaries to the project outcomes in terms of number of projects financed and amount disbursed8. This
7 This measures the percentage of female employees among all the beneficiary enterprises each year. 8 The revised indicators were: number of subprojects financed by PBs/ total number of sub projects, and amounts disbursed through PBs / total credit line disbursed. 12
revision shifted the focus from the number of PBs to the relative balance between UEB and PBs. There was however no targeted proportion of wholesale/retail lending, given the importance of being flexible in the design process to allow the project to adjust to changing market circumstances. Also, the Bank introduced an intermediate outcome indicator to monitor the average share of female employees in beneficiary enterprises to capture more information about the gender-related impact of the project.
1.4 Main Beneficiaries
The primary beneficiaries for this project, as identified in the project appraisal document (PAD), were private exporting enterprises. The Loan Agreement provided detailed eligibility criteria for the beneficiary enterprises in terms of ownership, activities and financial health.9
The secondary beneficiaries were UEB and the participating banks. While UEB was selected for its strong management and implementation capacity, there was still room for the project to positively affect further institutional strengthening. In particular, the institutional development component provided for procurement of IT equipment to support UEB’s role in project implementation and retail lending to private exporter market. The participating financial institutions were expected to benefit as well from participation in the project and anticipated outcomes were to be measured by intermediate results indicators. Participation in EDP2 was expected to incentivize some banks to develop capacity for better risk management, procurement and monitoring of safeguards required by loan covenants, help banks adopt sound business practices, develop new products for exporters, and attract new lines of credit financed by other international financial institutions (IFIs). These benefits might be expected in a few banks, considering the serious weaknesses in the banking sector and the supervisor, and the limited size of the line of credit compared to banks’ overall portfolios.
1.5 Original Components (as approved)
EDP2 was designed as a follow-up to EDP1, which was purely a retail export intermediation loan directly from UEB to exporters. The EDP2 design as originally approved was centered around UEB operating as a wholesale export finance institution, and a wholesale line of credit to other PBs was the anchor component of the project. The project components were: • Component A (original amount USD150 million) -- Wholesale line of credit to UEB, which UEB would onlend to eligible participating banks (PBs), to be selected according to financial and export orientation eligibility criteria. The PBs in turn were to make medium- term working capital or long-term investment loans to eligible private exporters. • Component B (original amount USD 3 million) -- UEB institutional development-related procurement of IT equipment and consulting services. • Component C-- Unallocated amount of USD1.1 million. The amounts to be allocated among the above components were to remain flexible for possible reallocation during implementation.
9 Namely, the Loan Agreement stipulated that beneficiary enterprises should be privately-owned, exporter or prospective exporter of goods and services originating from Ukraine (including tourism) and generating foreign exchange proceeds in Ukraine; having a debt-to-equity ratio of 80:20; having a debt service ratio of 1.3:1 according to anticipated cash flows over the life of the prospective sub-loan; and having satisfactory financial structure and organization, management, staff and financial and other resources for carrying out its operations. 13
1.6 Revised Components
Following a restructuring of the project in 2009, UEB was allowed to channel the EDP2 loan proceeds to exporters both indirectly (through PBs, as originally approved) and directly. When the AF was approved in August 2011, the line of credit (component A) was divided into two sub- components: (i) direct lending by UEB, and (ii) wholesale lending to PBs. The tentative allocation between the sub-components was established as 30:70. Upon request from UEB in October 2013, due to the shortage of eligible PBs and slower-than-anticipated disbursement in a context of prolonged recession, the Bank agreed to increase the ratio of direct lending by UEB to wholesale lending to PBs to 60:40. At project closing, the ratio of direct lending by UEB to wholesale lending to PBs was 54:46 by sub-loan volume.
1.7 Other Significant Changes
Institutional, financial management, disbursement and procurement arrangements remained largely the same throughout the project lifetime, as set in the EDP2 Operations Manual, subject to updated procurement guidelines at the time of Additional Financing approval in August 201110.
UEB’s financial covenants were slightly revised for the AF. The requirements for FX and Liquidity ratios were revised to meet the applicable NBU regulations.
Finally, the closing date for the Project was extended by 3 years from the original closing date of December 31, 2011, to December 31, 2014, at the time of AF approval.
2. Key Factors Affecting Implementation and Outcomes
2.1 Project Preparation, Design and Quality at Entry
At the time of appraisal, the Bank had almost ten years’ experience providing active support to the Government’s priorities in the banking and export sectors. In addition to a number of development policy loans with financial sector conditionality, the World Bank had just completed the implementation of EDP1 in 2005 through UEB. As the official agent of the Government of Ukraine (GoU) for the intermediation of IFIs’ credit lines, and having the benefit of EDP1 experience, UEB was well-positioned to be the implementation agency under EDP2.
The project’s preparation, design, and quality at entry were based on the following: (i) Consistency with Bank and Government Priorities. The Ukrainian Government had placed the growth of Ukrainian exports as a national priority. UEB had earlier written to the Bank asking for additional funding under a new EDP2 project, and the Government endorsed this proposal. EDP2 was also consistent with the FY06-09 CAS for Ukraine; as stated in the CAS, an important objective was the revitalization of the real sector by providing access to long-term credit. The CAS’s key priorities for the medium-term included: completing the banking and financial sector reforms and filling the current gap in accessing credit facilities.
10 The commercial practice thresholds were raised from USD4 million to USD5 million, and the International Competitive Bidding procurement method replaced with Open Competitive Bidding method. 14
(ii) Incorporation of lessons learned from other bank lines of credit and EDP1. a. Flexibility. The main lesson learned during previous Bank credit line operations in ECA region was that project design should be kept as flexible as possible, with a minimum number of statutory requirements (e.g., avoiding constraints like minimum sub-loan size, maturity, currency denomination, sub-borrower co- financing requirements, sectoral lending focus, etc.), and sensible financial indicators should be used for the selection of both the PBs and the sub- borrowers/sub-projects in line with established market practices. b. Implementation arrangements. Another important lesson learned has been that the most successful formula for high quality and expeditious project implementation is to combine the Borrower and Implementing Agency functions in one and the same entity if possible. c. Incentives for quick disbursement. Pre-committing financial intermediaries to borrowing a certain part of a credit line (which involves paying a commitment fee on the pre-committed amount) provides a strong incentive to the intermediaries to be quick and effective in finding and financing eligible sub-projects, and leads to quicker disbursement of the Bank loan. d. Capacity-building. The Institutional Development Program for UEB, as the borrower and implementing agency, was instrumental for a successful implementation of EDP1 by providing developmental support and incentives for the project achieving the desired outcomes. e. Use of country systems. Procurement procedures in the initial stages of EDP1 proved to be difficult to implement by UEB and the borrowing enterprises, and led to the Bank’s assessment at the ICR stage that country commercial practices should be used as the guiding procurement principles for all but large and complex sub- projects, especially in cases where the buyer is a private enterprise.
(iii) Catalyzing financial intermediation through wholesale lending. The project was designed to provide for wholesale lending by UEB to commercial banks, aiming to reach a more diversified group of exporters in terms of size, geography and industry. In response to the severe economic and financial crisis, a project restructuring was necessary in 2009 that allowed for a combination of direct and wholesale lending by UEB. The project still kept the wholesale lending subcomponent to maximize its impact, and did not set rigid targets between the two lending approaches. The flexible allocation between wholesale and retail lending enabled UEB to play an important counter-cyclical function that sustained credit to enterprises while other banks were financially weaker and shrinking their balance sheets..
(iv) Identification of risks and associated mitigation measures. Risks were adequately assessed at appraisal, in particular political uncertainty and implementation risk, macroeconomic policy risk and financial system risk. The team identified strong mitigating measures for the latter in terms of tight prudential eligibility criteria for selection of PBs, based on IFRS rather than domestic accounting standards.
Quality of participating financial institutions. UEB and PBs were selected on the basis of assessment by WB experts and audited financial performance data. The banks were deemed to be well-capitalized and profitable. UEB’s loan portfolio had performed well during implementation of the original EDP, and the portfolios of the PBs were assessed at the time of approval of sub- borrower agreements, at which time the banks appeared to be run in a sound manner. The Bank’s 15
assessments confirmed the management capacity of UEB and the PBs and their ability to implement the line of credit.
Additionality and impact on lending conditions for private exporting enterprises generally. The design at entry envisioned all financing through wholesale model that was intended to spur development of lending instruments and capacity among a range of participating banks, albeit taking account that the sector faced serious weaknesses. The design was modified in response to the 2008-2009 financial crisis in a May 2009 restructuring that enabled UEB to directly lend a portion of funds to eligible enterprises. See Section 2.2—Scaling-up during financial crisis. Notably, the monitoring and evaluation design of the project was fairly shallow during implementation, with indicators that poorly captured impacts of borrowing on firms’ revenue growth, export market expansion, or job creation.
2.2 Implementation
Implementing arrangements: EDP2 was effective in March 2007 (within 8 months following Board approval), complemented with additional financing in July 2011 and closed in line with the original closing date of December 31, 2014, and with full disbursement. Implementation arrangements were overall effective. A few issues addressed during implementation included: • Pipeline of exporting enterprises: UEB and PBs developed a pipeline of eligible sub- borrowers consisting of private exporters (having more than 50 percent private ownership) with foreign exchange earnings, irrespective of their sector, and complying with debt-to- equity and debt-service ratios set out in the Loan Agreement. • Loan appraisal system and loan approval procedures: UEB and PBs prepared sub-loan packages consisting of credit application and information about procurement and environmental rules established as World Bank loan conditions. PBs provided to UEB regular reporting about the beneficiary owners of sub-borrowers and compliance with sub- borrower eligibility criteria. During the course of project implementation, several of the PBs strengthened their loan appraisal and approval procedures, updating IT platforms and improving their internal models for measuring rating in order to better align with Basel II norms. • Compliance with Financial Soundness Indicators: As Borrower and Implementing Agency, UEB provided bi-annual financial reporting, certification from management and from external auditors of IFRS-compliant financial reports to World Bank demonstrating its compliance with NBU regulatory requirements and IFRS-based financial covenants. UEB was required to demonstrate its compliance with capital adequacy ratio (of at least 10%) and related party exposure, large exposure, forex exposure and non-performing loans ratios. The related party and large exposure ratios complied with UAS-based criteria, but exceeded IFRS-based thresholds during the implementation period, but this reflects the IFRS definitions rather than a lending exposure to insiders related to the bank’s management. IFRS considers that all state-owned entities are related parties, so that the state-owned bank’s credit to these was considered as related party lending. UEB’s proportion of single insider lending (which eligibility criteria required as maximum 5 percent) increased over the 2006-2012 period from 12.75 to 21.11 percent with some reduction in 2013 to 17.70 percent, but rose sharply in 2014 to 41.1 percent at project closing. UEB’s proportion aggregate insider lending (which eligibility criteria required as 16
maximum 30 percent) ranged between about 45 and 64 percent during implementation, and peaked at 83.9 percent at closing. Single exposure exceeded IFRS benchmark (of 25 percent) in 2010 at 42.40 percent and at project closing at 43.8 percent, and was in compliance during other years of project implementation. It is noted that the increase of the single exposure ratio in 2014 is accounted for mainly by the UAH revaluation of FX- denominated loans to a private agricultural company, while there was no physical increase of the exposure limit in major foreign currencies. All ratios remained in compliance according to Ukrainian Accounting Standards throughout implementation. The Bank provided waivers in each period of implementation supervision, taking account of the unique role of UEB in lending to state-owned enterprises and its advanced approach to loan appraisal and risk scoring. The Bank’s decision to repeatedly grant waivers to UEB for non-compliance on these ratios seems to reflect that the Bank placed greater value on maintaining an effective implementation relationship with UEB and confidence in UEB’s overall strong financial position and possibly also on the beneficial counter-cyclical impact of UEB lending to SOEs, than on a strict interpretation of the eligibility criteria as established in the Loan Agreement. • The financial soundness of the PBs11 varied throughout the implementation period, owing in large part to the two financial crises (2008-09 and 2014) that resulted in widespread liquidity crunch and bank insolvencies, and the period of economic stagnation between the two crises. Two participating banks (Nadra and Ukrgasbank) were dropped from the program in 1H2009 due to failure to comply with performance criteria; they were placed under provisional administration and subsequently recapitalized. Nearly all borrowers serviced their EDP2 debt portfolios.12 Credit Dnipro and Kreditprombank were temporarily suspended from EDP2 disbursement in 2H2009 due to non-compliance with financial soundness indicators which were rectified, and the former resumed lending under the program in 2010. Megabank and Alfa Bank remained fully compliant with financial soundness indicators throughout implementation, and provided regular reporting under IFRS and UAS and consultation with Bank supervision team. See Section 2.2— Impact of crises on banking system. The prudential supervisory environment for banking sector was a weak for much of the project supervision period. However following the political transition and new leadership at central bank, substantial reforms to banking sector were introduced and supported by the Bank’s Financial Sector Development Policy Loan Programme launched in spring 2014; the reforms included stricter definition of problem and insolvent banks that contributed to stronger prudential approach. • Environmental assessment framework: The Bank team conducted regular assessments of sub-borrowers’ compliance with environmental safeguards in accordance with the agreed provisions of the legal agreement, agreed procedures outlined in Operation Manual (OP 4.01), and applicable WB Guidelines. The team found that UEB’s specialists dealing with project management benefitted from experience and training with the World Bank Safeguards Requirements; one staff has a dedicated environmental education. Overall, the
11 According to the Loan Agreement, PBs’ eligibility criteria included: minimum asset size of hryvnia 500 million; minimum paid-in statutory capital of EUR10 million, annual audit of financial statements according to IFRS for two previous years, share of loans to exporters not less than 10 percent of the bank’s total loan portfolio, and previous operational experience of at least 3 years. 12 The only exceptions were the three sub-projects approved by Nadra representing less than 3% of total loan portfolio disbursed under the Project. Nadra was not servicing fully its EDP2 subsidiary loan from UEB in 2013, but pursued delinquent borrowers through the court system and arranged an extended repayment period with the borrowers and UEB. 17
Bank team was pleased with the effectiveness of the PIU’s supervision of implementation of environmental management practices. UEB and PBs were seen to monitor all safeguards procedures with due diligence and in accordance with the Loan Agreement and Project Operational Manual provisions. Early in the project, when prospective loans were considered for Agribusiness sub-projects, the Bank team expanded environmental safeguard provisions in the Operations Manual to prohibit the financing of purchases of pesticides. This change necessitated some training and capacity development of UEB and PB teams, which the Bank team provided and continued throughout the project implementation; as a result, the revised procedures were implemented smoothly, and the PIU has demonstrated capability to supervise compliance. Overall, UEB and PBs provided satisfactory monitoring of the implementation by Sub-borrowers of the Environmental Management Plans, signed as the part of each Sub-project package (for Sub-project categorized as 2 or 3 category). • Procurement: As part of the regular implementation support for the project, targeted reviews were conducted to ensure that the project’s procurement and contracting processes were in line with the loan agreements and adhere to the procedures defined in the operations manuals. The reviews verified that the UEB was monitoring all procurement procedures with due diligence and in accordance with the Loan Agreement and Project Operational Manual provisions. All procurement procedures under the sub-projects were conducted in accordance to commercial practices and followed a competitive approach. UEB monitored the compliance of sub-borrowers to ensure that all contracted firms met the Bank’s eligibility criteria, and ensured the check of all firms against the Bank’s list of debarred firms prior to awarding a contract. The monitoring of contract administration was done by local branches of UEB, including inspections, and supervised by the PIU. The following positive observations were made: (i) adequate competition required for the applicable method of procurement (commercial practice) was ensured; (ii) there were no complaints; (iii) filing of procurement and contract documentation was properly maintained and all documents were available for review. • Financial Management: The World Bank Financial Management team conducted regular monitoring of UEB’s Financial Management Systems for implementation of the Project, including accounting, reporting, budgeting, flow of funds and staffing, and found that systems were overall satisfactory. Staff of the PIU benefitted from participating in several seminars and workshops organized by the World Bank. Accounting and reporting functions were seen to be carried out properly in the automated accounting and reporting system, and a strong system of internal controls was in place. Audits and financial management reports were submitted on time. The auditors issued clean audit reports on the project- and entity- level financial statements, and did not identify substantial weaknesses in internal controls.
Impact of financial and security crises on EDP2 implementation. Project implementation was significantly impacted by two severe financial crises: first financial crisis in 2008-09, then a period of economic stagnation in between, and in late 2013-2014, major political turmoil, territorial annexation, armed conflict, external financing crisis, and drastic contraction of industrial production and exports. The project could not have foreseen or mitigated these impacts in its design, and so project performance and financial institutions’ performance should be weighed against the extreme stresses put on the country. Despite the improvement in price competitiveness of Ukrainian producers (owing to huge exchange rate adjustment), Ukraine’s overall export revenues contracted by 37 percent in 2014. 18
• The annexation of Crimea and the military conflict in the Donbass did not directly impact project beneficiaries of EDP2; there had been only one project beneficiary in Crimea which repaid its loan before the annexation, and in 2014 there was only one active borrowing enterprise near the conflict zone in Eastern Ukraine. However, the indirect impact was substantial as the conflict region had accounted for 25 percent of Ukraine’s total exports in 2013. The conflict has interrupted supply chains, disrupted production, destroyed plants and industrial capacity, and then escalated to claim more than 6000 lives and cause more than 1 million internally displaced people. • The contraction was exacerbated by import restrictions from Russia that previously accounted for 25-30 percent of Ukrainian exports. Further, declining global commodity prices (of steel, food products, chemicals) associated with a sluggish global economy and falling oil prices weakened exporters. Ukraine’s industrial output fell by more than nearly 18 percent in 2014. Across the industries, machine building was hit the hardest (exports dropped by 29 percent in 2014) due to the deterioration of trade relations with Russia; export of chemical and metallurgical products decreased by 26 and 13 percent, respectively, in 2014. Food products suffered the least, declining by 2 percent in 2014 export volume, benefitting from a bountiful harvest and improved access to the EU markets. At the project closure, the outlook for Ukraine’s export sector remains highly uncertain, given the military conflict, loss of investor confidence amidst deepening financial crisis, and large external financing gap that is being addressed through IMF-led rescue package. • Impact of the 2009-09 and 2014 crisis on the banking system. Just as the project design could not anticipate or counteract the overwhelming impact the two crises has had on exporters, nor could the damaging impact on banks be avoided. As Table 2 shows, the banking sector’s ROA fell to lows of -4.4% at end-2009 and -4.1% at end-2014. Similarly, ROE fell to lows of -32.5% at end-2009 and -30.5% at end-2014. The financial crisis which unfolded during 2008-2009 caused two of the PBs (Nadra and Ukrgasbank) to be put under temporary administration and dropped from EDP2 program in 1H2009. Ukrgasbank was then recapitalized by the Government of Ukraine, that took a 97% ownership share, and it has since become a relatively strong bank. The eligibility of Credit Dnipr Bank and Kreditprombank was also suspended in 2009 and resumed in 2010. • The crisis in 2014 was even more severe. From the beginning of the year bank deposits leaked from the system, and the trend accelerated as the conflict in Donbass deepened, reaching 5 percent month-on-month in the fall of 2014. Severe economic crisis, annexation of Crimea and military conflict triggered massive losses of the banks, and the total loss reached UAH 53 billion in 2014 (reversing from the marginal profit of UAH 1.3 bn in 2013).The number of loss-making banks increased from 20 in 2013 to 52 in 2014. Build- up in loan loss provisions, coming from mounting NPLs as a result of severe economic recession and large-scale devaluation, and loan write-offs in Crimea and Donbass, was the main factors behind the banks’ acute financial deterioration. Loan loss provisions increased from UAH 26 billion in 2013 to UAH 94 billion in 2014, and ratio of provisions to total loans jumped from 3.2 to 9.8 percent in that period. Against the heavy deposit outflows, banks offered increasing interest rates, and lending activity slowed to a standstill, facing high economic and security risks. A few foreign banks that remained well capitalized through the crisis, held mostly cash and were not lending to local enterprises at all. Thirty- eight banks (from 181 at start of year) failed during 2014.
19
EDP2 played a counter-cyclical role during the financial crisis and took risks to continue intermediating to the real economy, because it was seen as vital to mitigate the contraction and preserve exports and jobs. Against this dire background, the need for credit to revive the real economy became more acute. The May 2009 project restructuring which enabled a portion of EDP2 financing as direct lending by UEB enabled the program to continue supporting viable exporting enterprises despite the surrounding credit crunch. The restructuring enabled UEB to step in and fill a credit gap by lending to viable exporting enterprises which most banks avoided due to risk aversion or their own weakened balance sheets. The August 2011 approval of additional financing anticipated the further demand by exporters for access to credit; as EDP2 initial funding was used up in 3Q2012, the project continued disbursing smoothly from AF. Also, the agreement in November 2013 to adjust upward the target proportion of direct lending by UEB (from 30 to 60 percent) and the agreement in August 2014 that the Bank could provide waivers on case-by-case basis for disbursements exceeding USD 10 million borrowing limit for certain enterprises, provided flexibility that allowed for complete disbursement of EDP2 at a time when most banks had stopped lending or were shrinking their balance sheets. The larger-than-anticipated role of UEB in direct lending under EDP2 might raise some questions about the additionality of the Bank’s funds (e.g., to spur more commercial banks’ lending and innovation). However, given the extremely volatile and weak condition of the banking sector and Ukraine’s economy in general between 2008 and 2014, it is highly doubtful that other commercial banks might have been better placed to intermediate these funds.
2.3 Monitoring and Evaluation Design, Implementation and Utilization
The project’s monitoring and evaluation (M&E) framework was effectively monitored throughout project implementation. Each supervision mission aide memoire presented a summary of the project performance, including amounts disbursed, number of beneficiary enterprises financed, and financial soundness indicators of UEB and PBs. Since the PDO (and most intermediate) indicators related to the borrowers’ performance in disbursing the borrowed funds, the outcome indicators were readily available and easy to monitor. All but one of the performance indicators were tracked, and implementation supervision was carried out on a twice- annual basis. In particular, the intermediate outcome indicator, Decreasing amount of non- performing sub-loans and leases to be measured by non-performing loans as ratio of total lending by participating financial institutions, was set out in the PAD for EDP2 in the Results Framework, but it was not tracked as such in the ISRs. However, the indicator itself seems to have been redundant given that PDO Indicator Portfolio-at-Risk also measured non-performing loan ratio within the EDP2 portfolio.
In addition to the results framework, the team gathered additional data on the project’s impact. The project did not systematically collect information on the project’s impact on beneficiaries (exporting enterprises’ revenues, market penetration, employment data) and participating banks (use of new lending technologies, expansion of lending, alteration of terms or broadening of services). Nevertheless, in late 2014 the World Bank and UEB administered a survey to participating banks and beneficiary enterprises, in an effort to gather additional information about the impact of EDP2 on banks’ institutional/credit risk management capacity and enterprises’ business performance/revenues/employment, respectively. Of the 50 beneficiary enterprises, 30 responded in full to a lengthy survey, and 44 responded to a shorter questionnaire. Also, four out of the six participating banks responded to the survey− these four were the most 20
active under the Project.13 Acknowledging the methodological limitations of endogeneity in program participation (the selection bias), crowding-out effects, and unobserved characteristics of firms, the analysis of the survey data reveals that the EDP2 had a positive impact on most beneficiary enterprises and participating banks. See Section 3.2 for elaboration of survey results.
There are inherent difficulties in evaluating credit lines. Ideally, an evaluation of the impact of a credit line on the performance of beneficiaries would require a randomized experiment, including a control group that is similar in all respects to the target group except for access to credit. This is difficult to do since the commercial interest of the participating bank is to grant credit to all creditworthy and qualified enterprises as long as funding is available. Likewise, the impact of a line of credit on the development of financial access conditions for exporting enterprises more generally, through improved lending practices by participating banks, and through increased competition by providing firms access to greater variety of lending products, is difficult to measure robustly. Given these methodological difficulties, the monitoring and evaluation framework was kept simple, although the ex-post evaluation provided some additional information.
EDP2 was no exception, and care should be taken in assessing impact with simple, before- and-after comparisons. Applying linear measures of project impact from appraisal to closing— for example, comparing before and after data on employment, export revenues of enterprises, or of banks’ return on assets, non-performing loan levels—is problematic when the project lifetime of nearly 8 years includes two massive financial crises, including one towards the end of implementation period. In this context, the size of the EDP2 line of credit is relatively small, and its potential development impact must be considered within the frame of the country’s overall instability, crisis and deepening conflict. The military conflict in Donbass alone is estimated to cost Ukraine 4 to 5 percentage points of GDP decline in 2014 (the region accounted for 15 percent of Ukraine’s GDP in 2013). See Section 2.2—Impact of the financial and security crisis.
2.4 Safeguard and Fiduciary Compliance
Overall, safeguard and fiduciary compliance was satisfactory during the project period. The well-developed operations manual and experienced PIU staff helped ensure the effective implementation of safeguards and fiduciary compliance. At least twice a year, the Bank team reviewed the systems established by the PIU to monitor the implementation of the project and selected samples that would be verified at the branch level. In general, compliance was positive.
During implementation, some of the challenges that the Borrower had to overcome included the following: • Financial management: Although financial management system of UEB was generally found to be satisfactory throughout the lifetime of the project, on one occasion the entity audit report for UEB in 2012 was issued by Baker Tilly Ukraine, which had been previously on the list of the World Bank’s eligible auditors, but had recently been dropped, and UEB was not aware. The Bank team informed UEB and accepted the report was accepted by the Bank on an exceptional basis, with the condition that a separate report on compliance with financial covenants was to be prepared by the audit firm from the Bank’s list of eligible auditors.
13 The two banks that did not submit survey responses, Nadra and Kreditprom, had a brief involvement in EDP2 and represented fairly small portion of portfolio (see Table A3). 21
• Compliance with Financial Soundness Indicators: Although UEB complied with all NBU prudential requirements, Ukrainian Accounting Standards (UAS) and EDP2 AF eligibility criteria, the related party and large exposure ratios exceeded IFRS eligibility limitations during the implementation period, as UEB lends to a number of state-owned institutions that are considered as related parties under IFRS (as discussed in more detail in Section 2.2). • Procurement: There were no issues identified. • Environmental Safeguards: There were no issues identified.
2.5 Post-completion Operation/Next Phase
During its operations in Ukraine over the past 22 years, the World Bank has provided three lines of credit to UEB: two supporting export development (totaling USD385 million), and a third, still under implementation, supporting energy efficiency (USD200 million). These loans were provided to UEB for retail and wholesale lending. In all of these projects, the main development objective has been to provide medium- and long-term finance to enterprises in these sectors. This objective remains relevant, given that the maturity structure of bank balance sheets has shifted only gradually and enterprises continue to point to financing as a dominant constraint for their expansion. This constraint is particularly acute during the current economic and political turmoil, which all but cut off other possibilities for external financing. This affects most severely the country’s nascent SME sector.
In reflection of the Government’s priority of stimulating new alternative sources of economic growth, employment and exports, in early 2015, UEB and the Government requested the World Bank’ support for an SME finance project. If the potential project crystalizes, it would include a line of credit component for UEB’s lending to SMEs both directly and through other qualified financial institutions, as well as a technical assistance component to improve the creditworthiness of the SME sector by improving accounting practices, management capacity, and international quality certification. The World Bank is currently in discussions with the authorities whether this project could be included in the future lending pipeline.
3. Assessment of Outcomes
3.1 Relevance of Objectives, Design and Implementation
The project proved highly relevant to Ukraine’s development priorities. The Government’s reform agenda for 2010-2014, “Prosperous Society, Competitive Economy, and Efficient State”, included as core objectives sustainable economic development, and improving business climate and attracting investments. Likewise, the project remains fully aligned with the Country Partnership Strategy (CPS) for FY12-FY16, in which the second pillar is: Improving policy effectiveness and economic competitiveness: support to building relations with businesses. The project also directly contributes to the outcomes under the current CPS, particularly to increase access to medium and long-term finance for export; and to improve risk management in the financial sector. The project design reflected the identified financing constraints facing exporting enterprises, and through direct and wholesale financing, was able to contribute to alleviation of such constraints for beneficiary enterprises as attested in the survey of beneficiaries. Fifty-four 22
percent of surveyed enterprises rated the EDP2 loan as “very high value” (the highest), while 43 percent considered it a “good value” (second highest). The project also made some contribution to the development of innovative lending products and approaches a number of participating banks.
The design of EDP2 built on several lessons learned in previous credit line operations, in particular the importance of flexibility and of a strong implementing agency. As mentioned above, the EDP2 project did not include restrictions for lending by sectors or currency; also the Additional Financing did not establish a fixed allocation between retail and wholesale lending by UEB, enabling a more flexible approach to lending in changing circumstances. Also, EDP2’s focus on having a strong implementing agency is justified in the light of the negative experience with the Ukraine Access to Financial Services Project (P076553), approved by the WB Board in June 2006. That project, intended to boost financial inclusion for rural SMEs through a line of credit (USD150 million), was to be implemented by the Ministry of Finance. Even with a project component to finance the staffing and expenditures of the project management unit, the MOF was ill-equipped to implement a financial intermediary loan, and the project had to be cancelled in 2009 due to very low disbursement. The importance of working directly through a financial institution as intermediary, and of selecting an institution with demonstrated implementation capacity, was highlighted by this experience.
The project design improved UEB’s implementation and risk management capacity, and promoted sound lending practices and strong supervision capacity at PBs through the TA component, financial covenants, and eligibility criteria. The second component of EDP2 provided for the upgrading of UEB’s management information system to a state-of-the-art platform capable of managing its wholesale and direct lending activities. The platform, installed in 2012, greatly enhanced UEB’s capability to manage information flows and reduced the costs of extending smaller credits to medium-sized enterprises, as UEB stepped into direct lending. The financial covenants for UEB also helped to promote sound banking practices; by requiring compliance with criteria not only according to Ukrainian Accounting Standards, but also according to IFRS, the EDP2 covenants created a strong incentive for UEB to improve its liquidity ratios, and reduce single exposures during implementation, although related exposures exceeded limits set in criteria. Finally, the eligibility criteria applied to PBs and loan covenants applied to exporting enterprises, had a positive effect on most of the banks to improve their risk management capacity, develop further the IT and management capacity for enterprise lending, and enhance their capacity for supervising safeguards and compliance. By building these strengths, some of the banks became much stronger during implementation, and out-performed the banking sector during the recent financial crisis.
3.2 Efficacy for Achievement of Project Development Objectives
The project effectively achieved its stated development objective, as measured by the indicators. By the project’s closing, the project had achieved 100 percent disbursement, with USD296.5 million14 in project funds fully disbursed to beneficiary enterprises for both working- capital and investment purposes. The target for lending to at least 50 exporting enterprises was achieved as well; the project had provided 67 sub-loans to 50 exporting enterprises, with 39 percent of female employees out of total workforce. In terms of export multiplier15 the project was able to
14 There is a grace period until end-April 2015 for the disbursement of an additional USD3.9 million which has been already committed in the form of sub-loans. 15 Export multiplier is defined as: Incremental average aggregate annual exports generated (measured over 3 years for all sub-borrowers) / Total credit line disbursed. 23
generate annual export turnover more than two-times exceeding the borrowed amount, a remarkable achievement in 2014, when Ukraine’s export revenues contracted by 37 percent. Although the target for Borrower’s ROA of at least 1.0 was not achieved (UEB’s ROA was - 10.38% in 2014), the banking system as a whole showed very large losses in 2014, and the team accepted the risk of weaker financial institution performance against the prerogative to provide much-needed finance to the real sector and sustain jobs and firm revenues while other banks were retrenching or collapsing. The target for zero portfolio-at-risk was not met, but results were much better than for the banking system as a whole, given the 2014 crisis (at closing, it was 2.0 percent according to IFRS while official estimates of system-wide NPLs were 15 percent, and market estimates were closer to 30 percent).16 , 17 The project was effective at providing access to finance, in terms of cost and maturity structure of lending. A quarter of beneficiary enterprises cited the longer maturity structure of EDP2 financing as the key benefit of participation, and nearly a quarter of participating enterprises cited flexibility of loan terms as the most attractive aspect of EDP2 credit. Thirty-six percent of enterprises indicated that the interest rate was the most attractive feature of the loan. This is consistent with the view of most of the PBs, which indicated that their lending under EDP2 allowed for more competitively priced interest rates and longer maturity structures than the rest of their enterprise lending portfolios. The project enabled longer-term lending by participating banks; while banks on average were lending to enterprises on two-to- three-year terms, their lending through EDP2 project was typically for longer terms, ranging to 10 years.
While EDP2 export dynamics generally reflect Ukraine’s overall trade structure, for most beneficiaries, the project contributed to growth in exports and a successful export diversification strategy. Ukrplastic, a plastic packaging producer, illustrates the impact that EDP2 has had to finance large investments in technology improvements to meet international quality standards and enable export diversification (see Box 1). The aggregate annual volume of exports generated by EDP2 beneficiary enterprises during 2006 to 2014 increased nearly seven-fold; even in the difficult period of 2011 to 2014, the aggregate annual volume of exports by participating enterprises increased by 75 percent. Figure 1, below, illustrates the shifting orientation of exports of the EDP2 enterprises as percentage of the combined annual revenues of the borrowing firms in each year.18 Excluding the largest borrower by revenues (one of Ukraine’s grain producers), EDP2 exporters’ sales to non-Russian market grew from less than 40 to 55 percent of export revenues over the project lifetime, and new markets were found in CIS countries (besides Russia), North Africa and Asia. Zhytomyrski Lasoschi is a case in point; the confectionary was hit by import restrictions from Russia in 2014, but through investments in updating production equipment to international standards, managed a reorientation of its products to other markets (see Box 2). The portion of EDP2 exports to the EU, excepting the largest exporter, grew from 4 to 16 percent of total export revenues during 2012-2014 period, The largest exporter by revenues, an agricultural producer with revenues of nearly UAH 7 billion in 2014, grew its revenues nearly eight-fold from 2006-2014 with expanding markets primarily in Japan, Middle East, and Korea.
16 Portfolio-at-risk measures substandard, doubtful, and loss loans as percentage of EDP2 active lending according to Ukrainian Accounting Standards at Project Closing. 17 It should be noted that on April 27, 2015, the UEB bondholders agreed to extend the maturity date of 2015 Eurobonds worth USD750 million for three months, until July 27, 2015. UEB requested the extension in order to restructure its outstanding debt due to the worsening economic situation and currency devaluation. Government of Ukraine is currently working to reach an agreement on debt restructuring with the holders of its Eurobonds, including those issued by a number of state-owned banks and companies. 18 The composition of enterprise borrowers under EDP2 changed year by year, and the largest (by far) participating enterprise by revenues is treated separately in Figure 2 due to its size at approximately 45% of total EDP2 firms’ revenues in 2014. 24
The project also effectively contributed to the institutional strengthening of UEB, by improving skills and training, and investing in a state-of-the-art information technology platform that enabled UEB’s improved management of direct and wholesale export lending, and other operations. The training has improved UEB’s ability to implement fiduciary, social and environmental safeguards that not only contributed to effective implementation of EDP2, but also contributed to UEB attraction of nearly USD850 million in additional lines of credit from IFIs. The greatly improved management information system enabled UEB’s lending in a broad range of loan sizes directly and through commercial banks, while maintaining low overheads and strong internal controls.
3.3 Efficiency for Achievement of Project Development Objective
The project was efficient at promoting exports through improving access to finance, as shown by the multiplier of exports generated to enterprise lending. At project closing, the incremental average aggregate annual exports generated measured over the last three years for all sub-borrowers, divided by the total credit line disbursed was 2.78. In other words, the project funds helped more than double the exports of borrowing firms.
An additional ex-post survey19 of participating enterprises and financial institutions supplements the project monitoring framework and provides evidence that EDP2 was efficient by having a multiplier effect on some banks’ funding and causing longer-term improvements in firms’ productivity and access to finance. The evidence from banks is that EDP2 contributed to their lending capacity in most cases and access to additional external funding in some cases. The Borrower increased its project implementation skills and IT capacity, by engaging in extensive training (e.g., related to financial management, risk supervision, supervision of financial covenants, environmental safeguards supervision, procurement good practices), UEB established itself as the intermediary of choice for multiple IFI and external donor programs, and nearly tripled its intermediation of foreign donor resources over the project lifetime. UEB also substantially developed its capacity for direct lending to exporters, including small and medium- sized exporters, and its ability to tailor products to smaller borrowers was supported by the loan limits in the EDP2 design. One mid-size participating bank with domestic ownership attracted three reputable foreign shareholders and numerous lines of credit after joining the EDP2 program, and weathered well the recent financial crisis. The management indicated that participation in EDP2 was instrumental in achieving these results. Three domestic banks expanded institutional and lending capacity substantially in the beginning of the Project, but ran into difficulty during the economy-wide crisis in 2008, and stopped their participation. Two more banks’ maintained sound financial performance throughout project implementation, but showed little impact on institutional capacity or lending approaches.
EDP2 was efficient in strengthening enterprises as well, as the survey findings show lending led to longer-term impacts on growth and opened opportunities for additional finance from other sources. The long-term development impact of credit lines for beneficiary exporting
19 While the project monitoring framework provides insufficient basis to draw conclusions about banks’ enhanced capacity for enterprise credit, or of longer-term benefits to firms, the survey provides useful information. The survey was conducted by World Bank and UEB during December 2014 to January 2015, and the sample includes 44 of the 50 participating enterprises, and 4 of the 6 participating banks from the life of the project which provided responses. The survey included both qualitative self-evaluation and quantitative comparative results that are elaborated in Annex 3. 25
enterprises was positive and substantial, enabling revenue growth and access to additional finance, and mitigating the revenues and employment impacts that hit hard on other Ukrainian exporters during the two crises. Nearly eighty percent of beneficiary enterprises managed to access additional credits after getting credit through EDP2. This compares favorably to the overall trend of bank lending to the enterprise sector, see Table A1.1 (nominal values), which fell precipitously in real terms in 2009, remained fairly weak during 2010-2013 period, and which fell in real terms (despite showing nominal growth, due to sharp currency depreciation) in 2014.20 More than three- quarters of participating firms reported that they expanded sales into additional export countries and introduced new products and services while participating in EDP2. Even as economy-wide export revenues contracted by 37 percent in 2014, EDP2 participants saw mitigated impact of the crisis on their revenues, which shrunk by 18 percent on average in 2014. Nearly half of participating enterprises reported that loans under the program significantly reduced the impact of the crisis for their operations.
Results of the beneficiary enterprise survey suggest that EDP2 not only helped to catalyze export growth during relatively stable times, but also counter-balanced credit, firm revenue, and jobs contraction during the financial crises. The varied responses are to be expected, given the different industries, regions and sizes of enterprises that participated in the project, with turnovers ranging from millions to billions of hryvnia. The year-on-year changes are presented in disaggregated form in Annex 3, Tables A3.2 and A3.3; given the changing composition of firm participation in EDP2 from year to year, aggregating responses is not meaningful. A few observations can be noted. During the 2009 crisis, while the Ukrainian economy saw export revenues decline by 37 percent, 15 out of 25 EDP2 enterprises (at that time) posted growth. Similarly, while Ukrainian export revenues contracted by 37 percent in 2014, 26 of the 28 borrowing firms under EDP2 that provided information showed better results than the Ukrainian export sector in general, and 13 firms actually grew. Firms achieved results that generally out- performed the export sector between the crises, as well. In terms of employment, two-thirds of firms in 2008, and more than 80 percent of firms in 2009, out-performed the overall job market, while it was stagnating and then contracting. Eurogold Industries Ltd, a leading producer of ironing boards, ladders and clothes driers, illustrates the impact of EDP2 for providing finance that enabled sizeable expansion of employees and production capacity (see Box 3). Those firms that added jobs at more than 20 percent for some time during the project lifetime, including an agricultural production company, a dairy producer, a logistics company, and an oil seed company, came from various regions and represented small and large firm sizes. Although a few firms had reduced employment sharply in response to the 2014 crisis, 21 out of 29 borrowing firms that shared information indicated that they out-performed the job market. Forty-six percent of participating enterprises indicated that borrowing under EDP2 significantly reduced the impact of the crisis on their operations; and thirty-two percent of enterprises indicated that participation in EDP2 partially mitigated the crisis impact.
The project provided broadly distributed support across most of Ukraine’s territory that bolstered a wide variety of economic sectors. Of the 24 oblasts (regions) and the Autonomous Republic of Crimea, EDP2 provided lending in 18 oblasts plus Crimea (See Table A1.3). Lending boosted export potential in oblasts with smaller relative share in export revenues, helping to build up nascent capacity and catalyze growth in Cherkasy, Ivano-Frankivsk, Kharkov, Khmelnitsky, Mykolaiv, Poltava, and Zhitomir. Lending supported a variety of industries, including grain
20 Notably during 2014, the apparent growth in bank credit to enterprises is measured in nominal terms at 15%, against a depreciation by nearly three times against the USD by project closing. 26
producers, poultry farms, tool and machine-builders, metal and steel products, confectionaries, breweries, and others. UEB and the PBs also tailored lending to different enterprise sizes. About one-fifth of the loans disbursed were under USD1 million, and two-fifths between USD1-5 million in size. The participating banks managed loans as small as USD53,000 and as large as USD10 million, while maintaining the same standard of risk management and compliance with safeguards, procurement and other loan covenants. The practical experience gained from EDP2 strengthened participating banks’ capacity to work effectively with the small and mid-size enterprise segment.
The imposition by Russia of import restrictions since mid-2013 has had a damaging effect on the performance of certain exporting enterprises with strong orientation to that market (e.g., metals, machinery, transport and chemicals), and accounts for most of the slowdown in Ukrainian exports in 2014. The country-wide export dynamics varied by destination and by industry; for example in 2014, exports to CIS declined by 34 percent. Exports to EU declined by less than 1 percent, and some industries—ICT, agricultural products, wood, and chemicals—marked gains of 35, 7, 16, and 13 percent, respectively, in sales to EU. These industries seem to be managing the transition to new markets more nimbly than, for example, metals, machinery and transport. Future assistance to Ukraine’s export competitiveness may require substantial efforts to assist the restructuring of some sectors less adept at re-orientation.
Other participating banks have had some indications of increased institutional capacity and improved credit risk management approaches as a result of EDP2 participation, but with limited evidence of long-term impact. During its participation in EDP2 in 2007-2008, Ukrgasbank established a professional PIU team, organized training and implemented good practices in environmental management supervision, procurement, and financial management. Ukrgasbank management indicates that after signing as sub-borrowers of EDP2, they began to consider new areas of potential risk to some extent, including related-party risk. UEB helped Ukrgasbank to improve risk monitoring and risk management systems during EDP2 implementation prior to the 2008 financial crisis; at that time, Ukrgasbank was the most dynamic participant in the EDP2 portfolio. Bank Credit Dnipro and Alfa Bank maintained strong performance indicators during EDP2 participation, but the longer-term impact on their governance or institutional capacity is not obvious. The EDP2 portfolios were a very small fraction of the banks’ overall balance sheets, and the banks (owned by a wealthy Ukrainian individual and by Russian financial-industrial group, respectively) did not unlock additional external financing as a result of participation.
The limited institutional strengthening impact of EDP2 outside of UEB as PIU/Borrower and a few PBs should be considered against the extreme stresses and serious structural weaknesses of the Ukrainian banking system during the project lifetime. This is elaborated in Section 2.2—Impact of Crises on Banking System. In this context, the twin objectives to boost the export sector and promote diversification of banks’ services may have been unreasonable to achieve together, and one objective would have to supersede the other given the challenges in external environment during implementation. In agreeing with UEB to increase its proportion of direct lending, the Bank team placed the first objective ahead of the second, and thus ensured timely disbursement and completion of the project despite very difficult market conditions.
3.4 Overall Performance Rating: Satisfactory
The project met its development objectives. It provided much-needed working capital and investment finance to private exporting enterprises with maturity structures and flexibility that 27
enterprises and banks saw as high value. As survey results showed, it enabled most participating enterprises to grow more revenues and create more jobs than other exporting enterprises during stable times, and substantially mitigated losses during crisis times. It had a multiplier effect: for most of the project implementation, EDP2 enabled exporting enterprises to generate about double the value of the credits, and most of the borrowing enterprises accessed more finance after participating in the project. The capacity that UEB and some PBs developed for risk management and project implementation enabled some of the banks to attract additional foreign funding in multiples of the EDP2 credit. Some of the PDO indicators were not fully achieved, such as ROA of minimum 1.0 or zero non-performing loans; but this should be viewed in light of the impact of two major crises during project implementation, and EDP2 borrowers still out-performed the Ukrainian banking system as a whole. Given the broadly positive results of this evaluation, the overall satisfactory rating is justified.
3.5 Overarching Themes, Other Outcomes, and Impacts
(a) Poverty Impacts, Gender Aspects, and Social Development
A gender indicator was added when Additional Financing was approved in 2011, measuring the percentage of women employees represented at beneficiary enterprises. This indicator was monitored during implementation, and female participation was seen in the range of 40 percent of total enterprise participation, demonstrating that the project had positively impacted women in particular. Specific poverty and social development indicators were not collected, although the project was not designed specifically to deal with such issues.
(b) Institutional Change and Strengthening
UEB achieved remarkable progress in skills upgrading and training its PIU and thereby mobilizing additional foreign credit lines as a result of participation in EDP2. UEB PIU for EDP2 consisted of 4 to 5 full-time specialists with additional 4 to 5 part-time ones, who work for the same department but are also engaged into other IFI-related credit lines implementation. PIU staff invested heavily in their training to align with World Bank standards for procurement, social risk management, environment safeguards monitoring, and monitoring of other loan covenants. This specialized training at the PIU improved UEB’s capacity and attractiveness to other IFIs and foreign donors and multilateral projects. Since project appraisal, UEB has mobilized almost USD850 million in additional foreign funding, including: EBRD Energy Efficiency Program line of credit (USD510 million since 2007), EBRD subordinated debt (USD250 million) and syndication (USD50 million) both in 2008; Nordic Investment Bank line of credit (USD50 million, 2008); Global Climate Partnership Fund line of credit (USD30 million); World Bank Energy Efficiency line of credit (USD200 million, 2011); and European Investment Bank loan (EUR100 million, 2012).
Under Component B of the Project, UEB improved its information technology platform to manage wholesale and retail lending better. The Borrower fully utilized the US$3.375 million allocated to this Component for purchasing and installing hardware for an improved centralized data warehouse. Some delays in implementation of this component were caused in 2010-2011 by
28
the need to complete the reconstruction of premises where the hardware were then installed to the Bank’s satisfaction. The Centralized Data Warehouse System was successfully completed as an integrated infrastructure for the collection, structuring, protected storage and processing of corporate data. It provides information lifecycle management and ensures simple, secure and efficient work of users. The new system has substantially improved the information capacity of UEB by providing reliability and data integrity of application systems.
To varying degree, the PBs strengthened some aspects of their internal procedures as a result of working with the World Bank on the project, but results are uneven as were the volumes of banks’ participation in the line of credit. Certain banks, as elaborated above, achieved significant improvements by boosting their IT capability, hiring additional staff and improving the credit appraisal function, computerizing credit risk decision-making, and leveraging additional donor and IFI resources. Other banks made certain early improvements in institutional capacity, improving identification of risks and ramping up lending to exporters, but these changes were then undermined by the impact from the financial crises. For banks that participated in amounts around USD20 million or less, the line of credit represented a very small part of total portfolio, and so the expectation of its transformative impact should be limited, especially in Ukraine’s context.
3.6 Other Unintended Outcomes and Impacts (positive or negative)
None.
3.7 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops
A survey of beneficiary enterprises was conducted by World Bank and UEB in December 2014- January 2015. The results of the survey are presented in Annex 3.
4. Assessment of Risk to Development Outcome
Rating: Substantial
Although the amounts disbursed under EDP2 are low compared to the balance sheets of the participating banks and overall economy of Ukraine, the demonstration impact on enterprise finance is significant, and its effects on some of the participating financial institutions are fairly sustainable. This conclusion is based on the following factors:
Replicability: The core design of the credit lines in Ukraine has not changed substantially. In subsequent credit lines (e.g., for SMEs) by the World Bank and other IFIs, some features might be tweaked to enhance performance, but at its core the basic model has been tried, and all parties have gained experience in ensuring its effectiveness.
Demand: There is continuing demand from firms for medium-term financing. UEB and PBs were able to find new clients and provide additional credit to existing clients even during the financial crisis in 2014.
However, potential demand for further credit would have to be considered against the worsening conditions in Ukraine. In 2014, the economy contracted by approximately 7 percent, and export revenues shrunk by 37 percent. As the crisis in Ukraine deepened in the final months of project 29
implementation, firms’ demand for finance was shifting from investment needs to working capital needs, and more firms were having difficulty meeting project targets. If conditions in Ukraine will deteriorate further, the combined impacts of an expanding conflict destroying manufacturing capability and transport capacity, Russia’s continuing import restrictions and weakening economy, Ukraine’s macroeconomic instability and loss of investor confidence and economic contraction may make it harder for surviving banks to find strong enterprise borrowers.
As the World Bank considers potential further line of credit operations, it will be important to consider opportunities for further leveraging the development impact across the economy. Over time, World Bank and IFIs may aim for: more commercial orientation in approach by leveraging more commercial funding; and promoting longer-term domestic savings instruments so that there is more term funding and reliance on external resources is reduced.
The World Bank Group offers value through its coordinated approach to policy engagement and private sector development and investment. Continued parallel efforts to improve the investment climate, increase financial transparency and streamline business regulation in Ukraine, would contribute to the successful impact of such line of credit operations.
5. Assessment of Bank and Borrower Performance
5.1 Bank Performance
(a) Bank Performance in Ensuring Quality at Entry
Rating: Satisfactory.
Design of EDP2 demonstrated strategic relevance at the time of project preparation in terms of aligning with the CAS, responding to Government priorities, incorporating lessons from other lines of credit and building on previous Bank work in Ukraine. The project also provided needed flexibility and the subsequent restructuring to enable direct lending by UEB served well to increase flexibility and provide for counter-cyclical response to contraction in bank lending.
While the monitoring and evaluation framework could have incorporated a greater array of indicators of enterprises’ growth and sustainability, as well as institutional development and lending product development at PBs, these deficiencies are in part compensated by efforts undertaken in the last few months of the project to gather additional information. This is a weakness in the design that should be addressed in future credit line operations.
(b) Quality of Supervision
Rating: Satisfactory.
The Bank provided thorough and effective support for the implementation of the project, meriting a satisfactory rating for the following reasons: • The field-presence of TTL and other key team members during most of the project implementation period provided the client real-time support and allowed for greater proactivity in resolving potential problems. Similarly, the PIU appreciated the local presence of the fiduciary staff. 30
• The team responded with flexibility to changing circumstances in economy and banking sector to restructure the project to allow for direct and wholesale lending by UEB, and restructured the project again in response to client needs to strengthen the institution- building component, providing timely and needed re-allocation of resources. • The team conducted periodic (twice a year, on average) implementation support missions that included meetings with management of UEB and other banks involved in the project. In total, the mission conducted at least 15 formal implementation support missions over the project’s life. • Implementation support missions often included field visits to beneficiaries in different regions; these visits included discussions with loan recipients on both the loan process and the effects of the financing on their business. • Supervision missions were followed by aides-mémoire, which were thorough and candid. • The Implementation Status and Results (ISR) Reports prepared for the project between July 2006 and December 2014, were filed regularly. The ratings for project components and project management were consistent with the performance of the project.
(c) Justification of Rating for Overall World Bank Performance
Taking into account the ratings of design and supervision, the overall rating for Bank performance is Satisfactory.
5.2 Borrower Performance
(a) Government Performance
Rating: Moderately Satisfactory.
Government performance is rated moderately satisfactory, because the Government of Ukraine has shown ownership of the project and commitment to its objectives, but the Government’s ability to implement meaningful reforms to improve the business environment and ensure banking sector soundness has been uneven during project implementation period, and at times authorities took counter-effective measures that undermined enterprise and banking sector development. To its credit, the Government has actively participated with UEB in portfolio performance reviews, and provided timely guidance and consultation regarding implementation.
However, the long-term sustainability of EDP2 and similar initiatives is affected by broader reforms in the financial and enterprise sector. During much of the implementation period, there were seen to be serious problems with the independence of the central bank, and related weaknesses in prudential supervision, liquidity provision, and problem bank identification. Banking discipline was eroded, while the playing field was skewed by an increasing number of liquid but insolvent banks. The authorities that came into office following the political transition in spring of 2014 have so far demonstrated commitment to undertake the difficult but necessary reforms in business environment and banking sector. This has been seen in authorities closer dialogue with international financial institutions following the political transition, and real progress in cleaning the banking system of insolvent banks. However, the Government’s ability to realize many tough reforms in a short time is limited by significant security risks, political and economic uncertainty; at the same time, even the most ambitious reform program could not immediately improve the investment climate, while violent conflict, insecurity, macroeconomic and financial instability worsened during 2014. 31
(b) Implementing Agency Performance
Rating: Satisfactory.
Overall, the performance of UEB was satisfactory. Building on the experience from EDP1, UEB developed strong institutional capacity, skilled staff (also benefitting from several World Bank workshops and seminars), and appropriate financial management system. Routine monitoring by the Bank team observed the PIU to demonstrate satisfactory implementation of the Project, including internal controls, accounting, reporting, budgeting, flow of funds and staffing throughout the project lifetime. Audits and financial management reports were submitted on time and to satisfaction of the Bank team.
(c) Justification of Rating for Overall Borrower Performance
Rating: Satisfactory.
Based on the ratings of the Government performance and of the implementation agency, the overall rating for borrower performance is satisfactory.
6. Lessons Learned
Key lessons for the World Bank are:
Enterprise finance is delivered most effectively through a sound financial institution with a proven implementation track-record. As one of the largest financial institutions in Ukraine, with external credit ratings and financial soundness indicators that have evidenced its relative strength and stability compared to other local banks, as well as its leadership position in export finance, UEB was well-positioned to be the borrower and implementing agency. In contrast to the Access to Finance Project also approved in 2006, but later cancelled without much disbursement, EDP2’s design centered on financing through a financial intermediary, rather than a line ministry, and working with a proven implementation unit, rather than building one from scratch. The resources, information technology, and professional skills for implementing the project were therefore far superior.
Flexibility is key to effective design and implementation. At the design stage, it is not possible to envision all potential scenarios. The flexibility to reallocate resources among components, and to adjust the balance of wholesale/retail lending by UEB, for example, has been important to enable the project team to respond to changing circumstances. The Bank decided to restructure project design early on in the interest of providing countercyclical funding to the exporting enterprises quickly, although this may have reduced the scope for the project impacting a broader number of participating banks through the wholesale model. In retrospect, the choice to allow UEB to provide both direct and wholesale lending was appropriate and enabled the scaling up and sustained disbursement of the project even during the recent crisis.
At the design stage, it is important to elaborate outcome indicators for participating banks and beneficiary enterprises that will enable assessment of the PDO. Although the Bank and UEB conducted additional surveys of PBs and beneficiary enterprises in the last months of 32
implementation, a more robust M&E framework from the start of the project could have been helpful to track the impact on an ongoing basis and adjust the project if needed.
Close interaction and on-the-ground support are vital to ensuring smooth implementation. The implementation support missions often identified opportunities to improve the project, including through discussions with the PIU, participating banks and beneficiary enterprises. The financial management, procurement, and environmental safeguards team were close to the project throughout implementation, and their regulator interaction helped to quickly identify and resolve questions as they arose. The strong supervision performance could have been improved further by the early incorporation of intermediate results indicators more specific to the intended outcomes for PBs and beneficiary enterprises. Given the underlying premise that the credit line strengthened the exporting enterprise sector, it would have been useful to monitor indicators of this impact during the implementation period and take these into consideration in adjustments along the way. Likewise, it would have been useful to include more indicators demonstrating the impact of participation in EDP2 on PBs’ institutional capacity and lending instruments, to substantiate the second development objective. However, efforts to gather this additional information in the last months of the project implementation have been very helpful to illustrate these results.
Lines of credit should take advantage of opportunities for leveraging the impact of Bank financing, and this was evident in the impact of the Ukraine Financial Sector Development Policy Loan Programme initiated during the last year of EDP2 implementation. The FSDPL1 promoted stronger banking supervision through more stringent definition of problem and insolvent banks, that improved discipline in the sector, for example. In addition, the WBG might consider technical assistance that helps PBs develop the systems and skills to attract additional lines of credit. During the implementation of EDP2, a few of the banks developed strong implementation capacity, improved risk management, financial management, procurement and safeguards know- how that contributed to their ability to attract additional financing from other international financial institutions. Going forward, other approaches to increase leverage, such as partial credit risk guarantees (PCGs) and co-financing requirements, should also be explored. Both instruments increase the amount of funding available to borrowing enterprises for each IBRD dollar investment in the project. PCGs enable banks to raise funds from the international markets with improved terms than what would be possible by the bank on its own creditworthiness under market conditions. The structures allow the borrower to secure the much-needed financing at reasonable costs, while also minimizing transaction risk in a climate of volatility. In addition, the targeted volume is matched against the bank’s ability to support project beneficiaries quickly and efficiently. Co-financing arrangements ensure that the participating financial institution complements borrowed funds with resources from its own balance sheet. In the face of limited IBRD resources, leveraging funds through such instrument should be encouraged whenever possible.
7. Comments on Issues Raised by Borrowers, Implementing Agencies, and Partners
(a) Borrower/Implementing Agency
Implementation of EDP2 assured reliable finance for Ukrainian exporters in spite of the financial crisis 2008-2009, followed by the recession and economic downturn since mid-2013 and thereupon. Almost 50 success stories were originated by the Project, supporting export 33
growth and diversification through timely provisioning of the needed financing to the exporting community (see Annex 5).
The flexibility of EDP2 design multiplied by professional and qualified teams from the both sides, collaborating closely, allowed to timely react on the challenging environment as well as proactively target either towards soothing of the imminent problems or reaching of the available opportunities. Combination of wholesale lending to commercial banks and direct lending to exporters, working capital and investment needs, absence of constrains related to geographical, industry and company size preferences secured the efficiency of the Project by that. However, that the statutory arrangements did not precluded the teams to stay in though throughout the implementation of the Project, processing of the PBs and sub-borrowers requests with due expediency and according to the best practices and in the interest of the Project’s DOs. The introduction of the direct lending option, reallocation between the Project Categories and wholesale vs. direct lending amounts, quasi-export eligibility, easing of SME application, amendment to the safeguards (re. pest-management) have to be noted in this regard.
The Project provided for the extensive professional knowledge sharing platform within a segment of the banking community related to the financial tools & risk management, proper procurement procedures and environmental, social and other safeguards checks and procedures. Participation in seminars and trainings held by IBRD and UEB, in-depth studying of financial requirements, procurement and environmental procedures, ensured practical application of Project tools and practices by PBs within their Project related activities as well as gradual introduction of the certain experience obtained into current-type of activities. The exporter also benefited from the Internationally recognized procurement and safeguards practices; adopting them as a fair basis for efficient use of resources and counteraction to the reputational risks, with special sentiments towards EU and other new market.
The lessons learned suggest that it is worth to fine-tune any future private sector project design according to the existing market conditions, keeping maximum flexibility in reaching PDOs, avoiding excessive paperwork and practices not relevant to the Objectives, as well as countering for application of any redundant criterion or procedure. The successful Project implementation and high resulting indicators – providing almost 3USD of export revenues per 1USD on-lent by the Closing Date and will continue to grow – were procured by the Project’s design flexibility and close teams collaboration. Especially, reliable banking may require no tool, additionally to the armory in practice, covenants and co-financing requirement inclusive, in order to ensure good shape of the Project portfolio, while proper customer relations might procure for wider information gathering opportunity, than contractually prescribed ones. The above suggested that the originality of EDP2 deserves replication.
(b) Other Partners and Stakeholders
34
Annex 1. Additional Data
Table A1.1. Banking Sector Performance Indicators, 2008-2015 Indicators 12/31/2007 12/31/2008 12/31/2009 12/31/2010 12/31/2011 12/31/2012 12/31/2013 12/31/2014 Number of licensed banks 175 184 182 176 176 176* 181* 143* Total Bank Enterprise Lending 276 184 472 584 474 991 508 288 580 907 609 202 698 777 802 582 (UAH mln) Regulatory capital 13.92 14.01 18.08 20.83 18.90 18.06 18.26 15.60 adequacy(sufficiency) (Н2), % Financial results of the banks' 6 620 7 304 -38 450 -13 027 -7 708 4 899 1 436 -52 966 activities (UAH mln) Return on assets, % 1.50 1.03 -4.38 -1.45 -0.76 0.45 0.12 -4.07 Return on equity, % 12.67 8.51 -32.52 -10.19 -5.27 3.03 0.81 -30.46 Source: National Bank of Ukraine. * Of which one bank is licensed as a remedial bank that is a bad asset entity not taking deposits.
Table A1.2. Annual Growth (Decline) in Enterprise Lending, Ukraine Banks 2007-2014 2007 2008 2009 2010 2011 2012 2013 2014 Total Bank Enterprise Lending (in UAH million) 276184 472584 474991 508288 580907 609202 698777 802582 Growth in Enterprise Lending 71% 1% 7% 14% 5% 15% 15% Source: National Bank of Ukraine
Figure A1.1. Export Orientation as % of EDP2 Enterprises' Revenues, by Year* 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2006 2007 2008 2009 2010 2011 2012 2013 2014
Russia EU Other countries
Source: UEB. *Data excludes largest borrower by revenues. Other countries mainly CIS and North Africa.
35
Box 1: UkrPlastic
Ukrplastic is a leading manufacturer of flexible plastic packaging both in Ukraine and Eastern Europe. The enterprise employs highly-automated, state-of-the-art production facilities to produce innovative packaging solutions, which are fully compliant with the EU quality standards. The company meets the following international quality standards: ISO 9001:2008 (quality management system); ISO 22000:2005 (food safety management system); ISO 14001:2004 (environmental management system); OHSAS 18001 (occupational health and safety management system); BRC/IOP (packaging and packaging materials safety system).
Although the primary destination for UkrPlastic products is the domestic market (mainly local production facilities of multinational food producers), the enterprise also has expanded its export sales via offices in Poland and Russia. Additionally, the company explores expansion into new markets in the Middle East and Africa. Ukrplastic seeks to be ranked among top-10 European manufacturers of flexible packaging, with a complete production cycle and diversified range of products. The Central and Eastern European flexible packaging market is a very competitive one, where in some countries domestic production exceeds consumption; however, Ukrplastic has managed to outcompete its rivals with lower labor costs and responsive innovation.
UkrPlastic benefitted greatly from its participation as a returning customer of EDP2. Over the course of participation in EDP2, the company invested more than USD130 million in modernization of its production facilities. The enterprise was able to implement a modernization project aimed at expanding its export markets and diversifying its production. As a result, during the period of its participation in EDP2 from 2009 to 2014, Ukrplastic increased its revenues by 74 percent, and considerably diversified its export markets. EDP financing is one of the lowest-cost resource in the debt profile of the company, while the targeted use of funds was relatively flexible and reporting requirements were not complicated. The long- term and relatively inexpensive nature of EDP financing helped Ukrplastic to manage through the economic downturns caused by the 2008-09 and 2014 crises, even as many of its domestic clients were in arrears and while most banks reduced credit limits for working capital.
Box 2: Zhytomyrski Lasoschi
Zhytomyrski Lasoschi, or Zhytomyr Confectionary, is a successful turnaround story. A surviving confectionary from Soviet era, ZhL managed through participation in EDP2 project, to implement a comprehensive modernization project during 2006-2012. The project involved replacing production machinery with modern, high-tech equipment that has substantially enhanced production capacity to more than 80,000 tons per year. Modernization also has enabled ZhL to increase the quality and variety of products, making them more competitive on international markets. Nowadays, the confectionary employs 28 production lines to produce boxed sweets, chocolate bars, glazed and non-glazed sweets, chocolate snacks, chocolate wafer sweets, biscuits, wafers, fudge, cereal bars, cereal desserts in yoghurt, and sugar- free products. ZhL is the fifth-largest confectionary in Ukraine, and one of the largest employers in northnern Zhytomyr region. Most of ZhL’s employees are women.
ZhL suffered a substantial decline in exports to Russia in 2014 due to Russia-imposed import restrictions. In late 2013, ZhL installed a new automated production line of glazed roasted nuts and English toffee, sweets geared toward Central Asian markets. Thanks to modernized, more efficient and flexible production 36
lines, ZhL managed to quickly reorient away from Russian markets, and it currently exports 35 percent of its output to Germany, Belarus, Moldova, Estonia, Latvia, Lithuania, Israel, Azerbaijan, Kazakhstan, Georgia, Armenia, and Mongolia. The share of EU market in the structure of export grew from 1.5 percent in end-2011 to 3 percent in end-2014, while revenues grew by 6 percent over the period. Currently the company is exploring markets of the Far East, North America, and Pacific island countries.
ZhL management emphasizes the value that EDP2 provided in lending on competitive terms with very clearly defined, understandable criteria. EDP2 resources required ZhL’s adherence to financial covenants and export plan. During ZhL’s participation in EDP2, the enterprise reports that the confectionary market became more competitive than ever, and two financial crises plus weaker consumer demand in Europe made conditions ever more difficult. However, access to EDP2 financing helped ZhL to optimize debt servicing costs, modernize production process, and expand product line at a critical time, enhancing the confectionary to keep a competitive edge on external markets.
Box 3: EuroGold Industries Ltd
EuroGold Industries Ltd in Zhytomyr oblast provides a vivid example how innovative investment transformed an abandoned Soviet-era metal producer into a leading supplier of household products selling to the largest European retail chains. The company’s Austrian owners brought to EuroGold experience in the consumer goods market from previous investments in Italian manufacturers, and in Ukraine they saw the opportunity to exploit existing metallurgy inputs, reasonable energy prices, and highly skilled, yet affordable labor to develop their own production line of ironing boards, metal ladders, and clothes-dryers. The firm’s cost-efficiencies and quality has enabled it to outcompete other producers in Turkey and Germany.
EuroGold sells a smaller portion of its products within Ukraine, while its major market is the EU, where it sells both under EuroGold brand and under the brands of several leading European household products. EuroGold’s products are sold across leading European retail networks. The recent profound devaluation of the Ukrainian local currency has substantially improved the firm’s cost-profile and has strengthened its competitiveness in EU markets, while access to long-term and relatively inexpensive EDP2 credit facilities has allowed EuroGold to invest in new technologies and renovation of its production facility.
As a returning customer under both EDP2 and Additional Financing, EuroGold was able to use both working capital for procuring inputs and raw materials, as well as investment loans for acquiring new equipment and production premises. The result has been a considerable increase in EuroGold’s export volumes and a growth to 840 employees. An especially attractive feature of EDP2 funding was the ability to refinance already-incurred expenses. Compared to other loans in the company’s debt profile, resources under EDP2 offered the most attractive interest rate, relative long maturity and excellent support from the implementing bank in preparing related documents. Despite the general slowdown in 2008-09 and 2014 crises EDP2 financing allowed EuroGold to maintain liquidity and diversify its export markets.
37
Table A1.3. Beneficiary Enterprises and Loan Disbursement by Region Region No. of Sub- Value sub-loans Region's contribution Value of projects projects disbursed in region to total Ukrainian financed in region as (USD) good exports, 201421 % of total projects financed in EDP2 Kiev 10 55372130 21.3% 18.4% Dnipropetrovsk 4 24995000 16.3% 8.3% Donetsk t 3 19931949 15.6% 6.6% Zaporozhye 1 10000000 6.9% 3.3% Poltava 5 25686811 3.9% 8.6% Kharkhov 4 16808337 3.4% 5.6% Mykolaiv 2 18746324 3.4% 6.2% Odessa 2 2557557 3.3% 0.9% Lviv 3 1300000 2.4% 0.4% Kirovograd 6 12824833 1.5% 4.3% Sumy 1 1500000 1.4% 0.5% Vinnytsya 2 2044039 1.4% 0.7% Cherkasy 4 25860361 1.2% 8.6% Zhitomir 8 36249370 1.2% 12.1% Ivano-Frankivsk 2 12600000 0.9% 4.2% Khmelnitsky 3 21617643 0.9% 7.2% Kherson 1 1721052 0.7% 0.6% Ternopol 5 7023210 0.7% 2.3% Crimea* 1 3525133 1.2% Other regions not included: Volyn, Zakarpattya, Luhansk, Rivne, Chernivtsi, Chernihiv 13.6% 0.0% Total 67 300,363,749 100% 100% *This loan was already repaid at time of Russia annexation of Crimea. t There were no active loans in rebel-controlled area of Donetsk during 2014. There have been no loan beneficiaries in Luhansk region.
21 According to the State Statistics Service of Ukraine, data excludes Autonomous Republic of Crimea, as of end- 2014. 38
Annex 2. Project Costs and Financing
Table A2.1: Project Cost by Component
USD millions Components Appraisal Estimate Actual (including Percentage of AF) Appraisal Wholesale line of 150 300.4 200% credit to UEB UEB institutional 3 3.4 112% development Unallocated amount 1.1 0 0% Front End Fee 0.4 0.7 175% Total Project Cost 154.5 304.5 197%
Table A2.2: Project Cost by Financing (USD millions)
Source of Type of Appraisal Actual Percentage of Funds Cofinancing Estimate Appraisal Borrower World Bank IBRD-4360 154.5 154.5 100% IBRD-80890 150 150 100%
39
Annex 3. Outputs by Component
Table A3: Breakdown of Subloans by PBs, EDP2 and AF
Date of SLA SLA amount, # of Disbursed to # PB name Date of SLA start expiry Subproject subprojects, US$ s approved US$ million million
February, 1 OJS CB “Nadra” March, 2007 4.5 3 4.5 200922
2 Kreditprombank February, 2007 July 2009 17.1 2 17.1
March 3 OJSC “Ukrgasbank” July, 2007 23.1 5 23.1 2009
July, 4 OJSC “Megabank” July, 2007 24.5 9 24.5 2009
October, 5 OJSC “Megabank” March, 2013 20.0 2 20.0 2014
August, 6 Credit Dnipro Bank August, 2008 20.0 3 20.0 2010
Decembe 7 Alfa-Bank December, 2013 25.0 4 25.0 r, 2014
8 Ukreximbank May, 20091 n/a 39 166.2
Total - 300.4 67 300.4*
Source: UEB; data as of January 30, 2015, includes disbursements within grace period following project closing.
22 Sub-loan agreements for Nadra Bank, Kreditprombank and Ukrgasbank did not have built-in expirations, as the later SLAs did. In the case of Nadra and Ukrgasbank, the SLAs became null when the banks’ financial conditions deteriorated below eligibility thresholds for participation in EPP2 during early 2009. Kreditprom SLA was suspended when its financial conditions deteriorated, and it did not resume lending in 2010. 40
Annex 4. Beneficiary Enterprise Survey Results23
Table A4.1: Qualitative Responses of Beneficiary Enterprises
How satisfied was the firm with the EDP2 credit?
Very satisfied 39% Satisfied 61% Moderately unsatisfied 0% Not satisfied 0%
How does the firm compare the value of this credit to other available resources?
Very high value 54% Good value 43% Same value as other available resources 4% Less value than other available resources 0% Don’t know 0% No other available credit resources were available 0%
Which of the following factors was the most attractive aspect of the EDP-2/AF credit for the firm?
Value of the interest rate 36% Client services provided by the bank 16% Maturity structure of the loan 25% Flexibility of the terms 22%
What has been the impact of crises of 2008-2009 and 2014 on the firm, and to what extent has credit through EDP-2/AF EDP-2 loan helped mitigate these impacts, if at all?
Loans under the program significantly reduced the impact of the crisis 46% Participation in the program has partly mitigated the impact of the crisis 32%
23 World Bank and UEB conducted an ex-post survey of participating enterprise during December 2014 to January 2015. This sample includes 44 of the 50 participating enterprises that responded to the survey. 41
Participation in the program didn't help to reduce the impact of the crisis 11% Loans under the program had a negative impact on the activity of the company during the crisis 0% Not occurred 11%
Suggestions for improving the design of potential future WB lines of credit?
Revision of the EDP2 financial covenants* 24% Increase of the Sub-Loan limit per single borrower** 17% Increase of the procurement threshold 12%
Facilitation of project evaluation and monitoring procedures 12% Increase of the period (over 180 days) for refinancing of 11% eligible expenditures No suggestions 6% State support for beneficiaries enterprises *** 4% To accept exports of all companies within business-group 1% Eligibility of procurement from affiliated (within a group) 1% companies, under certain conditions
Grant co-financing of institutional development of the 1% enterprise * - including reduction of benchmark value of the covenant, alignment to current economic trends ** - inc. higher celing if lending to several group members (related beneficiaries) *** - inc. exemption from the mandatory sale of foreign currency, facilitation of customs procedures, sales promotion on European markets Table A4.2. Year-on-year Change in Revenues, EDP2 Beneficiaries vs. All Ukraine exports Participating 2007 2008 2009 2010 2011 2012 2013 2014 Enterprise24 1 32% 243% 31% 13% -15% 57% 12% -14% 2 22% 19% 51% 19% 14% 14% 2% 10% 3 87% 167% -1% 27% 64% -12% 4 -7% 62% 33% -18% 5 23% 22% 2% 11% 12% 6% 5% 25% 6 38% 51% 36% 7% 26% -1% 3% 30% 7 27% 52% 34% 46% 4% 21% 1% 9% 8 31% 12% -17% 44% 66% 16% 9% 26% 9 47% -4% 77% 40% 12% -1% -41% 10 28% 97% 24% 30% 42% -7% 13% 38% 11 11% -8% 63% 27% 23% -4% 18% 12 86% -2% -80% 14% 23% -10% -47% 13 74% 76% -4% -12% -27% 14 49% -8% 26% 27% 25% -2% -12% -24% 15 65% 16 42% 17% 20% 1% 2% 2% 2% 17 2917% 31% 25% -10% 13% -18% 18 24% 83% 40% -13% 28% 11% -3% -20% 19 50% -9% -37% 17% 43% 14% -12% 14% 20 36% 7% -38% 71% 41% -13% -21% -26% 21 40% 36% -64% -26% 140% 224% -24% -19% 22 2360% 105% 7% 35% -16% 23 5% 24% -6% 28% 20% -5% -2% 22% 24 43% -2% 33% 31% 26% 4% 41% 25 50% 18% 23% 22% -2% 13% 26 62% 24% 28% 77% 27 34% 26% -9% -38% -48% 28 -39% 59% 559% -65% 4% 63% -15% -32% 29 2% 9% 3% 4% 24% 74% -3% -7% 30 37% 23% -62% -39% 80% 5% 21% 0% Median value, EDP2 borrowers 31% 24% 17% 25% 26% 12% 0% -3% Avg y-o-y change, all Ukraine 27% 34% -37% 28% 28% 1% -5% -37% exports Source: Ukreximbank, Participating enterprises, and State Statistics Service of Ukraine.
24 Of the 50 participating enterprises, 30 provided detailed information about change in firm revenues. 43
Table A4.3. Year-on-year Change in Employment, EDP2 Beneficiaries vs. Economy-wide Participating 2007 2008 2009 2010 2011 2012 2013 2014 Enterprise25
1 11% 34% 21% 28% 15% 14% 7% 4% 2 2% 3% 1% 5% 9% -5% -3% -3% 3 100% 1475% 240% 150% 25% 1% 3% 4 13% 6% 8% 7% 5 4% -4% 0% 5% -1% -2% 0% -6% 6 5% 2% 12% 2% 4% 3% 0% 13% 7 14% 21% 22% 18% 24% 15% 31% 11% 8 -4% 1% -13% 0% 18% 9% 1% 5% 9 14% 1% 14% 12% 11% 6% 7% 10 -12% 5% -6% 15% 2% 2% -2% 11% 11 -1% 2% 9% 3% 5% 2% -2% 12 -22% -70% 13 -1% -15% 14 34% 19% 29% 23% 14% -4% -14% 8% 15 60% 16 0% -5% 5% -11% -15% -5% 4% 17 26% 14% -3% 3% -10% 18 1% 4% 3% 1% 3% 1% 1% 0% 19 3% 8% 7% 6% 4% 2% 3% 3% 20 0% 0% 0% 0% 0% 0% 1% 1% 21 1% 1% 1% 1% 1% 1% 1% 2% 22 42% 547% 28% 0% 1% 0% 1% 23 13% 0% 6% 11% 0% 0% 0% -5% 24 10% -10% -4% 2% -11% 15% -2% -1% 25 1% 2% 4% 8% -6% 2% 26 16% -1% 20% 3% 27 7% 6% -2% -15% -23% 28 0% -6% 3% 6% 6% 3% -3% -11% 29 3% 7% 18% -1% -4% 4% -1% -13% 30 -16% -6% 2% 12% -21% Median value, EDP2 3% 3% 3% 6% 4% 2% 0% 1% borrowers ______Y-o-y growth avg 1% 0% -5% 0% 0% 1% 1% -3% employment, working- age adults, UA Source: Ukreximbank, Participating enterprises, and State Statistics Service of Ukraine.
25 Of the 50 participating enterprises, 30 provided detailed information about change in firm employment. 44
Annex 5. Bank Lending and Implementation Support/Supervision Processes
Table A5.1: Task Team Members Names Title Unit Responsibility/Speciality Alexander Pankov Lead Financial GFMDR TTL ( 9/2007 to 6/2010 Sector Specialist and 11/2012 to 12/2014) Marius Vismantas Lead Financial GFMDR TTL ( 6/2010 to 11/2012) Sector Specialist Lalit Raina Advisor GFMDR TTL (until 9/2007)
Angela Prigozhina Senior Financial GFMDR Team member Sector Specialist Colleen Mascenik Financial Economist GFMDR ICR Team Leader Yevhen Hrebeniuk Financial Analyst GFMDR Team member Natalia Lutsenko Consultant ECSFP Team member Isfandyar Zaman Program Leader ECCU5 Team member Khan Irina Babich Financial GGODR Financial Management Management Specialist Irina Shmeliova Procurement GGODR Procurement Specialist Anna Wielogorska Lead Procurement GGODR Procurement Specialist Knut J. Leipold Lead Procurement GGODR Procurement Specialist Dmytro Glazkov Senior Energy GEEDR Environment Specialist Alexei Slenzak Senior GENDR Safeguards Environmental Specialist Ronald N. Hoffer Consultant GCCPT Safeguards Bernard Baratz Consultant GENDR Safeguards Johnson Appavoo Operations Analyst OPSOR Safeguards Fatiha Amar Program Assistant GWADR Team member Vitaliy Bigdai Consultant ECSFP Team member Daria Gulei Program Assistant ECCU2 Team assistant Aida Japarova Program Assistant GFMDR Team assistant
45
Table A5.2: Staff Time and Cost Stage of Project Cycle Staff Time and Cost (Bank Budget Only) No. of staff weeks USD (including travel and consultant costs Lending26 FY05 3.98 25,561.80 FY06 55.96 254,274.24 FY07 2.79 17,263.38 FY08 FY09 FY10 (Additional Finance P109649) 62,747.66 FY11 FY12 FY13 FY14 FY15 Total 62.73 359,847.08
Supervision/ICR FY07 13.27 59,828.11 FY08 26.38 83,739.06 FY09 22.95 97,380.41 FY10 25.64 101,114.99 FY11 21.42 75,611.83 FY12 21.37 84,956.41 FY13 21.92 103,009.00 FY14 17.51 81,739.90 FY15 16.37 78,019.68 Total 186.83 765,399.39
Total Lending and Supervision 1,125,246.47
26 Includes budget for the additional financing. 46
Annex 6. Summary of Borrower’s ICR
The final EDP2 Implementation Completion and Result Report is being prepared by UEB in accordance with the requirements and methodology determined by the Procedure for Initiation, Preparation and Implementation of Socioeconomic Projects of Ukraine Supported by the International Financial Institutions approved by Resolution of the Cabinet of Ministers of Ukraine No.1027 dated November 26, 2008.
Sixty seven sub-loans in the total amount of USD 300.4 million were granted in total under the EDP2. Fifty beneficiary enterprises from almost all regions of Ukraine operating in eighteen sectors of the economy took part in the Project. Figure 1. Economic sector structure of EDP -2 participating enterprises Trade and advertising Wine making equipment 1,17% Household 0,04% goods 4,21% Pharmaceuticals 0,80% Wire and cable pruduction Telecommunica 3,33% tions 0,69% Agriculture 20,55% Brewage 6,66% Extractive industry 6,02% Rubber and Metal plastic goods processing 8,30% 3,28% Wood Food industry processing 21,70% 0,33% Machine- building 11,19% Storage batteries 3,33% Control Printing and equipment, publishing lamps, 0,57% protective Transport equipment services 4,89% 2,95%
Source: Ukreximbank. 47
Figure 2. Annual sales revenue trend of EDP2 participating enterprises
UAH million 23 246 23 628 23 211 23 163 25 000 21 725 19 243 19 698 20 000 15 815 15 000 11 587
10 000
5 000
0 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: Ukreximbank.
Under the EDP2/AF EDP2 wholesale facilities UEB signed six Subsidiary Loan Agreements with participating banks selected under eligibility criteria. From the proceeds of the Subsidiary Loans twenty eight export development Sub-loans were granted to twenty five beneficiary enterprises in total amount of USD134.2 million, incl. twenty two Sub-loans in the total amount of USD 82.9 million financed from EDP2 funds and six Sub-loans in total amount of USD 45 million financed from AF EDP2 funds. Under the direct lending scheme UEB granted thirty nine export development Sub-loans to twenty five beneficiary enterprises in the total amount of USD 166.2 million At EDP2 completion the allocation of the Project proceeds under the category Sub- loans and Lease Finance was as following.
Figure 3.
Allocation of the EDP2 funds to participating–banks
PJSC "Nadra" 1% JSB “Ukrgasbank” PJSC "BANK 8% CREDIT DNEPR" 7%
PJSC "Kreditprombank" 6%
JSC "Ukreximbank" 55% PLC Megabank 15%
PJSC "ALFA- BANK" 8%
Source: Ukreximbank.
48
Participation in the Project enabled Ukrainian exporters to enter new export markets, diversify geographical and product structure of export, renovate machinery and equipment, modernize production facilities, and improve competitiveness of the goods.
Figure 4. Annual export trend of EDP2 participating enterprises
USD million 1 400 1 285 1 172 1 200
955 1 000 886 726 741 800
600
400
200 109 12 0 2007 2008 2009 2010 2011 2012 2013 2014
Source: Ukreximbank.
Figure 5. Export geographical structure of EDP2 participating enterprises
Other countries 34% Russia Federation 13% Germany 2%
The Netherland 3%
Belgium 2%
Other UE countries 7%
Tunisia 5% Belorussia 2%
Kazakhstan 2%
Egypt 20% Saudi Arabia 3% Jordan 7%
Source: Ukreximbank.
In 2007-2014 the implementation of EDP2 resulted in the total export of the project beneficiaries of USD 5,885 million and the preliminary calculated aggregate export multiplier of 2.78 meaning that one dollar of the EDP2 loan proceeds generated almost three dollars of export revenues of the project beneficiaries. It is important to note that the multiplier effect will continue upon sub-projects’ completion.