Document of The World Bank Public Disclosure Authorized FOR OFFICIAL USE ONLY Report No. 40716-UA INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Public Disclosure Authorized AND THE INTERNATIONAL FINANCE CORPORATION COUNTRY PARTNERSHIP STRATEGY FOR UKRAINE FOR THE PERIOD FYO8-FY11 Public Disclosure Authorized November 8,2007 Ukraine, Belarus and Moldova Country Management Unit Europe and Central Asia Region International Finance Corporation Central and Eastern Europe Department Public Disclosure Authorized This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. The date of the last Country Assistance Strategy was October 23,2004 CURRENCY EQUIVALENTS Currency Unit = Hryvnia (UAH) July 2007: US$=UAH5.05 FISCAL YEAR Government of Ukraine: January 1- December 3 1 ABBREVIATIONS AND ACRONYMS AAA Analytical and Advisory Activities BEEPS Business Environment and Enterprise Performance Survey CAS Country Assistance Strategy CAS CR Country Assistance Strategy Completion Report CEM Country Economic Memorandum CIDA Canadian International Development Association CIS Commonwealth of Independent States CPAR Country Procurement Assessment Report CPPR Country Portfolio Performance Review CPS Country Partnership Strategy CTP Center for Tender Procedures and Business Planning DPL Development Policy Loan EBRD European Bank for Reconstruction and Development EC European Commission ECA Europe and Central Asia EIB European Investment Bank EMBI Emerging Market Borrowing Index ESW Economic and Sector Work FDI Foreign Direct Investment FSAP Financial Sector Assessment Program FTA Free Trade Agreement GATT’s General Agreement on Tariffs and Trade GDP Gross Domestic Product GoU Government of Ukraine IBRD International Bank for Reconstruction and Development IEG Independent Evaluation Group IFC International Finance Corporation IMF International Monetary Fund ISR Implementation Status and Results MICs Middle Income Countries MIGA Multilateral Investment Guarantee Agency MoF Ministry of Finance NATO North Atlantic Treaty Organisation NBU National Bank of Ukraine NGO Non-governmental Organization FOR OFFICIAL USE ONLY OECD Organisation for Economic Co-operation and Development PAL Program Adjustment Loan PAYG Pay As You Go PEFA Public Expenditure and Financial Accountability PFM Public Finance Management Reform project PIUS Project Implementation Units PPPS Public Private Partnerships PTAP Programmatic Technical Assistance Partnership PTP Power Transmission project SAMP Social Assistance Modernization project SIAM Social Insurance Administration Modernization project SIDA Swedish International Development Association SME Small and Medium Enterprise SOEs State owned Enterprises STATCAP Statistics Capacity Building SWAPS Sector-Wide Approaches TB Tuberculosis TFP Total Factor Productivity TIMMS Trends in International Mathematics and Science Study TRIMS Trade-Related Investment Measures TRIPS Trade-Related Aspects ofIntellectual Property Rights UEFA European Soccer Association USAID United States Agency for International Development VAT Value-Added Tax WBG World Bank Group WBI World Bank Institute WTO World Trade Organization IBRD IFC Vice President: Shigeo Katsu Declan Duff Country Director: Paul Bermingham Jerome Sooklal Team Leader: Martin Raiser Oksana Nagayets This CAS was prepared by a core team that included Anush Bezhanyan, Olena Belch, Julia Smolyar, Katia Petrina, Zoran Anusic, Igor Oliynik, Hermann von Gersdorff, Paul0 Correa, Alexander Pankov, Natasha Kapil, Hormoz Aghdaey, Vitaliy Bigdai, Dejan Ostojic, Dmytro Glazkov, Alexander Kaliberda, Alexei Slenzak, Matthias Grueninger, Svetlana Budagovska, Maria Koreniako, Tetyana Komashko, Jana Kunicova, Viktoria Siryachenko, Oleksiy Balabushko, Rush Piontkivsky, Pablo Saavedra, Munaver Sultan Khwaja, Luis Alvaro Sanchez, Anna Wielogorska, Dmytro Derkatch, Suzy Yoon, Yulia Snizhko, Iouri Loutsenko, Cathy Summers, Sergiy Kulyk, Ivan Velev, Florentin Blanc (IFC), Sanjar Ibragimov (IFC) and Aliona Voloshina (IFC’r. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization. TABLE OF CONTENTS EXECUTIVES~Y .......................................................................................................... i I. COUNTRY CONTEXT................................................................................................ 1 A . Economic Context ................................................................................................... 1 B. Recent Social Developments .................................................................................. 3 C . Recent Political Developments ............................................................................... 7 I1. RECENTECONOMIC DEVELOPMENTS AND RISKS ..................................................... 9 A . Recent Economic Growth - Drivers and Prospects for Sustainability ................... 9 B. Maintaining Macro-Economic Balance ................................................................ 11 C . Key Risks to the Outlook ...................................................................................... 14 I11. UKRAINE’SDEVELOPMENT CHALLENGES .............................................................. 16 A . Sustaining Growth and Improving Competitiveness ............................................ 16 B. Public Finance. Public Sector Reform and Improved Public Service Delivery ... 17 C . Governance and Public Support for Reform......................................................... 19 IV. GOVERNMENTRESPONSE ...................................................................................... 21 V . WORLD BANKGROUP STRATEGY .......................................................................... 24 A . Lessons Learned from the 2003-2007 CAS .......................................................... 24 B. Operational Principles and Rules of Engagement ................................................ 28 C . CPS Pillars and Objectives ................................................................................... 31 D. Operational Activities by Pillar ............................................................................ 33 E. Results, Monitoring and Evaluation ..................................................................... 41 F. Consultation Process............................................................................................. 44 VI. RISKS AND RISK MITIGATION................................................................................ 45 A . Implementation Risks ........................................................................................... 45 B. Credit Risks ........................................................................................................... 48 Tables: Table 1: Main Macroeconomic Indicators. 2000-2006 ...................................................... 2 Table 2: Key Social Indicators, 2005 .................................................................................. 7 Table 3: Medium-Term Economic Projections for 2007-2010 ........................................ 14 Table 4: Common Reform Areas in Government Programs, 2000-2007 ......................... 22 Table 5: The CPS Programs by Pillar and Typology ....................................................... 32 Table 6: The Transition from Extensive to Intensive Growth - Pillar 1 Themes ............. 35 Table 7: CPS Activities in FYO8 and FY09 ..................................................................... 43 Figures: Figure 1: GDP Growth Rate. 1991-2006 ........................................................................... 1 Figure 2: EBRD Average Transition Indicator. 199 1-2006 .............................................. 2 Figure 3: Poverty Rate in Ukraine. 2000 -2005 ............................................................... 3 Figure 4a-d: Ukraine Poverty Rates.................................................................................... 5 Figure 5: Natural Gas Prices by Type of User ................................................................... 6 Figure 6 a-b: The Structural Transformation of Ukraine’s Economy .............................. 11 Boxes: Box 1: Poverty in Ukraine: Concepts vs . Perception.......................................................... 4 Box 2: Recovery from the Transition Crisis and the Impact of Reform........................... 13 Box 3: Euro 2012 ............................................................................................................. 17 Box 4: The Recent Evolution of Public Procurement...................................................... 19 Box 5: Portfolio Performance and the Investment Lending Review ............................... 26 Box 6: Operational Approach to Governance in the CPS ............................................... 36 Box 7: Portfolio Monitoring and Implementation: Agreed Services Standards ............. 47 Annexes: Annex 1: Key Development Challenges .......................................................................... 50 Annex 2: Governance and Anti-Corruption Agenda ....................................................... 60 Annex 3: CAS Completion Report (FY04-07) ............................................................... 76 Annex 4: IEG Recommendations from the Country Assistance 2003-2007