The World Bank Kyiv Urban Mobility Project (P170290) Public Disclosure Authorized Public Disclosure Authorized Project Information Document (PID) Appraisal Stage | Date Prepared/Updated: 25-Mar-2020 | Report No: PIDA27612 Public Disclosure Authorized Public Disclosure Authorized Dec 12, 2019 Page 1 of 19 The World Bank Kyiv Urban Mobility Project (P170290) BASIC INFORMATION OPS_TABLE_BASIC_DATA A. Basic Project Data Country Project ID Project Name Parent Project ID (if any) Ukraine P170290 Kyiv Urban Mobility Project Region Estimated Appraisal Date Estimated Board Date Practice Area (Lead) EUROPE AND CENTRAL ASIA 30-Mar-2020 03-Sep-2020 Transport Financing Instrument Borrower(s) Implementing Agency Investment Project Financing Ukraine Kyiv City State Administration Proposed Development Objective(s) The Project Development Objective is to improve urban mobility and accessibility and to strengthen Kyiv City State Administration’s capacity to plan and prepare investments in public transport. Components Component 1 - TRT Preparations Component 2 - Borshchahivka Rapid Tram & enhancement of Vokzalna Square Component 3 - Strengthening Kyiv’s transport planning systems Front end fee PROJECT FINANCING DATA (US$, Millions) SUMMARY-NewFin1 Total Project Cost 41.25 Total Financing 41.25 of which IBRD/IDA 40.00 Financing Gap 0.00 DETAILS-NewFinEnh1 World Bank Group Financing International Bank for Reconstruction and Development (IBRD) 40.00 Non-World Bank Group Financing Dec 12, 2019 Page 2 of 19 The World Bank Kyiv Urban Mobility Project (P170290) Counterpart Funding 1.25 Local Govts. (Prov., District, City) of Borrowing Country 1.25 Environmental and Social Risk Classification Substantial Decision The review did authorize the team to appraise and negotiate B. Introduction and Context 1. GDP growth was solid at 3.6% in the first half of 2019, driven by agriculture and sectors dependent on domestic consumption, while investment growth remained weak. Real GDP grew by 2.5% in the first quarter of 2019 and by 4.6% in the second quarter of 2019, driven by a strong agricultural harvest, and sectors such as wholesale and retail, transport, and the financial sector. Household consumption continued to grow rapidly in the first quarter of 2019 (by 11.2%) supported by (i) one-off social transfers during the election cycle; (ii) continued strong remittances from labor migration to EU countries; and (iii) a resumption of consumer lending. Remittances continued to grow by 12% between January and September 2019. On the other hand, manufacturing and investment growth remained weak, with the manufacturing sector contracting by 0.2% and fixed investment growth slowing to 12%. The level of fixed investment at only 20% of GDP continues to remain too low for stronger and sustained economic growth. 2. Ukraine’s terms of trade saw a significant adjustment, while sound fiscal and monetary management and appreciation of the Hryvnia are helping reduce public debt and inflation in 2019. Ukraine’s terms of trade improved due to higher iron ore and wheat prices. Exports increased by 8% over the period January-September 2019, although imports grew faster than exports (8.3%), driven by intermediate goods. The fiscal deficit was contained at 2.1 % of GDP in 2018, which (together with appreciation of the Hryvnia) helped reduce public debt to 63% of GDP. The appreciation of the Hryvnia led to a shortfall of VAT on imported goods and other external trade-related proceeds, although this was offset by other revenue sources due to higher than expected GDP growth. On the expenditure side, a more prudent increase in the minimum wage in 2019, together with prudent monetary policy, helped reduce inflation. 3. The situation in the labor market has recently improved. Ukraine's unemployment rate dropped to 7.80 % in Jun 2019 from 8.3% in the second quarter of 2018. This was driven by the growing demand for labor from domestic companies and by a contraction of labor supply related to labor migration to EU countries, particularly Poland. Real wages grew by 9.5 percent, driven mostly from growth of salaries in Dec 12, 2019 Page 3 of 19 The World Bank Kyiv Urban Mobility Project (P170290) the private sector due to the pressures from outward labor migration. As a result of higher wages and consumption growth, poverty is also projected to decline to 14.5 percent by the end of 2019. 4. Ukraine needs to safeguard macroeconomic stability by addressing current expenditure pressures and fiscal risks, while securing adequate financing. Ukraine faces significant debt repayments in 2019- 2021, which will require mobilizing adequate international financing and further strengthening public finances to meet the fiscal deficit target. At the same time, Ukraine remains vulnerable to external shocks and commodity price cycles due to its reliance on commodity exports. The key to safeguarding fiscal sustainability going forward will be to address current expenditure pressures and keep the fiscal deficit at 2 percent GDP to ensure the sustainable debt reduction. Future reforms will similarly need to accelerate the structural transformation of its economy by boosting nontraditional and higher value- added exports. 5. The outlook for economic growth depends on delivering on the new government’s key reform priorities to address bottlenecks to investment and productivity. Given the strong performance in the first half of 2019, growth is projected to remain solid at 3.6 percent in 2019 overall. Going forward, if the new government is able to deliver on its ambitious reform goals, it is estimated that growth can increase up to 4 percent by 2021. This will require progress in the following areas: (i) attracting private investment into tradable sectors by establishing a transparent market for agricultural land, privatizing state-owned enterprises, and tackling corruption; (ii) increasing the efficiency and growth of bank lending to the enterprise sector by completing the reform of state-owned banks and reducing non-performing loans (NPLs); and (iii) safeguarding macroeconomic stability to continue reducing inflation, interest rates, and public debt. 6. Despite overall population decline in Ukraine, key economic centers continue to grow. A decline in the fertility rate, aging and out-migration, accentuated by the ongoing conflict in the East, led to a decrease of more than 20% of the Ukrainian population in the last 20 years. Despite this trend, Kyiv and most of the large cities1 continue to sustain population growth. This growth derives mainly from internal migration driven by better education and job opportunities and other benefits of agglomeration economies. However, the perceived value of these benefits can decrease where there are high transport costs and pollution related to poorly performing urban transport systems. 1 With the exception of Dnipro Dec 12, 2019 Page 4 of 19 The World Bank Kyiv Urban Mobility Project (P170290) Figure 1: Population change from 2001 to 2018 B. Sectoral and Institutional Context 7. Ukraine has a high urbanization rate, with around 69% of the total population living in urban areas. The major cities are Kyiv (2.9 million people2), Kharkiv (about 1.5 million), Odesa (about 1 million) and Dnipro (about 1 million). These cities are surrounded by satellite cities that form agglomerations with additional populations that commute on a daily basis, putting additional pressure on transport infrastructure. High urbanization leads in turn to high demand for urban transport systems including trams, trolleybuses, buses and metros. 8. Kyiv is the 8th largest city in Europe with a growing population and increasing demand for public transport. Kyiv covers an area of more than 835 km2 and is developing its culture, policies, and strategies to reflect a European-looking Ukrainian market economy. Kyiv is growing both spatially and economically, which has increased pressure on legacy transport systems. Approximately 500,000 people regularly commute on a daily basis to the capital either for work, education, or other purposes. As the city continues to grow, it is experiencing rising levels of private car ownership and use as well as increasing pressure on public transport, which is at or near full capacity. The public transport network has not changed much since independence beyond the continuous extension of metro lines, which in turn has exacerbated crowding. New trolleybus lines have been constructed recently, but in many cases these have replaced tram lines that suffered from dilapidated infrastructure and correspondingly deteriorating competitiveness. 2 Source: ukrstat.org Dec 12, 2019 Page 5 of 19 The World Bank Kyiv Urban Mobility Project (P170290) 9. The post-independence transition to a market economy has impacted public transport in Ukrainian cities. When Ukraine gained independence in 1991, Kyiv and Kharkiv had dense networks of public transport, comprising buses, trolleybuses, trams and metros with large fleets of rolling stock available. Transformation towards a market economy, the breakdown of economic ties and consequent economic decline had a strong influence on transport systems throughout the country. Funding shortages as well as changes to travel patterns following the disintegration of large industrial concentrations jointly impacted the attractiveness of public transport in Ukraine. 10. Private unregulated services appeared in the 1990s to fill the gap in public provision. Private operators entered the market using a variety of buses, from vans to medium-sized buses, new