Document of The World Bank Report No: 30962 IMPLEMENTATION COMPLETION REPORT (TF-21274 SCL-41070 SCL-41071) ON A LOAN/CREDIT/GRANT IN THE AMOUNT OF US$60 MILLION AND DM15 MILLION TO THE UKRAINE FOR AN EXPORT DEVELOPMENT PROJECT December 15, 2004 Finance & Private Sector Development (ECSPF) Europe & Central Asia Region (ECA) CURRENCY EQUIVALENTS (Exchange Rate Effective June 30, 2004) Currency Unit = Hryvnia (UAH) 1 UAH = US$ 0.188 US$ 1 = UAH 5.3207 FISCAL YEAR January 1 December 31 ABBREVIATIONS AND ACRONYMS EDAL ­ Enterprise Development Adjustment Loan EXIM ­ State Export Import Bank of Ukraine FSAL ­ Financial Sector Adjustment Loan FSU ­ Former Soviet Union Jexim ­ EXIM of Japan MOE ­ Ministry of Economy and On the Issues of European Integration MOF ­ Ministry of Finance MOFER ­ Ministry of Foreign Economic Relations NBU ­ National Bank of Ukraine PAL ­ Programmatic Adjustment Loan SME ­ Small and Medium Size Enterprises SOE ­ Statement of Expenditures TA ­ Technical Assistance Vice President: Shigeo Katsu Country Director Paul Bermingham Sector Manager Fernando Montes-Negret Task Team Leader/Task Manager: Angela Prigozhina UKRAINE Export Development Project CONTENTS Page No. 1. Project Data 1 2. Principal Performance Ratings 1 3. Assessment of Development Objective and Design, and of Quality at Entry 3 4. Achievement of Objective and Outputs 6 5. Major Factors Affecting Implementation and Outcome 12 6. Sustainability 14 7. Bank and Borrower Performance 15 8. Lessons Learned 17 9. Partner Comments 19 10. Additional Information 21 Annex 1. Key Performance Indicators/Log Frame Matrix 23 Annex 2. Project Costs and Financing 25 Annex 3. Economic Costs and Benefits 27 Annex 4. Bank Inputs 28 Annex 5. Ratings for Achievement of Objectives/Outputs of Components 30 Annex 6. Ratings of Bank and Borrower Performance 31 Annex 7. List of Supporting Documents 32 Project ID: P044851 Project Name: Export Development Team Leader: Angela Prigozhina TL Unit: ECSPF ICR Type: Core ICR Report Date: December 30, 2004 1. Project Data Name: Export Development L/C/TF Number: TF-21274; SCL-41070; SCL-41071 Country/Department: UKRAINE Region: Europe and Central Asia Region Sector/subsector: General industry and trade sector (96%); Banking (4%) Theme: Export development and competitiveness (P); Small and medium enterprise support (P) KEY DATES Original Revised/Actual PCD: 02/16/1996 Effective: 08/13/1997 08/07/1997 Appraisal: 06/07/1996 MTR: 10/15/1999 10/01/2001 Approval: 11/21/1996 Closing: 06/30/2002 06/30/2004 Borrower/Implementing Agency: STATE EXPORT/IMPORT BANK OF UKRAINE/STATE EXPORT/IMPORT BANK OF UKRAINE Other Partners: STAFF Current At Appraisal Vice President: Shigeo Katsu Johannes Linn Country Director: Paul G. Bermingham Basil G. Kavalsky Sector Director: Fernando Montes-Negret Paul J. Siegelbaum Team Leader at ICR: Angela Prigozhina Marie-Renee Bakker ICR Primary Author: Angela Prigozhina; Katalin Forgacs 2. Principal Performance Ratings (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=Highly Unlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible) Outcome: S Sustainability: L Institutional Development Impact: SU Bank Performance: S Borrower Performance: S QAG (if available) ICR Quality at Entry: S Project at Risk at Any Time: No Introduction Following Ukraine's independence in 1991 the first three years were characterized by poor economic management and runaway inflation, rapidly increasing external debt, a massive across the board decline in formal economic activity, and a virtual collapse of exports, particularly sales to the Former Soviet Union (FSU). Largely as a result of energy needs (with Ukraine being a major importer of energy products), the country suffered a considerable current account deficit and economic losses when Russia and other oil and gas suppliers raised their prices to world market levels. However, in October 1994, following the election of the new President, a major reform program was introduced, designed to reduce inflation, improve living standards, and promote a sustainable recovery of production. In the ensuing period, a tenuous stabilization took hold, with inflation falling sharply from more than ten thousand percent in 1993 to double digit figure in 1996, trade having been liberalized, as did most internal prices. A process of tax reform to introduce a modern revenue base for the State was also undertaken along with reforms in other sectors. In a major departure from earlier years, the complicated dual exchange rate system in operation from late 1993 and early 1994 was swept away and replaced by a relatively open foreign exchange regime. This has also resulted in removing the export barriers for a number of products. As part of 1994 reforms, the Government of Ukraine began trade liberalization process. The weighted average import tariff in 1995 was 6 percent, with less than 1 percent of all imports having tariffs greater than 30 percent. There remained few quantitative restrictions on imports other than licensing of certain pharmaceutical and chemical products, for health and environmental purposes, and convertibility of the currency was set to most current account transactions, although exporters were required to sell 50 percent of their foreign exchange earnings (after servicing of any foreign currency denominated debt) at the interbank currency exchange (auction). With exchange rates at this auction being market determined, this foreign currency surrender requirement no longer constituted a tax on exports. Importers, however, faced problems in obtaining certification in compliance with Ukrainian standards. However, the Government, as part of the conditionality for the World Bank's Enterprise Development Loan (EDAL), agreed to eliminate such controls at the point of importation in favor of random checks at the wholesale level. The extensive system of export taxes and quotas in operation in 1994 was abolished, although about one half of Ukraine's exports remained subject to export control through the use of minimum prices. A decree dated September 25, 1995, however, removed the Ministry of Foreign Economic Relations (MOFER) discretionary power to impose controls. As part of EDAL conditionality, indicative prices had to be limited only to commodities where anti-dumping problems apply or which are subject to voluntary export restrictions or international contingent agreements. All other export controls had to be rescinded. As a result, this paved the way for Ukrainian exporters' operation with minimal restrictions. Thus, the policy regime under which exporters operate has been improved significantly in the period of 1994-1996 and was subject for further improvements. Recognizing that exports would be the key engine of growth in Ukraine (as they have been in all successful CEE countries), the Export Development Project (EDP) was developed. The strategy for economic reform in Ukraine through expansion of exports was supported by the evidence from most CEE and other transition economies that have achieved positive economic growth at the account of a strong and continuing surge of exports, especially to Western markets. While other reforms were stagnating, largely due to low consumption rates and increasing fears of unemployment, low private sector investment because of regulatory, tax and general policy uncertainty and slow progress in privatization, export was often a driving - 2 - force for renovation of production and FDI and capital inflow into the country. Experience in CEE and other transition economies confirmed that export growth was built predominantly on efforts to more effectively and efficiently use existing capacity. Since there was substantial excess capacity in all potential export sectors in Ukraine, there was a clear social gain (from a macro-economic) perspective for a project that would lead to efficient export growth by resolving problems hampering such a recovery. Moreover, further gains would be expected to emerge through multiplier effects in the rest of the economy, due to the then-excess capacity in both capital and labor markets. The export sector was viewed as the sector where the demand for financial services was most likely to pick up first. Consumer credit was virtually non-existent at that time, and private investment was barely taking place. Exports, on the other hand, could be greatly facilitated if the financial resources were available to companies. The high demand for export finance presented the opportunity to develop a long-term financial sector reform program built driven by the sector's growth. 3. Assessment of Development Objective and Design, and of Quality at Entry 3.1 Original Objective: The main objective of the EDP was to develop Ukraine's emerging private sector export potential by (i) supporting the production and marketing of goods, works and services for export in all sectors of the economy, (ii) providing an integrated package of information, technical assistance and finance services to private and privatized exporters; and (iii) developing the capacity of EXIM (EXIM), through a comprehensive institutional development program. The Government and EXIM expressed the wish to transform EXIM into a dedicated and effective export-import bank, capable of supporting the Government's key policy objective of rapid development of Ukraine's export potential with a structured menu of information, technical assistance and financing services for existing and prospective private sector exporters. For this purpose, the Government and EXIM requested the World Bank to assist them in arranging and identifying financing for a comprehensive institutional development program for EXIM. 3.2 Revised Objective: The project objectives were not revised. 3.3 Original Components: Originally, the EDP project comprised the following four categories with a total baseline cost of US$70 million: l Component 1: a cost sharing EDF grant to provide Technical Assistance to exporters ­ US$5 million; l Component 2: technical assistance for the institutional development of EXIM in the amount of US$2.5 million; l Component 3: a credit line in the amount of US$50 million and DM15 million; and l An unallocated portion in the amount of US$2.5 million Component 1 was built on the recognition by the Ukrainian Government, EXIM and the World Bank of - 3 - the need for the institutional development of EXIM, strengthening its financial performance and enhancing its capacity for providing comprehensive export advice, information and marketing services to exporters on a sustained basis. The initial capacity building strategy included the creation of a new Export Services Department in EXIM, headed by a senior manager, consisting of (a) an Export Development Fund (EDF) Division, and (b) an Export Information Division. In response to this strategy, the export development technical assistance to exporters under the EDP was designed to support two elements. First, the EDP would provide financing for setting up an EDF to provide targeted technical assistance to specific private and privatized exporters; and second, the EDP would, in the context of the institutional development program for EXIM, provide know-how and assistance to EXIM to develop its Export Services Department, establish necessary database and skills to provide information to exporters. Component 2 focused on strengthening EXIM's capability in becoming a leading export support and financing institution in Ukraine, and to assist EXIM in EDP implementation. The institutional development component included a twinning arrangement with an experienced foreign EXIM bank (or a similarly qualified institution specialized in trade finance and promotion). This component focused on assisting EXIM in developing a strategic plan, new structure for its operations, addressing corporate governance issues, strengthening its credit, asset & liability management, accounting, and information technology functions, assisting in the establishment of new Export Services Department, and reinforcing EXIM's EDP implementation capability. The specific elements of this institutional development program covered fourteen key areas, categorized under the following groupings: Strategic Development, Technical Capacity and EDP Implementation. Strategic The strategic cluster focused on: l Strategic and financial planning issues; l EXIM's charter and corporate governance arrangements; and l EXIM's Organizational structure. Technical The technical cluster focused on developing and implementing best practices in various EXIM operating functions. These included: l Credit management ; l Asset and liability management; l Human resource development and training; l Internal audit; l Marketing; l Accounting and management reporting; l Information technology; and l Export support services. EDP Implementation. The institutional development program supported the implementation of the EDP by providing assistance to EXIM's: l Credit Department; l Export Services Department; and l Project Management Unit (PMU) - 4 - Component 3 consisted of an export-oriented credit line which would finance both short-term imports of inputs into production for export, as well as medium- to long-term investment projects of export-oriented private and privatized firms. 3.4 Revised Components: During the lifetime of the loan, Bank Management approved three significant reallocations of resources among the major components: The first significant change was approved and communicated by the Bank in February 1998. In the framework of this amendment, the following reallocations were approved. A new sub-component was introduced: "Goods for [Component 2] of the Project". This newly established category amounted to US$4.95 million. As such, the following amounts were reallocated: l US$2.5 million from unallocated resources l US$2.45 million from Component 2 (the original activities under Component 2, were reduced to US$50,000, accordingly). Following the first reallocation the EDP project comprised the following components: l Component 1: A cost sharing EDF grant to provide Technical Assistance to exporters (US$5 million); l Component 2: Goods and equipment to be procured by EXIM under the institution building component of the project in the amount of US$4.95 million; and US$50,000 for consultants' services; l Component 3: A credit line in the amount of US$50 million and DM15 million. The second major reallocation of resources among the various components was approved in 2002. This reallocation was made along the following lines: US$2.5 million from the underutilized Component 1 (Export Development Fund component) was reallocated to Component 2 (the Institutional Development component); The other portion of underutilized Component 1 in the amount of US$2 million was reallocated to Component 3 of the Export Development Credit Facility. The original version of the Loan Agreement envisaged a free limit in the amount of US$2.5 million. The definition of the free limit was amended to mean "the combined exposure of EXIM to any single borrower." Following the second reallocation, communicated by the Bank April 2002, the EDP project comprised components with the following financing allocations: l Component 1: A cost sharing EDF grant to exporters (US$0.5 million); l Component 2: Goods and equipment to be procured by EXIM under the institution building component of the project in the amount of US$7.45 million; and US$0.05 million for consultants' services under the same component of the project; and l Component 3: A credit line in the amount of US$52 million and DM15 million. Finally, after the third reallocation communicated by the Bank in April 2003, the EDP project in its final form comprised components with the following financing allocations: l Component 1: A cost sharing EDF grant to exporters (US$ 0.394 million); - 5 - l Component 2: Goods and equipment to be procured by EXIM under the institution building component of the project in the amount of US$7.556 million and US$ 50,000 for consultants' services under the same component of the project; and l Component 3: A credit line in the amount of US$52 million and DM15 million. 3.5 Quality at Entry: The quality at entry was rated satisfactory. The project design was in line with the Bank 's Country Assistance Strategy (CAS). The EDP was designed to contribute directly to the strategy for the financial sector as outlined in the World Bank's Financial Sector Review of June 1995.This strategy sought to speed up the differentiation between strong, well capitalized and well managed banks, and banks which are financially and managerially weak and may need to be closed and downsized. This goal was partly to be achieved both by bottom-up direct institutional strengthening of individual banks or groups of banks, through projects like the EDP. On the other hand, this strategy was envisaged to succeed also through top-down pressures towards improved bank performance, strengthened bank regulation and supervision as well as better legal and accounting environment. This top down approach was pursued through extensive technical assistance, especially in the areas of NBU regulation and supervision of banks, accounting reform and the reform of collateral law. The World Bank has played a critical role in directing and supporting these and other reforms through the Financial Sector Adjustment Loan (FSAL). The EDP was designed to fit into this strategy as an important component of the bottom-up approach. It was envisaged that the EDP project would serve the objectives in a bottom-up fashion while the FSAL project contained conditions that ensured a top down approach bringing more transparency and stricter regulations into Ukraine's financial sector. 4. Achievement of Objective and Outputs 4.1 Outcome/achievement of objective: The overall rating of the project objectives is Satisfactory as 100% of the funds were disbursed and project development objectively have been met. The project development objectives were: l At the macro-economic level, facilitate development of Ukraine's emerging private sector export potential by supporting the production and marketing of goods, works and services for export; promote exports by building up the capacity of the State Export-Import Bank of Ukraine (EXIM) to become an efficient provider of services to private and privatized exporters; and l At the financial sector level, support building a stronger financial intermediation by development of the institutional capacity of EXIM­one of the largest banks in Ukraine­as part of the World Bank's overall strategy for financial sector. The achievement of the project's development objectives can be demonstrated by the following examples: l the export potential of Ukraine's economy has been steadily increasing: after the significant export reduction in 1998 as a result of financial crises, Ukraine's exports recovered and reached almost 70% growth in the period of 1999-2003. During 1999-2003 export proceeds of EDP sub-borrowers tripled and reached UAH 1,415.3 million (or US$267 million) by 2003. Overall sales of EDP sub-borrowers doubled. During the lifetime of the project, EDP incremental proceeds - 6 - reached US$321.5 million; l the institutional capacity of EXIM has been significantly strengthened as the result of extensive, well-targeted technical assistance and investments into bank's technologies, risks management and management information systems (MIS), development of new products and strengthening of bank's lending procedures and internal systems. The bank expanded the menu of its products and became one of the most efficient and profitable banks in the country, with modern risks management and MIS systems. EXIM is the best international clearing bank in Ukraine; and l in addition, the production quality, competitiveness, modern management of the production process and marketing of EXIM sub-borrowers under EDP has been enhanced. This is emphasized by the increased exports and receipt of ISO certificates by a number of project's borrowers. Moreover, a number of ­ EDP sub-borrowers increased their transparency as a result of IAS compliant external audit and strengthened their financial management and procurement skills. Both summary ratings (achievement of PDO and Implementation progress) and project component ratings have been satisfactory throughout the lifetime of the project. There were certain delays in project implementation and in the disbursement of funds in 1998-1999 as a result of the financial sector crisis of 1998. However, cautious attitude of EXIM towards selection of sub-projects and credit scoring of sub-borrowers proved to be justified since it led to no deterioration of EDP portfolio. Thus, the disbursement lag was effectively cured by the proactive action plans designed together by successive supervision missions and EXIM's staff. The impact on export growth Export potential of the 29 sub-borrowers funded under the Project expanded significantly during the life of the Project. The export income of these enterprises increased more than three times from UAH 537.4 million in 1998 to almost UAH 1415.3 million in 2003. Moreover, their total sales grew from UAH 1.17 billion in 1998 to more than UAH 2.88 billion in 2003. During the period of project implementation the 1 total EDP incremental export reached US$321 million. The average EDP Credit Facility incremental export multiplier is 2.32 which means that every dollar invested from EDP credit line generated on average 2.32 dollars of export proceeds. In some instances (e.g. Vozko, Nibulon, Zaporizhtransformator), this multiplier equaled 4-5. With 100 percent of the credit line's funds having been fully disbursed by the December 31, 2002, many sub-borrowers have already fully repaid earlier granted loans or started their repayment, while several of them have received second or third loans under the program. As of June 1, 2004 out of 36 sub-projects funded from the EDP credit line facility only three loans were outstanding. During the life of the project, EXIM has issued more than 70 loans from the re-flow of funds which allowed to generate additional export proceeds in the amount exceeding UAH 1.5 billion, thus multiplying the project's impact. _______________ 1Ukraine's exports grew more than 70% during the period of 1999-2003. - 7 - The impact of the institutional development program EXIM, as confirmed by its recent financial performance indicators, has clearly achieved excellent performance in most of the areas which needed to be addressed. The financial performance of EXIM has been significantly strengthened, and the bank became one of the best performing leading banking institutions in the country; taking into account its operational efficiency, modern technological solutions, high level of automation of banks' operations, advanced MIS and risks management systems and competent management team. The bank meets all the NBU prudential requirements and Project's eligibility criteria. It is ranked among the top 10 largest banks in Ukraine and is considered to be the best international clearing bank in Ukraine; the excellent rating that was assigned to EXIM and published by Fitch on May 25 2004 reflects the results of the efforts aiming at the institutional development program. 2 The bank has recently achieved additional substantial success in raising its level of international recognition. A syndicated loan in the amount of US$30 million has been organized by ING Bank, with a maturity of 12 months and the option to extend the facility for another 6 months. Framework agreements have recently been concluded with UBS and Credit Lyonnais. According to the bank's annual IFRS and ISA compliant audit report for year end 2003, EXIM's capital adequacy equals 11.33%; which is significantly higher than the 8% set in the EDP Loan agreement and higher than the 10% required by the National Bank of Ukraine, according to the Ukrainian prudential standards. Moreover, in September 2004 EEXIM has placed US$150 million of Eurobond at the fixed yield rate of 7.75 which is the considered to be the most competitive corporate bond in Ukraine after the sovereign Euro bonds. The following issues highlight EXIM's continued compliance with the EDP eligibility criteria and NBU prudential requirements: l On the need for acceptable auditing, the requirement for IAS/IFRS compliant audits was met, with EXIM having had an unqualified audit throughout the period of 1996-2003, with the latter report produced by Ernst & Young; l In regards to institutional development, EXIM has completed TA activities with JEXIM (Japan) and ABN-AMRO (Netherlands) as well as contracted external technical legal advise under EDP to revise EXIM's lending legal documents; l With the minimum capital adequacy ratio (according to BIS/IAS) requirement set at 8% starting in 1998, EXIM achieved a CAR of 13.67% in 2002 and 11.63% in 2003; l Single Borrower Exposure (as a percentage of total equity) was set at 25%, EXIM achieved a rate of 23.8% in 2002 and 24.6% in 2003. The aggregate exposure to insiders (lending limit as % of equity) was set at 15%, with EXIM having reduced it to below 1% in 2002, and 2.9% in 2003. 4.2 Outputs by components: Component 1: Export Facilitation through Cost-Sharing EDF The Export Development Fund component of the project has been designed to provide cost-sharing grant financing to potential sub-borrowers of EXIM aimed at strengthening their project planning and export development potential, strengthening their marketing and sale techniques, enhancing their performance and standards (including ISO compliance), improving their financial management and procurement skills etc. _______________ 2Ratings EXIM: Foreign Currency Long-Term "B+"; Short-Term "B"; Outlook for Long-Term rating is Stable; Individual -Support "4"; Sovereign Risk; Foreign Long-Term "B+"; Local Long-Term "B+". - 8 - Although EXIM had received more than 20 applications from enterprises for co-financing of technical assistance, EXIM has provided funding to 17 sub-projects for total amount of US$ 419 thousand. As compared to the originally planned US$ 5 million, disbursements under this component significantly lagged behind the agreed schedule and required reallocation of funds to other components. Despite the initial delays in EDF disbursement, and the Bank's decision to reallocate $4.606 million from the EDF component (Component 1) to other components under the Loan (Components 2 and 3), implementation of this component has been rated satisfactory. This was largely a demand driven component, dependent on the interest in and readiness of EXIM's sub-borrowers to use technical assistance for development purposes. Thus, EXIM's ability to allocate cost-sharing grant financing on a 50/50 basis during the period of 1997-2001 was seriously constrained by a number of factors independent from EXIM's own capacity and commitment to the Project. Despite the interest of many enterprises in grant financing in 1998-1999, their participation in this program was constrained by the lack of counterpart financing. Moreover, many Ukrainian enterprises were hit by the economic crises in Ukraine in 1998, that turned to be even more painful for Ukrainian exporters to Russia and a number of East Asian Countries. In addition, domination of barter operations and use of tax evasion schemes made enterprise finances opaque, accounting and reporting unreliable. Unpredictability of Government policies and legislation, specifically in the area of foreign currency regulation, export quotas, duties and taxation negatively impacted export sales and hindered the development and growth of new export markets for many Ukrainian products and goods, with certain exception of metallurgy and row materials. These developments suppressed the ability of EXIM to promptly utilize EDF in the first years since the launch of the Project. This led to the reallocation of the Project funds as outlined above. Another impediment on the way to successful implementation of this component of the Project was the limited capacity of EXIM to serve fully as export promotion bank. Before the launch of the project in 1997, one of EXIM's main function was to act as an Agent on behalf of the Government (when obligations and related risks belong to the Government) in facilitating bilateral export and import agreements and provide administrative support to disbursement of funds in line with the agreed purpose for use of funds or selected sub-projects. At this juncture, EXIM had limited institutional capacity in funding its own projects and developing adequate skills and database for serving as export development institution. This resulted in limited knowledge of newly established enterprises or potential exporters about the services and financial products of EXIM. With limited branch network, EXIM had limited capacity to outreach new clients without extensive marketing and advertising. Although the Government had ambitious plans for EXIM as was outlined in its statutory documents, the strategy for transforming bank into the narrow, traditional export import facilitation credit institution has been curtailed by the limited capital of the bank. According to the Decree of the President #29, dated January 3, 1992, the Government envisaged that EXIM's statutory capital would amount to US$200 million. EXIM, however, has never been provided with sufficiently large equity and with an adequate funding structure. This led to EXIM's attempt to diversify its resource base and began operating in the household deposits market. The current structure of liabilities, consisting of household and company deposits, prevent EXIM from transforming into narrow export-import development bank. Although the Agency function remained to be one of the side activities of EXIM on the basis of the formal Agency Agreement between the Ministry of Finance and EXIM signed in November 1996 as a pre-condition of EDP implementation, EXIM has taken significant measures to develop its own export promotion potential and build up an extensive clientele base. This correlated with the strategy envisioned for EXIM in its statutory documents, i.e. development of EXIM as an export facilitation institution. - 9 - During the life of the project, EXIM played an important role in advising its sub-borrowers in business planning (preparation of export development plans which was required under EDP), procurement, compliance with standards and certification requirements, improved financial management, marketing and advertising. As a result, the demand for EDF funds increased after 2001 that allowed EXIM to successfully contract 100% of EDF budget during the period of 2001-2004. A total 17 TA sub-projects for US$394,000 were disbursed from WB funds by EXIM's management under the Export Development Fund component of the project during 1997-2003. Several supervision missions helped EXIM to find a useful application of such funds. Finally, it was agreed that EXIM should make efforts to convince some of its largest borrowers to undertake annual audits according to international accounting standards IAS. As a result of these efforts, EXIM financed seven IAS annual audits for its sub-borrowers. Component 2: Institutional Development Impact Both auditors and supervision missions have commended EXIM for the progress achieved in lending policies and procedures. EXIM has evolved significantly in the area of institutional building under Component 2 of the project. Given the extensive technical assistance received from JEXIM (Japan) and ABN AMRO (Netherlands), EXIM has streamlined its credit decision-making process, risk management procedures and modernized its internal operations and quality of banking products. The Japanese PHRD Grant TF 021274 financed this activity (Amount: US$2.5 million). The TF financed a twinning agreement between the Japanese EXIM (JEXIM) and the Ukrainian EXIM. Within the framework of this agreement, JEXIM provided consultants and guidance to the EXIM in the area of its institution building and its MIS creation process. The twinning agreement has been successfully completed. In addition, the Dutch Trust Fund (TF036961) in the amount of US$173,500 (NLG347 000) helped finance consultants from ABN AMRO Bank to develop EXIM's credit function. With additional funding available from these trust funds, World Bank funds originally envisaged to finance the TA component of the project could be released. As a result, under this component, EXIM fully disbursed the available funds in the amount of US$7.556 million in contracts for IT procurement. Major items under this procurement program have substantially contributed to the IT development of EXIM, including Hewlett­Packard's e-banking platform, a structured cable system and the internal computer network developed by Soft-Tronik (USA) etc. EXIM also purchased front office computer system for its treasury & trading division from Reuters and Swift Alliance Access software. With the help of the legal advisor contracted under Component 2 of the project (US$50,000), the loan documentation of EXIM has been modified and adjusted to incorporate international best practices, with special attention paid to the recent legislative changes in Ukraine (including passage of the Law on Secured transactions, Law on Leasing, Law on Mortgage) and focusing on allowing EXIM to further increase its assets without compromising the quality of the loan portfolio. Component 3: Export-Oriented Credit Line 100 percent of the funds of the credit line in the amounts of US$52 million and DM15 million were disbursed by December 31, 2004. Under the EDP credit line, 29 sub-borrowers and a total of 37 sub-loans have been funded. A further US$122 million, EUR 12 million and DM 750,000 and 2.5 million UAH were committed from the reflow of funds to finance 70 sub-loans up to June 2004. In 1998, the total export income of companies financed under the EDP amounted to UAH 537 million. In 2003, this figure amounted to UAH 1415.3 million (or US$ 267 mln). If taking into consideration the use - 10 - of EDP original funds as well as re-flow of funds as of June 2004, the amount of export proceeds for all the companies financed under the EDP (total 106 sub=projects) exceeded US$494 million. Quality of EDP Sub-loan Portfolio There have been no cases of default under the EDP credit line. In accordance with the revised April 2004 NBU Regulation on Loan Classification and Provisioning, EXIM undertakes a monthly review of the loan classification and provisioning for bank's assets, including sub-loans financed under the EDP. As of June l, 2004, 14 customers were classified as "standard", one customer was classified as "watch", one customer was classified as "sub-standard" and one was classified as "doubtful". Monitoring reports reflect the combined position of exposures from the initial funds and from the reflow of funds. These reports also reflect both the financial situation of borrowers and their behavioral scoring with regard to repayment discipline with EXIM. EXIM has been very responsive to Bank's suggestions during supervision missions. Accordingly, EXIM has started to prepare loan classifications according to NBU requirements as well as in compliance with IAS. The latter classification of customers and assets is now regularly carried out for management information purposes. This can be interpreted major progress in institutional capacity building, considering that in October 2000 the WB mission stated the following: "A unified credit policy and procedures manual is still pending, credit procedures are still fragmented and proper risks management procedures are not yet in place". Based on the recommendations of the ABN AMRO consultants regarding the strengthening of the credit function in EXIM, a decision was then reached to create a central Risk Management function directly reporting to the Chairman. 4.3 Net Present Value/Economic rate of return: Not applicable. 4.4 Financial rate of return: Not applicable. 4.5 Institutional development impact: During the lifetime of the EDP, EXIM has significantly improved its performance and achieved substantial progress in the area of institutional building under Component 2 of the project. Implementation of twinning arrangement program financed by the Japanese grant in the amount of US$2.5 million contributed significantly into the process of bank's transformation into a viable commercial bank that operates according to the best international standards. With extensive technical assistance from JEXIM and ABN-AMRO (funded from the Bank-executed Dutch TF036961), EXIM streamlined its credit decision making process, established sound MIS and risk management systems and procedures, modernized its operations and upgraded the quality of banking products and services. Further technical assistance provided to the bank by ABN-AMRO under the auspices of the project and with the support of the EU TACIS program in 2000-2001 has complemented the institutional development work funded the Bank. - 11 - In the opinion of EXIM's management, timely implementation of the institutional development program for EXIM funded under Component 2 of the Project and supported by the technical assistance grant financing has proved to be one of the core factors of successful EDP project implementation, and prudent disbursement of loan funds. 5. Major Factors Affecting Implementation and Outcome 5.1 Factors outside the control of government or implementing agency: Project implementation began in an unfavorable political and economic environment. A spillover from the Russian crisis in August 1998 first affected the deposit markets, especially the demand deposit segment where the banks were obliged to allow prompt withdrawal. The resulting financial turbulence and restructuring of government T-bills seriously undermined the already fragile liquidity of the market. Although markets stabilized in 1999-2000, Ukraine's banking markets have remained shallow and inherently unstable. Low confidence of the population in the banking sector has resulted in low saving mobilization capacity of banks. Poor access to international money markets further reduced the capacity of banks for intermediation of funds. In 2000, total household deposits in Ukraine amounted to UAH 4.4 billion, while total loans reached slightly more than UAH 23.6 billion or less than 16% of GDP. Banking sector remained fragmented, uncompetitive, with high transaction costs and limited outreach. During the period of 2001-2004, the National Bank of Ukraine has encouraged a number of changes in the banking sector, supported by the legal and regulatory amendments and strengthened prudential requirements. Moreover, liquidation of a number of small banks and one of the largest banks (namely Bank Ukraina) has allowed to address immediate risks in the banking sector. Creation of a Deposit Insurance fund in 1999 has allowed to rebuild the confidence of depositors. During the period of 2001-2003, total deposits in the banking sector increased from UAH 30 billion in 2001 to UAH 83.8 billion as of January 2004 and reached 31.7% of GDP. Banking assets surged to UAH 101 billion in January 2004 which represents 38% of GDP. Total loans grew more than three fold in 2001-2003 and amounted to more than US$14 billion (or 27% of GDP) by the end of 2003. However, the transaction costs remain very high as compared to other economies and interest rate spreads, despite the recent declining trends, are still considered too high which results in high cost of borrowing and limited access to finance for SMEs and enterprises which need restructuring. Many Ukrainian enterprises were severely hit by the economic crisis in Ukraine in 1998, which turned to be even more painful for Ukrainian exporters to Russia and to East Asian countries. The real sector in Ukraine saw the first signs of recovery and growth only in the aftermath of the 1998 crisis. In line with macro stabilization and significant growth in exports, the demand for new banking finance has revived beginning from 2001. This demand significantly intensified in 2002-2003. Ukraine's exports grew more than two-fold during the period of 2002-2004. As a result of improving macroeconomic conditions, which is confirmed by the continued economic growth and low inflation, the real economy is now showing increased appetite for export financing. In the light of this development, EDP finance and export promotion services of EXIM became very important for the country's development, in particular, export support. In the absence of appropriate trade finance infrastructure in Ukraine, it will be very important to expand EXIM's role in export facilitation. Thus, the role of EXIM as part of the Government's overall strategy for export promotion in Ukraine should be clarified by defining more clearly the bank's mission and introducing amendments to the draft Law on State Support to Export Insurance and Financing which was submitted to Parliament by the Cabinet of Ministers - 12 - in October 2002 (registration number #2349). 5.2 Factors generally subject to government control: The EDP benefited from improvements in the banking system brought about by a strengthening of the supervisory capacity of the NBU. Specifically, NBU introduced tougher prudential requirements in the area of banks' capital (including recalculation of Tier 1 and Tier 2 capital and increase of capital adequacy ratio from 8 to 10 percent), loan classification and provisioning, large exposures etc. However, there has been little progress in strengthening banks corporate governance and reducing insider lending. State banks, including EXIM and Savings Bank, were affected by the provisions of article 7 of the new Law on Banks and Banking Activities. The major concerns in the governance of EXIM still relate to the composition and powers of the bank's Supervisory Council. 3 There is a very high level of representation of political powers on the council. The absence of strict provisions on the prevention of conflict of interest for the members of the supervisory board of a state bank results in the representation of competing institutions and groups whose activities may infringe the market position and longer-term viability of the state banks. The confidentiality of major credit decisions cannot be ensured because several of the new members in the Supervisory Board of EXIM also have financial holdings in and have similar positions on the Boards of other banks. The Bank has repeatedly advised the management of EXIM, NBU and the Government of Ukraine to introduce adequate amendments to the Article 7 of the Law on Banks and Banking and ensure that all the members of the Supervisory Council meet the "fit and proper" criteria and do not have any conflicts of interest. The strategic positioning of EXIM is another directly related to the project which depended on the Government's position. The Bank repeatedly requested that the Government investigate the potential role that EXIM may play in export facilitation in the future. However, despite various proposals, there has been little progress with deciding on the future role of EXIM in the export support scheme as well as its ownership transformation. Attempts of the Government to sell Government assets held by EXIM (under the Agency agreement EXIM had approximately US$800 million in loans accounted off-balance sheet) failed due to limited demand. EXIM's diversification into the retail deposits market has been a necessary step for mobilizing more resources to expand EXIM's lending and retain its market niche. However, with more commercial banks competing in the same line of businesses (and for the same clients), EXIM and the Government need to endorse a more robust strategy for EXIM's future development which will envision either the transformation of the bank into a narrowly specialized export-import bank (depending mainly on non-retail, often Government and bilateral international funding) or expansion of its commercial lending that will entail gradual privatization of the bank. In 2002, the Ministry of Economy prepared a draft law on export support which envisioned establishment of an Export Guarantee and Credit Agency and didn't mention the role of EXIM in this process. The draft Law on State Support to Export Insurance and Financing was submitted to the Parliament of Ukraine in 2002, however, it was not discussed and will require serious reconsideration, including clarification of the role of EXIM in this scheme and its future development strategy. ______________ 3These changes are motivated by the text of Article 7 of the new Law on Banks and Banking that was enacted on January 17, 2001. The provisions of this article on corporate governance result in excessive politicization of the decision-making in state banks. Representation of 14 people in the Board of a commercial institution makes this body cumbersome, inflexible and unconstructive, which may impact the strategic development and even operational efficiency of the state banks. - 13 - 5.3 Factors generally subject to implementing agency control: Prior to the Project launch, the Bank has indicated a number of areas of operational and financial performance of EXIM requiring further improvements aimed at acceleration of project implementation as well as transformation of the bank into a viable, modern and efficient financial institution. These included (i) creation of an independent division within EXIM for project implementation, (ii) development and implementation of a more efficient, uniform credit appraisal and monitoring procedures and systems; (iii) creation of proper risks management practices and procedures, inter alia, for improved management of assets and liabilities, treasury risk management and credit risks monitoring. Concerted efforts of the management of EXIM, its committment to the efficient implementation of the Project and strong interest for improving bank's performance have resulted in significant upgrading of bank's internal practices and procedures in line with Bank's recommendations. Moreover, technical assistance engaged in the process of project implementation (funded from both grant and loan proceeds) has helped eliminate defficiencies existing in the performance of the Borrower in 1996-1997 and facilitate acheivement of the project's objectives. EXIM has established an independent division for project implementation, namely Export Development Department, which proved to be one of the most efficient structural divisions in the bank. Throughout the life of the Project, EXIM has demonstrated proactive and constructive attitude towards Bank's advise with regards to EXIM's operational performance as well as dialogue with the Government. Thanks to the professionalizm of EXIM's management and core staff, the reasonable formula for securitization and repayment of Government related debts was used. Although one loan remains to be fully repaid (i.e. loan to Donkavamet), EXIM has used all existing legal instruments to recover the loss: several auctions for the sale of the collateral were organized (although without any interest on the part of the potential buyers), the bank has fully provided for this loan, trilateral discussions between the Government, EXIM and the Bank were repeatedly organized to address the issue. The final project supervision mission has recommended that Government of Ukraine and NBU allow EXIM to write off this loan. Although this decision is beyond the scope of authorities of EXIM, this will be necessary for EXIM to further pursue this solution. Moreover, in the absence of Government's clear vision of the bank's future, EXIM has developed and suggested for Government's review the mission statement and the business plan for bank's development for 2004. To accelerate project implementation and streamline disbursement of project funds, specifically under the Credit Line and Export Development Fund components, EXIM initiated several seminars and workshops for the sub-borrowers to enhance their skills in the area of sub-projects, business plan and export development plans preparation and implementation, expand their knowledge in the area of financial management as well as procurement. Although EXIM was committed to disburse credit line resources in the most expedient manner, it took the most rationale and justified approach of slower disbursement during 1998-1999 which allowed EXIM to (i) enhance its own credit scoring and risks management skills; (ii) minimize exposure and thus reduce the risks in the afthermath of the Russian 1998 crisis which affected Ukrainian exporters; and (iii) reduce adverse selection and thus allow more efficient and export potential enterprises to benefit from the use of the Project funds during the period of 1998-2003 when economic situation in Ukraine began to stabilize and real economy needed more investmetns, first of all credit resources such as EDP, to upgrade production and expand exports. - 14 - 5.4 Costs and financing: No specific cost issues were determined. The sub-borrowers contributed significantly from their own funds to the sub-projects financed from the credit line, thus increasing the leverage effect of the credit line towards private sector investments and activity. 6. Sustainability 6.1 Rationale for sustainability rating: The project provided a noticeable contribution to the improvement of risks management and specifically credit risk analysis and management skills and systems of EXIM. The quality of the sub-loan packages provided for the Bank's review were significantly better in the second half of the project. This was confirmed by the NBU due diligence of 1999 and on-site examinations of EXIM in 2001-2003. NBU and EXIM management confirmed that the high quality of EXIM EDP portfolio and lately ­ EXIM overall loan portfolio - was clearly the result of the technical assistance provided to EXIM under EDP. The Project Implementation Unit (PIU) has now been assigned the task to review all investment type lending. Thus there is substantiated expectation that the know-how accumulated in the PMU will spread to other organizational units of EXIM and that the institutional development impact of the project will be sustained. In addition, several sub-borrowers significantly improved their knowledge and skills and thus expanded their business substantially. Moreover, they have also made a progress in their procurement and financial management techniques. The World Bank has provided several training courses on the issues if risks management and prudent procurement for EXIM staff and representatives of sub-borrowers. Finally, the rationale for sustainability rating can be substantiated by the fact that the EDP credit line targeted a very wide range of sectors of the Ukrainian economy, and would therefore not dependent on industrial trends or performance in specific segments of the economy. Ukraine is an export dependent economy, with heavy representation of metallurgical and chemical industries in total exports and high dependency on world prices for these products. One of the major characteristics of EDP portfolio which adds to its sustainability is the diversification by regions and sectors. EDP portfolio is represented by more than 12 different industries and 30 countries of export. 85% of EDP credit line funds were invested in manufacturing/industrial production, 13% was allocated to agriculture and fishery, and 2% of EDP credit loan funds was granted to the transport industry. Majority of EDP clients were medium size enterprises, many of which were entering new export markets or launching their first exports as a result of EDP financing. 6.2 Transition arrangement to regular operations: NA 7. Bank and Borrower Performance Bank 7.1 Lending: Bank performance in the identification, preparation and appraisal of the project is rated as satisfactory. The project was prepared and came into force in a relatively short time (total ­ less than 17 months) which is - 15 - still considered to be one of the best practices for project preparation in Ukraine. Preparation of the project was closely linked to the Bank's strategy in reforming Ukraine's financial sector which envisioned restructuring of individual banks, strengthening governance and financial performance of state banks. The original structure of the project with three major components and its development objectives proved to be successful. 7.2 Supervision: Supervision of the project was in line with Bank procedures, and remained thorough throughout the lifetime of the project in spite of the several changes in the Bank project team leadership. Continuity was preserved throughout, supervision missions were highly proactive and responsive to the changing environment in Ukraine which resulted in successful project implementation as well as achievement of additional positive results in restructuring of EXIM and streamlining the dialogue between the bank and the Government of Ukraine. EXIM's management has gratefully accepted the Bank's advice in various areas of bank's performance and governance. These included, among other things, suggestions with regard to the uses of EDF funds, revisions of EXIM's legal and loan documentation and credit scoring of the borrowers, repayment of major Government related loans to EXIM etc. In addition, a number of changes were implemented which strengthened the structure and implementation of the project. In the course of project supervision, the Bank demonstrated strong understanding of the Ukraine's changing economic and financial sector environment and responded proactively to the requests of EXIM aimed at improving bank's performance and supporting export development in Ukraine. Amendments to Loan agreement reflect Bank's diligent approach to supervision of the credit line disbursement as well as institutional strengthening of EXIM. For example, the Bank amended the Loan agreement incorporating (i) one obligor free limits, based on total combined exposure towards any sub borrower, (ii) debt to equity ratio of 70/30 for EXIM sub-borrowers; (iii) permission to EXIM to finance lease contracts; (iv) increased investments for upgrading EXIM's systems and technologies necessary for modern banking etc. In the aide memoires of the supervision missions the Bank issued numerous technical suggestions and recommendations aimed at enhancing project monitoring at PMU, expanding EXIM's positive EDP experience to other areas of its activities, strengthening EXIM's governance and market position. New implementation arrangements for more diligent monitoring of sub-borrowers and TA recipients were agreed with the PMU. The Bank organized a number of seminars and conference aimed at deepening the knowledge of EXIM staff and its borrowers, including such areas as assets and liabilities management, risks management, assets based finance, secured lending, procurement etc. 7.3 Overall Bank performance: Bank performance can be considered as satisfactory. The Bank team showed flexibility in its dialogue with the Borrower and pro-activity in trying to promote adequate credit analysis standards, timely resolve emerging or potential problems and support EXIM's strive for developing as a modern competitive and sound financial institution. Borrower 7.4 Preparation: The project was implemented in record time. The Borrower, i.e. EXIM bank of Ukraine, has been highly - 16 - committed to project preparation and implementation and thus made all the necessary institutional changes to incorporate project needs. The Borrower's contribution to project preparation is thus rated satisfactory. 7.5 Government implementation performance: The Government's implementation performance was satisfactory. The Government as the Guarantor continued to support the project consistently and performed vast majority of its obligations. Although in the middle of 2000 the Bank expressed its serious concerns about EXIM's potential complaince with the capital adequacy requirements caused by the Government's delayed action in repaying its related debts to EXIM (which led to mission's classification of Project implementation progress as unsatisfactory), the Government issued respective resolutions resulting in corporatization of EXIM in 2000, repayment of its major debts during 2000-2003 and replenishment of EXIM's capital in 2004. Throughout the lifetime of the project, the Bank has emphasized the need for EXIM's capital replenishment to allow further growth and institutional development of the bank. The Bank has also strongly supported EXIM's efforts aimed at the recognition and repayment of Government related loans on the books of the bank. Three such loans (namely Cargyll, Yuzhmash (Pivdenmash) and Donkavamet) have been recorded on the books of EXIM since early 90s and severely damaged EXIM's portfolio performance. As a result of EDP preparation strategy, the Government and EXIM signed an Agency Agreement in November 1996 where Government recognized its liabilities under these loans. In 1998, the largest of the three loans (i.e. Cargill loan) was restructured and secured by the promissory notes (veksels) of the Ministry of Finance in the amount of UAH 533 mln, and by October 2003 the loan has been fully repaid. Another loan to a company called Pivdenmash was fully repaid in 2003. This resulted in a significant decrease of loan loss provisioning for bad assets and positively impacted bank's capital position. According to the Ukrainian statutory accounting requirements, EXIM had a total equity in the amount of UAH 414 million by year-end 2002, and UAH 444 million by year-end 2003. These very same figures 4 amounted to UAH 271 million in 2002 and 322 million in 2003 using IFRS. Moreover, taking into consideration that the Government didn't have resources to inject additional capital into bank's equity during 1992-2003, the Government supported EXIM's requests for channeling its annual retained earnings to replenish bank's capital. Thus, during the period of 1992-2003, EXIM's equity substantially increased despite banking crises in 1998 and significant capital erosion in US Dollar terms. In June 2004, the Parliament of Ukraine passed amendments to the Law on state 2004 budget of Ukraine authorizing capital investment into EXIM in the amount of UAH 80 million (approximately US$15 million). Although several issues remain outstanding, specifically, repayment of Pivdenmash loan on the books of EXIM (this loan is fully provisioned and secured by the collateral) and finalization of EXIM's development strategy, the Bank recognizes that the future political and economic environment would most likely be more conducive for final successful resolution of these issues. ______________ 4 The Ukrainian economy was regarded as being hyperinflationary for the ten-year period ending 31 December 2000. As such, the Bank has applied IAS 29 "Financial accounting in hyperinflationary economies". The effect of applying IAS 29 is that non-monetary items were restated using the Consumer Price Index to measuring units current at 31 December 2000, and these restated values were used as a basis for accounting in subsequent accounting periods. In the first half of 2002, the management of EXIM decided to carry out a revaluation of its fixed assets. As a result, the balance sheet of the bank as of December 31, 2002 reflects a growth in fixed assets in the amount of UAH 132,4 million and a growth in the statutory capital of the bank in the amount of UAH 118 million. - 17 - 7.6 Implementing Agency: The Export Development Department that was established as project's PMU in EXIM, has performed satisfactorily throughout the project. Despite the extension of project closing date, the Bank believes that the slow disbursement of project funds during the period of 1997-1999 proved to be fully justified and rationale since EXIM and EDP portfolio could have been negatively affected by the 1998 banking and economic crisis. This didn't happen and EDP portfolio, as confirmed by NBU, remained satisfactory as a result of precautionary attitude of EXIM's management towards disbursement of project funds in the unstable economic environment and rewarding the best performing enterprises, thus avoiding adverse selection. Although project closing date was extended till June 30, 2004 EXIM has completed credit line disbursement by December 31, 2002 almost in line with the earlier schedule. Despite the EXIM's institutional weaknesses in the area of sub-project's appraisal at earlier stages of project implementation, EXIM has significantly improved its performance and procedures, following the extensive TA and training which was provided to its staff in the areas of credit risk assessment and procurement. The PMU was particularly instrumental in accelerating disbursement and project implementation through timely approval of free-limit sub-projects, and fast execution of disbursements. In addition, to accelerate and enhance quality of procurement by sub-borrowers, PMU transferred knowledge to sub- borrowers by organizing training and study tours for its clients. EXIM, jointly with representatives of its sub-borrowers, attended the Bank's procurement seminar in Italy in summer of 2000, as well as disbursement seminar in October 2000 in Kiev which was hosted by EXIM. Moreover, in 1998-2002, EXIM hosted and organized a number of conferences on assets and liabilities management, risks management, assets based finance, mortgage finance which were attended by EXIM's staff, representatives of NBU commercial banks of Ukraine. Although in April - June 2000 the Bank highlighted its dissatisfaction with the status of Goverment obligations in repaying state guaranteed debts to EXIM that could lead to EXIM's non-compliance with the capital adequacy requirements, the Government issued respective resolutions to repay the largest Government related loans while EXIM has created necessary provisions for these loans. The Project and EXIM annual audit reports confirmed EXIM's compliance with the capital adequacy requirements and thus Project's eligibility criteria. EXIM has also contracted ABN AMRO under the Dutch grant to strengthen its credit function. Thus, throughout the Project EXIM continued to comply with the Bank's requirements and performed most of the recommended activities, especially in the area of credit scoring and risks management. 7.7 Overall Borrower performance: Overall performance of the Borrower was satisfactory, including such areas as disbursement, financial management and project reporting etc. A conservative approach to risk containment was developed as a result of technical assistance rendered by JEXIM of Japan and ABN Ammo. The Government, for its part, has also contributed to the success of the project by complying with Bank's requirements aiming at the repayment of government directed loans. 8. Lessons Learned - 18 - The main lessons learnt from the EDP relate to measures which can be adopted by the Bank at project design of Fills to strengthen project implementation. They include the following recommendations and observations: l One of the positive features of EDP project design was that during the implementation of the EDP project, the Bank combined a bottom up approach with a top down pressures aimed at improving banking sector performance at the level of individual banks as well as system in general through improved regulation and supervision, and better legal and accounting environment. This top down approach was pursued through extensive technical assistance and adjustment lending, especially in the areas of NBU regulation and supervision of banks, accounting reform and the reform of collateral law. Although FSAL project (which ensured this top down pressure) was closed prior to the EDP, the Bank continued its support to the banking sector reform through the series of PAL operations (PAL 1, PAL 2). It was through FSAL, PAL 1 and PAL 2 that the Bank pursued amendments to the banking legislation, revisions of the NBU prudential requirements, Government commitment to restructuring of state banks, including repayment of Government related loans to EXIM. l Another major prerequisites for the successful implementation of EDP was the requirement and the program for institutional development of EXIM as a participating financial institution. Thus, implementation of EDP has not only provided EXIM with the funds for expanding its intermediary capacity, but more importantly, it has built-in incentives and provided necessary mechanisms for strengthening bank's financial and operational performance. The complementary technical assistance (TA) engaged in addition to loan funds allowed to tailor TA to the needs of EXIM, where necessary supported the TA with capital investments (such as IT/MIS investments of EXIM), brought prompt and more sustainable results and increased synergy in using loan and TA resources. In addition, the following lessons merit consideration: l Throughout the life of the project, the Bank emphasized the need for EXIM's compliance with the covenants entailed in the Loan agreement. During project implementation the Bank recognized the need to clarify the provisions of the Loan agreement related to one obligor exposure and debt to equity ratio of 70/30. In 2000, the Bank introduced amendments to the Loan Agreement, requiring EXIM to comply with maximum (combined) one obligor exposure for all the loans, guarantees and other exposures of EXIM to a single EDP sub-borrower, including EDP credit line and other EXIM's resources. This approach allowed to accommodate the existing risk that branches of EXIM could have extended new loans to the customers of EXIM under EDP and thus exceed the existing limitations. This also allowed to ensure that the existing indebtedness of a sub-borrower (e.g. debt to equity) is kept within the limits envisaged by the Loan agreement. Thus, it is recommended that free limits for the credit line disbursement should be defined on the basis of total exposure towards any one customer. l In the absence of the previous experience of EXIM and sub-borrowers in using internationally accepted procurement practices, the Bank's procurement rules proved to be too complicated which delayed procurement, first of all IT/MIS systems for EXIM, at the early stages of project implementation. Moreover, commercial practices of sub-borrowers varied and not always proved to be efficient. As a result, EXIM took tremendous efforts to enhance its own in-house procurement practices as well as increase the procurement skills of its sub-borrowers. The Bank - 19 - also achieved substantial progress in simplifying its procurement guidelines for private sector beneficiaries. In the future, the Bank should allow sub-borrowing enterprises to use commercial practices, provided that local legislation lays down a foundation for basic procurement principles and enterprises undergo some training in the area of procurement , e.g. brief seminar (to be organized by the Bank or a borrowing agency) similarly to the seminars organized under EDP. l With regard to future credit lines to financial intermediaries, it is worth noting that according to international best practices, one of the best ways to reduce credit risk is to broaden the appropriate credit product range. For example, permitting a finance lease scheme might have ensured for EXIM the possibility to retain the ownership of the equipment. Leasing was not permitted under the existing loan agreement. The same recommendation relates to the purchase and discounting of negotiable export documents, factoring, and other forms of asset-based lending to strengthen the bank's collateral position. 9. Partner Comments (a) Borrower/implementing agency: On November 19, 2004 EXIM Bank of Ukraine has provided the Bank with detailed report on assessment of EDP outcomes and lessons learnt (Annex X to the ICR). The main project results can be summarized as follows: l Implementation of EDP played a significant role in strengthening EXIM's and sub-borrowers institutional foundation, enhancing their skills and raising export promotion capacity; l Financing of EDF sub-projects (specifically, for external IAS audit) has allowed EXIM to reduce credit risks; l The EDP Credit Line and Export Development Fund facility proved to be highly successful that played a significant role in increasing the export capacity of sub-borrowers. Since majority of EDP participants were small and medium size enterprises, many of them prepared Export Development Plans and entered export markets for the first time. Some have expanded their export potential by accessing new markets with compatible products. Combination of EDP relatively inexpensive long-term credit resources with know how and technical assistance granted by EXIM allowed many sub-borrowers to refigure their internal management processes, improve marketing and sales, adopt ISO standards and undertake IAS compliant audits. Financial performance of EDP sub-borrowers improved, all participants became highly-dynamic, export-oriented enterprises, with some of them ranking among the largest exporters of Ukraine in their product niches. Many EDP sub-borrowers and TA recipients significantly enhanced their financial management and business planning skills that resulted in expanding the access of EXIM sub-borrowers for new lending, including from international banks operating in Ukraine. l Institutional development program for EXIM, which included extensive TA in a form of twinning arrangement with Jexim and complimentary targeted TA from ABN-AMRO and external legal advice, have allowed EXIM to promptly amend its internal procedures, modernize the information systems, introduce new products and risks management techniques that allowed bank to become one of the most advanced in terms of technologies and most efficient in terms of costs and quality of operations (especially for corporate clients) banking institutions in the country. Among the EDP success factors, the borrower named the following: - 20 - l Clear structure of EDP designed by the Bank's team allowed it sufficient flexibility to adapting the Project to needs of the Borrower and the sub-borrowers; l Continued effective communication and cooperation between the experts of the Bank and EXIM during and in-between the supervision mission resulted in prompt and effective resolution of emerging issues and thus allowed to facilitate project implementation process; l Strong commitment and comprehensive, consistent support to the project from the Bank, Government of Ukraine and top management of EXIM;. l Successful combination of lending, technical assistance resources under EDP and policy dialogue interventions through FSAL, PAL allowed to achieve significant results, both in terms of disbursement of credit line, development of export potential, restructuring of EXIM as well as strengthening dialogue between EXIM, Government and NBU with regard to the needs of the banking sector of Ukraine and the role of the Government in reforming state banks; l EDP was the first Bank's project which accommodated the needs of the economy of Ukraine in long-term credits for development and modernization of production; l Ability of the Borrower to employ for PMU skilled employees (specialists in credit analysis, financial management, credit line monitoring, procurement etc.) and thus no retraining or long-term training from the scratch was required; l Creation of an independent Export Development Department as Project's PMU proved to be an efficient vehicle for project implementation; it also benefited from the support from other departments of EXIM such as legal, credit and risks management. Moreover, EXIM now intends to use Export Development Department for all the investment lending operations, not only for financial of projects from the re-flow of EDP funds. The Borrower has also recognized some issues which emerged in EDF implementation and led to reallocation of funds under this component. Nevertheless, in borrower's opinion, the reallocation of funds didn't impact the effectiveness and overall results of the project. Moreover, it proved to be justified since it allowed EXIM to make capital investments in bank technologies and thus reduce its operating costs which significantly contributed to the institutional restructuring of EXIM and its transformation into a viable financial institution in Ukraine. Slow implementation of EDF was caused by: l Limited knowledge and interest of exporters in developing and implementation of sophisticated export and marketing programs aimed at export development; l Unwillingness of Ukrainian enterprises to invest resources into marketing and promotion of products. This was conditioned by the conservative budgeting of their costs, low quality of management and lack of understanding of modern management and promotion techniques, absence of skilled and trained personnel in the area of export production marketing and sales, the structure of Ukrainian traditional exports (such as metallurgy, chemicals, agricultural produce) which used established traditional markets, were dominated by old soviet type companies which required little promotion; l Inability (and sometimes unwillingness) of the enterprises to comply with the international procurement rules and procedures, which could result in cost reduction and improvement in quality of the manufactured goods. In Borrower's opinion, the project was implemented satisfactorily. EXIM considers the level of interaction and cooperation with Bank's project team as highly constructive and efficient. High qualification and significant experience of the IBRD specialists involved in the Project contributed to the achievement of the defined goals, resolving problems that arose in the course of project implementation in a timely manner. The transfer of knowledge by the IBRD specialists enabled the borrower's employees to shorten the initial - 21 - stage of the Project implementation and ensure a respective level of qualification of the borrower's employees involved in the EDP. (b) Cofinanciers: There were no cofinanciers in this project. (c) Other partners (NGOs/private sector): The Bank received comments and reaction of the Government of Ukraine as well as NBU to the project implementation (See Annex 7 with the copies of the letters from the Ministry of Finance, Ministry of Economy and On the Issues of European Integration and NBU). Specifically, the Ministry of Finance as the Guarantor in the September 14, 2004 letter to the Bank has confirmed its satisfaction with the results of the project and the impact it made on the increased efficiency of EXIM, improved performance (in terms of technological modernization, skills and financial results) of Ukrainian enterprises ­ participants of EDP as well as overall stimulus the project provided for the development of the banking sector and increased performance of Ukrainian banks. The Ministry of Finance of Ukraine, as the Guarantor's representative under the Loan Agreement, drew Bank's attention to the absence, throughout the Project, of any breach of the Loan Agreement on the part of EXIM, or of any other event that could trigger use of the guarantee. MinFin confirmed that in the course of the project and as a result of extensive development support EXIM transformed into a financially viable and efficient banking institution, one of the best performing banks in Ukraine, with sound reputation and strong recognition in the international markets. Considering the positive outcomes from the Project implementation, the Ministry of Finance deems it necessary to continue cooperation with the IBRD through initiation of new lending programs with other Ukrainian banks as well as continued cooperation with EXIM. Deputy Minister of Economy in the letter of September 16, 2004 named EDP as one of the best investment projects implemented in Ukraine. MinEconomy reiterated its assessment of positive results of EDP demonstrated by the successful disbursement of project funds, strong financial performance of EXIM as well as significant impact of the project on development of export potential of Ukraine. MinEconomy stressed the important of institutional development program for EXIM as well as usefulness and uniqueness of the export development technical assistance support extended to Ukrainian enterprises under the EDF component of the project. The NBU in the October 13, 2004 letter from the deputy Governor commended the Bank for substantial lending and technical assistance support to EXIM which has led to serious improvement of EXIM operations, including such areas as strategic and business planning, credit assessment and risk management, enhanced MIS, IT and communication technologies, qualification of bank's personnel, export promotion skills. More importantly, NBU indicated that EXIM has significantly strengthened its capital position, increased its profitability, has adequate provisioning, complies with NBU requirements. In NBU's opinion, EXIM improved its position in the market by introducing new banking products and services. Thus, EDP contributed to the development of Ukraine's export potential and financial sector. - 22 - 10. Additional Information In order to better understand the role and impact of the project on EXIM, it is worthwhile to summarize the development of the bank in terms of its key financial performance indicators. - 23 - Financial Performance of EXIM during the period of 1996-2003 Based on EXIM's Annual Financial Statements Audited According to IAS/IFRS, in US$ thousands 1 Balance Sheet Items 2003 2002 2001 2000 1999 1998 1997 Assets Cash and due from the NBU 42,592 36,967 45,064 32,411 21,431 30,221 39,156 Amounts due from credit institutions 76,916 71,663 49,248 73,882 93,429 87,229 173,248 Loans and advances to customers 446,595 305,078 214,398 141,385 64,605 56,761 75,703 Investment securities 62,205 30,832 88,331 83,248 87,808 8,538 16,235 Government related debts 134,085 136,257 Tax asset 88 Property, equipment and computer software 65,320 61,133 52,955 49,541 60,577 51,294 36,189 Other assets 4,930 45,391 10,411 6,859 12,231 17,083 7,581 Total Assets 698,646 551,066 460,406 387,326 340,081 385,211 484,369 Liabilities Amounts due to the National Bank of Ukraine 71,044 78,100 111,730 121,140 125,378 128,716 197,426 Amounts due to credit institutions 134,621 86,931 59,269 33,301 23,671 19,004 26,875 Amounts due to customers 427,112 332,346 255,655 211,128 163,966 175,647 194,572 Current tax liabilities 1,129 459 Provisions, accruals and deferred income 3,240 8,515 Other liabilities 4,305 2,328 4,141 2,746 4,409 1,804 1,918 Total Liabilities 638,211 500,164 430,795 368,315 317,424 328,411 429,306 Shareholders equity Share capital 182,970 170,588 154,949 151,240 62,338 62,338 61,973 Accumulated deficit (122,535) (119,686) (125,339) (132,229) (39,681) (5,538) (6,910) Total shareholders equity 60,435 50,902 29,611 19,011 22,657 56,800 55,063 Total liabilities and shareholders' equity 698,646 551,066 460,406 387,326 340,081 385,211 484,369 Income and Loss Statements 2003 2002 2001 2000 1999 1998 1997 Interest income 70,797 62,312 43,406 33,177 25,583 34,133 32,340 Interest expense (37,355) (38,203) (14,441) (9,709) (8,450) (20,970) (14,944) Net Interest Income before allowance for impairment 33,442 24,108 28,965 23,468 17,133 13,163 17,396 Allowance for impairment on interest bearing assets (4,490) (2,618) (7,292) 1,631 (42,039) (2,409) (16,733) Net interest income after allowance for impairment 28,953 21,491 21,673 25,098 (24,906) 10,754 663 Fee and commission income 23,822 20,043 17,987 17,934 16,324 Fee and commission expense (3,103) (1,905) (1,247) (1,013) (1,281) Fees and commissions, net 20,719 18,138 16,740 16,920 15,043 15,708 20,221 Net profit on foreign exchange operations 4,961 4,140 1,448 520 3,411 8,015 5,860 Dealing in Securities 11 37 (679) 232 (306) Other operating income 519 1,988 484 213 2,395 1,284 849 5,492 6,165 1,253 965 5,500 9,299 6,709 Non-interest income, net 26,211 24,303 17,993 17,885 20,543 25,007 26,930 Remeasurement of financial instruments (478) (303) Salaries and benefits (25,033) (17,681) (15,883) (11,700) (10,052) (6,234) (7,568) Depreciation and amortization (4,819) (4,821) (3,761) (3,545) (4,185) (3,868) (3,070) Other operating and administrative expenses (10,667) (9,302) (8,497) (8,817) (7,307) (9,921) (6,804) Allowance and provision release (charge) for other losses (277) 365 0 (370) 1,257 Translation differences, net (7,044) (10,406) (103) Non-interest expenses (41,275) (31,741) (28,140) (24,433) (27,331) (30,429) (17,545) Income before tax 13,889 14,052 11,526 18,551 (31,694) 5,332 10,048 Income tax (4,355) (1,911) (1,393) (2,821) (2,449) (3,595) (6,896) Gain on net monetary position 4,901 Net income 9,533 12,141 10,133 20,631 (34,143) 1,737 3,152 - 24 - Annex 1. Key Performance Indicators/Log Frame Matrix Outcome / Impact Indicators: 1 Indicator/Matrix Projected in last PSR Actual/Latest Estimate Growth of export in the private sector The beneficiaries of the EDF grant Ukraine's exports grew by more than 70% assistance represented a number of during the period of 2002-2003. industries, including leather, cloth and fur production, electronic equipment and industrial machinery, agriculture and food processing, plastic and rubber production etc. Intermediation capacity growth at EXIM, as Technological improvements and changes in In nominal terms, the statutory capital of demonstrated by the growth of assets and MIS allowed Eximbank to substantially EXIM increased by more than 5.7 times since capitalization of the bank and improvement in reduce costs and increase its operational the foundation of the bank in 1992. EXIM its corporate culture efficiency. streamlined its credit decision making process, established sound MIS and risk management systems and procedures, modernized its operations and upgraded the quality of banking products and services. EXIM assets grew 1.5 times in US$ dollar terms and more than 305 percent in UAH terms during the period of 1997-2003. Increase in sales, and export potential of The majority of EDF grant beneficiaries were Export potential of the 29 sub-borrowers private beneficiaries under the EDP medium enterprises that managed to funded under the Project expanded increase their export capacity three times significantly during the EDP life. Export during the period of the EDP implementation. income of these enterprises increased from $156 million in 1998 to almost $267 million in 2003. Moreover, their total sales grew to more than UAH 2.88 billion (orUS$542 million) in 2003. Institutional development and enhancement The use of EDF technical assistance allowed EXIM played an important role in advising its of marketing capacities of EDF grant grant beneficiaries to (i) enhance their sub-borrowers in business planning beneficiaries business and financial management skills; (ii) (preparation of export development plans enter new product markets both inside and which was required under EDP), outside the country by using new marketing procurement, compliance with standards and strategies and participating in international certification requirements, improved financial exhibitions; (iii) enhance knowledge about management, marketing and advertising. sales opportunities abroad and bring their products in compliance with best practices, including ISO requirements. Institutional development of EXIM Further technical assistance provided to the According to the IFRS audit report, at the demonstrated by the growth in the number of bank by ABN-AMRO under the auspices of end of December 31, 2003 the bank's capital export financing credit applications handled the EU TACIS program in 2000-2001 has adequacy ratio equalled 11.63% as by EXIM, while maintaining EXIM's portfolio complemented the institutional development compared to 13.67% at the end of 2002, well quality and other key performance indicators work funded the Bank and was focusing on exceeding the 8% ratio stipulated by the loan strengthening Eximbank's management and agreement. strategic planning function as wel l as continued improvement of bank.s treasury operations. - 25 - Output Indicators: 1 Indicator/Matrix Projected in last PSR Actual/Latest Estimate Number of Sub-projects financed from the Export potential of the 29 sub-borrowers 100% of funds under the credit line EDP funds and re flow of funds funded under the Project expanded component of the project, namely US$52 significantly during the EDP life. Export million and DEM 15 million were fully income of these enterprises increased more disbursed by December 31, 2002. This has than three times from $156 million in 1998 to allowed to finance 29 sub-borrowers and total almost $494 million in 2003. Moreover, their 36 sub-projects. In June 2004, 33sub-loans total sales grew from mere $340 million in were fully repaid to EXIM, while three 1998 to more than $1.05 billion in 2003. subprojects were still outstanding. As of June 2004, additional US$122 million, EUR 12 million, DM 750 000 and UAH 2,5 million have been committed to finance 70 sub-loans from the reflow of EDP funds. During the project life, EXIM financed total more than US$195 million for 106 sub-loans from the EDP original credit line and the reflow of EDP funds. Number of Sub projects financed from the During the life of the project in 1997-2003, Seven IFRS and ISA compliant audit reports EDF Grants serving capacity building to sub Eximbank received a large number of were financed for EXIM's sub-borrowers from borrowers: IAS compliant audits of sub applications for the technical assistance for the EDF. borrowers and financing attendance of the total amount of US$ 847.3 thousand, seminars and marketing efforts where 17 sub-projects for US$ 419 644 have been financed by Eximbank. IT capacity increase at EXIM The loan funds in the amount of E-banking, a state of the art plastic cards Improvement in credit policies and US$7,556,00 were used for procurement of processing system, expanded ATM network, procedures improvement in the quality of IT/MIS and telecommunication systems modern SWIFT software to accelerate legal documents which allowed Eximbank to become one of payments, software from Reuters (Condor+) the technologically most advanced and better allowing better management of FOREX equipped banking institution in the country. exposure as part of its improved Treasury Specifically, Eximbank established modern and Trading function have been procured plastic cards processing system, expanded and installed. EXIM has devised new credit its ATM network, introduced modern SWIFT assessment and monitoring procedures, software to accelerate payments execution established risks management department, and reduce costs, installed modern designed new legal documents for new security/information protection systems, banking products, introduced a number of developed new services and products for new products for corporate and retail clients. clients and increased client's access to information, purchased and installed modern software from Reuters (Condor+) allowing better management of banks. FOREX exposure as part of its improved Treasury and Trading function etc. 1End of project - 26 - Annex 2. Project Costs and Financing Project Cost by Component (in US$ million equivalent) Appraisal Actual/Latest Percentage of Estimate Estimate Appraisal Component US$ million US$ million Export Development Technical Assistance Fund 5.00 0.39 8 Institutional Development of the Borrower 2.50 7.61 304 Export Development Credit Facility 60.00 62.00 103 Unallocated 2.50 0.00 0 Total Baseline Cost 70.00 70.00 Total Project Costs 70.00 70.00 Total Financing Required 70.00 70.00 Project Costs by Procurement Arrangements (Actual/Latest Estimate) (US$ million equivalent) 1 Procurement Method Expenditure Category ICB NCB 2 N.B.F. Total Cost Other 1. Works 0.00 0.00 2.88 0.00 2.88 (0.00) (0.00) (0.09) (0.00) (0.09) 2. Goods 5.66 0.00 37.28 0.00 42.95 (5.42) (0.00) (18.46) (0.00) (23.88) 3. Services 0.00 0.00 0.11 2.56 2.67 (0.00) (0.00) (0.05) (2.31) (2.36) 4. Miscellaneous 0.00 0.00 0.00 0.00 0.00 (0.00) (0.00) (0.00) (0.00) (0.00) 5. Miscellaneous 0.00 0.00 0.00 0.00 0.00 (0.00) (0.00) (0.00) (0.00) (0.00) 6. Miscellaneous 0.00 0.00 0.00 0.00 0.00 (0.00) (0.00) (0.00) (0.00) (0.00) Total 5.66 0.00 40.28 2.56 48.50 (5.42) (0.00) (18.60) (2.31) (26.33) 1/Figures in parenthesis are the amounts to be financed by the Bank Loan. All costs include contingencies. 2/Includes civil works and goods to be procured through national shopping, consulting services, services of contracted staff of the project management office, training, technical assistance services, and incremental operating costs related to (i) managing the project, and (ii) re-lending project funds to local government units. - 27 - Project Financing by Component (in US$ million equivalent) Percentage of Appraisal Component Appraisal Estimate Actual/Latest Estimate Bank Govt. CoF. Bank Govt. CoF. Bank Govt. CoF. A. Export Development 5.00 2.50 0.39 0.53 7.8 21.2 Technical Assistance Fund (EDF) B. Institutional 2.50 0.50 7.61 15.14 304.4 3028.0 Development program (technical assistance for EXIM) C. Export Development 60.00 9.00 62.00 36.55 103.3 406.1 Credit Facility* Unallocated 2.50 1.25 0.00 0.00 0.0 0.0 * Including grants of Government of Japan and the Netherlands and expenditures of those funds for Actual - 28 - Annex 3. Economic Costs and Benefits Not applicable - 29 - Annex 4. Bank Inputs (a) Missions: Stage of Project Cycle No. of Persons and Specialty Performance Rating (e.g. 2 Economists, 1 FMS, etc.) Implementation Development Month/Year Count Specialty Progress Objective Identification/Preparation 03/08/1996 3 TASK TEAM LEADER (1), S S SENIOR FINANCIAL ANALYST (1), OPERATIONS OFFICER (1) Appraisal/Negotiation 06/19/1996 4 TASK TEAM LEADER (1), S S SENIOR FINANCIAL ANALYST (1), BANKING CONSULTANT(1), OPERATIONS OFFICER (1) 12/14/1996 3 TASK TEAM LEADER (1), S S SENIOR FINANCIAL ANALYST (1), OPERATIONS OFFICER (1) 04/27/1997 4 TASK TEAM LEADER (1), S S SENIOR FINANCIAL ANALYST (1), BANKING CONSULTANT(1), OPERATIONS OFFICER (1) Supervision 07/24/1997 3 TASK MANAGER (1); S S FINANCIAL ANALYST (1); OPERATIONS ASSISTANT (1) 11/29/1997 3 TM/SR. FIN ANALYST (1); SR. S S FINANCIAL ANALYST (1); OPERATIONS OFFICER (1) 04/30/1998 4 PTL/TASK LEADER (1); SR. S S FINANCIAL ANALYST (1); SR. BANKING EXPERT (1); OPERATIONS OFFICER (1) 10/02/1998 4 PTL, SR. FIN ANALYST (1); S S SR.FIN SECTOR SPEC. (1); BANKING EXPERT (1); OPERATIONS OFFICER (1) 06/19/1999 5 PROGRAM TEAM LEADER S S (1); SENIOR FINANCIAL SECTO (1); PROCUREMENT ACCREDITED (1); PROCUREMENT/DISBURSEM E (1); PROJECT OFFICER (1) 06/08/2000 4 OPERATIONS OFFICER (1); U U SECTOR MANAGER (1); - 30 - FINANCIAL SPECIALIST (1); PRIN. OPERATIONS OFF. (1) 04/12/2001 2 BANKING SPECIALIST (2) S S 09/21/2001 4 TASK MANAGER (1); S S FINANCIAL SPECIALIST (1); PROCUREMENT SPECIALIST (2) 02/13/2002 2 BANKING SPECIALIST (1); S S FINANCIAL SECTOR SPEC. (1) 07/24/2002 2 MISSION LEADER (1); S S MISSION MEMBER (1) 04/25/2003 5 TASK TEAM LEADER (1); S S BANKING SPECIALIST (1); FMS (1); PAS, KIEV REG.OFFICE (1); ENVIRONMENT SPECIALIST (1) 12/06/2003 4 TASK TEAM LEADER (1); S S PAS (1); FMS (1); BANKING CONSULTANT (1) ICR 06/12/2004 2 TASK TEAM LEADER (1), S S BANKING CONSULTANT (1) (b) Staff: Stage of Project Cycle Actual/Latest Estimate No. Staff weeks US$ ('000) Identification/Preparation Appraisal/Negotiation Supervision 149.361 286,787.14 ICR 9.925 6,168.38 Total 159.286 292,955.52 - 31 - Annex 5. Ratings for Achievement of Objectives/Outputs of Components (H=High, SU=Substantial, M=Modest, N=Negligible, NA=Not Applicable) Rating Macro policies H SU M N NA Sector Policies H SU M N NA Physical H SU M N NA Financial H SU M N NA Institutional Development H SU M N NA Environmental H SU M N NA Social Poverty Reduction H SU M N NA Gender H SU M N NA Other (Please specify) H SU M N NA Private sector development H SU M N NA Public sector management H SU M N NA Other (Please specify) H SU M N NA - 32 - Annex 6. Ratings of Bank and Borrower Performance (HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HU=Highly Unsatisfactory) 6.1 Bank performance Rating Lending HS S U HU Supervision HS S U HU Overall HS S U HU 6.2 Borrower performance Rating Preparation HS S U HU Government implementation performance HS S U HU Implementation agency performance HS S U HU Overall HS S U HU - 33 - Annex 7. List of Supporting Documents 1. November 22, 2004 letter from the Chairman of State Export-Import Bank of Ukraine Mr. Oleksander Sorokin to Mr. Paul Bermingham, Director for Ukraine, Belarus and Moldova with the detailed comments from the Borrower to the Project's Implementation Completion Report. 2. Detailed comments from the Borrower to the Project's Implementation Completion Report. 3. Letter from the Deputy Minister of Finance Mr. Anatoly Shapovalov to the Bank dated September 14, 2004 regarding preparation of Project's ICR. 4. Letter from the Deputy Minister of Economy and on the Issues of European Integration Ms. Lyudmila Musina dated September 16, 2004 with the Mininstry's commentaries to the Project's ICR. 5. October 13, 2004 letter from the Deputy Governor of the National Bank of Ukraine Mr. Oleksander Shlapak to the Bank with the commentaries to the ICR and overall project assessment upon completion. - 34 - - 35 -