Document of The World Bank Report No: ICR00004070 IMPLEMENTATION COMPLETION AND RESULTS REPORT (IBRD-8392-UA AND IBRD- 8511-UA) FOR A PROGRAMMATIC DEVELOPMENT POLICY LOAN SERIES IN THE AMOUNT OF DPL 1: US$ 750 MILLION DPL 2: US$ 500 MILLION TO UKRAINE May 1, 2017 Macroeconomics and Fiscal Policy Management Global Practice Belarus, Moldova and Ukraine Country Management Unit Europe and Central Asia Region CURRENCY EQUIVALENTS (Exchange Rate Effective 5/1/2017) Currency Unit = Ukrainian Hryvnia (UAH) US$ 1.00 = 26.54 UAH UKRAINE - FISCAL YEAR January 1 – December 31 ABBREVIATIONS AND ACRONYMS CPS Country Partnership Framework MOF Ministry of Finance DB Doing Business NABU National Anticorruption Bureau DH District Heating NACP National Anticorruption Prevention Agency DPL Development Policy Loan NBU National Bank of Ukraine DTF Distance-to-frontier NPL Non-performing loans European Bank for Reconstruction and EBRD Development OECD Organization for Economic Cooperation and Development ECA Europe and Central Asia PDO Program Development Objective EFF Extended Fund Facility PEFA Public Expenditure and Financial Accountability EIB European Investment Bank PIM Public Investment Management EU European Union PIMA Public Investment Management Assessment FY Fiscal Year SBA Standby-Arrangement GDP Gross Domestic Product SFS State Fiscal Service HUS Housing and Utiliy Subsidy SLB State Land Bank IAC Inter-Agency Committee TA Technical Assistance ICR Implemention Completion and Results UAH Ukraine Kryvnia IMF International Monetary Fund UN United Nations JICA Japan International Cooperation Agency US$ United States Dollars M&E Monitoring & Evaluation VAT  Value-added Tax Global Practice Senior Director: Carlos Felipe Jaramillo Global Practice Director: John Panzer Country Director: Satu Kahkonen Practice Manager: Gallina Vincelette Task Team Leaders: Sebastian Eckhart, Lalita Moorty ICR Team Leaders: Christoph Ungerer, Anastasia Golovach UKRAINE Programmatic Multisector Development Policy Loan Series 2014-15 CONTENTS Data Sheet A. Basic Information B. Key Dates C. Ratings Summary D. Sector and Theme Codes E. Bank Staff F. Results Framework Analysis G. Ratings of Program Performance in ISRs H. Restructuring 1. Program Context, Development Objectives and Design ............................................ 1 2. Key Factors Affecting Implementation and Outcomes .............................................. 1 3. Assessment of Outcomes ............................................................................................ 2 4. Assessment of Risk to Development Outcome ........................................................... 2 5. Assessment of Bank and Borrower Performance ....................................................... 3 6. Lessons Learned.......................................................................................................... 3 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners............. 3 Annex 1 Bank Lending and Implementation Support/Supervision Processes................ 4 Annex 2. Beneficiary Survey Results ............................................................................. 5 Annex 3. Stakeholder Workshop Report and Results ..................................................... 6 Annex 4. Summary of Borrower's ICR and/or Comments on Draft ICR ....................... 7 Annex 5. Comments of Cofinanciers and Other Partners/Stakeholders ......................... 8 Annex 6. List of Supporting Documents ........................................................................ 9 MAP A. Basic Information Program 1 Development Policy Country Ukraine Program Name Loan 1 Program ID P150313 L/C/TF Number(s) IBRD-83920 ICR Date 05/24/2017 ICR Type Core ICR Lending Instrument DPL Borrower UKRAINE Original Total USD 750.00M Disbursed Amount USD 750.00M Commitment Implementing Agencies Cofinanciers and Other External Partners Program 2 Country Ukraine Program Name Ukraine - DPL 2 IBRD-83920,IBRD- Program ID P151479 L/C/TF Number(s) 85110 ICR Date 05/24/2017 ICR Type Core ICR Lending Instrument DPL Borrower Original Total USD 500.00M Disbursed Amount USD 500.00M Commitment Implementing Agencies Cofinanciers and Other External Partners B. Key Dates Development Policy Loan 1 - P150313 Revised / Actual Process Date Process Original Date Date(s) Concept Review: 04/22/2014 Effectiveness: 05/27/2014 Appraisal: 04/25/2014 Restructuring(s): Approval: 05/22/2014 Mid-term Review: Closing: 10/31/2014 10/31/2014 Ukraine - DPL 2 - P151479 Revised / Actual Process Date Process Original Date Date(s) Concept Review: 08/01/2014 Effectiveness: 08/27/2015 Appraisal: 04/15/2015 Restructuring(s): Approval: 08/25/2015 Mid-term Review: Closing: 06/30/2016 06/30/2016 C. Ratings Summary C.1 Performance Rating by ICR Overall Program Rating Outcomes Satisfactory Risk to Development Outcome Substantial Bank Performance Satisfactory Borrower Performance Satisfactory C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Overall Program Rating Bank Ratings Borrower Ratings Quality at Entry Satisfactory Government: Satisfactory Implementing Quality of Supervision: Satisfactory Satisfactory Agency/Agencies: Overall Bank Overall Borrower Satisfactory Satisfactory Performance Performance C.3 Quality at Entry and Implementation Performance Indicators Development Policy Loan 1 - P150313 Implementation QAG Assessments Indicators Rating: Performance (if any) Potential Problem Quality at Entry Program at any time No None (QEA) (Yes/No): Problem Program at any Quality of No None time (Yes/No): Supervision (QSA) DO rating before Closing/Inactive status Ukraine - DPL 2 - P151479 Implementation QAG Assessments Indicators Rating: Performance (if any) Potential Problem Quality at Entry Program at any time No None (QEA) (Yes/No): Problem Program at any Quality of No None time (Yes/No): Supervision (QSA) DO rating before Closing/Inactive status D. Sector and Theme Codes Development Policy Loan 1 - P150313 Original Actual Major Sector Public Administration Other Public Administration 29 29 Financial Sector Banking Institutions 14 14 Energy and Extractives Other Energy and Extractives 28 28 Industry, Trade and Services Other Industry, Trade and Services 29 29 Major Theme/Theme/Sub Theme Economic Policy Fiscal Policy 7 7 Tax policy 7 7 Private Sector Development Business Enabling Environment 43 43 Regulation and Competition Policy 43 43 Public Sector Management Public Administration 15 15 Transparency, Accountability and Good 15 15 Governance Public Finance Management 15 15 Domestic Revenue Administration 7 7 Public Expenditure Management 15 15 Social Development and Protection Social Protection 14 14 Social Safety Nets 14 14 Ukraine - DPL 2 - P151479 Original Actual Major Sector Public Administration Other Public Administration 40 40 Financial Sector Banking Institutions 5 5 Energy and Extractives Other Energy and Extractives 20 20 Social Protection Social Protection 10 10 Industry, Trade and Services Other Industry, Trade and Services 25 25 Major Theme/Theme/Sub Theme Economic Policy Fiscal Policy 7 7 Tax policy 7 7 Private Sector Development Business Enabling Environment 43 43 Investment and Business Climate 50 50 Public Sector Management Public Administration 15 15 Transparency, Accountability and Good 15 15 Governance Public Finance Management 15 15 Domestic Revenue Administration 7 7 Public Expenditure Management 15 15 Social Development and Protection Social Protection 14 14 Social Safety Nets 14 14 E. Bank Staff Development Policy Loan 1 - P150313 Positions At ICR At Approval Vice President: Cyril E Muller Laura Tuck Country Director: Satu Kristiina J. Kahkonen Qimiao Fan Practice Gallina Andronova Vincelette Carolina Sanchez Manager/Manager: Task Team Leader: Faruk Khan Lalita M. Moorty ICR Team Leader: Christoph Theodor Friedri Ungerer ICR Primary Author: Christoph Theodor Friedri Ungerer Anastasia Golovach Ukraine - DPL 2 - P151479 Positions At ICR At Approval Vice President: Cyril E Muller Cyril E Muller Country Director: Satu Kristiina J. Kahkonen Qimiao Fan Practice Gallina Andronova Vincelette Ivailo V. Izvorski Manager/Manager: Task Team Leader: Faruk Khan Sebastian Eckardt ICR Team Leader: Christoph Theodor Friedri Ungerer ICR Primary Author: Christoph Theodor Friedri Ungerer Anastasia Golovach F. Results Framework Analysis Program Development Objectives (from Program Document) The Program Development Objectives were to: i) promote good governance, transparency and accountability in the public sector (Pillar A); ii) strengthen the regulatory framework and reduce costs of doing business (Pillar B); and iii) reform inefficient and inequitable utility subsidies while protecting the poor (Pillar C). Revised Program Development Objectives (as approved by original approving authority) The PDO was not revised Indicator(s) Development Policy Loan 1 - P150313 Original Target Formally Actual Value Baseline Values (from Revised Achieved at Indicator Value approval Target Completion or documents) Values Target Years Ukraine - DPL 2 - P151479 Original Target Formally Actual Value Baseline Values (from Revised Achieved at Indicator Value approval Target Completion or documents) Values Target Years Share of competitive procurement selection by value Indicator 1 : Value (quantitative or 35% 55% N/A Qualitative) Date achieved 12/31/2013 12/31/2016 12/31/2016 Comments (incl. % not available yet achievement) Share of new eligible public investment projects appraised and selected Indicator 2 : through the public investment management system Value (quantitative or 0% 100% 100% Qualitative) Date achieved 12/31/2013 12/31/2016 12/31/2016 Comments (incl. % achieved achievement) Share of Financial Disclosures Subject to External Verification Indicator 3 : Value (quantitative or 0% 100% 0% Qualitative) Date achieved 12/31/2013 12/31/2016 12/31/2016 Comments (incl. % not achieved achievement) Coverage of External Audit includes State Revenues Indicator 4 : Value (quantitative or NO YES YES Qualitative) Date achieved 12/31/2013 12/31/2016 12/31/2016 Comments (incl. % achieved achievement) Ratio of VAT refund claims older than 74 days/quarterly flow of VAT Indicator 5 : refund claims Value (quantitative or 153% 20% 0.2% Qualitative) Date achieved 12/31/2013 01/31/2017 12/31/2016 Comments (incl. % overachieved achievement) Number of business permits Indicator 6 : Value (quantitative or 143 84 56 Qualitative) Date achieved 12/31/2013 01/31/2017 12/31/2016 Comments (incl. % overachieved achievement) Naftogaz financial deficit, US$ equivalent (cash basis) Indicator 7 : Value (quantitative or 3.3 billion 1.0 billion 0.0 billion Qualitative) Date achieved 12/31/2013 12/31/2016 12/31/2016 Comments (incl. % overachieved achievement) Number of families receiving Housing and Utility Subsidy Indicator 8 : Value (quantitative or 1.3 million 2.0 million 6.6 million Qualitative) Date achieved 12/31/2013 12/31/2016 12/31/2016 Comments (incl. % overachieved achievement) Share of means and income tested programs in overall social assistance Indicator 9 : spending Value (quantitative or 13% 20% 68% Qualitative) Date achieved 12/31/2012 12/31/2016 12/31/2016 Comments (incl. % overachieved achievement) G. Ratings of Program Performance in ISRs NA H. Restructuring (if any) NA 1. Program Context, Development Objectives and Design The purpose of this Implementation Completion and Results (ICR) Report is to assess the reforms implemented and results achieved with the support of the programmatic multisector Development Policy Loan (DPL) series for Ukraine in 2014 and 2015. This DPL series was complemented by a programmatic financial sector DPL series for which a separate ICR has been prepared. Both DPL series closed on June 30, 2016 and supported Ukraine in implementing considerable reforms in the face of unprecedented shocks to begin addressing longstanding structural bottlenecks. These reforms helped stabilize the economy, reduce large imbalances, and mitigate the impact of the shocks on the population. At the same time, the backlog of structural bottlenecks and the magnitude of the shocks have been so sizable that further reforms will be needed for Ukraine to move from economic stabilization to sustainable growth. 1.1 Context at Appraisal Ukraine has struggled with structural and institutional bottlenecks that have undermined its development prospects for more than two decades. Weak governance and corruption have been endemic, undermining the efficient use of public resources, the quality of service delivery, and citizen’s trust in public institutions. Prior to 2014, a de facto fixed exchange rate combined with large fiscal deficits, sizable quasi-fiscal deficits in the energy sector, and widespread related party lending and weak supervision in the financial sector, to lead to large macroeconomic imbalances. In addition, inefficient public infrastructure investment, an onerous tax regime, complicated business regulations and weak contract enforcement depressed private investment and growth. As a result, while economic growth averaged more than 7 percent per year during 2000 to 2007 driven by favorable external conditions, growth essentially stagnated during 2008-13. Furthermore, the consolidated fiscal deficit, including Naftogaz, reached 6.7 percent of GDP in 2013 and the current account deficit reached 9.2 percent of GDP in the same year. Unprecedented shocks from the conflict in eastern Ukraine and weak external conditions combined with this backlog of structural bottlenecks to precipitate a serious economic crisis during 2014 and 2015. The conflict in eastern Ukraine disrupted supply and distribution chains, impacted industrial production and revenue collection, and led to a decline in confidence in the overall economy. In addition, a drop in global commodity prices led to a deterioration of Ukraine’s terms of trade. As a result, real GDP contracted sharply by 6.6 percent in 2014 and by a further 9.8 percent in 2015. Furthermore, structural bottlenecks and accumulating imbalances preceding the crisis necessitated a considerable fiscal and external adjustment in response to the shocks, which further compressed domestic demand. The currency depreciated by 47 percent in 2014 and inflation increased to 24.9 percent. The consolidated fiscal deficit, including Naftogaz, reached 10.1 percent of GDP in 2014 and public and guaranteed debt spiked to 70.3 percent of GDP. The deep recession and depreciation caused deposit outflows, rising levels of nonperforming loans, and large numbers of bank failures, further reducing confidence in the economy. 1 The new pro-reform government that came into power after February 2014 moved quickly to put together a reform program to stabilize the economy and to begin addressing structural and institutional bottlenecks. Following widespread public dissatisfaction with the performance of the previous government and its decision to withdraw from the European Union accession talks, the “Maidan revolution” led to the formation of a new government with a strong mandate for change. The new government moved quickly to outline the key elements of its economic reform program, which included: (i) economic stabilization and reducing large imbalances through fiscal austerity measures, reducing waste in expenditures, and reforming energy tariffs; (ii) transparency and anti-corruption measures, including improving transparency in the use of state funds and procurement and (iii) structural reforms to improve the investment climate by removing restrictions that hinder competition and limiting the role of state “control” in economic activities. The new government announced presidential elections for May 2014 and Parliamentary elections for October of the same year. It also resumed accession talks with the EU. The new government’s reform program received broad support from the international community, including the World Bank and the IMF. In light of the significant shift in Ukraine’s willingness to move forward with much needed reforms and to manage the fallout from the unprecedented shocks, the World Bank and other international partners announced a significant scale up in engagement and support for Ukraine. In March 2014, the World Bank announced plans for new support for Ukraine amounting to US$ 3 billion in 2014, including support for reforms through the resumption of DPL operations. In the same month, the EU announced a large package amounting to EUR 11 billion in support of Ukraine’s political, economic and financial stabilization (including EUR 3 billion of macro-financial assistance grants and EUR 8 billion of projects though EBRD and EIB) and the US Treasury announced the signing of a US$1 billion loan guarantee agreement. In April 2014, the IMF approved a new two-year US$ 17 billion Standby Arrangement (SBA), immediately disbursing US$ 3.19 billion. These assistance packages also intended to contribute to meeting Ukraine’s urgent financing needs estimated at $18 billion in 2014. The Multisector DPL series approved in May 2014 supported Ukraine’s ambitious reform agenda to address the structural roots of the crisis, stabilize the economy, tackle imbalances, and mitigate the impact of the shocks on the poor. The main policy reform areas supported by this programmatic series of two operations were: (i) strengthening public sector governance (Pillar A); (ii) promoting deregulation and creating a level playing field in the real sector (Pillar B); and (iii) supporting restructuring of the energy sector, while mitigating the impact on the poor (Pillar C). The program helped Ukraine respond to the demand for reform and change from the “Maidan” revolution and begin to tackle some of the deep structural and governance problems at the heart of the economic crisis. The reforms under the first pillar helped improve transparency and accountability in the use of public resources and in the public sector more generally. The reforms under the second pillar helped stabilize investor confidence and stimulate economic activity. The reforms under the third pillar helped reduce large and inequitable 2 quasi-fiscal deficits in the energy sector while putting in place and scaling up targeted utility subsidy and social assistance programs. By focusing on longer term structural underpinnings of the crisis, the reforms leveraged the World Bank’s sectoral technical expertise and complemented the IMF program’s focus on immediate stabilization of Ukraine’s macroeconomic framework. The multisector DPL series also complemented a parallel World Bank financial sector DPL series to support the resolution of insolvent banks, implement bank recapitalization/restructuring plans, and strengthen bank supervision. 1 The reforms supported by the DPL series were well aligned with the government program and the World Bank’s Country Partnership Strategy for Ukraine. The reforms supported by the DPL series contributed to seven out of the ten core pillars of the Ukrainian government program adopted in 2014: (i) public service delivery, (ii) anticorruption strategy, (iii) economic policy, (iv) state property management, (v) agricultural policy, (vi) energy independence and (vii) social protection. The DPL- supported reforms also contributed to the strategic directions set out in the World Bank Country Partnership Strategy (FY12-16) structured around two pillars: (i) improving public services and public finances and (ii) improving policy effectiveness and economic competitiveness. Figure 1: DPL Series Timeline The DPL series was prepared under a tight timeline and the reforms were implemented under a rapidly evolving economic, security, and political environment, thus calling for a more flexible approach. Given the rapidly deteriorating economic situation and the urgent need to support the ambitious reform agenda of Ukraine’s new government, the operation was prepared under a tight schedule (March to May 2014). This was made possible by the substantial policy dialogue and technical assistance over preceding years, which laid the groundwork for the DPL reforms. Events continued to unfold during the preparation of the DPL. In March 2014, the Autonomous Republic of Crimea and City of Sevastopol held referenda to join the Russian Federation, which were 1 The multisector DPL series amounted to $1.25 billion (with $750 million for DPL1 and $500 million for DPL2). JICA (US$400 million) and the Norwegian Government (NOK 200 million or US$24 million) provided parallel financing arrangements to the multisector DPL series. The financial sector DPL series amounted to $1 billion (with $500 million for each of the two operations). 3 widely criticized and declared as “having no validity” in the UN General Assembly resolution 68/262. At the same time, an armed conflict in eastern Ukraine gradually escalated around the industrial centers of Luhansk and Donetsk, which accounted for one quarter of the country’s industrial output. By further depressing economic activity and forcing additional military expenditures, the escalating conflict deepened Ukraine’s economic crisis over the course of 2014 and 2015. The full extent of the fighting and its impact on Ukraine’s economy were difficult to assess in early 2014. This called for a more flexible approach to the design of the reforms supported. In light of the evolving economic, political, and security environment, risks to the operation were high. First, the extent of the armed conflict in eastern Ukraine and its economic impact evolved over time. The economic contraction deepened in 2015, the hryvnia lost additional value, and the banking sector lost additional deposits. The government introduced significant fiscal austerity measures that had a further impact on the economy. Second, in order to support the urgent reform agenda, the DPL series was designed ahead of presidential and parliamentary elections in the summer and fall of 2014. While the emergence of a pro-reform government was widely expected, implementation of the ambitious reform agenda would fall upon the specific government counterparts that resulted from the elections. Third, the reforms supported by the DPL series tackled powerful vested interests, which had held back previous IMF and World Bank programs in Ukraine. 1.2 Original Program Development Objectives (PDO), Policy Areas and Key Indicators The program development objective (PDO) of this programmatic DPL series was to: i) Promote good governance, transparency and accountability in the public sector (Pillar A); ii) Strengthen the regulatory framework and reduce costs of doing business (Pillar B); iii) Reform inefficient and inequitable utility subsidies while protecting the poor (Pillar C).2 This section gives a broad overview of the three pillars and the reforms supported by the program. An in-depth evaluation of each prior action and the results indicators will follow in section 3. All prior actions and triggers are listed in table 2 at the back of this document. Pillar A supported reforms to strengthen public sector governance. First, as a large number of exemptions to standard competitive bidding procedures had hollowed out Ukraine’s 2010 public procurement law and created opportunities for corruption, DPL1 supported a legislative amendment to close these loopholes. Second, since the 2012 World Bank-IMF Public Investment Management Assessment (PIMA) highlighted that Ukraine’s ad-hoc and opaque process for investment project selection left ample room for corruption and the inefficient prioritization of projects, the DPL series aimed to move the appraisal 2 The PDO is reflected in the “Summary of Proposed Loan and Program” cover sheets of DPL1 and DPL2. It is also reflected in the first paragraph of section 4.1. “Link to Government Program and Project Description” of these documents. It can also be found in the DPL1 Letter of Development Policy of the Government. 4 and selection of public investment projects to a modern and transparent public investment management (PIM) system by 2015. Third, to deter corruption and the mismanagement of public assets, the operation supported the external verification of the asset declarations of all elected and senior public officials. Fourth, this pillar targeted that external budget audits by the Accounting Chamber of Ukraine be extended from covering only public expenditures to also include public revenues in 2015, addressing one of the key issues raised by Ukraine’s 2011 Public Expenditure and Financial Accountability (PEFA) report. To monitor results under this pillar, the program evaluated the share of competitive procurement selection by value, the share of new eligible public investment projects appraised and selected through a modern PIM system, the share of financial disclosures subject to external verifications and the inclusion of budget revenues in external audit reports. Pillar B supported measures to improve Ukraine’s business climate. First, since delays in tax refunds drained the liquidity of corporates and raised the effective cost of doing business, the DPL promoted measures to accelerate this process. Second, to improve the general business environment, the DPL also supported reforms to ease business and property registration, reduce the number of permits, establish regulatory impact assessment, rationalize construction permits, strengthen investor protection and harmonize Ukraine’s standardization system, legal framework for food safety, technical regulations and conformity assessments with EU requirements. Third, this pillar also aimed to abolish the financial sector and property market distortions created by the State Land Bank (SLB), preventing potential misappropriation of state land assets through this agricultural development bank. To monitor results under this pillar, the program evaluated the ratio of outstanding VAT refunds, the number of business permits required and Ukraine’s World Bank Doing business score. Pillar C aimed to reform Ukraine’s inefficient and inequitable gas and heating subsidies while protecting the poor. First, towards eliminating Ukraine’s high-cost and untargeted implicit gas and heating tariff subsidies, DPL1 supported resolutions to raise residential gas tariffs as well as residential heating tariffs. DPL2 aimed to strengthen the independence of the energy regulator, preventing the encroachment of new energy subsidies, and supported a restructuring plan for the state-owned gas company Naftogaz, including the eventual unbundling of Naftogaz’s transmission and production businesses in order to open Ukraine’s gas market to potential competition. Second, to reduce the impact of higher residential gas and heating tariffs on the poor, DPL1 supported the creation of a new social protection scheme to compensate the bottom 30% for the change in prices for the 2014-15 heating season. DPL2 aimed to improve the targeting of the existing 17 social protection schemes. Finally, to strengthen the independence of the social inspectors, DPL2 pushed to move this control function from Local Governments to the Ministry of Social Policy. To monitor results under this pillar, the program evaluated fiscal subsidies to District Heating (DH) companies, the number of families benefiting from the program’s new social protection scheme and the share of means-and-income-tested programs in overall social assistance spending. 1.3 Revised PDO, Policy Areas and Key Indicators, and Reasons/Justification 5 The PDO of DPL1 was not revised during preparation of DPL2, but some policy areas were adjusted due to the deteriorating macroeconomic environment and associated evolving reform priorities. Overall, the formulation of most prior actions was sharpened in DPL2 in light of further preparatory work in the second half of 2014 and the first half of 2015. Second, the DPL2 trigger on developing a restructuring plan for Naftogaz transformed into a more comprehensive prior action requiring a “Gas Sector Reform and Implementation Plan”. This broadening of the reform action became necessary because further depreciation of the Hryvnia in 2014-15 increased the cost of energy imports and undermined the fiscal gains of the 2014 residential gas and heating tariff increases supported by DPL1. A strategy for further energy tariff increases over 2015-16 became imperative. Third, to strengthen the independence of the social inspectors, DPL1 included an indicative trigger that aimed to move this control function from Local Governments to the Ministry of Social Policy. However, after board approval of DPL1 in May 2014, the election of a new President and Parliament in the summer and fall of 2014 led to the adoption of a new national decentralization agenda. The centralization mandated by this trigger therefore did not fit into the new government strategy and it was accordingly dropped in DPL2. In addition to strengthening policy areas, several outcome indicators were also adjusted to improve how the DPL series monitors impact. First, with the implementation of several DPL2 reforms extending well into 2015, the dates on most results indicators were moved forward by a year to reflect revised expectations on the speed with which outcomes would materialize. Second, DPL1 targeted an increase in the World Bank Doing Business (DB) Distance-to-Frontier (DTF) indicator, measuring Ukraine’s overall business environment. DPL2 dropped this results indicator to reduce the complexity of the results framework. Third, DPL1 included two results indicators for the gas and heating tariff reforms supported by the DPL series. DPL2 simplified this framework, reducing it to a single results target – the financial deficit of Naftogaz. This also aligned the indicator with one of the key metrics monitored by the IMF program. Fourth, the enrolment in the new social protection scheme developed under DPL1 proved low in the heating season of 2014-15 and the authorities voiced preference for alternatively revising and expanding an existing program, the Housing and Utility Subsidy (HUS) program. For DPL2, the operation therefore accordingly revised its results target. Instead of aiming for enrolment of 2 million beneficiaries under the new DPL1 social protection program by 2014, DPL2 targeted the enrolment of 2 million households in the HUS program by 2016. 1.4 Other significant changes As the macroeconomic environment deteriorated in the second half of 2014 and 2015, the authorities stepped up their policy response and the international community adjusted its support to Ukraine. The conflict in eastern Ukraine escalated significantly in the second half of 2014 and 2015, which led to a deeper economic contraction in 2014 and 2015 than originally anticipated. This also led to additional pressures on public finances, rising public debt, and rising numbers of bank failures. In response, the authorities stepped up their policy response, allowing the exchange rate to depreciate 6 further and adding to the fiscal adjustment measures put in place, including further energy tariff increases and austerity measures. In order to manage the fallout from the banking sector, the authorities strengthened the capacity of the Deposit Guarantee Fund (DGF) and strengthened supervision. In response, the international community scaled up its support for Ukraine. The IMF restructured its program, with a new four-year Extended Fund Facility (EFF) amounting to US$17.5 billion approved in March 2015. Key features of this new program included: (i) an extension of the IMF program from two to four years; (ii) further residential gas and heating tariff increases to achieve cost-recovery in energy prices by 2017; (iii) significant private sector involvement through the restructuring of Ukraine’s public external debt; and (iv) a delayed transition of the NBU towards inflation targeting. Furthermore, the World Bank also increased the loan amount for DPL2 from the originally planned US$ 250 million to US$ 500 million upon request of the government, taking into account the worsened macroeconomic environment, deeper reform priorities, and higher financing needs. 2. Key Factors Affecting Implementation and Outcomes 2.1 Program Performance The reforms backed by the DPL series were successful in helping Ukraine begin to address the structural and institutional roots of the crisis, stabilize the economy, reduce imbalances, and mitigate the impact of the shocks on the poor. Broadly, the reforms supported by the multisector DPL series and the parallel financial sector DPL series helped tackle key sources of corruption and poor governance by improving transparency and accountability in the public sector, closing loopholes for rent seeking in the economy in general and in the energy sector and banking sectors in particular. The reforms also helped stabilize confidence in the economy in the face of unprecedented shocks, reduce large macroeconomic imbalances, and mitigate the impact on the poor. The public sector governance reforms supported meaningful and highly visible steps towards improving public procurement and increasing the efficiency of public investment. The reforms to Ukraine’s business environment directly eased the regulatory burden faced by companies for decades and encouraged entrepreneurship. The energy sector reforms took radical action to reduce Ukraine’s large structural fiscal deficits and – by simplifying the tariff system for different customer segments – closed some of the largest arbitrage opportunities in the country, while cushioning the negative impact from the tariffs increase for the most vulnerable. Overall, these reforms helped to stabilize investor confidence and economic activity, strengthen Ukraine’s public finances, and cushion the impact of the shocks on the poor. Table 2 toward the end of the document presents a list of the measures implemented to meet all prior actions under DPL1 and DPL2, classified under each pillar of the program. Additional details on results achieved and reforms implemented are described in section 3.2 The macroeconomic framework supported the success of the DPL series, with the authorities adopting decisive policies to reduce fiscal and external imbalances in the 7 face of considerable shocks. As a result of the economic contraction and revenue losses from Donetsk and Luhansk, the consolidated fiscal deficit, including Naftogaz, ballooned to 10.1 percent of GDP in 2014. In response, the authorities implemented tight controls on spending and considerably restructured energy sector subsidies. These measures, together with higher inflation, reduced the consolidated fiscal deficit to 2.1 percent of GDP in 2015. In November 2015, Ukraine successfully restructured about $19 billion of its public external debt. As a result of these developments, public and publicly guaranteed debt stabilized at around 80 percent of GDP in 2015-16, up from 40 percent in 2013, although it increased further in 2017. In parallel, the authorities switched to a flexible exchange rate regime in February 2014 to avoid an imminent balance of payment crisis. The sharp depreciation of the Hryvnia, together with recession and administrative controls, compressed imports and narrowed the current account deficit to 0.2 percent of GDP in 2015 from 9.2 percent in 2013. Table 1: Key Macroeconomic Indicators 2012 2013 2014 2015 2016 2017P 2018P 2019P Nominal GDP, UAH billion 1,405 1,465 1,587 1,980 2,383 2,735 3,085 3,450 GDP per capita, US$ 4,080 4,216 3,119 2,122 2,174 2,277 2,464 2,736 Unemployment Rate 7.5 7.3 9.3 9.1 8.8 9.2 8.8 8.5 Real GDP, % change 0.2 0.0 ‐6.6 ‐9.8 2.3 2.0 3.5 4.0 Gross Domestic Investment, % GDP 21.7 17.9 14.1 15.3 18.5 18.6 19.2 18.6 CPI, % change eop ‐0.2 0.5 24.9 43.3 12.4 10.2 7.0 6.0 Current Account Balance, % GDP ‐8.2 ‐9.2 ‐3.5 ‐0.2 ‐3.8 ‐4.1 ‐3.0 ‐3.3 Exports of G&S, % GDP 49.3 45.2 49.1 52.9 49.2 49.5 50.0 48.5 Imports of G&S, % GDP 57.4 53.8 52.5 54.7 55.4 54.7 54.1 52.7 External debt, % GDP 76.6 78.6 97.6 131.5 129.6 131.6 125.4 107.5 International Reserves, US$ billion 24.5 20.4 7.5 13.3 15.5 21.8 29.5 29.8 In months of next year’s imports 2.9 3.3 1.9 3.2 3.4 4.6 5.8 5.4 Budget revenues, % GDP 44.5 43.6 40.3 42.1 38.4 38.8 38.9 39.0 Tax revenues, % GDP 38.9 37.9 35.8 35.5 33.1 34.3 34.8 34.8 Budget expenditures, % GDP 48.9 48.4 44.8 43.2 40.6 41.9 41.5 41.4 Current expenditures, % GDP 45.7 46.2 44.3 41.0 37.4 38.6 37.8 37.5 Capital expenditures, % GDP 2.9 2.0 1.3 2.2 3.1 2.8 2.9 3.1 Fiscal balance, % GDP ‐4.4 ‐4.8 ‐4.5 ‐1.2 ‐2.2 ‐3.1 ‐2.6 ‐2.4 Consolidated deficit, incl Nagtogaz, % ‐5.5 ‐6.7 ‐10.1 ‐2.1 ‐2.3 ‐3.1 ‐2.6 ‐2.4 Public and Guaranteed Debt, % GDP 36.6 40.6 70.3 79.4 81.2 88.8 83.5 75.9 Source: Ukrainian Authorities, WB projections Official financing in support of the government’s reform program also helped restore macroeconomic stability. The IMF approved a new two-year Standby Arrangement (SBA) in April 2014, which was converted into a four -year Extended Fund Facility (EFF) in March 2015. Total official financing in 2015 amounted to $8.5 billion and helped support private debt repayments and an increase in international reserves to $13.5 billion at end-2015, equivalent to 3.5 months of imports. The World Bank provided $2.25 billion in total during 2014-2015 through the multisector and financial sector DPL series. As a result of the reforms, the economy stabilized, with modest growth of 2.3 percent in 2016. In addition to the macroeconomic policies to reduce imbalances, significant 8 structural reforms in other areas also helped stabilize investor confidence. These reforms included streamlining the business environment, improving public procurement and public investment management, establishing key anti-corruption agencies, and in the financial sector reforms, resolving and recapitalizing banks and strengthening supervision. As a result, real GDP grew modestly by 2.3 percent in 2016, supported by a bumper agriculture harvest and a rebound in fixed investment from low levels. In addition, inflation stabilized at 12.4 percent in 2016 from 43.3 percent in 2015. At the same time, the pace of recovery remains modest due to weak external demand, the continuing conflict in eastern Ukraine, and remaining structural bottlenecks. Following implementation of the reforms supported, DPL1 disbursed US$ 750 million on May 28, 2014. Following the Bank’s March 2014 announcement to step up support for Ukraine, the DPL team conducted an identification mission from April 3 to 18, 2014, followed by an Operations Committee Review of the proposed DPL program on April 22, 2014. Following completion of 7 prior actions (2 actions on public sector governance, 4 actions on the investment climate, 2 actions on the energy sector reform), loan negotiations with the Ukrainian government concluded on April 30, 2014. The World Bank Board approved DPL1 of the series (and the triggers for DPL2) on May 22, 2014, paving the way for loan effectiveness on May 27, 2014, and loan disbursement on May 28, 2014, ahead of a hump in Ukraine’s financing needs in June 2014. DPL2 disbursed US$ 500 million on August 28, 2015. Following DPL1, the team conducted a series of follow-up missions in Fall 2014, and Spring 2015. As a result of technical meetings during these missions, as discussed in Section 1, the macroeconomic framework was revised to reflect the escalation of the military confrontation in eastern Ukraine, and the prior actions for DPL2 and the outcome indicators were adjusted in line with further technical discussions. The Operations Committee Review of DPL2 program took place on April 8, 2015. Following completion of 10 prior actions (4 actions on public sector governance, 3 actions on the investment climate, 3 actions on energy reform) negotiations took place on July 24, 2015. The World Bank Board approved DPL2 on August 25, 2015, followed by loan effectiveness on August 27, 2015, and loan disbursement on August 28, 2015. DPL2 was closed on June 30, 2016. Operation Approval Effectiveness Disbursed Amount Closing Date Date Date DPF 1 5/22/2014 5/27/2014 US$ 750 million 10/31/2014 DPF 2 8/25/2015 8/27/2015 US$ 500 million 6/30/2016 2.2 Major Factors Affecting Implementation: Adequacy of government’s commitment: Strong commitment of the Ukrainian government to reform – particularly in the Spring of 2014 – allowed this DPL series to support crucial and politically-sensitive policies. Following the Maidan revolution of February 2014, the new government faced strong political pressure to move forward with the public sector governance, competitiveness and energy sector reforms supported by this 9 operation. Urgent financing needs required disbursements from international donors. The economic crisis made major reform a necessity recognized by all parties. Given this context, the DPL program benefited from strong initial government support and a fertile ground for reforms. The program was able to tackle economically crucial policy areas, for example, increases in residential gas and hearing tariffs, that up to that point had faced insurmountable political resistance. As Ukraine’s politics gradually normalized in 2015 during preparation of DPL2, special interests reemerged. As a result, politically challenging reforms, including the laws on the energy sector, required extended negotiations between the government and the World Bank team until Summer 2015. Stakeholder involvement and participatory processes: The structural and governance reforms supported by the DPL series had strong support in the popular protest movement that led to the “Maidan” revolution. To form a coalition supporting the reforms, the preparation of the DPL series included consultations with civil society and development partners early on in Spring 2014. During implementation, civil society galvanized by the Maidan events continued to act as important safeguard and support for the implementation of prior actions promoted by the DPL series. Partnership with other development institutions: The DPL series and the contemporaneous engagements in Ukraine of the IMF, the EU, DFID, EBRD, USAID, the US Treasury as well as other development partners mutually reinforced each other during implementation. On the one hand, the institutions focused on their comparative areas of expertise. While the IMF SBA - and subsequent EFF program - focused on stabilization of the macroeconomic framework, the World Bank DPL and the EU put a relatively stronger emphasis on structural reforms and technical assistance, including the restructuring of Naftogaz and the reform of the social protection programs. On the other hand, the institutions also coordinated and agreed on joint positions on key issues, including residential gas and heating tariffs reform. By speaking with one voice, this coordination strengthened the case for reforms at crucial points during program preparation and implementation. Soundness of the background analysis: The World Bank’s longstanding engagement in Ukraine, including the strong relationships built with the government, helped meet the accelerated preparation and implementation schedule. Key prior analytical reports that served as foundations for the DPL program include the 2010 Country Economic Memorandum, the 2011 PEFA, the 2012 PIMA and the 2012-13 studies on gas and district heating tariffs. Project preparation also benefited from the lessons learned from previous World Bank DPL and IMF programs in Ukraine, including (i) the need for a frontloaded program to take advantage of reform momentum early on, (ii) a programmatic approach with multiple DPLs to ensure the program can accompany the implementation of structural reforms over several years, and (iii) the need for early civil society and development partner consultations to build a strong coalition to support the reform program. Assessment of the operation’s design: With 3 pillars, 7 prior actions under DPL1, 10 prior actions under DPL2 and 9 results indicators, this was a complex operation focused on reforms across multiple sectors. To ensure adequate implementation support 10 for each sector, the design of the DPL benefited from complementary World Bank investment lending and non-lending technical assistance projects. Key related projects that supported the implementation of the DPL reforms include: “Increasing Fiscal Transparency and Accountability” (P153935); “Preventing corruption: financial disclosures and preventive anticorruption agency” (P153952); “Improving tax administration” (P153919); “Ukraine Investment Climate” project (IFC-00584508); “Facilitating Power and Gas Market Reform” (P158496); “Advancing Energy Subsidy Reforms” (P157758); “Moving Forward Energy Tariff Reforms” (P152593); “Reform of the Natural Gas Sector Advisory ” (P151927); and “District Heating Energy Efficiency Project” (P132741). Materialization of Risks: Some of the key risks identified in the DPL1 program document materialized during implementation, requiring adjustment of the program without compromising rigor. Following approval of DPL1, the deterioration of the macroeconomic environment and Presidential and Parliamentary elections meant that the DPL series had to respond flexibly to evolving reform priorities. For instance, with the sharper economic contraction and currency depreciation, the need for further residential gas and heating tariff increases meant that a broader energy sector reform strategy was added to DPL2, and the DPL2 loan amount was increased. Furthermore, as the government articulated its decentralization agenda, DPL2 dropped the trigger on centralization of the social inspection function. Finally, when the new social protection scheme established by DPL1 did not achieve the desired take-up, the government decided to focus on improving the coverage and targeting of its existing HUS program – a reform that the World Bank and the government had also already been working on together for years. DPL2 thus refocused the reform action on the HUS program. 2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization: The World Bank worked closely with the Ministry of Finance (MoF) and a range of other counterparts to monitor and assess reform progress and impact during the course of the DPL program. Monitoring and evaluation was supported by data that was readily available from a range of counterparts including the Ministry of Finance, Ministry of Economic Development and Trade, Ministry of Energy, Ministry of Social Policy, State Statistics Service, National Bank of Ukraine, and other government agencies. Baseline and updated data was provided by agencies and tracked according to the list of quantitative results indicators included in the Policy and Results Matrix. Design: This operation included 9 results indicators set in the program documents (DPL2), which were closely monitored during regular missions. While the results indicators and targets are overall relevant and adequate, a few limitations existed. First, some results indicators would have benefited from more precise wording (see section 3 below for further elaboration on the Public Investment Management (PIM), asset declarations, VAT refunds and business licenses results indicators). Second, the M&E framework did not directly cover some reform areas of the DPL, such as State Land Bank and the transfer-pricing reform, for which the team felt that results would be difficult to measure adequately. 11 Implementation and utilization: All 9 results indicators of DPL2 track data that is publicly available, making the results framework accountable and simple to implement. Following adjustments to the program under DPL2, the M&E framework was accordingly updated to improve relevance. To further enhance transparency, it would have been useful for the DPL2 program document to provide further explanations for these modifications in the program document itself – particularly with regards the elimination of the DB ranking indicator and the reformulation of the results target linked to gas and heating subsidies reform. Following the accelerated preparation of DPL1 in Spring 2014, the World Bank team continued regular missions through Fall 2014, and Spring 2015, to work with the Ukrainian government to monitor and assess the results targets. This continuous engagement helped prepare the reforms needed for DPL2, using the results indicators to focus attention on achieving the outcomes targeted by the program. 2.4 Expected Next Phase/Follow-up Operation In order to move from economic stabilization to stronger and sustained recovery, Ukraine needs to address deeper structural bottlenecks and governance challenges in multiple areas. The economy stabilized in 2016 and large imbalances have been reduced, thanks to the decisive reforms implemented in 2014-15 with the support of the multisector and financial sector DPL series. However, growth prospects remain weak (growth is projected at 2 percent in 2017) because of considerable headwinds from the ongoing conflict and the weak global environment, as well as an accumulated backlog of structural bottlenecks. Macroeconomic vulnerabilities are considerable (public and publicly guaranteed debt is projected at 88.8 percent of GDP in 2017) and poverty is estimated to have increased significantly from 15.2 percent in 2014 to 22.2 percent in 2015. Moving from economic stabilization to stronger and sustained recovery and shared prosperity for the population will require accelerating deeper reforms to address longstanding structural challenges, including in the areas of tax and pension reform, financial sector, anti- corruption, land reform, private sector competitiveness, social assistance, and health. The recently completed Systematic Country Diagnostic (SCD) for Ukraine elaborates on reform priorities going forward. The longer-term nature of the priority reform agenda in multiple areas points toward considering further development policy lending for Ukraine. The reforms supported by the DPL series are part of a longer-term effort that goes beyond the time-span of the operation. This not only includes deeper reform actions and further implementation of the policy areas addressed in the past 3 years, but also additional reform priorities that are critical to Ukraine’s development progress going forward. In light of the importance of the reform agenda, the highest priority areas can be considered as part of further development policy lending for Ukraine. The Government has expressed interest in further development policy lending to support its highest priority reforms going forward. After the closure of the DPL series in 2016, the World Bank has continued to be active in a range of reform areas through investment lending and non-lending technical advisory activities. Section 3 details some of these follow-up activities. The 12 complementary IMF and EU economic adjustment programs have also continued to be active in Ukraine, accompanying the continued implementation of many of the reforms promoted by the 2014-15 DPLs. Many of these reforms are currently already under discussion in Ukraine and would benefit from the galvanizing effect of further development policy lending from the World Bank. 3. Assessment of Outcomes 3.1 Relevance of Objectives, Design and Implementation (a) Relevance of Objectives - Substantial The Program Development Objective was highly relevant for Ukraine. The PDO of this multisector programmatic DPL series was to: A) Promote good governance, transparency and accountability in the public sector; B) Strengthen the regulatory framework and reduce costs of doing business; C) Reform inefficient and inequitable utility subsidies while protecting the poor. The three pillars of the DPL series were therefore highly relevant for Ukraine, particularly in the context of the acute economic crisis. They touched on seven out of the ten core pillars of the 2015-16 Government Program adopted in December 2014: (i) public service delivery, (ii) anticorruption strategy, (iii) economic policy, (iv) state property management, (v) agricultural policy, (vi) energy independence, (vii), social protection.3 This DPL series was also aligned with the strategic directions set out in the World Bank Country Partnership Strategy for FY12-16 which was structured around two pillars: (i) improving public services and public finances and (ii) improving policy effectiveness and economic competitiveness. DPL pillars A and C of this operation address pillar (i) of the CPS. DPL Pillar B addresses CPS pillar (ii). (b) Relevance of Design - Substantial The operation was appropriately structured as a programmatic DPL series, giving the program (i) scope for a long-term engagement around policy reforms; and (ii) the flexibility to adjust to changing circumstances. To achieve the development objective, medium-term structural/legislative reforms were necessary. Given the significant economic and political uncertainty faced during program preparation in 2014, a flexible approach was essential. The size of the loans galvanized attention of the government and the World Bank on this crucial reform program, while somewhat frontloading the financing towards DPL1 to kick start the critical reform process and meet Ukraine’s urgent financing needs. The prior actions of the program tackled key issues to achieve the objectives of the three pillars. The team put emphasis on early meetings with representatives of civil society and development partners to build a consensus around the reforms. 3 In April 2016, a new Ukrainian government was formed and published a new government program in which the reform areas supported by the 2014-15 DPL remain prominent. 13 (c) Relevance of Implementation - Substantial Following preparation of DPL1, the World Bank and the government remained continuously engaged to prepare DPL2 in the Fall of 2014 and the Spring of 2015. The Prime Minister received regularly updated tables summarizing progress on each prior action. Given changing economic and political circumstances, the Bank team flexibly adjusted the program design (prior actions and triggers) to meet the program objectives. The reforms were accompanied by substantial technical assistance by the World Bank and other development partners, including the DFID Ukraine Governance Reform Program Technical Assistance Trust Fund (TF) in the total amount of GBP 2 million. Like the DPL series, the TF had three main components: A) Assist in promoting good governance, transparency and accountability in the public sector; B) Assist in strengthening the regulatory framework and reducing the cost of Doing Business; C) Assist in supporting reforms in the inefficient utility and construction sectors. In particular, the TF financed the Public Expenditure Financial Assessment (PEFA) and the Public Finance Review (PFR) that helped inform the government about further reform priorities and implementation approaches in public financial management, tax policy and administration, targeting social assistance as well as other social sectors. 3.2 Achievement of Program Development Objectives Overall, the program achieved the PDO as the authorities implemented a number of important reforms to promote good governance, streamline business regulations, and reform energy subsidies while protecting the poor. This section evaluates the achievements under each reform area pursued by the program. The evaluation of each reform area then feeds into a broader assessment of outcomes under each of the three pillars of the program. The results indicators table (in the appendix) defined by the program is an important, but not exclusive, factor in this assessment. Pillar A - Promote good governance, transparency and accountability in the public sector Public procurement – Achievement of objective: Moderately Satisfactory. By 2014, a large number of exemptions to standard competitive bidding procedures had hollowed out Ukraine’s 2010 public procurement law. This created opportunities for corruption and inefficient/expensive procurement outcomes. The amendment supported by DPL1 in April 2014 reduced the scope of such exemptions from 45 exceptions to 15 - enhancing the transparency and efficiency of public procurement. Following DPL1, the government enacted a new public procurement framework in 2015 to complement the roll-out of the government’s new e-procurement system (Prozorro) – superseding the DPL1 amendment to the old law. The new framework continued to reflect 14 the spirit of the DPL reform, generally emphasizing transparent competitive bidding procedures where possible.4 Despite these significant reforms that brought profound change to public procurement in Ukraine, the results indicator specified did not reflect improvements over the time period for which data is available to date. Specifically, the share of public procurement subject to competitive bidding actually decreased from 35 percent in 2013 to 30.2 percent by end- 2015 – compared to the DPL target of 55 percent by end-2016. Procurement data for the full 2016 calendar year was not yet available by May 2017 when this ICR was prepared. The full impact of the procurement reform is likely to have come through only in 2016. In fact, the latest data suggests that the share of competitive procurements increased to 37.5 percent in the first half of 2016. Two other factors are responsible for the apparent disconnect between reform actions and the dynamics of the results indicator. First, the period 2014-15 saw a relative shift in expenditure towards categories that are generally not subject to competitive bidding: security spending because of the conflict in the east of Ukraine and spending on utilities because of higher gas and utility tariffs. Furthermore, other expenditures subject to competitive bidding were compressed because of the fiscal consolidation effort, thus accentuating the increased share of military and utilities spending in overall procurement. This pushed the value-share of competitive procurements down - despite the DPL reform. Second, the 2015 launch of the Prozorro e-procurement system resulted in significant cost savings for competitive procurements, reducing the value share of competitive procurements even as the 2014 DPL reform reduced the number of exempted categories. Estimates of the share of competitive procurement excluding security and utilities spending, together with the overall share of competitive procurement in the first half of 2016, point toward improving procurement outcomes over time. The share of competitive procurement (excluding security and utilities spending) increased from 27.2 percent in 2014 to 36.8 percent in 2015 (similar to the 2013 level of 36.9 percent). The overall share of competitive procurement increased from 30.2 percent in 2015 to 37.5 percent in the first half of 2016. Together, these two trends suggest that the share of competitive procurement (excluding military and utilities spending) in the first half of 2016 likely increased significantly above its 2013 level. In addition, if the cost saving effects associated with competitive procurement and the 2015 introduction of Prozorro (which are sizeable according to government estimates 5 ) are taken into account, it becomes clear that the procurement reform supported by the DPL resulted in significant efficiency improvements in procurement in Ukraine. 4 The new 2015 framework introduced some new exemptions – however, these exemptions remained in line with reference frameworks, such as the relevant EU directive. 5 https://www.slideshare.net/ProZorro_slides/history-of-prozorro-73379060 15 2013 2014 2015 H1 2016 Procurement, single source UAHbn 87,965 53,220 72,723 54,241 Procurement, no procedure UAHbn 95,227 133,460 111,689 56,029 Competitive procurement UAHbn 97,502 60,572 79,865 Total procurement UAHbn 280,694 247,252 264,277 176,554 Value‐share of competitive procurement % 34.7% 24.5% 30.2% 37.5% Value‐share of security‐related procurement % 4.0% 8.5% 13.7% Value‐share of utilities‐related  procurement % 1.9% 1.4% 4.2% Estimated total procurement (excl security and  UAHbn 263,959 222,790 216,932 utilities) Estimated value‐share of competitive  % procurement (excl security and utilities) (/1) 36.9% 27.2% 36.8% (/1) Assumes all security and utilities‐related procurement not procured competitively Public investment management - Achievement of objective: Satisfactory. Ukraine’s ad- hoc and opaque process for investment project selection and appraisal left ample room for corruption and the inefficient prioritization of projects. The amendment of the budget law supported by this DPL2 action created a modern and transparent public investment management system for projects funded directly through the state budget, as recommended by the 2011 Public Expenditure and Financial Accountability Assessment (PEFA) and the 2012 World Bank-IMF Public Investment Management Assessment (PIMA). It introduced economic analysis of projects by the Ministry of Economic Development, followed by shortlisting through an inter-ministerial committee based on transparent project selection and appraisal guidelines. For the 2015 preparation of the 2016 State budget, the Ministry of Economic Development and Trade submitted 18 project proposals to the Government’s Inter-Agency Committee (IAC) for review and decision. The IAC selected 10 projects, which became the investment projects funded by the 2016 State Budget (total amount 1 billion UAH). In 2016, 27 projects were included in the long list of projects and the IAC shortlisted 24 projects in its September 2016 meeting, which became the list of investment projects included in the 2017 budget passed in December 2016. Formally, this meets the results target for DPL2. All new eligible public investment projects were appraised and selected through the public investment management system in 2016 – with the implicit qualifier that only investment projects funded directly by the state budget were targeted by the reform supported by this operation. Overall, the DPL series therefore made an important step towards introducing modern and transparent project selection and appraisal to Ukraine’s public investment. As next step, the public investment management reform needs to broaden in scope, bringing greater transparency also to projects financed by the local governments, including through the regional development fund, and, eventually, state-owned enterprises. The state budget reform promoted by this DPL series offers an important first step and template for such a more comprehensive policy change. 16 Financial disclosures - Achievement of objective: Moderately Satisfactory. To deter corruption and the mismanagement of public assets, prior to this DPL operation, Ukraine had already required public sector officials to submit annual asset declarations to the Human Resource Departments of their Ministries. However, the lack of external verification of declarations and the lack of sanctions for incorrect declarations undermined this system. DPL2 therefore supported enactment of legislation (i) to establish the centralized external verification of the financial disclosures of elected and senior public officials, (ii) to ensure administrative accountability for those who fail to comply with financial disclosure requirements or misrepresent financial information and (iii) to establish an independent National Anticorruption Preventivion agency (NACP) responsible for the verification of asset declarations. However, the implementation of these DPL reforms suffered from severe delays. While the law “On the Prevention of Corruption” passed in October 2014, the NACP only became staffed at an operational level in August 2016.6 In October 2016, the e-declarations of elected and senior public officials were collected and published online. Because of delays in the approval of the NACP verification guidelines by the Ministry of Justice, manual verification of the most high-profile officials and whistleblower cases subsequently only started in calendar year 2017. The NACP remains hampered by delays in the preparation of data sharing agreements with other government agencies. IT systems need to be connected to allow for the automatic large-scale cross-checks of asset declarations across government databases. These implementation delays imply that, technically, the DPL results indicator linked to the anticorruption reform was not met. At the end of calendar year 2016, while all asset declarations were legally subject to external verification, they were not yet effectively subject to verification. The institutional prerequisites (NACP verification guidelines) were not in place and verifications had not yet started in practice.7 Despite these delays in the establishment of the NACP, the achievements in this reform area are substantial. The e-declarations of October 2016 have brought a new level of scrutiny to the finances of public officials. The press has started to analyze the released data to identify corruption. The National Anticorruption Bureau (NABU), formed in January 2016 as an investigative agency separate from the corruption prevention function of the NACP, has also started using the e-declarations data, including for the preparation of 300 criminal cases as of March 2017 (of which NABU sent 60 to court, though no case closed with a conviction yet). The start of verifications by the NACP in 2017, albeit at 6 By March 17 2017 (end of last ICR mission in Ukraine), only 4 out of 5 NACP committee members have been selected. The NACP remains severely under-staffed relative to target levels. 7 The wording of the results indicator “Share of Financial Disclosures Subject to External Verification” should have been formulated more precisely in the DPL documentation, clarifying what criteria need to be met to satisfy this evaluation marker. 17 small scale so far, is also an encouraging sign. If the publication of the e-declarations becomes an annual exercise, this reform has the potential to become a major milestone in Ukraine’s fight against corruption. The World Bank team continues to be closely involved in discussions with the government on the implementation of Ukraine’s anti-corruption agenda and the full operationalization of the NACP, including through the project “Preventing corruption: financial disclosures and preventive anticorruption agency” (P153952). Key next reform steps considered are the full operationalization of the NACP and the establishment of an anticorruption court (or chamber). External budget audit – Achievement of objective: Satisfactory. Ukraine’s 1996 law “On the Accounting Chamber” did not clarify whether the mandate of Ukraine’s Accounting Chamber extended beyond budget expenditures to budget revenues. Ukraine’s budget audits therefore focused on expenditures - a key issues raised by Ukraine’s 2011 Public Expenditure and Financial Accountability (PEFA) report. DPL2 supported a new law in July 2015, which clarified this role, making the audit of budget revenues an explicit and central part of the mandate. The new law aligned Ukraine’s framework more closely with international best practice, as set out under the Lima Declaration of Audit Precepts and the Mexico Declaration on Supreme Audit Authority Independence. In accordance with this new framework, the Report of the Accounting Chamber has included an audit of budget revenues since 2014, meeting this results target of the DPL series. Transfer pricing law – Achievement of objective: Satisfactory. Companies can lower their overall tax burden by shifting profits towards sub-entities facing lower tax rates - selling goods and services at above-market or below-market prices between their affiliates. Transfer pricing laws reduce the scope for such tax arbitrage by regulating the prices companies can apply for transactions across their affiliates. In the case of Ukraine, however, the existing law gave the government excessive leeway in applying special transfer pricing rules to selected companies – which were widely perceived as opening the door to reducing the tax burden for well-connected Ukrainian companies. Controls of transfer pricing arrangements by the State Fiscal Service (SFS) were limited to the largest transactions, allowing companies to circumvent controls by breaking down large transactions into multiple smaller ones. The DPL therefore supported the enactment of amendments to the Law on Transfer Pricing to reduce tax avoidance in line with OECD guidelines, introducing arms-length principles to determine the prices companies can apply for transactions across their affiliates. Moreover, the amendment linked controls to the size of the entity and the overall value of all transactions with a related party, not the value of individual transactions. A trust fund (P153919) supported the government’s secondary legislation to implement this improved framework. In addition, the project organized seven training workshops with tax authorities.8 8 During a March 2017 ICR mission in Ukraine, the Authorities were highly appreciative of the quality of these training workshops. 18 As next steps under this reform stream, the staffing and training of the SFS transfer pricing unit should be strengthened further. Furthermore, during the parliamentary debate on the DPL-supported amendments to the transfer pricing law in December 2014, the SFS controls for transfer pricing were restricted to international transactions – while controls had previously covered both international and domestic cases. International practice does not give clear guidance on this change: out of 33 OECD countries, 20 apply transfer pricing controls to domestic transactions and 13 do not, as evaluated in 2010. Nonetheless, this change in the scope of Ukraine’s transfer pricing controls should be closely reviewed as part of any next amendment of the transfer pricing law and consideration could be given to expansion of the transfer pricing controls for domestic transactions in case taxpayers are subject to different corporate income tax (CIT) rates. Overall Assessment of Pillar A – Achievement of objective: Satisfactory. This pillar succeeded in promoting good governance, transparency and accountability in the public sector by supporting reforms in public procurement, public investment management, financial disclosures of officials, external budget audits and the transfer-pricing framework. The public investment management and financial disclosure reforms tackled important and difficult issues, making major inroads in the fight against corruption - which represent some of the biggest successes of the DPL - but also facing some of the toughest political opposition and, therefore, implementation issues. The external procurement, budget audits and transfer-pricing frameworks also met their intended outcomes. Concluding, despite some shortcomings, the supported reforms under pillar A were highly relevant and the outcomes achieved were significant. Looking beyond the M&E framework of the DPL series, the meta-analysis of Transparency International on corruption perception records an improvement in Ukraine’s score from 25 in 2013 to 29 in 2016 – though this still places Ukraine at rank 131 out of 176 participating countries. Results from the 2015-16 Global Competitiveness Index suggest that wastefulness of government spending, judicial independence and the efficiency of the overall legal framework remain particularly urgent challenges for public sector governance. Clearly, while the reforms supported by the DPL series achieved important progress, broader progress in Ukraine’s fight against corruption is a longer term effort that will require further reforms going forward. 19 Figure 2: Broad public sector goverance indicators generally improved during the program period, but further improvement is clearly a longer term agenda that will require further reforms going forward. Pillar B - Strengthen the regulatory framework and reduce costs of doing business VAT refunds – Achievement of objective: Satisfactory. Since delays in tax refunds drained the liquidity of businesses and raised the effective cost of doing business, DPL1 supported: (i) the enactment of legislation requiring publication of monthly data on VAT refund processing; and (ii) revoking the order of the Ministry of Revenue and Duties (the former State Fiscal Service) establishing targets for additional assessments and fines resulting from audits. DPL2 encouraged the improvement of VAT refund processing by extension of automatic VAT refund procedures and revising automatic refund eligibility criteria. Overall, the ratio of VAT refund claims older than 74 days (as percent of the quarterly flow of VAT refund claims) was brought down from 153 percent in 2013 to 0.8 percent at end- 2016, already far exceeding the 2017 Q1 target of 20 percent.9 10 9 While VAT refund data points toward a strong improvement in performance, businesses continue to voice concerns that corrupt officials favor certain companies by speeding up their VAT refunds. In June 2016, the Ministry of Finance briefly interrupted VAT refund payments to investigate these concerns. In March 2017, the government announced further measures to enhance the transparency of VAT refund procedures, including the elimination of separate VAT refund lists for exporters and other companies. 10 This results target is set for 2017 in the original DPL project documents. During preparation of this ICR, the DPL team clarified that these targets refer to Q1 2017. 20 Easing the regulatory burden on business – Achievement of objective: Satisfactory. DPL1 supported the enactment of legislation to ease business and property registration and reduce the number of permits required. DPL2 aimed to encourage the enactment of legislation to continue the overhaul of selected priority areas of regulation, rationalize construction permits, ease licenses, strengthen investor protection and harmonize Ukraine’s standardization system, legal framework for food safety, technical regulations and conformity assessments with EU requirements. By end-2016, the government has reduced the number of business licenses and permits from 143 in 2013 to 56, meeting the DPL results indicator of 84 licenses by Q1 2017.11 These eliminations have reduced the cost of doing business in Ukraine. For instance, new regulations for agribusinesses have resulted in estimated annual compliance cost savings of $37.7 million from grain silo certification and $25.6 million from grain quality certification.12 Other reforms in this area are also bearing fruit. Aligning food safety standards with international guidance, for instance, has opened up the EU and Chinese markets for Ukrainian food exporters. State Land Bank – Achievement of objective: Satisfactory. This DPL series aimed to abolish the financial sector and property market distortions created by the State Land Bank (SLB). As manager of the state-owned land and as an agricultural development bank, a Ukrainian legal amendment allowed the SLB to count its land assets as bank capital. The DPL argued that this set a dangerous precedent for financial sector stability, undermining Ukraine’s banking law and international Basel principles. A prior action of DPL1 was therefore submission to Parliament of a draft amendment revoking the right of the SLB (or any other institution) to count land towards its bank capital. A trigger for DPL2 was the enactment of this law. By effectively eliminating the legal basis for the SLB, this set of prior actions also prevented potential misappropriation of state assets through this financial vehicle. Following completion of the prior actions under the DPL, including passing the decree “On the State Land Bank Abolishment” in September 2014 that removed the legal possibilities for such institutions to exist, the Ukrainian Central Bank declared the SLB insolvent on July 26 2016. Overall Assessment of Pillar B – Achievement of objective: Moderately Satisfactory. This pillar aimed to strengthen Ukraine’s regulatory framework and reduce costs of doing business by supporting reforms on VAT refunds, easing the regulatory burden on companies and abolishing the SLB. Good performance under this pillar was a reflection of the strong preparatory technical work of the government and World Bank preceding the 2014 crisis in these areas. At the same time, the reform agenda in this area will need to progress further going forward. Ukraine will need to leverage the momentum of the DPL supported reforms to advance further reforms of its business environment. The overall Doing Business (DB) Distance- 11 This results target is set for 2017 in the original DPL project documents. During preparation of this ICR, the DPL team clarified that these targets refer to Q1 2017. 12 http://www.ifc.org/wps/wcm/connect/news_ext_content/ifc_external_corporate_site/news+and+events/ne ws/unleashing+agriculture+in+ukraine 21 to-Frontier (DTF) indicator improved modestly during the 2014-15 DPL implementation period, increasing from 58.44 percent in 2013 to 63.90 percent in 2016, pointing toward further progress that is needed and could not realistically be achieved in two years.13 The DTF breakdown suggests that important policy areas, such as improving Ukraine’s insolvency regime, remain particular challenges that Ukraine will need to tackle in the course of future reform initiatives.14 Figure 3: Doing Business Indicators for Ukraine indicate some improvement in Ukraine’s Doing Business Indicators during 2014-15 Pillar C - Reform inefficient and inequitable utility subsidies while protecting the poor Reducing implicit energy subsidies – Achievement of objective: Satisfactory. The DPL series aimed to reduce the high and poorly targeted energy subsidies of Ukraine. The state- owned oil and gas company Naftogaz sold natural gas to residential households and District Heating (DH) companies below-cost, leading to implicit energy subsidies of 4.6 percent of GDP and 2.1 percent of GDP respectively (DPL1 estimate for 2012). In addition, despite these significant gas subsidies, DH companies in turn sold residential heat below cost- recovery levels, requiring budget transfers to cover the difference (0.3 percent of GDP in 2012). Under DPL1, residential gas and heating tariffs were increased. Besides reducing the size of energy subsidies, this included the alignment of (i) average gas tariffs charged to households, and (ii) gas prices charged to DH companies for gas used to produce residential heat, effectively closing a source of illegal arbitrage and rent-seeking in the 13 This implies that the DPL did not meet the dropped results target of DPL1 to bring the DTF rating to 66.0% at end-2016. 14 During a March 2017 ICR mission in Ukraine, the Authorities reported that a new draft insolvency law was under preparation. 22 Ukrainian domestic gas market. 15 Under DPL2, the government developed a comprehensive energy sector reform plan. This included further gas and DH tariff increases that became especially urgent after the depreciation of the Ukrainian currency and the concomitant increase in the price of energy imports in late 2014. Finally, to prevent the establishment of new heating subsidies, DPL2 enacted a law that would prevent government from interfering with the heating tariff setting. Overall, residential gas tariffs increased by 450 percent and heating tariffs increased by 250 percent between 2014 and 2016 - allowing the Ukrainian government to achieve full cost recovery at Naftogaz and DH companies in 2016, one year ahead of the original schedule.16 Given these strong tariff adjustments, Naftogaz’s financial deficit of US$3.3 billion (2013) declined to zero (on cash basis) in 2016, meeting the key DPL results target. Despite this major achievement, progress with other energy sector measures has been weaker. First, the comprehensive energy sector reform plan supported by DPL2 targeted, among other things, the unbundling of the Naftogaz production and transmission functions - creating the basis for competition in Ukraine’s gas market. The plan included the approval of Naftogaz’s restructuring plan by the Energy Community Secretariat in late 2015 or early 2016. However, continuing legal issues, including the tax treatment of asset sales during the unbundling and the Stockholm arbitration court case, have prevented significant movement on this front. Second, to create an environment conducive to competition in the energy market and reduce government intervention, DPL2 supported the cabinet approval of a draft law to strengthen the independence of the national energy regulator, compliant with the EU’s third energy package. However, following DPL2, approval of this law in Parliament was delayed until November 2016, requiring substantial donor pressure to eventually pass. By March 2017, the rotation of energy regulator commissioners as well as the collection of licensing fees to provide an independent funding source for the regulator – two key components of the DPL energy regulator law - have yet to become operational. Strengthening explicit and targeted social protection schemes - Achievement of objective: Satisfactory. Given the acute fiscal crisis facing Ukraine in Spring 2014, the DPL supported sharp energy tariff increases ahead of the 2014 and 2015 heating seasons. Given the limited take-up of Ukraine’s existing social protection programs, this raised strong concerns about the impact of these reforms on Ukraine’s poor and potential civil unrest. In Spring 2014, the DPL1 program therefore put together a new temporary social protection scheme to accompany the 2014 tariff increases, compensating the poorest 30 percent of the population – those living below the subsistence minimum (UAH 1176 / 15 Before this reform, Ukraine had three gas prices charged to different types of domestic consumers: residential tariffs to households; gas prices to DH companies for gas used to produce residential heat; and the gas price charged to industrial consumers as well as DH companies for gas used to produce commercial heat. While gas prices to industrial consumers and DH companies for gas used to produce commercial heat were not subsidized, residential gas and gas to DH companies to produce residential heat was sold below its cost (though at different levels of subsidization). Multiple prices on Ukrainian domestic gas market created loopholes for illegal arbitrage and rent-seeking. DPL1 reduced the set of gas prices to two. 16 As discussed above, the weakness of international oil and gas prices since 2015 also contributed to this remarkable achievement. 23 US$76 per month on average) - for the energy price increases. This temporary scheme aimed to bridge the 2014 heating season – ahead of more comprehensive reform of Ukraine’s social protection programs in 2015 as part of DPL2. However, the take-up of the new temporary social protection scheme proved low. Around 10,000 households benefited from the temporary program during the 2014-15 heating season, relative to a target enrollment rate of 2 million and approximately 12 million eligible households. Discussions point toward two main reasons for this poor performance. First, the new temporary scheme – put together in a very short time in Spring 2014 - may not have been attractive relative to Ukraine’s existing social protection schemes, given (i) the limited eligibility of utility costs covered by the new program, (ii) the unfamiliarity of households and social workers with the new program and (iii) parallel efforts in the Fall 2014 to simplify the eligibility criteria for the existing Housing and Utility Subsidy (HUS) scheme - making benefits dependent on income rather than assets. Second, the tariff increases in the 2014-15 heating season (56 percent gas and 40 percent DH from a low base) may still have been relatively affordable to many households, reducing the incentive to opt into the new social protection program. In 2015, DPL2 flexibly adjusted its strategy, discontinuing the 2014 temporary scheme and supporting further policy improvements to the more popular existing social programs – in particular by further simplifying enrolment in the HUS scheme. This included reducing the length of application documents, introducing electronic verification of documents and automatic re-certification of eligibility for households enrolled in previous years. World Bank technical assistance programs in this area also supported workshops to strengthen the government communication strategy and the training of social workers. The formula for these programs were also tightened to improve targeting. Overall, given significant further tariff increases in 2015 and 2016, these measures increased enrolment in the HUS scheme from 1.3 million beneficiary households in the 2013-14 heating season to 6.6 million at end-2016, significantly exceeding the enrolment of 2 million households by end-2016 targeted by DPL2. The share of means and income tested programs in overall social assistance spending increased from 13 percent (2013) to 68 percent at end-2016, significantly above the program target ratio of 20 percent (2016). 24 Figure 4: The scale-up of the HUS scheme is estimated to have significantly cushioned the impact of higher gas and heating tariffs on the poor.17 In sum, this scale-up of the HUS scheme significantly mitigated the cost of higher gas and heating tariffs for the poor in 2015 and 2016, reducing the poverty rate by 3pp in 2015 and 4pp in 2016 against a counterfactual scenario without HUS reform. At the same time, the fiscal cost of the HUS program increased from 0.1 percent of GDP in 2014 to 1 percent in 2015 and is estimated to have reached 1.8 percent of GDP in 2016. This sharp increase in cost and the high beneficiary eligibility suggest that further improvements in the targeting of the program will be necessary going forward. According to a recent World Bank survey, only 50 percent of the HUS budget reaches the neediest 40 percent of households and about 50 percent of the neediest households are not covered. Figure 5: While the HUS scheme is targeted towards the poor, only 50 percent of the HUS budget reaches the neediest 40 percent of households and about 50 percent of the neediest households are not covered Overall Assessment of Pillar C – Achievement of objective: Satisfactory. This pillar supported the reform of Ukraine’s inefficient and inequitable gas and heating subsidies while protecting the poor. Overall, the program eliminated expensive and poorly targeted 17 The simulations are based on the 2014 national poverty line kept constant in terms of purchasing power to allow comparability over time 25 implicit energy subsidies, closed possibilities for the government to set tariffs below cost recovery levels and introduced a better-targeted and less expensive explicit social protection scheme. While Naftogaz’s financial deficit was reduced from 4.6 percent of GDP in 2013 to balance in 2016 (a rough proxy for the cost of implicit energy subsidies), the cost of the HUS social protection scheme increased from 0.1 percent in 2014 to only 1.8 percent in 2016. Better means-testing of the HUS helped alleviate the impact of this subsidy withdrawal on the poor. The DPL series also kick-started deep structural reforms of the energy sector, such as comprehensive gas sector reforms, including the unbundling of Naftogaz and the strengthening of an independent energy regulator. Overall, the DPL helped bring about a fundamental reform of Ukraine’s energy sector towards greater sustainability and transparency, while supporting social protection expansion to mitigate the impact of tariff increases for the poor. Going forward, Ukraine needs to continue with the implementation of these reforms. The scale of the 2015 and 2016 HUS programs suggests that further improvements in targeting of the program towards the households with the greatest needs should be considered. The implementation of institutional reforms in the energy sector, including unbundling of Naftogaz and the full operationalization of an independent energy regulator, needs to be concluded. 3.3 Justification of Overall Outcome Rating (combining relevance, achievement of PDOs) Ratings: Satisfactory Preparation: Despite a tight preparation schedule and a difficult economic environment, the government and the World Bank developed a strong program that advanced Ukraine’s development priorities in the face of unprecedented shocks. The program development objectives - strengthening public governance, improving the business environment and tackling inefficient energy subsidies – were highly relevant and closely linked with the priorities of Ukraine’s government and the overall World Bank strategy for Ukraine. A programmatic DPL series was appropriate to achieve these development objectives, giving the team both (i) the extended engagement period necessary for the preparation of complex reforms and (ii) flexibility to adjust the DPL program over time as the Ukraine crisis unfolded and risks materialized. The program tackled ambitious and highly relevant reforms across all three pillars, taking advantage of the reform window that opened in Ukraine after the 2014 “Maidan” revolution. The DPL team coordinated implementation of most reforms closely through other investment and technical assistance projects. Outcomes: Building on strong project preparation, the program was effective and supported major reform outcomes across all three pillars - jointly with the government and other international donors active in Ukraine during this period. Among others, these included the online publication of the e-declarations of elected and senior public officials in October 2016 - a major step towards strengthening Ukraine’s public governance and accountability. This also includes the streamlining of business regulations with international guidelines, opening international markets for Ukraine’s exporters. Finally, 26 this includes the elimination of implicit gas and heating tariff subsidies in 2016, replaced by expanded coverage of a means-tested social protection scheme to protect the poor. 3.4 Overarching Themes, Other Outcomes and Impacts (a) Poverty Impacts, Gender Aspects, and Social Development The DPL series helped cushion the impact of Ukraine’s crisis on the poor by strengthening social protection schemes. The deep recession, depreciation, and compression of public expenditures contributed to a significant contraction of disposable incomes in Ukraine, with both labor and non-labor incomes contracting in 2015 in real terms. Poor households, which spend a significant share of their budget on energy, also suffered under the dramatic, but unavoidable, increases in energy prices supported by the program in 2014 and 2015. As a result, the estimated poverty rate (under $5/day in 2005 PPP) increased from 3.3 percent in 2014 to 5.8 percent in 2015, while the estimated moderate poverty rate (the Bank’s national methodology for Ukraine) increased from 15.2 percent in 2014 to 22.2 percent in 2015. In this context, the rapid expansion of means- tested social protection programs supported by the DPL, first through the temporary scheme proposed by the DPL in 2014 and then the reformed HUS scheme in 2015, played a key role in preventing even larger increases in poverty. In the long run, the reforms supported by this DPL series will free additional resources that the government can use to support the poor. Governance measures will fight corruption and strengthen the efficient delivery of public services. Measures to strengthen the business environment will grow the economy and generate public revenues. When these resources become available, it will be crucial for Ukraine’s government to ensure that they also benefit those that need it most.18 (b) Institutional Change/Strengthening Pillar A of this DPL series directly aimed to strengthen the institutional capacity of Ukraine’s government. The stronger procurement and PIM frameworks supported by the program helped to improve efficiency, accountability, and transparency in the use of public resources. Building anticorruption institutions contributed to overall transparency and accountability between citizens, businesses, and the state, while battling state capture, administrative corruption, and the influence of vested interests across the board. In all reform areas, the World Bank supported legislative change with technical assistance, as needed. A key vehicle for this technical assistance was the DFID Trust Fund 18 Other gender and social impacts of the reforms supported by this DPL series have not been reported during the preparation of this ICR. This confirms the assessment in the project appraisal documents of this DPL series. 27 (see section 3.1.). The resulting policy discussions and the resulting knowledge transfer directly contributed to the quality of the reforms supported by the DPLs. However, and perhaps as important, these exchanges also helped Ukraine’s officials gain important new experiences and perspectives, which are expected to support Ukraine’s further reform effort beyond the horizon of this DPL series. (c) Other Unintended Outcomes and Impacts (positive or negative) No other significant unintended outcomes or impacts were reported during preparation of this ICR. 3.5 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops Not applicable 4. Assessment of Risk to Development Outcome Ratings: Substantial Structural and macroeconomic risks continue to be high. While the economy stabilized in 2016 and large macroeconomic imbalances have been reduced, growth prospects remain weak and macroeconomic vulnerabilities remain substantial. Considerable structural bottlenecks remain in a number of important areas, including governance, fiscal and financial sector stability, private sector competitiveness, and ineffective social services. Potential policy reversals and delays in the implementation of the reform agenda going forward, growing impatience from the public on the pace of reforms and improvement of their economic and social conditions, and potential escalation of the conflict in eastern Ukraine, are major risk factors. In addition, external and geopolitical risks could have an impact in the economic recovery of Ukraine, particularly given the continuing conflict and dependency on commodity prices. Backlash from vested interests remains another significant risk factor. By strengthening public sector governance, deregulating the private sector and simplifying an opaque web of energy subsidies, this program has undermined some of the core interests of Ukraine’s deep-rooted vested interests and a formidable system of patronage, corruption and favoritism. Such reforms became feasible under the special political climate that followed the Maidan revolution in 2014. As public outrage against corruption and poor economic management calms down in the coming years, Ukrainian society needs to remain vigilant against complacency, the re-appearance of special interests, and any rollback of reforms. The capacity and continued commitment of the Government to undertake necessary reforms is essential, particularly in an environment with influential vested interests. Political uncertainty and frequent changes in critical positions tasked with advancing reforms are risks to continued commitment to reforms and the willingness/ capacity to implement them. The willingness of Parliament to approve important legislation related to reforms will also be important going forward. 28 The strong and continued support of the World Bank and other development partners to preserve and advance additional reforms will be critical. The IMF’s ongoing EFF program provides continued support to Ukraine’s reform program. At the same time, the World Bank also needs to continue its engagement to help Ukraine advance reforms in deeper structural areas, including those initiated with the support of the DPL series. The recent completed Systematic Country Diagnostic (SCD) for Ukraine identifies key priority areas going forward, including tax and pension reform, financial sector, anti- corruption, land reform, private sector competitiveness, social assistance, and health. Crucial areas to follow up from the DPL series include: (i) the verification of the asset declarations of public officials, which needs to be further strengthened and followed-up with enforcement action and (ii) the calibration of social protection programs, which need to be further targeted towards the poorest sections of Ukrainian society. 5. Assessment of Bank and Borrower Performance (relating to design, implementation and outcome issues) 5.1 Bank Performance (a) Bank Performance in Ensuring Quality at Entry (i.e., performance through lending phase) Ratings: Satisfactory The Bank responded swiftly to support the authorities on the critical reform agenda in the face of unprecedented shocks. The swift response helped support Ukraine’s development objectives through a difficult economic environment, taking advantage of the window for change opened by the Maidan revolution. Significant technical assistance and policy dialogue between the Bank and the authorities in the preceding period helped contribute to a strong operation despite the tight preparation schedule. The reforms were highly relevant, tackling some of the root causes of Ukraine’s political and economic malaise. In this context, the design of the DPL program incorporated lessons from the World Bank’s experience with the 2008-09 global financial crisis, and in particular, the lessons learned from the outcome of the previous DPL program in 2008-09. Extensive policy dialogue with the different stakeholders in the Government ensured helped secure ownership of the technically complex and politically sensitive reforms across multiple areas. Coordination and complementarity with other development partners (IMF, the European Commission, JICA, DFID, and US Treasury) was critical to leverage results. (b) Quality of Supervision (including M&E arrangements) Ratings: Satisfactory The Bank followed the implementation of DPL-supported reforms closely. Following disbursement of DPL1, the Bank followed up with continued missions to implement DPL2. Frequent updates on the status of the DPL reforms were submitted to the Prime Minister. At the same time, the Bank structured the engagement with parallel technical assistance projects and investment lending, which additionally supported the implementation of the 29 DPL. When risks to the operation materialized, the Bank flexibly adjusted prior actions without compromising rigor, key DPL results indicators and the achievement of the program’s development objectives. Throughout, the Bank closely coordinated the implementation of reforms supported by the DPL series with other development partners active in Ukraine. Clearly, the reform agenda is complex and long term, which points to the importance of technical assistance and further development policy lending to strengthen development outcomes going forward. (c) Justification of Rating for Overall Bank Performance Ratings: Satisfactory Given satisfactory preparation and supervision, the overall bank performance on this DPL series is rated as satisfactory. 5.2 Borrower Performance (a) Government Performance Ratings: Satisfactory Following the Maidan revolution, the government developed an ambitious reform agenda and actively used this Multisector DPL series to bring about a change. In Spring 2014, the new transitional government embraced the DPL series as a tool to push forward the governance reforms that were demanded by the Ukrainian public, while securing vital financing to meet the government’s funding needs. While the reforms of the DPL directly affected vested interests connected to leading Ukrainian politicians, and the energy sector tariff increases were socially difficult, the government implemented prior actions agreed under the program – with minimal roll-back since completion of the program. In some policy areas, the prior actions of the DPL need to be followed up with deeper reform actions, including the full operationalizing the NACP, setting up the strengthened independent energy regulator and concluding the unbundling of Naftogaz. (b) Implementing Agency or Agencies Performance Ratings: Satisfactory The Ministry of Finance and Ministry of Economic Development and Trade closely coordinated with the Bank throughout the preparation and implementation of the DPL series, taking a leading role in coordinating government ministries involved. Given the simultaneous multiple deep engagements of other development partners with the Ukrainian government, this coordination work was particularly important for the success of the DPL series. (c) Justification of Rating for Overall Borrower Performance Ratings: Satisfactory Given the satisfactory performance of the government and key implementing agencies, the overall Borrower performance on this Multisector DPL series is rated as satisfactory. 30 6. Lessons Learned The 2014-15 Ukraine Multisector DPL series offers several key lessons for future operations:  Government ownership of the reform program and a commitment to its implementation are crucial for the success of DPL operations. A key factor behind the success of the policy changes supported by the multisector DPL was government ownership of the reform agenda, on the back of the momentum generated by the Maidan revolution. Notwithstanding the difficult economic environment as well as the technical and political difficulty of the reform program, the authorities showed significant commitment to its implementation, which required notable effort, cooperation, coordination, and determination. The DPL program effectively supported the window for reforms that opened in Ukraine in 2014.  Development partners need to coordinate closely in advancing critical and complementary reforms. Given the urgency of the economic circumstances facing Ukraine, the rapid and coordinated response by the international community was critical to support the Government efforts to stabilize and reform the economy.  Strong prior analytical work, technical assistance, and deep engagement between government counterparts and the World Bank team are crucial for the success of an operation. The multisector DPL series prepared an operation with meaningful reforms across multiple sectors within a short timeframe. Technical and policy dialogue between the Bank and the authorities, anchored in previous technical assistance, enabled the swift response in preparing, approving and implementing the DPL program.  DPL series need to respond flexibly to changing circumstances, without compromising rigor. DPLs that support countries undergoing major economic crisis and/or conflict will face significant uncertainties. As events unfold over the course of the series, the team needs to stand ready to adjust its approach to best meet the program objectives. This requires agility, but also the ex-ante preparation of mitigation measures in case downside scenarios materialize. The DPL teams need to use the flexibility provided by the programmatic DPL series instrument, without compromising the rigor of the DPL reform program. This Ukraine Multisector DPL series demonstrated this flexibility, for instance by backing away from centralizing social inspectors when a new government adopted a broad decentralization agenda or switching the focus of social protection reforms in DPL2, when the new social protection program introduced by DPL1 did not achieve the desired take-up.  To support longer-term structural reforms, the World Bank needs a long-term engagement strategy: This DPL series supported a range of deep reforms with 31 gestation periods that extended beyond the two-year horizon of the program. Follow-up monitoring and technical assistance to support the reforms beyond the program period were critical in meeting Ukraine’s development objectives. 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners (a) Borrower/Implementing agencies The Ukrainian authorities have provided written comments on the ICR (see Annex 4) where they have underscored the importance of the DPL series in supporting Ukraine's reform agenda and development results through challenging economic circumstances in 2014 and 2015. The authorities have also emphasized their commitment to continuing implementation of the medium-term structural reform agenda and look forward to continued support from the Bank on this front. (b) Cofinanciers While the operation was supported by parallel financing from JICA and the Norwegian government, there were no cofinanciers. JICA has provided written comments on the ICR (see Annex 5). These comments highlight that JICA was pleased to partner with the World Bank in providing parallel financing for these important reforms during a period in which Ukraine faced very significant shocks. JICA looks forward to continuing its partnership with the World Bank to support high priority reforms in Ukraine. (c) Other partners and stakeholders (e.g. NGOs/private sector/civil society) Not applicable 32 Table 2: Matrix for DPL1 and DPL2 Prior Actions for DPL 1 Triggers in DPL1 for DPL 2 Prior Actions for DPL 2 Pillar 1: Promote good governance, transparency and accountability in the public sector Prior Action 1: Enact19 legislative Trigger 1: Enact legislative Prior Action 1: The Borrower has amendments to reduce exemptions amendments, including to the Budget introduced rules for transparent appraisal in public procurement from Code, to improve the public investment and selection and predictable financing of competitive procedures. management framework public investments for purposes of improving its public investment management framework Prior Action 2: Government adopts Trigger 2: Enact legislation to establish Prior Action 2: The Borrower has and submits to Parliament legislation to centralized external verification of established a centralized external establish centralized external financial disclosures by elected and verification function for financial verification of financial disclosures by senior public officials and disciplinary disclosures of publicly elected and senior elected and senior public officials and and administrative accountability for public officials, and provided for disciplinary and administrative those who fail to comply with financial disciplinary and administrative accountability for those who fail to disclosure requirements or misrepresent accountability for those officials who fail comply with financial disclosure financial information and establish an to comply with financial disclosure requirements or misrepresent financial independent anticorruption preventive requirements or misrepresent financial information agency responsible for the verification information. of asset declarations Trigger 3: Enact amendments to the Prior Action 3: The Borrower has Law on the Accounting Chamber to expanded the mandate of the Accounting 19 Enact means legislation is approved by Parliament, signed by the President and published in official gazette. 1 expand coverage of external audits to Chamber of Ukraine to cover external state budget revenue audits of the Borrower’s budget revenues. Trigger 4: Enact amendments to the Prior Action 4: The Borrower has Law on Transfer Pricing to reduce tax improved transfer pricing legislation and avoidance in line with OECD guidelines practices in line with the OECD Guidelines for purposes of reducing tax avoidance. Pillar 2: Strengthen the regulatory framework and reduce costs of doing business Prior Action 3: Enact legislation Trigger 5: Improve VAT refund Prior Action 5: The Borrower has requiring publication of monthly processing by extension of extended automatic VAT refund data on VAT refund processing automatic VAT refund procedures procedures and revised automatic including claims, refunds, and revising automatic refund refund eligibility criteria guidelines automatic refunds, and arrears; eligibility criteria for purposes of improving VAT revoke order of the Ministry of refund processing. Revenue and Duties that establishes targets for additional assessments and fines resulting from audits Prior Action 4: Enact legislation Trigger 6: Enact legislation to Prior Action 6: The Borrower to ease business and property continue overhaul selected priority established a deregulation framework, registration and reduce the number areas of regulation, establish eased licensing and permit requirements, of permits regulatory impact assessment, and harmonized food safety standards and rationalize construction permits, procedures and technical regulations and conformity assessments with European ease licenses, strengthen investor Union requirements for purposes of protection and harmonize Ukraine’s improving the investment climate standardization system, legal framework for food safety, technical 2 regulations and conformity assessments with EU requirements Prior Action 5: Cabinet adopts and Trigger 7: Enact legislation to Prior Action 7: The Borrower has submits draft law to Parliament abolish use of land as bank capital removed the possibility of counting revoking possible use of land as (State Land Bank) land as bank capital. bank capital (State Land Bank) Pillar 3: Reform inefficient and inequitable utility subsidies while protecting the poor Prior Action 6: National Energy Trigger 8: Enact amendments to the Prior Action 8: The Borrower: (a) has Regulatory Commission (NERC) Law of Ukraine on Regulation of strengthened the independence of the adopts resolution to increase Communal Services to enforce national regulation of communal residential gas prices by 56 percent independence of the national services by removing provisions that (weighted average) and National regulation of communal services by allow the Borrower’s Cabinet of Commission for Regulation of making it impossible to set tariffs Ministers to develop a mechanism for Communal Services (NCRCS) below cost-recovery levels. The setting utility tariffs below cost- adopts resolution to increase Government approves the draft law recovery levels. residential heating tariffs 176 on regulation of energy sector licensees by 40 percent (weighted consistent with the Third Energy average) Package Prior Action 9: The Borrower’s Cabinet of Ministers has approved the Trigger 9: Approval of concept20 “Gas Sector Reform and for Naftogaz restructuring, Implementation Plan” acceptable to World Bank Prior Action 7: Cabinet adopts Trigger 10: Include social Prior Action 10:The Borrower has regulation to introduce new inspection as a centralized function introduced income testing of the targeted program to compensate in the bylaws governing the housing and utilities subsidies and increase in gas and heating bills of functions of the Ministry of Social reduced the amount of such housing 20 Concept here refers to an official document, cleared by Ministry of Economy, Ministry of Finance, Ministry of Justice, and approved by Cabinet of Ministers which includes among other things a strategy with time bound reform steps. 3 the poorest 30 percent of the Policy to improve targeting and utilities privilege benefits, population efficiency and contain errors and replaced universal child benefits with a fraud in social protection programs, guaranteed minimum income (GMI) including in new targeted program supplement for children of age 0-3, and has reduced the amount of the Trigger 11: Government adopts universal child-birth grant benefit, all further measures to improve for purposes of improving the targeting targeting of social assistance to the of social assistance to the poor. poor 4 Table 3: Results Indicators (DPL 2 Formulation) Baseline Target 2014 2015 2016 Share of competitive procurement selection by value (Source: 2013: 35% 2016: 55% 24.5% 30.2 NA State Statistics Service) Share of new eligible public investment projects appraised and 2013: 0% 2016: 100% 0% 0% 100% selected through the public investment management system Share of Financial Disclosures Subject to External Verification 2013: 0% 2016: 100% 0% 0% 0% Coverage of External Audit includes State Revenues 2013: No 2016: No No Yes Yes Ratio of VAT refund claims older than 74 days/ quarterly flow of 2013: 153% 2017: 20% NA 0.4% 0.2% VAT refund claims Number of Business Permits 2013: 143 2017: 84 143 56 56 2013: US$ 3.3 2016: US$ 1 Naftogaz Financial Deficit, US$ equivalent (cash bases) US$ 5.9 billion US$ 1.1 billion US $0.0 billion billion billion Number of families receiving Housing and Utility Subsidy 2013: 1.3 2016: 2 million 1.1 million 4.6 million 6.6 million (disaggregated by gender of household head) million21 Share of means and income tested programs in overall social 2012: 13% 2016: 20% 17% 49% 68% assistance spending Results Indicators Dropped (DPL 1 Formulation) Baseline Target 2014 2015 2016 DB 2014: DB 2016: DB 2015: DB 2016: DB 2017: Distance to the Frontier Doing Business 58.44% 66% 61.83% 62.77% 63.90% 2015: UAH 0.29 Fiscal Subsidies to DH companies 2013: 37 UAH NA NA NA billion Number of families below defined income threshold who receive 2013: 0 2014: 2 million 10 thousands 20 thousands22 0 new targeted program 21 This is actual number that was corrected after we put 1.1 million for 2013 in DPO documents. 22 By mid 2015 the new targeted compensation program has been canceled 5 Annex 1 Bank Lending and Implementation Support/Supervision Processes (a) Task Team members Responsibility/ Names Title Unit Specialty Lending DPL-1 (P150133) Adrian Fozzard Practice Manager GGO15 Manager Alexander Pankov Lead Financial Sector Specialist GFM03 Anastasia Golovach Economist GMF12 Anatol Gobjila Senior Agriculture Economist GFA03 Carolina Sanchez Senior Director GPVDR Manager Caterina Ruggeri Laderchi Senior Economist GPV03| Emil Daniel Tesliuc Senior Social Protection Economist GSP05 Eugeniu Osmochescu Senior Private Sector Specialist GTCEE Guranda Elashvili, Contracts Officer SPACP Heinz-Wilhelm Strubenhoff Senior Private Sector Specialist GTCEE Senior Financial Management Irina Babich GGO21 Specialist Irina Shmeliova Senior Procurement Specialist GGO03 Iryna Shcherbyna Public Sector Specialist GGO15 Iva Hamel Senior Private Sector Specialist GTCIC Jan Loeprick Senior Economist GGO28 Jana Kunicova Senior Public Sector Specialist GGO14 Joel Lachlan Cooper Operations Officer Jonathan David Pavluk Senior Counsel LEGEN Legal Katerina Petrina Senior Social Protection Specialist GSP03 Lalita M. Moorty Practice Manager GMF03 Task Team Leader Laura Pop Senior Financial Sector Specialist GFM1B Maiada Kassem Finance Officer WFALA Finance Officer Maurizio Guadagni Senior Agricultural Specialist GFA04 Oleksii Balabushko Senior Public Finance Specialist GGO15 Paolo Belli Program Leader AFCS1 Lead Private Sector Development Peter Ladegaard GGO28 Specialist Country Director Qimiao Fan Country Director SACBN for Ukraine Ruslan Piontkivsky Senior Economist GMF12 Ruslan Yemtsov Lead Economist GSPDR Sebastian Eckardt Program Leader EACVF Task Team Leader Tamar Sulukhia Program Leader ECCTR Tetiana Kovalchuk Program Assistant ECCUA Vidmantas Jankauskas Consultant 1 Country Officer for Viktoria Siryachenko Country Officer ECCSC Ukraine Vlad Alexandru Grigoras Social Protection Specialist GSP03 Yadviga Semikolenova Senior Energy Economist GEE01 DPL-2 (P151479) Adrian Fozzard Practice Manager GGO15 Manager Anastasia Golovach Economist GMF12 Carolina Sanchez Senior Director GPVDR Manager Caterina Ruggeri Laderchi Senior Economist GPV03| Colleen Mascenik Senior Financial Sector Economist GFM09 Dmytro Derkach Senior Communications Officer ECAEC Eugeniu Osmochescu Senior Private Sector Specialist GTCEE Heinz-Wilhelm Strubenhoff Senior Private Sector Specialist GTCEE Senior Financial Management Irina Babich GGO21 Specialist Irina Shmeliova Senior Procurement Specialist GGO03 Iryna Shcherbyna Public Sector Specialist GGO15 Iva Hamel Senior Private Sector Specialist GTCIC Ivailo Izvorski Lead Economist GMFDR Manager Jan Loeprick Senior Economist GGO28 Jana Kunicova Senior Public Sector Specialist GGO14 Joel Lachlan Cooper Operations Officer Julie Rieger Senior Counsel LEGAM Legal Katerina Petrina Senior Social Protection Specialist GSP03 Lalita M. Moorty Practice Manager GMF03 Task Team Leader Laura Pop Senior Financial Sector Specialist GFM1B Luis Schwarz Senior Finance Officer WFALN Finance Officer Mikhail Matytsin Research Analyst GPV03 Senior Financial Management Moses Wasike GGO21 Specialist Nithin Umapathi Senior Economist GSP03 Oleksii Balabushko Senior Public Finance Specialist GGO15 Paolo Belli Program Leader AFCS1 Lead Private Sector Development Peter Ladegaard GGO28 Specialist Country Director Qimiao Fan Country Director SACBN for Ukraine Sebastian Eckardt Program Leader EACVF Task Team Leader Tamar Sulukhia Program Leader ECCTR Tetiana Kovalchuk Program Assistant ECCUA Country Officer for Viktoria Siryachenko Country Officer ECCSC Ukraine Yadviga Semikolenova Senior Energy Economist GEE01 Supervision/ICR 2 Anastasia Golovach Economist GMF12 Christoph Theodor Friedrich ICR Task Team Young Professional GMF02 Ungerer Leader David Bernstein Lead Public Sector Specialist GGO15 Lead Economist and Program Faruk Khan ECCEE Leader Gallina Vincelette Practice Manager GMF12 Manager Irina Capita Consultant GGOII Ivailo Izvorski Lead Economist GMFDR Manager Karlis Smits Senior Economist GMF12 Lalita M. Moorty Practice Manager GMF03 Task Team Leader Laura Pop Senior Financial Sector Specialist GFM1B Nithin Umapathi Senior Economist GSP03 Oleksii Balabushko Senior Public Finance Specialist GGO15 Oleksiy Sluchynskyy Senior Economist GSP03 Country Director Qimiao Fan Country Director SACBN for Ukraine Country Director Satu Kahkonen Country Director ECCEE for Ukraine Sebastian Eckardt Program Leader EACVF Task Team Leader Sergiy Biletskyy Social Protection Specialist GSPGL Tetiana Kovalchuk Program Assistant ECCUA William Dillinger Consultant GMF04 (b) Staff Time and Cost Staff Time and Cost (Bank Budget Only) USD Thousands Stage of Project Cycle No. of staff weeks (including travel and consultant costs) DPL-1 (P150133) Lending FY14 34.45 254.714 FY15 8.09 34.598 Total: 42.54 289.312 DPL-2 (P151479) Lending FY15 51.59 289.948 FY16 7.22 40.533 Total: 58.81 330.481 Supervision/ICR FY16 10.09 82.828 FY17 (as of March 28, 2017) 15.29 111.292 Total: 25.38 194.12 3 Grand Total: Lending 101.35 619.793 Supervision/ICR 25.38 194.12 Total: 126.73 813.913 Annex 2. Beneficiary Survey Results Not applicable Annex 3. Stakeholder Workshop Report and Results Not applicable 4 Annex 4. Summary of Borrower's ICR and/or Comments on Draft ICR 5 6 Translated version of Borrower Comments on the ICR Satu Kahkonen Country Director Belarus, Moldova, Ukraine Europe and Central Asia Region The World Bank Regarding Implementation Completion and Results Reports for the 2014-15 Ukraine Development Policy Loans Dear Ms. Kahkonen! Thank you for sharing the Implementation Completion and Results (ICR) reports for the World Bank’s 2014-2015 Development Policy Loan (DPL) series for Ukraine. The objectives of the Multi-Sector DPL series were to support Ukraine’s reform plan regarding tackling the structural causes of the crisis; stabilizing the economy; and cushioning the impact of the crisis on the poor. The main reform arears supported by Multi-Sector DPL series were: (i) promote good governance, transparency and accountability in the public sector; (ii) strengthen the regulatory framework and reduce costs of doing business; (iii) restructuring of the energy sector, while protecting the poor. The Financial Sector DPL series supported failed banks’ resolution; development of the plans for banks recapitalization/restructuring; and strengthening of the banks supervision. The main components of the Financial Sector DPL series were: (i) to strengthen the operational, financial and regulatory capacity of the DGF for the resolution of insolvent banks; (ii) to improve the solvency of the banking system through implementation of bank recapitalization/restructuring plans and timely enforcement action; and (iii) to strengthen the legal and institutional framework to improve the resiliency and efficiency of the banking system. 7 The reforms, supported by the Multi-Sector and Financial Sector DPL series, helped to stabilize Ukraine’s economy. Substantial structural reforms helped to strengthen the banking system and to improve investors’ confidence. At the same time, the reform agenda remains vast, in particular there is an urgent need to reform the pension system, to launch the agricultural land reform and to deepen reforms, started in the energy sector and in the area of tax and custom administration. We would like to thank the World Bank for its development policy support to Ukraine and we look forward to continuing our future collaboration in this area. Sincerely, Yuriy Butsa Deputy Minister for European Integration 8 Annex 5. Comments of Cofinanciers and Other Partners/Stakeholders While the operation was supported by parallel financing from JICA and the Norwegian government, there were no cofinanciers. Please find below the written comments received from JICA. 9 Annex 6. List of Supporting Documents 10 MAP 11