ICRR 11020 Report Number : ICRR11020 ICR Review Operations Evaluation Department 1. Project Data: Date Posted : 08/10/2001 PROJ ID : P044110 Appraisal Actual Project Name : Coal Pilot Project Costs 28.50 28.08 US$M ) (US$M) Country : Ukraine Loan/ US$M ) 15.8 Loan /Credit (US$M) 12.72 Sector (s): Board: EMT - Mining and Cofinancing 1.3 .5 other extractive (52%), US$M ) (US$M) Other social services (25%), Micro- and SME finance (14%), Housing construction (6%), Pre-primary education (3%) L/C Number : L4016 Board Approval 96 FY ) (FY) Partners involved : Closing Date 12/31/1999 12/31/2000 Prepared by : Reviewed by : Group Manager : Group : Robert C. Varley Fernando Manibog Alain A. Barbu OEDST 2. Project Objectives and Components a. Objectives The central objective was to mitigate the social and environmental consequences that arise from mine closures, as part of an overall Government restructuring of the sector . A special agency for mine closures (UDKR) was set up to implement the project, which also required the involvement of the Ministry of Finance (MOF), the Ministry of Coal and Industry (MCI), Donetsk Oblast Administration (DOA) and municipalities. The project sought to: 1. Test ways to close mines safely with due regard to environmental, financial and social aspects . 2. Ensure that displaced miners could transfer to other jobs in the sector or exit the industry with compensation and choices for assistance in seeking other employment . 3. Transfer social assets and services to municipal management and protect access for the most vulnerable groups. 4. Gain experience for subsequent operations from the monitoring and feedback of the Pilot Project . b. Components The project cost of $ 28.08 million comprised: 1. Mitigation of Mine Closure (30%) 30 %) - physical closure required environmental mitigation, civil works and equipment (26%) and operating costs during closure (4%.) 2. Social Mitigation (48%) 48 %) - was for financial support in the form of statutory social benefits (34%) and employment creation (14%.) 3. Social Assets Transfer and Free Coal (17%) 17 %) - kindergartens, sport, cultural and health facilities (3%); housing (6%); and free coal (9%.) 4. UDKR Incremental Operating Costs (2%.) 5. Technical Services (3%.) c. Comments on Project Cost, Financing and Dates The Coal Pilot Project (CPP) was amended three times to reallocate funds as priorities changed during implementation. The CCP supported a larger restructuring program which was approved later in November 1996 as a $300 million Ukraine Coal SECAL (Sector Adjustment Loan.) 3. Achievement of Relevant Objectives: The three selected Donbass mines were closed in financially, socially and environmentally acceptable ways . Workers were laid off in line with legislation and project provisions, being compensated fairly if they did not find alternative employment. Social assets have been transferred to DOA and there has been no social or political unrest as a result of the mine closures . By component: 1. Physical closures were effected as planned with positive environmental impacts . 2. Social mitigation measures were largely successful and two social surveys at mid -term and completion confirmed that the target group were receiving benefits on time and in full . New employment was less than anticipated resulting and there was less spent employment creation component than planned . Microcredit was used to finance employment creation but was promptly cut back when the participating financial institution failed to perform satisfactorily. 3. Social assets were transferred as planned and the heating subsidy delivered . 4. The newly created UDKR, which was crucial to for project implementation, performed satisfactorily under difficult political conditions. 5. Technical assistance was successfully delivered and funded by DFID (UK), who remained engaged in follow-on projects. 4. Significant Outcomes/Impacts: 1. The approval of the Coal SECAL in November of 1996 built on early CPP achievements and confidence in the ability of the project to be replicated at other mines . To date UDKR has received more than 80 mines for closure of which more than half have completed all works for physical closure . UDKR has been the key to assuring a fair flow of social payments. 2. The project contributed greatly to building understanding and consensus on the need for mine closures . 3. The project made very effective and efficient use of European experience of closure, especially from Britain, whose "Know How Fund" was an active and valuable partner . 4. The project reclaimed 26 ha, 4500 tons steel were recycled and 380,000 m3 of decrepit industrial building demolished and cleared. 5. Not only did the project achieve its objectives but a financial analysis estimated that the NPV (@ 10% discount) of the net fiscal savings alone amounted to $ 43-59 million depending on the assumptions made . The ex-post economic analysis revised the ERR from 55% to 47% because social mitigation costs were higher than estimated at appraisal. This was also one of the few examples of the Bank including an easily understood and transparent analysis of the distribution of project benefits between stakeholder groups (using the Jenkins-Harberger approach.) 5. Significant Shortcomings (including non-compliance with safeguard policies): 1. Established regulations and procedures, often general and ambiguous, and in some cases contradictory, have hindered fast and efficient mine closures . 2. Government's poor delivery of public information conveyed a sense of incoherent reform policy and may have favoured political opposition to coal sector reform . 3. The Government's design institutes exercised bureaucratic power (for example using centrally prescribed standards sometimes without field inspection ) with a negative impact on time and costs of mine closures . Although the design institutes played a key role in preparation and supervision of the closures, Government chose not to redefine their role or change their working practices . 4. MCI could have lessened the delays occasioned by pumping operations by clearer instructions and priority setting. 5. Dissatisfaction with the status of social assets was found in a 1997 social assessment, due to the borrower not paying its part of the costs . Later payments improved and the situation was improved . 6. MOF gave in to political pressures, disregarded Bank cautions, and signed a fiscal agency agreement with a bank in poor financial standing . Local businessmen colluded with the bank management to misuse funds intended for micro-credit based employment generating activities . The MOF then promptly reimbursed the Bank, stopped the microcredit program and launched an investigation .) 6. Ratings : ICR OED Review Reason for Disagreement /Comments Outcome : Satisfactory Highly Satisfactory The CCP demonstrated closures were socially, environmentally and financially feasible and was the first successful step on a route followed by the Coal SECAL , and in future by the Bank Coal Sector Mitigation Project. Institutional Dev .: High High Sustainability : Likely Likely Bank Performance : Satisfactory Highly Satisfactory From preparation through supervision and implementation, DC and Kiev-based Bank staff showed a strong commitment to high technical and professional standards . Borrower Perf .: Satisfactory Satisfactory Although the Government was responsible for some shortcomings, due to factors within their control, it remained committed to coal sector restructuring and held to closure decisions. The UDKR performed remarkably well under the constraints and political attacks it had to deal with. Quality of ICR : Exemplary NOTE ICR rating values flagged with ' * ' don't comply with OP/BP 13.55, but are listed for completeness. NOTE: 7. Lessons of Broad Applicability: 1. Flexibility and adaptability as demonstrated under the CPP should be maintained for future mine closure operations. 2. Piloting that encounters difficulties can lead to successful new products - the Bank, in close cooperation with DOA and MOF, helped establish a Municipal Credit Line for noncommercial projects with eligibility based on having accepted social assets . This was successfully implemented under the Coal SECAL . MOR issued the credits and DOA guaranteed them. 3. Agencies for mine closures should be closely tailored to circumstances - normally physical closure and social mitigation would be vested in separate agencies . In this case the MOF and MCI functions were combined in UDKR which greatly contributed to smooth implementation . 4. Mine closure projects should concentrate on the essentials - acceptable statutory social benefits and first phase environmental mitigation limited to reduction of risks to safety and health . 8. Assessment Recommended? Yes No 9. Comments on Quality of ICR: Exemplary - the region has managed to deliver the essential inputs for OED's evaluation in only 8 pages; other ICRs often fail to do this even when they extend to 4 or 5 times this length.