World Bank Group - Ukraine Partnership: Country Program Snapshot October 2014
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World Bank Group – Ukraine Partnership:
Country Program Snapshot
October 2014
RECENT ECONOMIC AND growth has been seen in all regions of Ukraine.
SECTORAL DEVELOPMENTS The consumer price index (CPI) reached 14.2
percent year-on-year in August because of
Current Political Context devaluation and increases in gas and utility tariffs.
Figure 1. Consumption declined due to economic
Following intense economic and political adjustment
turbulence, a national unity interim
government was appointed on February 27,
2014. On May 25, 2014, Mr. Petro Poroshenko
was elected as the new president of Ukraine. The
interim government has committed to an
ambitious reform agenda and has requested World
Bank Group (WBG) assistance. On March 10,
2014, the WBG announced that in addition to its
ongoing portfolio of US$3.7 billion, it stands
ready to provide up to US$3.5 billion of new
financing to Ukraine and to assist the country in
formulating and implementing urgently needed
reforms. This snapshot focuses on the economic
situation and WBG support to the people of
Ukraine.
The fiscal deficit remained high in 2013 and
pressures continued to grow in 2014. The fiscal
Growth and External Performance deficit, including the Naftogaz deficit, was around
6.5 percent of GDP in 2013. In 2014, economic
Growth in real GDP halted in 2012–13 and fell contraction and the deteriorating situation in the
sharply in 2014 against the backdrop of east have been putting pressure on fiscal accounts.
geopolitical tensions. After five consecutive To contain the budget deficit during this year, the
quarters of negative growth that started in the Government adopted a package of fiscal measures
second half of 2012, Ukraine’s GDP grew by 3.7 in March 2014 to bolster revenues while curtailing
percent year-on-year in the last quarter of 2013 expenditures. Despite this, revenue performance
because of a good harvest and a low statistical deteriorated due to sharper economic contraction
base. This brought GDP growth to 0.0 percent in and the difficulty in collecting taxes in the east.
2013 (0.2 percent in 2012). Negative trends in the Proceeds from all the main taxes dropped, which
real sector have deepened in 2014 due to the was partly compensated for by frontloaded profit
situation in eastern Ukraine, developments that transfers from the National Bank of Ukraine
were impacted primarily by the conflict, which (NBU), though no further transfers are planned
intensified in June–August. GDP declined by 1.1 for the rest of the year.
percent in the first quarter of 2014 and 4.6 percent
in the second quarter, bringing the total decline of Meanwhile, the ongoing conflict in the east is
the first half of the year to -2.9 percent year-on- adding to security-related expenditure
year. pressures. In addition, the quasi-fiscal deficit of
Naftogaz widened due to increased import gas
Industrial production posted a 5.8 percent prices in hryvnia terms following the devaluation
decline in the first six months of 2014. The and higher gas imports during the first quarter of
decline has accelerated over the past few months 2014 to fill storages and lower sales to industrial
and in July, industrial production contracted by consumers because of weak economic activity. In
12.1 percent year-on-year, driven by sharp declines view of these developments, the Parliament
in the Luhansk and Donetsk regions (by 56 and 29 revised the budget in July to curtail discretionary
percent year-on-year, respectively). Transport and spending on subsidies, investment, and goods and
wholesale trade also declined in July by 11.5 and services, while enhancing revenue by extending
13.1 percent year-on-year, respectively. Retail sales the value added tax (VAT) exemption on grain
fell by 3.2 percent year-on-year during the first exports and eliminating VAT exemptions on
half of 2014 as a result of the devaluation of the wood production. The higher deficit of Naftogaz
hryvnia and a tighter fiscal policy. Agriculture still was partly monetized through the issuance of
remains a well-performing sector, growing at 6.3 recapitalization treasury bills (UAH 21 billion)
percent, year-on-year, for January–August, and below the line, adding to the public debt burden.
Naftogaz also accumulated external payment year was relatively shallow, economic contraction
arrears. is expected to continue to deepen over the coming
months as a result of the ongoing macroeconomic
Figure 2. Main tax revenues are falling adjustment and protracted instability in the
industrialized east. In particular, tighter fiscal and
monetary policies—underpinning the necessary
adjustment—are projected to be contractionary in
the short term and negatively affect the
purchasing power of households and businesses.
Credit to the economy is also expected to contract
in real terms during 2014 as a result of tighter
liquidity and lending standards. Therefore, both
consumption and fixed investment are expected to
decline in 2014. While external demand from
Ukraine’s largest trade partners is likely to be
muted, net exports are projected to positively
contribute to growth, as imports are expected to
continue contracting more due to the
After widening steadily over the past few depreciation.
years, the external current account has
adjusted rapidly after the shift to the flexible From 2015 onward, a return of positive, albeit
exchange rate regime. Devaluation in February low, growth is expected to be driven by
2104 following the abandonment of the long- growing net exports and, to a lesser extent, a
standing de facto peg to the dollar and fiscal recovery in consumption. Exports of steel,
tightening led to a sharp adjustment of the current chemicals, and agricultural products are expected
account deficit to 3.7 percent of GDP in the first to rebound because of devaluation in the context
quarter of 2014, compared to 8 percent of GDP of an improving external environment.
during the first quarter the year before. Imports Investment is expected to recover more slowly
fell sharply (-21.6 percent during first quarter of due to persistent external risks and tighter credit
2014 in value terms) due to the combined effect conditions in the banking system. Following three
of devaluation, weak domestic demand, and the consecutive years of sharp decline, investment is
lower price of gas imports during the first quarter. projected to rebound in 2016 due to the low base
Meanwhile, exports continued to decline due to effect and improving investor sentiment,
weak external conditions, although at a slowing contributing positively to economic growth.
pace. Equally, credit growth is expected to resume in
2016, provided that problems in the banking
Figure 3. Devaluation lowered the current account sector are resolved through improved deposit
deficit
insurance and the recapitalization of banks. The
recovery in economic activity should be
underpinned by accelerated structural reforms,
including an improved investment climate, which
are expected to boost the competiveness and
productivity of Ukraine’s businesses—a
precondition for the return of economic growth
and a sustainable recovery.
The risks facing Ukraine are substantial and
cannot be easily or fully mitigated. First, a
deeper than expected contraction during 2014 and
a slower recovery during 2015 could impede the
adjustment. A prolonged confrontation in the
The escalating conflict is expected to disrupt heavily industrialized eastern part of Ukraine
economic activity into the next year, implying could negatively affect growth. Lower levels of
a weaker outlook for the real sector. Real GDP bank liquidity, especially in the context of
is now expected to decline by 6.5 percent in 2014. significant risks in the banking sector and
While output decline during the first half of the monetary tightening, could constrain the credit
supply, in turn delaying the pickup of domestic high. The deterioration in capital adequacy in turn
investment at the same time that foreign is likely to force banks to make adjustments in
investment may remain subdued due to their lending standards, and the ensuing credit
heightened political uncertainty. Meanwhile, the crunch would further weaken investment and
recovery in consumption could be undermined by spending, amplifying the economic downturn.
the combined effect of fiscal adjustment and
depreciation. Second, external liquidity Financial and Private Sector Development
constraints could emerge if financing needs rise
above those projected in the baseline, or if The financial sector in Ukraine has been hard
rollover rates drop more due to tighter financial hit by a combination of political, security, and
conditions in global markets and/or heightened exchange-rate pressures since the beginning
risk perception due to political uncertainty. of 2014. The banking system, which represents
Shortfalls in official financing due to slippages in more than 95 percent of financial assets, has
implementing macroeconomic and structural structural weaknesses—high rates of related-party
reforms could potentially reduce external support lending, the short open currency position of many
and complicate efforts to finance the current banks, the high ratio of NPLs to total bank
account and fiscal deficits. Third, the weaker assets—that increase its exposure to shocks and
growth of key trade partners could undermine the are the result of regulatory forbearance and poor
recovery of exports, dampening the growth and governance in the system. These structural
adjustment of the current account. problems have been exacerbated by the unfolding
crisis in the country. Banks have witnessed an
Fourth, geopolitical tensions and disputes aggregate deposit outflow of nearly 20 percent
over gas prices could lead to a prolonged since the beginning of 2014; they have been
disruption in the gas supply as well as possible further weakened by the continuing depreciation
restrictions on exports to the Russian Federation, of the hryvnia, which has lost more than 50
reducing growth and leading to larger than percent of its value since the start of 2014.
expected external imbalances. Fifth, efforts to Depreciation is putting an immediate strain on the
restore sustainable public finances could prove to banks’ capital adequacy ratio through losses
be more challenging than expected. The economic generated from the open short foreign exchange
downturn and compliance problems in the east position, and in the longer run, through the
could undermine revenue performance despite deteriorating quality of the loan portfolio.
policy changes and efforts to improve tax Fourteen banks have been declared insolvent since
administration. Expenditures will be higher due to the beginning of the year, and the risk is very high
increased military spending and reconstruction in that a large number of additional banks will
affected areas. Meanwhile, cuts in social spending follow, shifting the burden to the Deposit
and wage freezes could run into resistance and Guarantee Fund (DGF), which may be required to
kindle further unrest. Pressures are exacerbated by make very large depositor payouts and resolve
Naftogaz, a major fiscal risk. While the multiple banks quickly.
Government has committed to reduce the
Naftogaz deficit, the complex nature of the In this context, the WBG is responding
problem, the size of the adjustment, and the quickly to reduce the impact of the crisis and
political economy could make this challenging, restore growth. Together with the authorities, the
especially in the short to medium term. WBG has identified the following critical goals: (i)
stabilize the banking sector and make it more
Sixth, problems in the financial sector can resilient to possible future shocks; (ii) facilitate
create vicious circles between initial deeper financial intermediation and flow of credit
macroeconomic shocks, balance sheet to the real sector on a sustainable basis; and
problems in banks, and instability and (iii) promote deeper reforms in the business
liquidity in financial markets, which in turn environment in order to reinvigorate private
deepen the economic downturn and may impose a sector–led growth and investment.
fiscal burden on the budget. The current
macroeconomic crisis has already aggravated risks On the first objective, the Bank, in close
in the banking sector because currency collaboration with International Monetary
depreciation is putting pressure on banks’ capital Fund (IMF), is working with the NBU on a
through losses generated from open short foreign crisis preparedness and management
exchange positions and the increase in framework, including external diagnostic
nonperforming loans (NPLs), which are already
assessments of the top 35 banks that are expected As new leadership has signed the Association
to be completed by end-September 2014 (surveys Agreement with the European Union (EU)
for the top 15 banks were completed at end-July). and expressed a commitment to attracting
The NBU will then require the banks to prepare investment and improving the business
and implement recapitalization and restructuring environment, attention is focused not only on
action plans, as necessary, by end-February 2015. DB indicators, but also on a broader program of
reforms. The WBG supports Ukraine’s efforts to
In the context of the World Bank and IMF maximize the benefits of access to EU markets by
programs, the authorities have adopted improving food safety and phytosanitary
criteria for the use of state funds to support standards, with significant progress seen already in
under-capitalized, systemically important the meat and dairy industries. Also, the WBG is
banks where necessary. In addition, the World working with the authorities to address the costs
Bank continues to provide support to strengthen of getting utilities; to improve corporate
the bank resolution framework, with amendments disclosure, director liability, and shareholder
enacted in July 2014, including additional criteria empowerment; and to continue to reduce the time
for the timely identification of problem and and number of payments involved in paying taxes.
insolvent banks. Moreover, a mechanism was In addition, the WBG has assisted the
established for back-up funding to the DGF from Government in streamlining business permits and
the Government, and additional instruments have licensing and introducing risk-based inspection
been provided to enable a lower-cost resolution of systems, and has promoted tougher anti-
banks. Finally, the top 35 banks have been monopoly policies to improve competition. While
compelled by the NBU to report their ultimate further progress is needed in all these areas, the
beneficiary owners, a first step toward improving WBG recognizes the cross-cutting constraints
transparency and reducing related-party lending. posed by weak governance, an inadequate
competition regime, weak rule of law and respect
Under the second objective, the Bank for property rights, and a highly inefficient court
supports the implementation of policy reforms system captured by vested interests. The Bank, in
in the areas of credit information; a regulatory and coordination with other development partners,
supervisory framework for insurance companies, advocates that the new authorities take an
capital markets, and credit unions; and financial integrated approach to tackling these related
consumer protection and financial literacy. The problems.
Bank also promotes access to longer-term
affordable finance for exporting enterprises and The Bank has two parallel programmatic
small and medium-sized enterprises (SMEs). development policy loan (DPL) series in
Ukraine that support financial sector and
Under the third objective, Ukraine has taken private sector reform agendas, in addition to
some steps to improve an enabling ongoing technical assistance programs. The
environment for private business growth and first programmatic Financial Sector DPL of
investment, but much remains to be done. US$500 million, approved by the Board of
Progress in the Doing Business (DB) indicators was Executive Directors on August 7, 2014, supports
marked in the previous year, particularly in dealing policy measures aimed at strengthening the DGF’s
with construction permits, reducing steps to legal, operational, and financial capacity,
starting a business, and streamlining procedures improving bank solvency, and overall, making the
for transferring property (improving Ukraine’s DB banking system more efficient and resilient to
ranking from 140 in 2013 to 112 in 2014), but possible future shocks. It is planned that the
these improvements represent only a small part of second operation will support further reforms in
a larger picture. As shown by considerable these three broad areas, with the loan’s delivery
feedback from domestic and foreign enterprises, expected in the third quarter of FY15. The
the overall business environment in Ukraine is programmatic multi-sectoral Fiscal Adjustment
critically weakened by macroeconomic instability, and Institutional Reform DPL includes reforms to
burdensome and obsolete regulations and improve the business environment, as well as
standards, weak rule of law and protection of macroeconomic and other reforms, within the
property rights, a lack of competition in many policy matrix. It disbursed US$750 million in May
sectors, and the shortage of affordable and long- 2104, while the second operation is currently in
term finance. preparation and is planned for the Board’s review
in December.
The Bank has also been supporting the The Bank has prepared a new project, the
provision of long-term financial resources to Social Safety Nets Modernization Project, to
Ukraine’s export sector through lending improve the performance of Ukraine’s social
instruments. The First Export Development Project assistance and social services system for low-
(EDP1) was completed in 2004. The successor income families. On July 3, 2014, the World
EDP2, implemented by state-owned Bank’s Board of Executive Directors approved
UkrEximBank, serves as a catalyst to supporting the new US$300 million project. Aware of the
export and real sector growth in Ukraine by poor targeting accuracy and limited impact on
providing medium- and long-term working capital poverty reduction, the Government has chosen to
and investment finance to private exporting expand the coverage of the Guaranteed Minimum
enterprises. As of end-July 2014, the entire Income program and gradually enhance its design
amount of the original EDP2 credit line and more to further improve targeting, simplify
than half of the Additional Financing amount, administration, and help non-working, work-able
totaling US$243.50 million, had been disbursed. beneficiaries transition from assistance to
The line of credit has benefited 53 private sector employment.
export-oriented projects across various industries
and regions.
A mother applies for social benefits at the Korostyshiv
welfare office, renovated with a Bank loan
A woman buys bread in Dnipropetrovsk
Over 2014–19, the number of beneficiary
Poverty and Social Protection
families is expected to increase to 300,000 (1.1
The Social Assistance System Modernization million persons), expanding the program’s
Project (SASMP) and the Development Policy coverage to about 2.5 percent of the population.
Loan (DPL) program have supported an By 2018, the Government intends to put in place
active policy dialogue on targeting accuracy. activation services and incentives, with the
The SASMP pursued activities aimed at finalizing objective of supporting the transition of work-able
the introduction of the “one-stop-shop” business beneficiaries from benefits to employment.
model for the administration of all types of social
assistance benefits countrywide, supported by a Health Development
new management information system. The
efficiency of client intake has further improved. The health system in Ukraine has not yet been
Application processing time per application was reformed. The health sector is one of the key
reduced from 4.5 to 1.4 hours in 2011 and to 1.2 areas of perceived underperformance, according
hours today. Such efficiency improvements have to surveys conducted in 2007 and 2010 (Life in
also yielded a higher number of benefits processed Transition Surveys, jointly implemented by the
per social officer per month: 498 up from 260, European Bank for Reconstruction and
thus contributing to the Ministry of Social Policy’s Development [EBRD] and the World Bank).
efforts to contain the growing administrative costs Between 1970 and 2010, Ukraine “gained” only
of social assistance programs. Now fully one year of life expectancy and lost 92 positions in
completed, the SASMP-financed renovations in ranking with regard to adult male mortality
local welfare offices are allowing the delivery of (probability of dying between age 15 and 60).
benefits and related services in better, more Today, crude adult death rates in Ukraine are
comfortable conditions. higher than in its immediate neighbors, Moldova
and Belarus, and are among the highest not only country with a similar population, and much
in Europe but also in the world. above EU averages per population), yet extremely
fragmented and unable to provide an adequate
Noncommunicable diseases and injuries are response to the current health crisis.
the main culprits in the mortality crisis in
Ukraine. As in all former socialist economies High levels of out-of-pocket medical costs
(FSE), the mortality gap in Ukraine vis-à-vis create severe financial barriers for the poor
Western Europe is largely explained by and potentially catastrophic expenses for those
noncommunicable diseases (first in order of who seek care and/or need to purchase medicines
importance is cardiovascular disease, which in for chronic diseases. According to a recent
Ukraine is responsible for approximately 70 household survey, in 2011, 22.6 percent of those
percent of the total number of deaths), followed who needed care were not able to receive it or buy
by injuries and poisoning (14 percent, most of medicines, primarily due to affordability. Out-of-
which are alcohol- and traffic-related injuries), and pocket costs account for more than 40 percent of
communicable diseases (7 percent). total health care spending, according to the
Household Budget Survey conducted every year,
Figure 4. Adult (15–60 years) Male Mortality Rates with little variation of its share of total
per 1,000 Men expenditure over the past 15 years.
Male Adult
400
mortality rate
Pharmaceuticals and other medical appliances are
350 (probability primarily financed by households (over 90
300 of dying percent, or two–three times the figure in
between 15
250 and 60 years comparison to developed countries).
200 of age per
1000 Together, the evidence shows that Ukraine is
150 population),
100 2011 facing a health crisis and that its health sector
50 ECA is not delivering results, either in terms of
0
health outcomes or financial protection.
Therefore, the Government needs to take urgent,
Czech Republic
Tajikistan
Estonia
Slovakia
Uzbekistan
Belarus
Latvia
Slovenia
Russian Federation
appropriate, and deep reform measures within its
health system. The overarching goal of these
reforms would be to create a health system that is
responsive to clients, transparent, efficient and
effective in its interventions, equitable, and
Source: World Health Organization, World Health Statistics, prevention oriented. Overall, opportunities to take
2013.
advantage of less invasive technologies, new
standards of care, and more dynamic service
Total health expenditure in Ukraine was 7.72 modalities are lost, results remain stagnated, and
percent of GDP in 2012 (with an EU average cost increases do not yield commensurate benefits,
of 9.8 percent), or approximately US$299.3 per thus closing a vicious circle. To break such a cycle,
capita at the average exchange rate in 2012. public funding needs to be linked to performance
Government health expenditure accounted for and to effective services rendered to patients.
12.7 percent of total consolidated budget
expenditures, or approximately 4.44 percent of The specific reform measures that would
GDP, while the rest (over 3.26 percent of GDP) contribute to this overarching objective
was mainly patients’ out-of-pocket expenditures. include:
Most state health financing comes from general
taxation, while other sources of revenue, such as Scale up preventive and primary care services.
insurance, are almost nonexistent. Government Enhance coordination mechanisms among
money is allocated according to inputs (linked different levels of care.
mainly to beds and bed days, with line-item Change the input-based norms that currently
budgeting for health facilities and seniority-based drive the budgeting and allocation of
salaries for doctors and nurses), and therefore the resources at different levels toward better
majority of public resources go to maintain the payment systems.
existing infrastructure. Also as a result of these Tackle the current substantial overcapacity in
allocation criteria, the health infrastructure is the hospital sector, with the creation of
oversized, with over 300,000 beds and 2,400 hospital networks and the establishment of a
hospitals (almost twice the number of Spain, a more rational distribution of services.
Enhance data availability and utilization. providers, and participation in international
Reduce the share of out-of-pocket payments assessments with feedback into policy design. For
(OOP). example, the Trends in International Mathematics
and Science Study (TIMSS) assessment 2011, co-
Implementation of health sector reforms supported by the World Bank’s Equal Access to
began in 2011, though cautiously, in three Quality Education project, demonstrated an
regions and in Kyiv, and was interrupted after the improvement in the performance of Ukraine’s
winter 2014 political crisis. The new Government 8th-graders in both math and science. The
is still in the phase of determining its priorities for students performed above average in science (501
action and reforms in this sector. A new Concept points compared to 485 in 2007) and improved in
of Health Reforms is being finalized. The Bank math (479 compared to 462 in 2007).
has supported the first steps in the reform process
through its advisory services, both at the central as After the closure of the Equal Access to
well as regional (oblast) levels in the areas of Quality Education in 2010, the Bank maintained
health financing, primary care, and hospital a policy dialogue with the Government on an
reforms, and in the establishment of a new optimization and efficiency agenda in line with the
strategy to develop a modern health management Program of Economic Reforms. Findings from
information system. the World Bank study, “Is Optimization an
Opportunity? An Assessment of the Impact of
In FY14, following a request from the Class Size and School Size on the Performance of
Government, the World Bank started Ukrainian Secondary Schools,” showed that bigger
preparation of a new investment lending secondary schools in Ukraine tend to show a
project in support of health care reforms, the somewhat better performance, both in terms of
Serving People Improving Health Project, which is test scores and test participation, while the size of
expected to go to the Board before end of 2014, classes does not matter. Thus optimization of the
will spearhead the process of reforms. secondary school network is unlikely to negatively
affect the quality of education if access is properly
Education ensured. In 2012–13, another type of assistance
came from the BOOST Public Expenditure Data
Literacy remains high in Ukraine. However, Analysis initiative, which supported an efficiency
demographic and economic realities require the agenda by improving government information on
school network to downsize so available—but public spending on education and increasing
limited—resources can be better used to improve government capacity to analyze that public
the quality of education. Education expenditure is spending.
approximately 7 percent of GDP, and enrollment
in primary and secondary schools is nearly
universal. While there is a shortage of slots in
childcare facilities, Ukraine has an oversized
school network. The number of teachers and
schools remains nearly the same, despite the
severe (40 percent) decline in student population
over the last two decades. Efficiency indicators,
including average school size and the student-
teacher ratio (nine on average, one of the lowest in
the world), have been falling sharply.
In this environment, Ukraine’s priority should
be to make better use of the resources
allocated to the sector by significantly Senior pupils check their test scores in Kharkiv
downsizing the school network to fit the smaller
(current and projected) cohorts of students. With Labor Market
a smaller network in place, the sector’s resources
could be reallocated to quality-enhancing inputs. Ukraine faces particular job challenges given
Key required reforms encompass school network its aging demographic profile, ongoing
optimization, revision of input-based norms, structural transformation, and fundamental
higher autonomy and accountability of service economic challenges. Ukraine is one of the
fastest-aging and depopulating countries in affect internal mobility will contribute to Ukraine’s
Europe. If age and gender-specific labor force development and transition to a modern dynamic
participation rates stay as they are today, the labor economy.
force in Ukraine is projected to shrink by over 15
percent between 2012 and 2035. A shrinking labor Informal employment in Ukraine is
force and an aging population pose a serious significant. In 2012, 4.6 million people in
threat to the future development of the country. Ukraine worked in the informal sector, equivalent
To compensate for the labor force decline and to 22.9 percent of total employment. Reducing
ensure improved living standards, it is necessary to informality is important for Ukraine’s
steadily increase labor productivity (0.36 percent development in terms of social cohesion, the
annually, according to the case study on Ukraine protection of workers, labor and product market
in the World Bank’s World Development Report 2013: efficiency, increased productivity, rule of law, and
Jobs). The Bank’s analytical work supports the governance. The four technical notes prepared by
Government in addressing some of the challenges, the Bank at the request of the Government
such as low internal labor mobility, high informal provide an overview of the scope and main
employment, and a skills mismatch, with a view to characteristics of informal employment in Ukraine
contributing to increased labor productivity, and offer international experience in addressing
advanced economic development, and improved this issue. They also point to international
living standards in the country. experience with reform of the labor code and
labor inspection services, which are integral parts
Removing existing barriers to internal of a comprehensive policy to reduce informality.
mobility is important to moving Ukraine
forward, as growing international evidence Education and training are recognized as
suggests that internal labor mobility tends to have central to economic development. Skills are at
positive effects on a country’s productivity and the core of improving employment outcomes and
growth. Achieving economic growth and increasing productivity and growth. Education and
improving living standards require connecting training systems, however, may not always provide
people to places where economic opportunity the skills needed to succeed in the labor market.
flourishes. Findings from the World Bank study, For example, 20 percent of Ukrainian firms regard
“In Search of Opportunities: How a More Mobile workers’ lack of skills as a major obstacle to their
Workforce Can Propel Ukraine’s Prosperity” firms’ operation and growth. While firms in the
(2012), show that Ukraine’s economy lacks country face a shortage of skilled workers, many
dynamism. Internal mobility is about half of what university graduates cannot find employment or
is expected when comparing Ukraine to other end up in jobs that do not use their skills. The
countries. With a population that is aging more Bank’s framework Skills Toward Employment and
rapidly than most, increasing labor mobility must Productivity (STEP) and initiative on System
happen sooner rather than later, since an older Assessment and Benchmarking for Education Results
population is even less likely to migrate to find (SABER) aim to get better information about the
work. distribution of various skills in the workforce, as
well as the demands for those skills from different
The main barriers to internal mobility in economic sectors, to support the design of skills-
Ukraine are institutional. Administrative development policies and improve employability
procedures, benefits tied to residence, and productivity.
underdeveloped housing and credit markets,
inadequate human capital, and weak formal labor Agriculture Development
market institutions all work to discourage and
hinder labor mobility in Ukraine. For example, Ukraine has tremendous agricultural potential
weak labor market institutions reduce dynamism that has a critical role to play in contributing
in the labor market, stimulate informal work to global food security. In 2012, agriculture
arrangements, and do not provide workers with contributed up to 9.3 percent to the country’s
enough reliable information about job openings GDP and constituted 17.2 percent of employment
and labor market conditions outside their current and 26 percent of national exports. However, this
place of residence. In addition, people in lagging potential has not been fully exploited, due to
regions often lack the necessary skills to access depressed farm incomes and an inadequate policy
better economic opportunities in high- framework that has reduced private investment to
productivity, modern sectors in the leading below the levels required to modernize the sector.
regions. Addressing institutional bottlenecks that
and Cadastre Project (US$89.7 million, closed in
Examples of ill-advised policy measures spring 2013), the Bank supported the
include repeated grain export restrictions Government in delivering improved services to
(most recently in 2010–11, now replaced by landowners through the issuance of land deeds
export taxes); interventions in domestic food and the establishment of an efficient electronic
markets to control prices; overregulated food land cadastre system, which started operation
safety controls that are not World Trade countrywide in January 2013. In the context of
Organization (WTO) compliant; weaknesses in this engagement, the Bank has highlighted the
contract enforcement that have discouraged importance of ensuring that basic institutional,
commodity financing and risk insurance legal, and regulatory conditions are in place to
mechanisms; and an incomplete process of land allow a transparent land market to operate prior to
reform. The Bank, in cooperation with the lifting the moratorium. The Bank also supported a
International Finance Corporation (IFC), is public awareness campaign to inform small
assisting the Government in developing a sound landholders of their rights to individual title, as
policy framework and investment climate in the well as their land use rights and obligations.
sector. Recently, an Institutional Development Fund
(IDF) grant has been approved to support
evidence-based policy making in Ukraine in the
agriculture and land sectors. Activities are
scheduled to commence soon.
Transport
The transport sector is important in Ukraine’s
economy and hence, efficiency improvements
are particularly critical to raising
Agricultural Work in the Poltava Region competitiveness. The country generates far more
transport movements and volumes relative to its
The establishment of a legal framework for GDP than any other country in Europe, due to its
secured land ownership, the development of reliance on agriculture and heavy industry. This
an efficient registration system, and the implies that transport costs make up a much larger
assurance of free and transparent land part of the final price of many goods.
markets are important elements of a policy Consequently, the transport system has substantial
framework to facilitate agricultural development in potential to improve aggregate productivity and
Ukraine. While the privatization of land in state regional competitiveness.
and communal farms and enterprises through
designated parcels has been under way and state Less than 10 percent of freight traffic (in ton
land deeds have been issued since the early 2000s, kilometers) is by road, while rail and pipelines
agricultural land markets are constrained by a account almost equally for most freight volume.
moratorium on the sale of agricultural land. However, this is changing quickly. Due to steadily
Combined with poorly defined ownership rights increasing commercial and passenger traffic, some
and weak contract enforcement, this has strategic sections of the road network are
exacerbated difficulties for small- and medium- functioning at peak capacities. Yet, substantial
sized farms in accessing credit and contributed to portions of the network need upgrading to
suboptimal investment levels. European technical and safety standards.
Ukraine’s road safety record remains one of the
The Bank is currently engaged in analytical worst in Europe in terms of road accidents and
work on grain transport and logistics. Its fatalities.
objective is to develop a measurable Action Plan
for the Government of Ukraine to address both
physical and regulatory bottlenecks that increase
the cost and time required to transport and trade
grains.
The Bank is Ukraine’s major development
partner in improving rural land administration
and management. Through the Rural Land Titlingeconomic growth, degrade the environment, and
increase the cost of social services. Therefore,
improvements in this sector are clearly among
Ukraine’s top strategic priorities. Ukraine became
a member of the Energy Community Treaty in
2010 and has committed to meeting the treaty’s
requirements.
Since the early 1990s, the Bank has supported
Ukraine in its efforts to reform and restructure
its energy sector through policy dialogue,
Road work on a section of the Kyiv-Kharkiv road technical assistance, and the financing of
financed by the World Bank adjustment and investment projects. Energy
infrastructure investments under the Hydropower
The World Bank is Ukraine’s key partner in Rehabilitation Project helped increase reliability and
the transport sector. The US$400 million Roads reduce the cost of hydropower generation. The
and Safety Improvement Project is financing (i) an project helps increase the installed capacity of the
upgrade of a 126-kilometer section of the Kyiv- Dnipro and Dniester Hydropower Cascades by
Kharkiv road; (ii) the elimination of the “accident about 250 megawatts and its production by about
black spots” throughout the nation’s road 300 gigawatt hours, which is equivalent to building
network; and (iii) technical assistance to a major new hydropower plant. During the past
strengthen the road agency’s capacity in road five years of project implementation, the
management and maintenance. rehabilitation of 59 hydropower units in six
hydroelectric plants was completed, and the
The US$450 million Roads and Safety installed capacity of rehabilitated hydroelectric
Improvement Project 2 started in 2012, with plants increased by about 156 megawatts by
the objective of upgrading the next consecutive August 2014. The project also pioneered the
section of the Kyiv-Kharkiv road to Poltava and concept of carbon financing in Ukraine, as it was
improving the road safety of selected high-risk the first Joint Implementation Project under the Kyoto
corridors. The Bank is also engaged in road sector Protocol in the country.
policy dialogue with the Government to assist the
country in developing a sound road sector
strategy.
Energy
Restructuring and upgrading its energy sector
continues to be one of the key development
challenges for the Government of Ukraine.
Ukraine is among the world’s top-10 most energy-
intensive economies. While the country’s energy
intensity declined at a rate of 5 percent per year
between 1996 and 2009, it still exceeds that of Upgraded hydropower units at the Dniester hydropower
Germany by a factor of 3.7—for instance, 0.45 plant
kilograms (kg) of oil equivalent in Ukraine vs 0.12
kg in Germany—and is three times higher than In implementing the Power Transmission
the EU average. It is also about double that of the Project, the Bank has also worked with the
EU12 countries. state-owned company UkrEnergo to expand
the capacity of its power transmission grid and
The sector faces serious challenges in reduce losses. Under this project, UkrEnergo will
maintaining the security, reliability, and rehabilitate seven substations in various regions of
quality of supply, due to delays in energy sector the country. The rehabilitation will help reduce
reform, the poor financial condition of energy energy losses by about 33 gigawatt hours per year.
sector enterprises, a lack of investments, and The projects in the electricity sector are designed
deferred maintenance to aging infrastructure. to improve the quality of supply to enable Ukraine
These problems threaten the sustainability of to meet Western European standards (ENTSO-E). Improvements to the transmission backbone Water and Sanitation Services
will facilitate an increased electricity trade,
including with the EU. The municipal services sector in Ukraine
suffers from decades of underinvestment and
In addition to being energy intensive, Ukraine poor maintenance. The need to invest in water
is one of the most energy-inefficient countries and wastewater utilities is growing dramatically,
in the region. This is due to a number of reasons: and the existing low tariff levels are a major
the high concentration of energy-intensive sectors, limitation to the sustainability of these utilities.
inefficient industrial processes and old equipment, The need for rehabilitation is exacerbated by the
inefficient district heating systems, and poor overall high energy consumption in water
quality building stock. Ukraine’s ratio of total production and wastewater treatment. It is
primary energy supply (TPES) to GDP is 10 times estimated that energy intensity in Ukraine is one
higher than the Organisation for Economic Co- of the highest in the region. Improving service
operation and Development (OECD) average. delivery through the rehabilitation of
Calculated in purchasing power parity (PPP) infrastructure and the promotion of energy-
terms, Ukraine uses around 3.2 times more energy efficiency solutions offers the possibility of driving
per unit of GDP than the average among OECD utilities toward financial sustainability while
countries. To address this challenge in a providing improved services.
sustainable way, the Bank provides financial
support through a credit line (the Energy Efficiency The Bank has been providing significant
Project, US$200 million, approved by the Board in support through the Urban Infrastructure
May 2011). The project provides access to long- Project (US$140 million). It assists 14 municipal
term financing to municipalities and industrial water and sanitation utilities in improving the
enterprises specifically for projects that propose quality of water and wastewater services and
commercially viable energy-efficiency investments. increasing energy efficiency. This is achieved
through selected infrastructure investments,
In addition, the World Bank has launched the energy-efficiency investments, and institutional
US$382 million District Heating Energy strengthening activities. A parallel grant, financed
Efficiency investment project to help reduce by the Swedish International Development
losses and increase the efficiency of 10 district Cooperation Agency (SIDA), contributes to
heating companies across Ukraine. This new institutional capacity building for water and
project focuses on the rehabilitation of boiler sanitation utilities and supports municipal sector
houses, replacing network pipes and installing policy work.
individual heat substations and building-level heat
meters, with the overall aim of increasing the The new US$350 million Urban Infrastructure
efficiency of these district heating companies. In Project 2 was approved to continue providing
doing so, it will help in reducing costs, enhancing investment financing to the sector as well as
the reliability of service, and improving the overall technical assistance for building the capacity of 10
quality of the heat supplied to over 3 million participating water institutions. This will result in
Ukrainians. A highly concessional investment of better access to water, wastewater, and solid waste
US$50 million from the Clean Technology Fund services for over 6 million citizens. The project
will also have a transformational impact on the includes US$50 million from the Clean
district heating sector of Ukraine by facilitating a Technology Fund.
large-scale installation of Individual Heat
Substations.
The World Bank is also working with the
Government, the European Commission
(EC), and other international financial
institutions (IFIs) to provide technical assistance
in restructuring the gas sector, with the objective
of facilitating commercial and IFI investments in
the modernization of Ukraine’s gas transit system
and improving sector governance.
The Boryspil water and sanitation utility upgraded its
equipment with a Bank loan.THE WORLD BANK PROGRAM IN sustainability. In FY14, the Bank delivered a total
UKRAINE of US$1.48 billion, including two large investment
operations to improve municipal service delivery
The World Bank’s Country Partnership and a US$750 million multi-sector DPL that was
Strategy (CPS) for Ukraine for 2012–16 was prepared in record time.
endorsed by the World Bank’s Board of Directors
in February 2012. Since Ukraine joined the World Bank in 1992,
Bank commitments to the country have totaled
The WBG’s assistance is concentrated in two over US$9 billion for 45 projects and programs.
areas:
Improving public services and public
finances. The Bank’s efforts in this area are
targeted at achieving improvements in: (i)
responsible and sustainable fiscal
management; (ii) the efficiency of service
delivery in health and education and better
targeted social assistance spending; and (iii)
the provision of municipal services (water,
sanitation, heating). The WBG finances
investments in public sector infrastructure and
works on improving monitoring mechanisms The World Bank Group Office in Kyiv
and strengthening the governance of public
service providers, while supporting intensified
dialogue between the Government and civil International Finance Corporation
society in key policy areas, such as health care
reform, water supply, district heating, and As laid out in the new Ukraine CPS for FY12–
public procurement. 16, IFC strategy in Ukraine continues to support:
Improving the business climate to unlock (i) banking sector stabilization and targeted
Ukraine’s economic potential. The CPS finance, (ii) agribusiness, and (iii) infrastructure,
focuses on (i) improving the business accompanied by two cross-cutting themes of
environment for both domestic and foreign improving the business environment and
investors; (ii) improving the physical promoting energy efficiency.
infrastructure to reduce the cost of doing
business; and (iii) creating an appropriate Financial sector stabilization will entail an
policy framework to attract private investment expansion of the Global Trade Finance Program
in agriculture to allow Ukraine to benefit from to facilitate trade, and possible capital and liquidity
the high international demand for food and support for selected banks. The investment and
agricultural commodities. advisory work on distressed assets and NPLs will
continue. In the longer term, IFC will provide
Improvement in the implementation of the targeted financing through banks for SMEs,
existing portfolio is critical to achieving energy efficiency, and the agribusiness sector.
strategic outcomes. The current investment
lending portfolio includes 13 operations for a total Agribusiness development, which constitutes
amount of US$4.19 billion. Ukraine ended FY14 the core part of IFC’s strategy in Ukraine, is
with a historically high disbursement rate of 31.6 supported throughout the supply chain to address
percent. Efforts will continue to accelerate the main bottlenecks to the sector’s growth and to
disbursements and ensure quality outcomes from generate broad sectoral impact. In its agribusiness
existing investments financed by the World Bank. investments, IFC emphasizes projects with
individual companies to maximize impact through
Responding to the crisis in Ukraine, in March a demonstration effect. Investments in
2014 the WBG announced that it would agribusiness are accompanied by advisory work to
provide up to US$3.5 billion to Ukraine by the improve the investment climate for agribusiness,
end of 2014. This lending aims to support the bring food safety standards to international levels,
Government in undertaking the critical reforms and develop agri-finance and agri-insurance. IFC’s
needed to put the economy on a path to investment climate advisory also supportsimplementation of recently enacted permits and Multilateral Investment Guarantee Agency
licenses legislation, the adoption of legislation on
certification and standardization, and institutional The Multilateral Investment Guarantee
reform in the area of technical regulations. Agency (MIGA) contributes to the
development of the financial sector in Ukraine
In the infrastructure sector, IFC is by continuing to support foreign strategic
considering renewable energy projects and investors through the provision of political risk
exploring opportunities in waste, transport, and IT guarantees. In particular, MIGA focuses on
services, as well as trying to promote transaction investments that: i) improve SMEs’ access to
advisory work to support structuring public- finance, ii) increase the provision of specialized
private partnership (PPP) transactions and banking products, including lease financing, and
developing proper transparent mechanisms for iii) strengthen banks’ capitalization. Also, MIGA
attracting private sector financing. supports projects in manufacturing that promote
the modernization of production and contribute
IFC is aiming to improve Ukraine’s energy to the diversification of the economy. MIGA’s
efficiency in a cross-cutting investment effort, outstanding gross exposure in Ukraine totals
complemented by advisory services on Resource US$743.5 million.
Efficiency, Residential Energy Efficiency, and
Sustainable Energy Finance. As the country’s long-term development
partner, the WBG has been implementing an
The IFC portfolio in Ukraine: Ukraine is the ongoing investment and guarantee program
third-largest IFC exposure in the region after of about US$3.7 billion, supporting improved
Turkey and Russia and the 12th-largest IFC basic public service delivery in areas such as water
exposure globally, accounting for about 10 percent supply, sanitation, power, and roads, and also
of IFC’s total outstanding portfolio. As of the end supporting the private sector.
of February 2014, IFC had a committed portfolio
of about US$1.06 billion to about 30 clients in
Ukraine. In FY13, IFC committed nearly US$300
million in Ukraine for its own account, including
US$200 million in the agribusiness sector, and
mobilized another US$55 million. In FY14 year to
date, IFC had invested US$191 million for its own
account and mobilized US$85 million more.
In addition, IFC has a large, long-standing
advisory presence in Ukraine, consisting of 10
active advisory projects targeting both crisis
response needs and longer-term objectives. IFC
advisory services in Ukraine focus on the
following priority areas: agribusiness, energy
efficiency, and financial markets management.
Figure 5. IFC Annual commitments in Ukraine,
FY 06-14UKRAINE: URBAN INFRASTRUCTURE PROJECT
Key Dates:
Approved: August 28, 2007
Effective: November 10, 2008
Closing: September 30, 2014
Financing in million US Dollars*:
Financier Financing Disbursed Undisbursed
IBRD 140.00 132.32 7.68
Total Project Cost 140.00
*Source: World Bank BW data as of September 11, 2014
Note: Disbursements may differ from financing due to exchange
rate fluctuations at the time of disbursement.
The Project Development Objective is to improve the quality of water and wastewater services and increase
the energy efficiency of select water and sanitation utilities.
The Project addresses (i) institutional strengthening for utilities toward improved operational efficiency; (ii)
rehabilitation investment needs in water and wastewater in Odessa, Ivano-Frankivsk, and Chernihiv; and (iii)
the need to finance urgent energy-efficiency investments in 14 water and sanitation utilities.
Results achieved:
The project started implementation slowly, due to the low readiness of investment projects for financing, a
reflection of the low capacity in many municipalities and utilities. However, more recently, the project has
made steady implementation progress, meeting the expected objectives.
Energy-efficiency investment subprojects were completed in eight participating cities—Kolomyia,
Novo Kakhovka, Drogobych, Cherkasy, Kharkiv, Chernihiv, and Kamyanets-Podilskiy—and in each
city, the obtained results exceeded the target of having at least 15 percent energy savings.
Specifically, energy efficiency improved by 35 percent in Kolomyia, 30 percent in Cherkasy, 25
percent in Drogobych, 21 percent in Kamyanets-Podilskiy, and 20 percent in Nova Kakhovka.
In Kolomyia, a new water pumping station was opened, resulting in fewer breakdowns in the water
supply system. The water utility company, which is owned by the city council, estimates annual
savings of about 1 million-kilowatt hours of electricity.
Business plans have been developed by three participating utilities to improve their strategic planning
and enhance their decision-making practices, and ultimately are expected to have a positive impact on
the utilities’ financial situation.
In total, the project is expected to reach 4 million people, who will have better access to clean, safe,
and reliable water.
Key Partners: (i) the Ministry for Regional Development, Construction, Housing and Communal Services is
responsible for the overall policy setting as well as for project implementation; (ii) the municipal authorities of
Odessa, Ivano-Frankivsk, and Chernihiv, which have regional Project Management Units; and (iii) 11 other
municipal utilities in participating cities.
Key Development Partner is the Swedish International Development Cooperation Agency (SIDA), which
has provided SKr 35,844,217 (an equivalent of about US$5.5 million) in support of institutional strengthening
and energy efficiency under the Urban Infrastructure Project.UKRAINE: SECOND URBAN INFRASTRUCTURE PROJECT
Key Dates:
Approved: May 22, 2014
Effective (Expected): October 24, 2014
Closing: October 31, 2020
Financing in million US Dollars*:
Financier Financing Disbursed Undisbursed
IBRD 300.00
CTF 50.00
Total Project Cost 350.00
*Source: World Bank BW data as of September 11, 2014
Note: Disbursements may differ from financing due to exchange
rate fluctuations at the time of disbursement.
The Project Development Objective is to improve the quality and efficiency of water, wastewater, and solid
waste services in selected cities in Ukraine.
The Project addresses some of the challenges the water and sanitation sector face through: (i) advancing
institutional reform; (ii) supporting sustainable improvements in service; and (iii) promoting recycling, reducing
solid waste, and supporting a reduction of environmental hazards in 10 participating water and sanitation
utilities.
Results expected:
The new Urban Infrastructure Project-2 was approved to continue providing investment financing to the sector
as well as technical assistance for building the capacity of water institutions. This will be achieved through three
components:
Component 1, urban infrastructure investments (US$335 million), will support the rehabilitation and
reconstruction of water supply, sanitation, and solid waste infrastructure in 10 cities (Kyiv, Kharkiv,
Donetsk, Zhytomyr, Kirovohrad, Ternopil, Kolomiya, Ivano-Frankivsk, Cherkasy, and Kramatorsk);
Component 2 (US$10 million) will support improvements in sustainable service delivery through
institutional strengthening and capacity building; and
Component 3 (US$5 million) will support project management and implementation. The project will also
support the transition toward more efficient and financially sustainable utilities.
In total, the project is expected to result in better access to water, wastewater, and solid waste services to
over 6 million citizens across Ukraine.
Key Partners: (i) the Ministry for Regional Development, Construction, Housing and Communal Services is
responsible for the overall policy setting as well as for project implementation; (ii) the water utility companies, or
vodokanals, in Kyiv, Ivano-Frankivsk, Kharkiv, Kolomiya, Donetsk, Kramatorsk, Kirovohrad, Zhytomyr,
Cherkasy, and Ternopil have regional Project Management Units; and (iii) Kharkiv Municipal company for
Waste Management.
Key Development Partners: the Clean Technology Fund (CTF), which has provided US$50 million in support
of institutional strengthening and energy efficiency under the project. An additional US$7 million grant from the
Swedish International Development Agency (SIDA) will cofinance institutional strengthening and capacity-
building activities.You can also read
