Document ofThe World Bank

FOR OFFICIAL USE ONLY

Report No: 24473

IMPLEMENTATION COMPLETION REPORT(SCL-43910)

ONA

LOAN

IN THE AMOUNT OF US$300 MILLION

TO THE

UKRAINE

FOR A

FINANCIAL SECTOR STRUCTURAL ADJUSTMENT LOAN

November 5, 2002

This document has a restricted distribution and may be used by recipients only in the performnance of theirofficial duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

(Exchange Rate Effective November 2002)

Currency Unit = Hrivnya1 UAH = US$ 0.1874US$ 1 = 5.33335 UAH

FISCAL YEARJuly 1 June 30

ABBREVIATIONS AND ACRONYMS

EDP Export Development ProjectFSAL Financial Sector Adjustment LoanGOU Government of UkraineIAS International Accounting StandardsICR Implementation Completion ReportIMF International Monetary FundNBU National Bank of UkrainePAL Programmatic Adjustment LoanSECAL Sector Structural Adjustment LoanUAH Ukrainian Hrivnya

Vice President: Johannes F. LinnCountry Manager/Director: Luca Barbone

Sector Manager/Director: Khaled SherifTask Team Leader/Task Manager: Alexander Fleming

UKRAINEFINANCIAL SECTOR STRUCTURAL ADJUSTMENT LOAN

CONTENTS

Page No.1. Project Data 12. Principal Performance Ratings 13. Assessment of Development Objective and Design, and of Quality at Entry 14. Achievement of Objective and Outputs 35. Major Factors Affecting Implementation and Outcome 76. Sustainability 97. Bank and Borrower Performance 98. Lessons Learned 109. Partner Comments 1110. Additional Information IIAnnex 1. Key Performance Indicators/Log Frame Matrix 12Annex 2. Project Costs and Financing 13Annex 3. Economic Costs and Benefits 14Annex 4. Bank Inputs 15Annex 5. Ratings for Achievement of Objectives/Outputs of Components 17Annex 6. Ratings of Bank and Borrower Performance 18Annex 7. List of Supporting Documents 19

Project ID: P040560 Project Name: Financial Sector StructuralAdjustment Loan

Team Leader: Alexander E. Fleming TL Unit: ECSPF

ICR Type: Core ICR IReport Date: November 5, 2002

1. Project Data

Name: Financial Sector Structural Adjustnent Loan L/C/TFNumnber: SCL-43910Country/Department: UKRAINE Region. Europe and Central

Asia RegionSector/subsector: Central government administration (17%); Banking

(83%)

KEY DATESOriginal Revised/Actual

PCD: 07/18/1996 Effective: 09/15/1998Appraisal: . 11/26/1997 MTR: 09/04/1999Approval: 09/15/1998 Closing: 12/31/1999 02/15/2001

Borrower/Implementing Agency: GOVERNMENT OF UKRAINE/MiNISTRY OF FINANCE/NATIONAL BANKOF UKRAINE

Other Partners:

STAFF Current At AppraisalVice President: Johannes F. Linn Johannes F. LinnCountry Manager: Luca Barbone Paul J. SiegelbaumSector Manager: Khaled F. Sherif Hennie van GreuningTeam Leader at ICR: Alexander E. Fleming Alan R. RoeICR Primary Author: Alan R. Roe

2. Principal Performance Ratings

(HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=HighlyUnlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible)

Outcome: S

Sustainability: BE

Institutional Development Impact: SU

BankPerformance: S

Borrower Performance: S

QAG (if available) ICRQuality at Entry: S

Project at Risk at Any Time: No

3. Assessment of Development Objective and Design, and of Quality at Entry

3.1 Original Objective:

(a) To support the balance of payments and budget financing needs of the period 1998-1999;(b) To strengthen the financial sector as one key component of improved private sector

contribution to growth;(c) To mitigate the direct budgetary costs of the authorities' reform program for the financialsector; and(d) To provide a framework of reform to guide technical assistance support to the sector to beprovided by other donors.

These objectives accorded closely with the priorities identified jointly with the GOU in both the1996 CAS and the 1998 CAS Progress Report. Both documents defined the strengthening of thefinancial sector as a major priority to help support private sector performance in the aftermath ofthe privatization programs initiated in 1995. They were also consonant with the objectives of theIMF's Extended Fund Facility (EFF) which was in preparation at the same time.

3.2 Revised Objective:There were no revisions of project objectives.

3.3 Original Components:The policy agenda to be supported by the Loan had three main components, each with asignificant number of sub-components. These were:

Actions to strengthen the Legal framework for Banking Activity (main sub-componentswere a new Law on the National Bank of Ukraine, and a new Law on Banks and BankingActivity). This component was motivated by the need to provide the NBU with clearer authorityover the banking system and also to institutionalize modem procedures for prudential regulation,including arrangements for the entry and exit of banks.* Actions to Strengthen the Informational and Regulatory basis of Banking (mainsub-components were the drive to achieve IAS-based accounting and reporting; a sound systemof loan-loss provisioning; and a radically reorganized Supervision Function within the NBU,including specific arrangements for intervening in problem banks).* Actions to begin the Restructuring of the Sector (main sub-components included arestructuring program for the Savings Bank; the establishment of procedures for enforcementactions against problem banks; targeted interventions in three former state banks; and thedevelopment of sound technical arrangements for Deposit Insurance).

The design strategy took specific account of the likely delivery capacity of the authorities byfocusing on the creation of Institutional Capacity, rather than on specific and highly designedinterventions in particular banks. It also took into account some of the bottom-up initiatives onreform that were being driven by an earlier Bank project - the Export Development Project(EDP). Among other things, this led to the FSAL excluding any detailed work on Ukreximbank -the bank which was the main target of the EDP.

3.4 Revised Components:There were no revisions to the components of the Project.

3.5 Quality at Entry:The ICR rates the quality at entry as "Satisfactory". This is based on the fact that the FSALdesign followed best practice in being firmly rooted in the results of an in-depth diagnostic studyof the sector that had been undertaken in 1995-96.(see Ukraine: Risks and Transition: A Review

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of the Financial Sector, Report No. 14526 UA, June 1995) The conditions for the release of thefirst and second tranches of the loan were extremely demanding. However, the entry pointjudgments about what could be achieved and on what time scale have proved to be reasonablyrealistic. The only adjustments to initial project design have been those associated with theextension of the closing date to accommodate problems with two of the third tranche conditions(see Section 4.3 below).

The FSAL was an appropriate vehicle to support the authorities' need to establish a wide range ofnew legal and institutional infrastructure to support financial sector development. It would havebeen premature at the beginning of the project in 1997 for the Bank to have engaged actively inspecific investment type activities directed at particular banks. Information about the perfonnanceof individual banks was patchy at that time. The high quality IAS data that would have beenneeded to select specific banks for in-depth support was largely absent and indeed these databecame a specific output of the FSAL interventions. The banking sector, being very small inabsolute terns, did not constitute a major risk of becoming a source of serious macroeconomicdisruption. This led to the at-entry judgment that the institutional foundations for the sectorshould be laid before any in-depth policy involvement in individual banks. At the point of entry itwas also anticipated that a Financial Services Project (FSP) would be prepared to build on thefoundations laid by FSAL. Although this never materialized, some of the institution-building at thelevel of individual banks was achieved during the identification phase for FSP.

4. Achievement of Objective and Outputs

4.1 Outcome/achievement of objective:Achievement of objectives and outputs was satisfactory. In relation to the four objectives listedabove, the achievements were as follows:

(a) To support the balance ofpayments and budgetfinancing needs of the period 1998-1999.During the period September 1998 - December 2000, the loan provided $260 million of balanceof payments and budgetary support. This was a crucial contribution to the financing of thegovernment's program during that period: a period that followed immediately on thedestabilization associated with the August 1998 Russian financial crisis. In this regard itcomplemented the disbursements made under other Bank adjustment operations and the IMF'sExtended Fund Facility. This development objective has therefore been achieved.

(b) To strengthen the financial sector as one key component of improved private sectorcontribution to growth. In the period September 1998 - December 2000, the loan wasundoubtedly the major influence behind the significant improvements in the legal, regulatory andother institutional infrastructure of the sector. These improvements, taken as a whole, have madea critical contribution to the development objective of building a stronger and more robustfinancial sector. This development objective has therefore been achieved.

(c) To mitigate the direct budgetary costs of the authorities reform program for the financialsector. The budgetary support provided by the loan has made it possible for the government tomeet increased expenditures (e.g. those associated with paying off government debt to banks, andthose associated with the corporatization of the Savings Bank) and also to accommodate to some

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losses of revenue (notably those associated with the introduction of tax deductible loan lossprovisions). These budgetary commitments in turn have been a critical element of the reformpackage. This development objective has therefore been achieved.

(d) To provide a framework of reform to guide technical assistance support to the sector to

be provided by other donors. During the period of project preparation and projectimplementation, all major donors have coordinated their support around the FSAL agenda in anactive and concerted manner. This has mobilized substantial Technical Assistance in support ofthe reform effort for the sector. This development objective has therefore been achieved.

4.2 Outputs by components:A significant majority of the identified outputs of the project have been met in a satisfactorymanner. There are two exceptions associated with the third tranche that are addressed belowalongside the successful outputs.

Development of new Banking Legislation: The Law on the National Bank of Ukraine wasapproved by the Supreme Rada on May 20, 1999. This Law confirmed the status and powers ofthe NBU in respect of the safeguarding of monetary stability, and the protection of a safe bankingsystem. In most respects the Law conforms with modem Western best practice. However, asmall number of its Articles were subject to criticism by domestic Ukrainian and some. externalagencies mainly because they introduced a role for a Supervisory Council that, in somecircumstances might be construed as a threat to the independence of the NBU. The Bank's viewon this has long been that this Council is unavoidable given the Ukrainian Constitution (Art. 100)and that other articles of the law had been appropriately drafted to mitigate the dangers as theyintroduced proper checks and balances. A modern new Law on Banks and Banking Activity wasapproved on December 7, 2000. This provides the NBU with substantially strengthenedsupervisory powers in relation to banks, not least the powers to dictate the liquidation process forfailed commercial banks. The third Legislative act, namely the Law on Deposit Insurance was notapproved at the time of loan closure in December 2000. However, all the substantive work onthis Law had been finalized, and the Law was approved on September 20, 2001.

* Introduction of IAS Accounting for Commercial Banks: All commercial banks in thecountry were converted to IAS accounting by January 1, 1998 (negotiation condition), and allreporting by banks to the NBU is now also made on an LAS basis.

Introduction of System of Loan Classification and Loan-Loss Provisioning: The NBUBoard approved the necessary new regulations for a modern system of loan classification andprovisioning in September 1997, and the Corporate Tax Law which embodies tax deductibility ofmost provisions was approved in May 1997. Subsequently the NBU has assiduously monitoredcompliance with the requirement to build adequate loan loss provisions in all banks and has alsoroutinely sanctioned noncompliant banks. At the time of the closure of the project, only twobanks were substantially out of compliance and one of these (Bank Ukraina) has since been put inliquidation. The other (Savings Bank) is operating under a modified forbearance regime. Theoutcome has been that the level of provisions in the banking system has grown from almost zeroin 1997 to a fully adequate amount by 2001.

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Reorganization and Strengthening of the Bank Supervision Function: The NBU Boardhas agreed and has implemented a fundamental restructuring of its bank supervision function. Thishas included the designation of a Vice-Govemor as the head of the Bank Supervision Department,the creation of a Large Bank Unit, establishment and a significant upgrading of the divisionresponsible for bank resolution matters. This is an area of work that has benefited in a sustainedmanner from donor technical assistance (especially from US-AID and EU-Tacis).

Improve the On-Site Examination of Banks: This work has now become a core element ofthe NBU's routine work with all banks subject to regular on-site examinations. The technicalquality of this work has benefited from ongoing technical assistance, and received a significantfillip with the IMF-led diagnostic reviews of the larger banks undertaken in 1998. In accordancewith the NBU practice, all the commercial banks of Ukraine are examined on an annual basisfollowing the CAMEL system.

Strengthen the Licensing Arrangements for Banks: The NBU has progressively refined itscriteria for licensing banks including the minimum capital requirements, and has enforced thesecriteria stringently. The new Law on Banks and Banking Activity incorporates improvedstandards for shareholders and managers of banks, and these are now being incorporated in NBUprocedures.

Establish Enforcement Capacity and Procedures to Address Problem Banks: The NBUhas progressively refined its arrangements for taking enforcement actions against problem banks.This has included an increasingly refined set of NBU criteria and triggers for moving banks to thebank resolution department; the evolution of operational procedures to deal with the liquidationof banks; and the gaining of practical experience in the administration of banks, including somelarger ones.

* Specific Interventions in Former State Banks: The NBU has extended its arrangementsfor the off-site surveillance and on-site inspection of banks to include all the large banksconsistently with all other banks. The IMF-led diagnostics undertaken in 1998 covered the sevenlargest banks (based on assets), including all the former state banks, thus embracing almost 60%of the banking sector total assets. All these banks were subject to correction programs whichwere reflected in Commitment Letters signed between the banks and the NBU in May-June 1999,and extending through December 2000. One of the former state banks (Bank Ukraina) showedunsatisfactory compliance with the commitment letter, and has subsequently been liquidated. Atthe same time, the NBU has negotiated successfully with the Ministry of Finance to ensure thereduction to UAH 100 million ($18 million-equivalent at current exchange rates) of outstandinggovernment loans to the three former state banks identified for this purpose in the FSAL LoanAgreement (Prominvestbank, Bank Ukraina, and Ukrosotsbank).

* Implement the First Stages of a Restructuring Program for the Savings Bank: Theauthorities successfully achieved the corporatization of the bank in 1999. The bank'smanagement, together with the NBU Large Bank Unit, also succeeded in introducing severalimportant elements of a restructuring program for the bank. These elements included significantprogress with the introduction of a Treasury system; some strengthening of the credit function;

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improving bad debt resolution capacity, and some rationalization of the branch network.However, other elements of the agreed restructuring, such as the finalization of an InformationTechnology Strategy, improved Human Resource Management and development of a proper

Product Development and Marketing plan were not achieved to the standard anticipated. Nor

was the bank's performance against its NBU Commitment Letter particularly good. Hence, bythe end of 2000, it still had a capital deficit almost as large as at the time of the diagnostic study

in 1998, and it was one of only two banks with a major deficiency in its loan loss provisions. In

spite of this, the bank came under government pressure from August 2000 to make loans toenergy companies, some of which seemed destined to worsen the financial condition of the bank.For these various reasons, the last supervision mission prior to project closure determined that the

third tranche condition relating to the Savings Bank had not been met. However, this is a

component of the project where considerable donor technical assistance has been provided -

principally by EU-Tacis, with ING-Barings as the main contractor. This work is continuing, and

gives rise to the hope that the shortfall on meeting the conditionality will be made good given alittle more time.

Establish a Sound System of Deposit Insurance: The authorities have established a

Deposit Insurance Fund (Presidential Decree of September 10, 1998) and have passed the Deposit

Insurance law in September 2001 that will govern its operations. This embodies principles ofsound practice that have drawn from Bank guidance, and from the variety of internationalexperiences that the Ukrainian specialists have had via technical support coming from Canada,

Hungary, and other countries. After a great deal of debate, modest limits on the size of theinsurance cover have been established, and workable exclusion arrangements for problem banks

have been drawn up. Unfortunately, the draft Law was unable to achieve its approval through theRada prior to the project closure date. Hence, this condition also failed to be met in full byclosure. Again, given that the Law was passed in September 2001, the substance of the conditioncan be considered met.

4.3 Net Present Value/Economic rate of return:

Not applicable.

4.4 Financial rate of return:Not applicable.

4.5 Institutional development impact:The FSAL had a significant impact on Institutional Development in all the main dimensions that

are relevant to financial sector performance. The new Legal structures for banking (both the laws

and the detailed regulations of the NBU) have arisen as a direct consequence of the guidancecoming from the FSAL package. Accounting reform for banks is a direct consequence of the

project and the associated technical assistance. The upgraded organizational arrangements in the

NBU for the regulation and the supervision of commercial banks have also been put in place

under the umbrella and support of the project. Although many other donors contributed technical

assistance to ensure the delivery of key components, the structure of conditionality designed into

FSAL has been an important organizing influence for this TA. The same is true of the reform of

some key elements of the tax laws to assist sound banking and in particular it is true of the

adoption of a revised Corporate Tax law permitting deductibility of loan losses.

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5. Major Factors Affecting Implementation and Outcome

S.1 Factors outside the control ofgovernment or implementing agency:The main point to note is that the timetable for Rada discussion of major legislation has beenconsistently unpredictable and that the outcomes from those discussions have also beenunpredictable in some cases. This was an issue impacting the failure to achieve the approval of theLaw on Deposit Insurance in a timely fashion. It also accounts for the presence of some of thecriticized articles in the Law on the NBU.

5.2 Factors generally subject to governmtent control:The overall performance of the State Savings Bank under the FSAL program has beendisappointing in spite of the dedicated efforts made by many of its senior staff to achieve theprogress that had been agreed. The poor performance relates to both the unsatisfactory financialsituation of the bank at the end of the project period, and also to the inadequate progress in someof the qualitative areas mentioned earlier. To a degree, the GOU through its involvement in theSupervisory Council of the bank bears much of the responsibility for the shortfalls. It seemspossible that a more committed and determined stance by government could have avoided at leastsome of the problems that are now evident.

5.3 Factors generally subject to implementing agency control:Extension of the Original Closing DateThe initial extension of the closing date to June 30, 2000 was motivated by the authorities'success in meeting three of the six third tranche conditions. Equally, at the time of the extension,the new Law on Banks and Banking activity was in an advanced stage of preparation, and thereappeared to be a strong possibility that this could achieve approval by the Supreme Rada by thesummer recess. That Law in turn was regarded as a crucial element in the whole reform packagesince it fundamentally upgraded the authority and the powers of the NBU to deal with all aspectsof banking problems from entry (licensing) to exit (liquidation). The other two unmet conditionsrelated to Deposit Insurance and the restructuring of the Savings Bank. In both these cases, muchof the technical work had been achieved, and full satisfaction of the conditions seemed to only bea matter of time. There were no disagreements of substance between the Bank and the Ukrainianauthorities.

Two factors in this situation changed regarding the decision to extend the closing date and theonset of the new closing date at end-June 2000. First, because of the time pressure on the Rada(see 5.2 above), only the first reading of the Law on Banks and Banking Activity was achieved bythe summer recess of 2000. But at the same time, the situation in Bank Ukraina had become moreobviously serious and liquidation of that bank seemed the only sensible course of action. Theauthority of the new law was needed to ensure that the various options being considered for thetroubled bank could go ahead legitimately. Second, the Bank's Programmatic Adjustment Loanhad begun its preparation, and offered a possible vehicle to sustain some of the unfinished work ofreform initiated in the FSAL. For these reasons, and because the new banking law was stillregarded as a vital component of the project, Board approval was sought for an extension of theclosing date to February 15, 2001 and a restructuring of the third tranche component of the LoanAgreement.

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The actions approved by the Board were as follows:

* The third tranche was reduced in size from $100 million to $60 million-equivalent, andthe outstanding conditions were further strengthened and moved to the proposed PAL operationthat was expected to be presented to the Board in the Spring of 2001.* The restructured third tranche was released upon approval by the Executive Directors ofthe proposed amendment.

The decision to allow the authorities more time to achieve approval of the Law on Banks andBanking Activity was justified in that the law was approved in early December 2000. The broadjustification for the restructuring was set out in the Board memorandum as follows:

"Staff believes that Ukraine has reached a critical stage in its reform of the financial sector. Thereis a renewed commitment by the Authorities to increase the momentum of financial sector reform,which is supported by the recent creation of the financial sector Policy Coordination Board and anumber of other complementary initiatives. This warrants a seamless phasing of supportencompassing a restructured FSAL flowing into a PAL containing a substantive financial sectorprogram. Against this background, Staff is of the view that progress under the third tranche ofFSAL is sufficient to merit a partial release of the tranche."

The restructuring involved only two of the original conditions. As regards the reform of the

Savings Bank, the justification was as follows:

"Staff supervision of the project in early December concluded that this condition has not been metin its entirety. There are several explanations for this. One is that at the time of Loan negotiationsthe Ukrainian Authorities were not in a good position to articulate a robust restructuring strategy.The basis is now much better defined after an 18 month TA program delivered by ING-Baringsand financed by EU-Tacis. A new strategy document has recently been prepared by the SavingsBank and its advisers and the Bank has received a request to assist in the refining andimplementation of that strategy. There is a strong argument to restructure the FSAL condition insuch a way as to ensure ongoing Bank support (through the PAL) in an agenda of work which isonly partially completed."

As regards the system of Deposit Insurance, the justification was as follows:

"The Authorities have notified the Bank that they will not be able to comply in time with the sixthFSAL condition, specifically the approval of the new Law on Deposit Insurance. The technicalwork on this Law is substantially complete after considerable Bank assistance through the FSALperiod. However, the legislative timetable has not found room for the Law and its promoters alsoperceive the need to achieve stronger financial underwriting of the insurance cover before theLaw is formally debated in the Rada. Staff have no difficulty with this logic and again wouldsupport the request that this unmet condition be restructured for possible inclusion in the agendaof the PAL."

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5.4 Costs andfinancing:

As an adjustment operation, the FSAL does not require a cost estimate and a financing plan. TheGovernment disbursed an acceptable overall budget in support of the reform objectives of theloan. Certainly some of the individual budget expenditures and revenue losses (1997-2000)associated with these reforms were of a substantial magnitude. Note should also be made of thevery substantial technical assistance provided by other donors in support of the objectives of theFSAL project. None of this was provided as the result of formal co-financing agreements but themonetary value and the technical quality of this support should certainly be factored in as one ofthe positive outcomes of the FSAL initiative.

6. Sustainability

6.1 Rationale for sustainability rating:Most of the new or reformed institutional arrangements put in place under the FSAL project (seealso sections 4.2 and 4.5) have a high probability of remaining sustainable and thereby making anongoing contribution to a sounder banking system for the country. Some of the reforms, such asthe introduction of the new Laws, [AS accounting and the system of loan loss provisioning will behard to reverse. This justifies the "HL" rating in regard to "Sustainability".

6.2 Transition arrangement to regular operations:

One caveat, however, concerns the strength of the commitment to take full advantage of, and toenforce, the new arrangements. This commitment is not fully assured, and is likely to depend for alittle longer on some external pressures, such as those that will be associated with the ongoingtechnical support from some donors, including the Bank in its own future operations relating tothe sector. The Bank's new PAL operation will be critical in sustaining momentum in relation tosome of the dimensions of the FSAL reforms.

7. Bank and Borrower Performance

Bank7.1 Lending:

Bank lending perfornance is assessed as Satisfactory, even though it was necessary to extend theclosing date of the project and to truncate the disbursements associated with the third tranche (seealso section 5.3). First and second tranches of $100 million each were disbursed promptly,without waivers, and within a year of loan approval (in September 1998 and September 1999respectively). These disbursements provided the government with substantial balance of paymentssupport at a very critical stage in its macroeconomic evolution. Second tranche conditions werevery demanding on the authorities, and this accounts for the one-year gap between first andsecond tranche releases. Softer conditionality or the use of waivers could have helped to achievean earlier release of the money. However, this would not have been of great significance in termsof the macroeconomic situation of that time. The reduced third tranche disbursement of $60million also made an important contribution in this regard.

7.2 Supervision:

Supervision of the loan has been intensive throughout. This has been associated with regularsupervision missions, but equally important with a very "hands-on" approach by the key staff

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based in the Kiev Resident Mission. This has ensured timely awareness of problems and an almostday-to-day ability to help Ukrainian counterparts interpret and deliver on the program of policyreform. It has also been crucial in affecting the nature and timing of some of the key TA inputsfrom other donors that have contributed to the project's success.

7.3 Overall Bank performance:The overall performance of the Bank in relation to the project is assessed as Satisfactory.

Borrower7.4 Preparation:The Borrower's performance in preparing the project is assessed as Satisfactory. Although themain Borrower agency - the NBU- entered into preparation in 1996/97 with only a sketchy viewof the appropriate strategy for the sector and weak institutional capacity, especially in the area ofbank supervision, it quickly assimilated some of the guidance provided to it by the Bank tobecome an effective counterpart for the preparation of the project. Its practical work indeveloping the component of the project was carried out to a good standard. The maindifficulties related to the relatively poor coordination between the different parts of thegovernmental system for reaching conclusions and agreeing actions. Some elements of thepreparation process involved degrees of confrontation rather than cooperation between differentparts of governments. At the same time the legislature - the Supreme Rada - was treated assomething of an outsider, even a threat to the reform process. This attitude gradually dissipated.

7.5 Government implementation performance:The Borrower's implementation performance is rated as Satisfactory. On some issues having highpolitical sensitivity or divided opinions, procrastination was sometimes experienced and thisrequired considerable persistence by the Bank to achieve progress. On one or two issues, thegovernment seemed not to fully buy-into the intention of the reform, and to take actions whichseemed to run counter to those intentions. Its ambivalence regarding the Savings Bank is oneexample.

7.6 Implementing Agency:Most of the work of implementation was undertaken by the NBU. The generally positivecomments about this agency as set out in 7.4 apply.

7.7 Overall Borrower performance:The overall performance of the Borrower in relation to the project is assessed as Satisfactory.

8. Lessons Learned

Coordination amongst the various parts of government. The NBU has shown that it is able to

take the main responsibility for organizing and managing most dimensions of a complexmulti-component adjustment operation in the financial sector. At the same time, the project hasrevealed that the quality of the coordination between the NBU and other key organs ofgovernment is relatively poor. The absence of a unified vision of what financial sector reform ismeant to achieve has resulted in a great deal of wasted effort in project implementation - withactions by one part of the administration negating the intentions of another. A far more integratedand unified approach from government will be needed fully to ensure the economic benefits fromthe types of reform initiated by this project. This is now being implemented through a new

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inter-agency Financial Sector Policy Board established at the end of 2000.

9. Partner Comments

(a) Borrower/implementing agency:

In the letter dated July 5, 2002 from the Ministry of Economy and on the issues of EuropeanIntegration of Ukraine, the Government of Ulraine confirned its full agreement with the ICR andthe assessment made on the performance of the FSAL in the ICR. In the letter dated July 5,2002, the GOU wrote:

" The Government of Ukraine reviewed the assessments proposed by the World Bank inthe draft Implementation Completion Reportfor the Financial Sector Adjustment Loan (FSAL)

completed in February 2001, and communicates its full agreement with the presentedachievements and assessments.

In our opinion, this Project, on the whole, had very positive impact on the development of

financial sector of Ukraine and made significant contribution to the strengthening of thecomprehensive legalframework, as well as regulation and supervision of the banking sector of

Ukraine".

(b) Cofinanciers:

Not applicable.

(c) Other partners (NGOs/private sector):

Not applicable.

10. Additional Information

A detailed list of additional available documentation on the project can be found in Annex 7.

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Annex 1. Key Performance Indicators/Log Frame Matrix

Not applicable.

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Annex 2. Project Costs and Financing

Project Cost by Appraisal Estimate Actual Estimate Percentage ofTranche (Disbursed) AppraisalFirst tranche US$100 million US$100 million 100%Second tranche US$100 million US$100 million 100%Third tranche US$100 million US$60 million 60%TOTAL US$300 million US$260 million 87%

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Annex 3. Economic Costs and Benefits

Not applicable.

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Annex 4. Bank Inputs

(a) Missions:Stage of Project Cycle. - -- N- .No. oofPersons and Specialty - --Pe6fomnanice Rating- .

. -- -- --(e.g. 2Ecorfornists, V.FMS,- etc.) - mplefnentation DevelopmentMonth/Year -Couiit - Specialty- . - -Progress : -Objective

Idenffflcation/PreparationJune 1996 5 Task Manager, Economist,

Accounting Specialist, BankingSpecialists (2)

October 1996 5 Task Manager, OperationsOfficer, Banking Specialists(3)

March 1997 9 Task Manager, OperationsOfficer, Accounting Specialist,Economist, Banking Specialists(5)

June 1997 5 Task Manager, AccountingSpecialist, Banking Specialists(3)

July 1997 3 Task Manager, BankingSpecialists (2)

Appraisal/NegotiationNovember 1997 5 Task Manager, Operations

Officer, AccountingSpecialist, BankingSpecialists (2)

SupervisionNovember 1998 2 Task Manager, Banking S S

Specialist

May 1999 3 Task Manager, Banking S SSpecialists (2)

July 1999 2 Task Manager, Banking S SSpecialist

March 2000 5 Task Manager, Director, U UBanking Specialists (3)

June 2000 4 Task Manager, Banking S SSpecialist, Financial Specialists(2)

October 2000 5 Task Manager, Director, U UBanking Specialist, FinancialSpecialist

December 2000 3 Task Manager,Banking S SSpecialist, Financial Specialist

ICRI Financial Specialist

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(b) Staff:

- Site of.Project Cycle -. A. .tual/Latest Es.ijimate .-- -- - No. Saff eeks - -US$ COOO) -

Identification/Preparation 517Appraisal/Negotiation 172Supervision 374ICR 53Total 1,116

Note: The current MIS does not provide information on the actual staff weeks spent during the project cycle.

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Annex 5. Ratings for Achievement of Objectives/Outputs of Components(H=High, SU=Substantial, M=Modest, N=Negligible, NA=Not Applicable)

RatingOI Macro policies O H OSUOM O N * NAO Sector Policies OH * SU O M O N O NAEl Physical O H OSUOM O N * NAO Financial O H * SU O M O N O NAO Institutional Development 0 H 0 SU 0 M 0 N 0 NAO Environmental O H OSUOM O N * NA

SocialO Poverty Reduction OH OSUOM ON * NAFl Gender OH OSUOM ON *NALI Other (Please specify) OH OSUOM O N * NA

b Private sector development 0 H O SU *M 0 N 0 NAOl Public sector management 0 H * SU O M 0 N 0 NAO Other (Please specify) * H OSUOM ON O NA

Mobilization of Donor Support

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Annex 6. Ratings of Bank and Borrower Performance

(HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HU=Highly Unsatisfactory)

6.1 Bankperformance Rating

F Lending OHS*S OU OHU• Supervision OHS OS O U O HU

3 Overall OHS * S O U O HU

6.2 Borrowerperformance Rating

%3 Preparation OHS OS O U O HUF Government implementation performance O HS O S 0 U 0 HUF Implementation agency performance O HS O S 0 U 0 HU0 Overall OHS OS O U O HU

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Annex 7. List of Supporting Documents

Memorandum of the President (dated February 23, 1998)Letter of Financial Sector Development Policy (dated February 24, 1998)Loan Agreement (dated September 15, 1998)Back to Office Reports/Aide MemoirsProject Status ReportsTranche Release MemorandumLetter from the Govemment of Ukraine communicating its agreement with theICR assessments of Project Implementation (In Ukrainian and English translation)

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Report No.: 24473Type: ICR

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