Private Sector Opportunities for a Green and Resilient Reconstruction in Ukraine Synthesis Report October 2023 © 2023 The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved This work is a product of the staff of The World Bank. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. 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Page x: Kent Banes / Unsplash. ii Contents Acknowledgements .............................................................................................................................................................. iv Abbreviations and Acronyms ............................................................................................................................................. v EXECUTIVE SUMMARY ................................................................................................................................................ vi CHAPTER 1: COUNTRY CONTEXT AND CROSS-CUTTING ISSUES .................................................... 1 1.1 Recent Developments .......................................................................................................................................... 1 1.2 Private Sector Investment Projections .............................................................................................................. 3 CHAPTER 2: THE COMMERCIAL SECTORS ..................................................................................................... 6 2.1 Agriculture ............................................................................................................................................................. 6 2.2 Industry and Commerce ..................................................................................................................................... 11 2.3 Culture and Tourism ............................................................................................................................................ 12 CHAPTER 3: INFRASTRUCTURE ............................................................................................................................ 13 3.1 Transport ................................................................................................................................................................ 13 3.2 Energy and Extractives ........................................................................................................................................ 18 3.3 Telecommunications, Postal Services, and Broadcasting .............................................................................. 22 3.4 Water and Sanitation Services ............................................................................................................................ 23 3.5 Irrigation ................................................................................................................................................................ 24 CHAPTER 4: PRIVATE INVESTMENT OPPORTUNITIES IN THE SOCIAL SECTORS .................... 25 4.1 Housing .................................................................................................................................................................. 25 4.2 Municipal Services ............................................................................................................................................... 26 4.3 Health ..................................................................................................................................................................... 27 4.4 Education ............................................................................................................................................................... 28 CHAPTER 5: MOBILIZING DOMESTIC PRIVATE FINANCING ................................................................ 30 5.1 Finance and Banking ........................................................................................................................................... 30 5.2 Pensions .................................................................................................................................................................. 31 Annex. Technical Team and Contributing Reviewers ................................................................................................. 33 LIST OF TABLES Table 1: Critical Reforms and Interventions to Mobilize Private Financing for a Green and Resilient Reconstruction in Ukraine 2023–2033 ......................................................................................................... ix Table 2: Ukraine’s RDNA2 needs and projected private sector financing opportunities 2023–2033 ................. xii Table 3: Agricultural Risks and Risk-Mitigation Instruments ................................................................................. 10 LIST OF FIGURES Figure 1: Updating on the Constraints on Private Sector Growth Identified in the 2021 Country Private Sector Diagnostic .............................................................................................................................................. 3 Figure 2: Evolution of Global and Ukrainian Wheat Prices ($/ton) ........................................................................ 7 Figure 3: Selected Ukrainian Agricultural Exports, 2021 and January–November 2022 ($ billions) ..................... 8 LIST OF BOXES Box 1: Mobilizing Private Financing for Public Investment under a Deferred Payment Structure ............... 16 iii VOLUME 1: PRIVATE SECTOR OPPORTUNITIES FOR A GREEN AND RESILIENT RECONSTRUCTION IN UKRAINE Acknowledgements This report was prepared under the leadership of Alfonso Garcia Mora, Vice President for Europe and Latin America at the International Finance Corporation (IFC), Susan Lund, Vice President, Economics and Private Sector Development, IFC, Anna Bjerde, Vice President Europe and Central Asia, IBRD until March 2023, and Antonella Bassani, Vice President Europe and Central Asia, IBRD, since March 2023. Rana Karadsheh (Regional Director Europe, IFC), Arup Banerji (Country Director, Ukraine, Moldova and Belarus, IBRD), Lisa Kaestner (Senior Manager, Ukraine and Moldova, IFC) and Gevorg Sargsyan (Country Manager for Ukraine, IBRD) provided guidance to the team preparing the report. Tatiana Nenova (Manager Country Economics Europe and Latin America (CELCE), IFC until June 2023) and Levent Karadayi (Acting Manager CELCE, since July 2023) provided technical oversight to the team. The report benefited from peer review comments from Omar Chaudry (Manager, IFC); Laurence Carter (Senior Advisor, IFC); Vivien Foster (Chief Economist, Infrastructure, IBRD until March 2023); Maria Vagliasindi (Lead Economist, Infrastructure, IBRD); and Karlis Smits (Lead Country Economist, IBRD). In addition, Anders Aslund, adjunct Professor at Georgetown University and the Kyiv School of Economics provided helpful comments. The technical team and reviewers who commented during the concept note, quality enhancement review, and decision meetings are listed in annex A. The report benefited from consultations with the government of Ukraine and guidance provided by its representatives. The report team would like to express its deep appreciation to Yuliia Svyrydenko, First Deputy Prime Minister of Ukraine and Minister of Economy of Ukraine; Oleksandr Kubrakov, Deputy Prime Minister for Restoration of Ukraine and Minister for Communities, Territories and Infrastructure Development of Ukraine; and Serhii Marchenko, Minister of Finance of Ukraine, for their support during the preparation of the report. The team is also grateful for the valuable contributions provided by Volodymyr Kuzyo, Deputy Minister of Economy of Ukraine; Olexii Sobolev, Deputy Minister of Economy of Ukraine; Nadiya Bihun, Deputy Minister of Economy of Ukraine; Anna Yurchenko, Deputy Minister for Communities, Territories and Infrastructure Development of Ukraine for European Integration; Oleksandra Azarkhina, Deputy Minister for Communities, Territories and Infrastructure Development of Ukraine; Olga Zykova, Deputy Minister for Ministry of Finance of Ukraine; Kateryna Rozhkova, First Deputy Governor of the National Bank of Ukraine (NBU); Sergiy Nikolaychuk, Deputy Governor of the NBU; Farid Safarov, Deputy Minister of Energy of Ukraine; Roman Andarak, Director General for Strategic Planning and European Integration, Ministry of Energy of Ukraine; Maryna Denysiuk, Senior Project Manager, Team Lead, Green Deal Coordination, the Reforms Delivery Office of the Cabinet of Ministers of Ukraine. Finally, the team would like to thank the ministerial and central bank staff who provided the data and other inputs that inform the analysis presented in this report. iv ABBREVIATIONS AND ACRONYMS Abbreviations and Acronyms CPSD Country Private Sector Diagnostic CSA Climate-smart agriculture DPS Deferred payment structure EU European Union FDI Foreign direct investment FIT feed-in-tariff GDP Gross domestic product GHG Greenhouse gas GW Gigawatts IBRD International Bank for Reconstruction and Development ICT Information and communication technology IDP Internally displaced people IFC International Finance Corporation IMF International Monetary Fund MW Megawatt MWh Megawatt-hour NBU National Bank of Ukraine OECD Organization for Economic Cooperation and Development PPP Public-private partnership PSO Public service organization PV Photovoltaic RDNA Rapid Damage and Needs Assessment RES Renewable energy sources SPS Sanitary and Phytosanitary SOE State-owned enterprise UAH Ukrainian hryvnia UNDP United National Development Program JSC UZ Joint-Stock Company Ukrzaliznytsia VAT value-added tax v VOLUME 1: PRIVATE SECTOR OPPORTUNITIES FOR A GREEN AND RESILIENT RECONSTRUCTION IN UKRAINE Executive Summary Russia’s invasion has radically altered Ukraine’s While the projections are subject to considerable economy, which will emerge from the military uncertainty, this report presents two scenarios invasion transformed. The dissolution of the projecting the extent to which the private country’s longstanding financial and trade ties sector may be able to finance the reconstruction with Russia, coupled with its ambitious drive needs identified in the second Rapid Damage toward European Union (EU) membership, is and Needs Assessment (RDNA2).1 Note that fundamentally altering Ukraine’s role in the private-sector financing for a green and resilient regional and global economy. While a rapid and reconstruction is distinct from compensation for sustainable recovery will require strategically damages, an issue not discussed in this report. mobilizing scarce public resources to crowd The first scenario assumes that the Ukrainian in private investment, this process must focus government implements no major economic not only on the reconstruction of existing reforms and that the state’s relationship with value chains, but also on the development of the private sector essentially reverts to its new industries and infrastructure that reflect pre-invasion status quo as described in the Ukraine’s deepening integration with European World Bank Group (WBG) 2021 Country and transatlantic markets. Private Sector Diagnostic (CPSD) for Ukraine (WBG 2021). Under the second scenario, the During the invasion, the role of the public sector government implements an extensive pro- expanded while the private sector contracted, both competition reform program, while intervening in absolute terms and as a share of gross domestic to alleviate distortions in specific sectors, product (GDP). Due to the extraordinary demands supported by favorable macroeconomic placed on the defense budget, public debt increased conditions. While the reform-and-intervention while the private sector accumulated financial scenario’s priorities vary across sectors, pro- assets. In this context, the right policies, incentives competition reform would entail a broad and risk management tools could make private effort to scale back the presence of state- financing available to support a green and resilient owned enterprises (SOEs) while encouraging reconstruction. To unlock these opportunities, the collaboration between the public and private authorities will need to strategically allocate scarce sectors, eliminating regulatory obstacles public resources while implementing extensive that inhibit the creation or expansion of reforms to increase competition, lower transaction competitive markets, and accelerating the costs, and encourage the entry of foreign firms alignment of domestic laws and regulations and the acquisition of new technologies. While with EU standards and global best practices. these actions by the authorities could provide International development partners could play necessary conditions, the actual private sector an important role in supporting the identified financing response also requires other conditions reform measures and risk mitigation, such as that are beyond the scope of this report, including guarantees for private investors. While risk conducive macroeconomic developments and mitigation is important the instruments are not external guarantees for security and governance. discussed in detail in this report. 1 This report is based on data collected for the second RDNA2 that the World Bank, the government of Ukraine, the European Commission and the United Nations Development Program (UNDP) jointly prepared. The RDNA2 provides estimates of damages, losses and needs caused by Russia’s invasion of Ukraine between February 2022 and February 2023 (World Bank et al. 2023). The RDNA2 does not assess damages from the destruction of the Nova Kakhovka hydroelectric dam, which caused catastrophic flooding across a large area of southern Ukraine. vi EXECUTIVE SUMMARY In addition to identifying the role for private Implementing the reforms and interventions finance in meeting recovery needs this report identified in this report (Table 1) could increase provides a detailed analysis of private sector total opportunities offered by Ukraine’s green investment opportunities in selected sectors and resilient reconstruction from $172 billion going beyond the recovery needs identified to $412 billion for private financing during the in the RDNA2. This includes development of RDNA2 period (2023-2033, Table 2). additional capacities needed for green transition of Ukraine and supporting the country’s goal In agriculture and food processing, public to integrate fully into the European and global investment combined with policy reforms to supply chains, specifically by increasing trade crowd in private investment could allow the (export) and modernizing domestic production. private sector to fully cover the reconstruction These opportunities are particularly significant needs identified in the RDNA2 while triggering in the transport and energy sectors (Table 2). In an additional $16 billion in private investment areas where the private sector is projected to fully (Chapter 1). Private financing opportunities cover the identified needs – such as the commerce in food processing and agriculture are closely and metal sectors – this report did not seek to related to the recovery of agriculture and the identify further investment opportunities. Under EU accession process. Key interventions include: the second scenario, reforms increase private (i) creating an efficient land market through sector opportunities to address investment needs continued liberalization of land sale and identified in the RDNA2 as well as other private strengthening of institutions for land governance, sector opportunities. (ii) establishing a framework to enable private- sector participation in the irrigation subsector, In the absence of reforms and interventions, the (iii) maintaining free trade agreements with analysis assumes that the private sector would EU and opening new markets for agricultural resume investing in the same sectors as it did products, and (iv) demining and decontaminating prior to Russia’s invasion, with no clear path agricultural land affected by the invasion. toward structural change. Under this status quo scenario, private financing is projected to cover a In transportation and logistics, public investment large share of the identified reconstruction needs and policy reforms could increase private for the 2023–2033 period in the agricultural investment opportunities from $9 billion to $47 sector (over 80 percent), industry and commerce billion while accelerating the adoption of climate- (77 percent), and banking (63 percent), but smart technologies. Key interventions include: much smaller shares (just over 30 percent) in the (i) concessioning selected water transport and telecommunications and housing sectors (Table railway assets, (ii) reformulating the road network 2). In the infrastructure sectors where assets are and introducing public-private partnerships largely publicly owned and operated, private (PPPs) in the road subsector, (iii) establishing investors could mobilize less than $4 billion2 new business models for fleet renewal, (iv) in financing for RDNA2 needs over the period. reformulating the airport network and airport Continuing a pre-invasion investment pattern, concessions, and (v) aligning transportation and an additional $38 billion in infrastructure logistics regulations with EU regulations. investment opportunities could also become available over the period that would not be In energy and extractives, policy reforms could related to the reconstruction needs identified in enable the private sector to invest $36 billion the RDNA2 (Table 2). in the RDNA2 reconstruction needs covering 2 All dollar amounts in this report are in US dollars. vii VOLUME 1: PRIVATE SECTOR OPPORTUNITIES FOR A GREEN AND RESILIENT RECONSTRUCTION IN UKRAINE 76 percent of the needs, while unlocking $132 oversight to encourage competition. In parallel, billion in additional investment opportunities. reforms that facilitate the establishment of Key interventions include: (i) wholesale private pension systems and open a wider electricity market reform, (ii) tariff reform in range of sectors to institutional investors could electricity generation, transmission, distribution rapidly increase the private financing available to and end-users of electricity and district heating, support a green and resilient reconstruction. (iii) tariff reform in gas to enable district heating switching to renewable fuels, (iv) auctions for The macroeconomic assumptions reveal the renewables-based electricity and hybrid energy importance of mobilizing domestic private storage and generation, and (v) alignment with resource mobilization to meet the corporate EU standards. demand for private financing. The report argues that the banking and pension sectors Private investment opportunities in the can provide financing of more than 5 percent social sectors are concentrated in rebuilding of GDP to the corporate sector per year during and improving the country’s damaged and the 2023–2033 period (Chapter 5). Including dilapidated housing stock. Ukraine’s housing the banking and pension sectors and part of stock is 95 percent privately owned, and most the projected foreign direct investment (FDI) investments will be made by households.3 net inflows of 4.8 percent of GDP, Ukraine Market failures discourage corporate investment. may be able to mobilize 20 percent of GDP During 2023–2033, pilot projects to allow in private investment for a green and resilient corporate investment in housing could lay the reconstruction in 2027 as included in the groundwork for more comprehensive reforms International Monetary Fund (IMF) baseline over the medium term. Corporate investment scenario published in March 2023 (IMF 2023a). in water and sanitation, health, education, and The first review of the IMF program (IMF municipal services will also be tested through 2023c) revised the projection for the private pilot projects during the period. However, investment to GDP ratio in 2027 to 15.9 even these pilot projects will require sector- percent. The analysis presented in this report specific reforms, as well as the support of local suggests that these amounts of financing could communities and potentially complementary be available for mobilization if the Ukrainian public funding. government implements the right combination of targeted public investment, reforms, Reforms in the financial sector and the pension and interventions, including providing risk sector are crucial to mobilize resources for mitigation for private investors, supported by domestic corporate investment. The banking international development partners. While the sector requires reforms to the insolvency and reforms are critical, they may not be sufficient debt-resolution systems, as well as measures conditions for unlocking private financing for to accelerate the digital transformation and a green and resilient reconstruction in Ukraine. modernize financial market infrastructure. The Nevertheless, the reform effort and the size of banking sector would also benefit from stronger possible private investment support Ukraine’s creditor rights, the development of a market planning process and its engagement with for distressed assets, and enhanced regulatory development partners and potential investors. 3 Some of the multifamily apartment buildings are on the balance sheet of the municipalities and are to be repaired and maintained in public areas by municipalities. viii EXECUTIVE SUMMARY Table 1 Critical Reforms and Interventions to Mobilize Private Financing for a Green and Resilient Reconstruction in Ukraine 2023-2033 Sectors Reforms and Interventions Commercial sectors Agriculture, food and beverages4 • Complete the agricultural land-reform process, and build institutional capacity for land governance • Ensure access to affordable financing, including through digitizing and simplifying crop receipts • Adopt international sanitary and phytosanitary (SPS) standards and trade- facilitation mechanisms • Enable adoption of climate-smart agricultural (CSA) technologies • Reimburse value-added taxes (VAT) to exporters in a timely manner Industry and commerce Base metals and metal products • Ensure competitive access to iron ore to attract new investors and pass confidence-building measures for existing investors Engineering and machine building • Privatize large non-military SOEs • Integrate into EU value chains • Align regulations with the EU Agreement on Conformity Assessment and Acceptance of industrial products to obtain “industrial visa-free” access to EU markets Retail • No sector-specific reforms Tourism • Update the obsolete licensing requirements for tour operators and create modern insurance mechanisms • Abolish the mandatory categorization of hotels and create self-regulating organizations • Create a regulatory framework for destination management organizations at the national, regional, and local levels Infrastructure Transport Road • Reevaluate the management of the road network and the potential introduction of PPPs • Liberalize international passenger road transport Rail • Deregulate the railway subsector and approve regulatory changes to allow the private business to enter the market • Continue the process of adopting the standard European gauge Maritime and inland waterways • Privatize water-transportation SOEs, particularly those involved in managing the Danube ports • Create concession agreements for seaports and river infrastructure Airports • Optimize the airport network • Create concession agreements for airports Urban transport • Promote the renewal and electrification of the public transport fleet • Introduce asset separation and/or aggregation models for fleet renewal • Establish risk-sharing contractual arrangements between operators and the government 4 The food and beverage sector is combined with agriculture as SPS standards and trade facilitation applies to both sectors. In the report food and beverages are discussed as an industrial sector, following the RDNA2 sector classification. ix VOLUME 1: PRIVATE SECTOR OPPORTUNITIES FOR A GREEN AND RESILIENT RECONSTRUCTION IN UKRAINE Sectors Reforms and Interventions Intermodal transport and logistics • Expand the multimodal network to focus on westward routes • Implement a transparent and competitive tariff system through independent regulation Energy and extractives Electricity generation • Revise the maximum and minimum price caps for different segments of the wholesale market to allow for free price formation • Reduce household electricity costs through energy efficiency and conservation, and social assistance • Implement auctions of electricity from renewable energy sources (RES) and from hybrid renewable energy with energy storage Energy storage • Ensure the financial viability of energy storage by allowing multiple revenues sources (e. g., balancing and ancillary services markets) Electricity transmission • Implement measures to prevent debt accumulation at Ukrenergo • Allow commercial financing of or private participation in Ukrenergo • Allow private investment in the construction of independent high-voltage lines District heating • Offer demand-side incentives to improve energy efficiency and energy conservation • Implement cost-recovery tariffs with incentives to switch to efficient district heating • Allow commercial financing and/or private participation in modernizing and operating district heating systems Electricity distribution • Revise regulatory asset-base tariff to allow cost recovery of investments Extractives • Improve environmental, social, and governance practices by increasing transparency around licensing and the environmental impact assessments • Implement the Ukrainian subsoil law and methodologies and new lists of strategic and critical raw materials • Allow biomethane exports and implement guarantees of origin Telecommunications, postal services, and broadcasting Telecom and digital • Simplify procedures to enable the rollout of 5G • Further expand internet access by mandating infrastructure-sharing arrangements and verifying that restrictions on internet resources are clearly defined • Update the regulatory framework for radio spectrum allocation to increase frequencies available for mobile communications • Integrate Ukraine into the EU roaming space and ensure that new players can access the market • Adopt a formal policy enabling the outsourcing of e-government services through a competitive bidding process Postal • Facilitate competition in postal services • Enable private sector participation in Ukrposhta x EXECUTIVE SUMMARY Sectors Reforms and Interventions Broadcasting • Attract commercial financing, and ultimately allow more private sector participation in public broadcasting • Safeguard media freedom Water supply and sanitation • Develop a comprehensive sector strategy • Streamline sector regulations and legislation • Reform sector governance to address market fragmentation • Aggregate sector providers where feasible while clarifying the ownership of water and sanitation assets • Reform tariffs to ensure cost-recovery and promote investment sustainability Irrigation • Complete the adoption of reforms to enable more private investment in water delivery and on-farm water management • Implement relevant laws on irrigation and water-user organizations • Improve institutional coordination Social sectors Housing • Develop a sectoral policy framework and supporting legislation • Update or replace outdated regulations, including the Housing Code • Streamline urban planning and land-allocation procedures • Harmonize construction materials rules with EU standards • Create an enabling environment for the production of green materials in line with EU standards • Adopt investor protections and other investment policy reforms to attract foreign investment in the construction sector • Strengthen creditor rights and establish an effective collateral enforcement mechanism • Develop an effective mortgage market • Create an enabling legal environment for the rental market Municipal services • Mandate the use of standard e-procurement systems by all subnational governments • Review subsidized SOEs and establish a program for commercializing their activities • Implement legislative reforms to allow transparent and predictable decisions on rezoning land for private-sector development and PPPs Health • Improve transparency of medical licensing • Strengthen rules around state inspections • Close policy gaps that limit the adoption of e-health technologies • Modernize regulations on telehealth services and data-sharing protocols • Create an electronic medical records system • Build the capacity to implement PPPs in the health sector Education • Revise the PPP framework to incentivize private-sector participation in education- related construction of education assets xi VOLUME 1: PRIVATE SECTOR OPPORTUNITIES FOR A GREEN AND RESILIENT RECONSTRUCTION IN UKRAINE Sectors Reforms and Interventions Financial sector Finance and banking • Strengthen the credibility of financial supervision through consistent regulator enforcement • Facilitate resolution of non-performing loans and strengthen creditor rights • Bolster insolvency and debt-resolution mechanisms by adopting effective enforcement measures such as foreclosure and collateral sales • Develop the market for distressed assets and asset-resolution companies • Modernize capital-market infrastructure • Prepare state-owned banks for privatization, or provide incentives for these banks to sell their assets • Develop the insurance market and improve the supervision of insurance companies • Promote financial literacy and strengthen consumer protections Pensions • Adopt and enforce the legislation on state regulation of capital and commodity markets and the mandatory pension system • Implement international standards for asset management and pension supervision Table 2: Ukraine’s RDNA2 needs and projected private sector financing opportunities 2023-2033 ($ billions in 2023 prices) Private sector opportunities Non-reform Reform and scenario intervention scenario RDNA2 Addressing Other Addressing Other RDNA needs opportunitiesd RDNA needs opportunitiesd Part I: Commercial sectors Agriculture 29.7 24.2 - 29.7 4.9 Industry and commerce 23.2 17.8 - 18.1 11.5 Industry 18.6 13.2 - 13.5 11.5 Commerce 4.6 4.6 - 4.6 - Tourism 6.9 - 5.1 - 5.1 Part II: Infrastructure Transporta 92.1 0.2 8.6 6.6 40.6 Road transport 50.7 - 5.6 5.1 14.9 Rail 27.8 - 1.4 - 1.8 Maritime and inland waterway transport 0.4 0.1 - 0.1 8.2 Airports 1.7 0.1 - 0.4 0.4 Urban transport, including sharing services 4.6 - 1.6 1.1 14.4 Intermodal transport and logistics - - - - 0.9 Table 2 continues on the next page. xii EXECUTIVE SUMMARY Private sector opportunities Non-reform Reform and scenario intervention scenario RDNA2 Addressing Other Addressing Other RDNA needs opportunitiesd RDNA needs opportunitiesd Part II: Infrastructure Energy and extractives 47.0 2.2 28.5 35.6 131.7 Electricity generation 28.2b 1.8 0.7 25.0 72.1 Energy storage 1.7c 0.1 0.1 1.5 7.0 Electricity transmission 3.7b - - 0.3 3.0 Electricity distribution 3.7b 0.3 - 3.1 0.7 District heating 2.5 - 4.9 1.7 14.2 Extractives 7.3 - 22.8 4.0 34.7 Telecommunications, postal and broadcasting 4.5 1.4 1.2 4.3 4.8 Telecommunications and digital 2.3 0.2 1.1 2.0 3.4 Postal 2.1 1.2 0.1 2.1 0.6 Broadcasting 0.1 - - 0.1 0.8 Water and sanitation 7.1 - 0.2 - 0.3 Irrigation 8.9 - - - - Part III: Private social investment opportunities Housing 68.6 22.5 45.1 30.2 60.4 Municipal services 5.7 0.2 - 0.8 - Health 16.4 - - - 0.2 Education 10.7 - - - 0.3 Part IV: Domestic private finance resource mobilization Finance and banking 6.8 4.3 10.8 4.3 22.7 Social protection, pensions 41.8 - - - - TOTAL (includes cross-cutting 41.2) 410.6 72.7 99.3 129.6 282.4 a. The RDNA2 includes needs to replace damaged private vehicles ($6.8 billion), that are not included in the transport sector assessment. b. IFC estimates (WBG 2023 forthcoming) c. Lithium-ion battery energy storage d. Private sector opportunities that are not related to damages included in the RDNA2. In the transport sector these are related to (i) underreported damages of private assets (using extrapolation of the reported data, e.g. railway and urban transport fleet) and (ii) opportunities not related to damages but required to maintain the same level of service (i.e. fleet renewal and infrastructure reconstruction) or improving efficiency and resilience of transport systems (i.e. investment opportunities in new infrastructure or assets, etc.). In the energy and extractive sectors, the World Bank Group team estimated private sector opportunities based on energy demand and supply projections elaborated by the team taking into account Ukraine’s energy strategy and estimates by the IMF, IBRD, European Network of Transmission System Operators for Electricity, European Network of Transmission System Operators for Gas, European Union, International Energy Agency, International Renewable Energy Agency, Energy Community and the European Union Agency for the Cooperation of Energy Regulators. These estimates are indicative and could vary significantly depending on assumptions used. Other opportunities (beyond RDNA2) are estimated taking into account government of Ukraine’s goals for the development of energy and extractive sectors. The main difference from the RDNA2 is that the estimate of the baseline projection includes Ukraine’s goals (e.g., nuclear, natural gas, biomethane, exports, etc.) although the report’s projections are below the figures of the government of Ukraine energy strategy. This concerns especially the reform and intervention scenario which varies from the energy strategy in the areas of 10 GW wind, 5 GW electrolyzer, 2 GW peaker and 2 GW lithium-ion 2-hour battery energy storage. These investment opportunities include development of new or modernization of existing infrastructure and assets as well as development of local renewable energy equipment manufacturing capacity. (WBG, 2023 forthcoming). Note: Conditions and assumptions underpinning the scenario analysis are discussed in Section 1.2 and in the forthcoming Sector Assessments (WBG 2023 forthcoming). Source: RDNA2 and World Bank Group (2023 forthcoming). xiii VOLUME 1: PRIVATE SECTOR OPPORTUNITIES FOR A GREEN AND RESILIENT RECONSTRUCTION IN UKRAINE CHAPTER 1 Country Context and Cross-Cutting Issues This report explores the potential for private second scenario, the government implements capital mobilization and examines the private an extensive pro-competition reform program sector’s role in financing a green and resilient while intervening to alleviate distortions in recovery in Ukraine. Private sector financing specific sectors. Under this scenario, economic for Ukraine’s green resilient recovery needs is growth and returning refugees offer a supportive distinct from compensation for damage, which is environment for the adoption of pro-competition not discussed in this report. The analysis in this policies. While these actions by the authorities report applies the WBG’s cascade approach which could provide necessary environment, the actual seeks to maximize the impact of scarce public private sector financing response also requires resources. The cascade approach seeks to mobilize other conditions that are beyond the scope of commercial finance, enabled by upstream reforms this report, including conducive macroeconomic where necessary. In the Ukrainian context, this developments as well as external guarantees for approach requires understanding the state’s security and governance. role in the economy, the market failures and constraints present in different sectors, and the 1.1 Recent Developments types of private financing available to support the recovery. The EU accession process offers unique Russia’s invasion of Ukraine has triggered a opportunities to mitigate country risk, which is massive social, humanitarian, economic, and projected to remain elevated even after the end energy crisis. By June 2023, nearly one-third of of Russia’s invasion. The assessment evaluates Ukraine’s population had been forced to flee the sectors and industries best positioned to drive their homes. An estimated 6.3 million Ukrainians a green and resilient recovery and highlights remain refugees,5 while another 5.1 million are reforms and interventions that can catalyze internally displaced people (IDP) (UNHCR private investment in an environment of scarce 2023a; IOM 2023).6 While Ukraine’s economy public resources. The report synthesizes detailed contracted by a staggering 29.1 percent in 2022, sector assessments that are scheduled to be it is expected to grow by 2 percent in 2023, published by the WBG in November 2023. according to World Bank projections published in June 2023 (World Bank 2023a). According The report presents an analysis of private to preliminary estimates by the World Bank, the investment opportunities under two alternative headcount poverty rate increased from 5.5 percent scenarios. Both scenarios assume broader in 2021 to 24.1 percent in 2022, indicating macroeconomic and external developments that the invasion has pushed an additional 7.1 (Section 1.2). In addition, the first scenario million people below the poverty line, reversing assumes that no major structural economic 15 years of progress on poverty reduction (World reforms are implemented and that the state’s Bank 2023b).7 As of February 24, 2023, direct relationship with the private sector essentially damages from the invasion have totaled $134.7 reverts to its pre-invasion status quo. Under the billion, while economic losses have reached 5 The number accounts for the number of refugees registered globally as of July 2023 and does not include those who were refugees before that date. 6 The figure for IDP include returnees. 7 Data are based on the WBG’s global poverty line for upper middle-income countries of $6.85 per person per day. 1 CHAPTER 1: COUNTRY CONTEXT AND CROSS-CUTTING ISSUES $289.1 billion, resulting in total reconstruction severing of Ukraine’s financial and commercial needs of $411 billion (RDNA2). These estimates ties with Russia, combined with its simultaneous include neither the destruction of the Nova pivot to European and transatlantic markets,8 Kakhovka hydroelectric dam on June 6, 2023 represents a lasting westward shift in the nor the subsequent flooding that devastated a country’s economic center of gravity.9 large area of southern Ukraine. Updated damage Meanwhile, internal and external displacement and loss estimates are therefore expected to be has altered Ukraine’s population patterns in significantly higher. ways that will endure long after the invasion. In parallel, the EU accession process is driving Despite the massive impact of the ongoing sweeping reforms to economic governance, invasion, sound economic policies and large- competition policy, and public-sector scale external support have helped stabilize the transparency.10 EU accession also offers access Ukrainian economy. An expansion of public to vast financial resources, including the Green sector expenditure has been accommodated by Deal and other programs designed to catalyze private sector financial savings, and a four-year the transition to low-carbon growth. While IMF program was launched in March 2023 (IMF the alignment of Ukrainian legislation with the 2023a). Long-term growth is projected to stabilize EU Acquis Communautaire is still in its early at 4 percent under the baseline scenario and 5 stages, it has had an encouraging dynamic that percent under an upside scenario, and private is anchoring the private sector’s expectations investment is projected to recover. The current about the country’s future legal framework. account is projected to turn to a deficit in 2023, The decentralization reforms adopted and the deficit is projected to reach 6.7 percent and implemented since 2014 have greatly of GDP in 2025, but it is projected to narrow strengthened the role of local governments in thereafter. FDI inflows are projected to reach 2.4 planning, financing, and investment decisions to percent of GDP in 2025, before increasing to improve local accountability and service delivery. 4.8 percent of GDP in 2027, fully financing the The government of Ukraine is committed to current-account deficit (IMF 2023a). engaging local governments in developing place-based reconstruction strategies and plans, Russia’s invasion has permanently transformed and it will support local authorities in the the Ukrainian economy, and the restoration implementation of agreed projects. Russia’s of sustainable macroeconomic policies should invasion will likely have a lasting impact on not be interpreted as a return to pre-invasion Ukraine’s political economy, strengthening social conditions. The constraints identified in the cohesion and reframing the social contract Ukraine Country Private Sector Diagnostic between citizens and the state at both the (WBG 2021) have evolved (Figure 1). The national and subnational level. 8 The change in the direction of trade also has an impact on the composition of exports, as exports to Russia and Belarus are more complex than exports to the EU. 9 This process started following Russia’s actions with respect to Crimea in 2014, but it accelerated dramatically after the invasion in February 2022. 10 The political criteria of EU accession include specific demands to ensure the rule of law. The European Commission in its Communication COM(2022)407 in June 2022 identified the steps Ukraine needs to follow to start formal negotiations: (i) enact and implement legislation on a selection procedure for judges (in line with Venice Commission); (ii) finalize the procedures to establish the High Qualification Commission of Judges of Ukraine; (iii) further strengthen efforts to fight corruption, in particular at higher levels of government; (iv) ensure that anti-money laundering legislation is in compliance with the standards of the Financial Action Task Force (FATF); and (v) implement the anti-oligarch law in a legally sound manner, taking into consideration the forthcoming opinion of the Venice Commission on the relevant legislation. Two more conditions relate to securing the independence of media and rights of minorities. Link: https://eur-lex. Europa.eu/legal-content/EN/TXT/ ?uri=CELEX%3A52022DC0407. 2 VOLUME 1: PRIVATE SECTOR OPPORTUNITIES FOR A GREEN AND RESILIENT RECONSTRUCTION IN UKRAINE Figure 1 Update on the Constraints on Private Sector Growth Identified in 2021 Country Private Sector Diagnostic Lack of competition and Governance Limited access to finance Infrastructure large state presence in the economy In July 2021, the first stage The government Access to finance remains Infrastructure constraints of Ukraine’s land-reform has created a well- broadly unchanged since have become more binding program took effect. designed framework of the 2021 CPSD. since the start of the anticorruption and law- invasion. The state increased its enforcement agencies. A healthy flow of finance role in the economy from the financial sector Damage to infrastructure due to Russia’s invasion; Reform momentum to Ukraine’s corporate accounted for 39 percent temporary measures must be sustained while sector will be an crucial of all invasion-related introduced will be reversed the newly established element in the overall damage, 24.5 percent of when the invasion ends. institutions mature, as it financing to support losses and 38 percent of will take time to attract a green and reconstruction needs. Reforms to improve the financing for post-invasion resilient recovery. governance of state- reconstruction. owned enterprises (SOEs) started prior to Russia’s invasion, though much remains to be done. Source: WBG (2023, forthcoming). 1.2 Private Sector Investment Projections telecommunications, infrastructure sectors such as transportation and logistics, and social sectors Following IMF macroeconomic projections (IMF such as housing and education. The report also 2023a) and considering the needs identified in discusses banking and pensions, as reforms the RDNA2, this report quantifies the role of the in these areas could help mobilize additional private sector in meeting the country’s needs. The domestic private resources. When banking and report uses the same time period as the RDNA2 pensions are included, Ukraine may be able (2023–2033) and follows the same sectoral to mobilize 15.3 percent of GDP in domestic classification. The report divides the economy private financing for a green and resilient into commercial sectors such as agriculture and reconstruction in 2027 (IMF 2023a).11 11 The IMF projects a private investment to GDP ratio of 20.1 percent in 2027 and an FDI-to-GDP ratio of 4.8 percent in the same year (IMF 2023a). Assuming projected FDI fully contributes to gross fixed capital formation, domestic resources will contribute 15.3 percent of GDP to private investment in 2027 under the baseline projection. The IMF report published in June 2023 (2023c) revised the private-investment-to-GDP ratio from 20.1 to 15.9 percent, while FDI was revised up from 4.8 to 5.0 percent of GDP, suggesting that only 10.9 percent of domestic resource mobilization would finance private investment. The revisions left the projected growth rate unchanged, implying more efficient investment and a lower incremental capital output ratio (ICOR). The revised scenario makes financing external to the firm, including bank lending, even more important than the baseline, since financing external to the firm contributes disproportionately to productivity and growth (Rajan and Zingales 1998). 3 CHAPTER 1: COUNTRY CONTEXT AND CROSS-CUTTING ISSUES The analysis presented in the sector-specific Reforms and interventions are projected to chapters is subject to important caveats.12 First, the increase the share of private financing to private financing opportunities described reflect address the needs outlined in the RDNA2 as numerous assumptions and are merely indicative well as increase opportunities for other private of the possible impact of alternative policies. While investments beyond the scope of the needs the specified reforms and interventions would identified in the RDNA2. These reforms and be necessary to create these opportunities, they interventions include: would not be sufficient to mobilize the amount of private financing estimated in the report. Under a. Measures that increase opportunities for any scenario, multiple factors outside the scope of the private sector to manage or utilize state the analysis would influence investment decisions. assets. These measures tend to be sector- Economic growth, sound macroeconomic specific, ranging from port and airport management, governance reforms, and conducive concessions to the mobilization of private trade and investment policies as well as risk capital and the eventual privatization of mitigation instruments delivered by international SOE, such as electricity distribution system development partners will be crucial to attract operators, Kharkiv combined heat and private financing from both domestic and foreign power plant and Centerenergo. sources. Second, the estimates presented are based b. Adjustment of controlled prices. For on information available as of May 31, 2023. example, revising maximum and minimum Given the rapidly evolving context of the invasion price caps on the different wholesale market and the uncertainty regarding the ultimate extent segments to ensure free price formation of invasion-related damages and losses, the analysis will further its process of integration in the will require subsequent updates to remain accurate. EU electricity markets, demand reduction, investments and energy security. The sector-specific projections assess whether c. Public investment. For example, public private investment can effectively address the investment in irrigation and the demining needs outlined in the RDNA2. Private financing of land will expand the scope for private requires: (a) private ownership or private agricultural investment. management of public or formerly public assets; d. Public sector capacity to address regulatory and (b) cost recovery for investors. Even without issues. State capacity is required to prepare reforms, these conditions are largely met in the assets for PPPs, enforce competition agriculture, commerce, industry, tourism, and policy, and administer creditor rights. The banking sectors. There are, however, subsectors administration of these types of measures is such as engineering and machine-building that a public policy issue that is not addressed in are profitable but that cannot attract private this report. investment due to the dominant market position e. Pilot projects to explore private investment of state-owned enterprises (SOEs). Moreover, opportunities in state-dominated sectors. price controls inhibit investment in sectors that These sectors include water and sanitation, are already largely private, such as renewable education, and health. energy. The housing sector is a special case: as private reconstruction financing is expected to Sector-specific assumptions and projections originate mostly from households, projections for will be elaborated in the second volume of the this sector are based on household investment in report (Sector Assessments), which is scheduled housing as a share of GDP. to be published in November 2023. Despite 12 Further information on the projections in the transport and energy sectors is included in sections 3.1 and 3.2. 4 VOLUME 1: PRIVATE SECTOR OPPORTUNITIES FOR A GREEN AND RESILIENT RECONSTRUCTION IN UKRAINE the uncertainty generated by Russia’s invasion and transatlantic markets. This report identifies and the limited availability of risk-mitigation reforms and interventions that could expand instruments, the report offers estimates and opportunities for private investment and growth projections designed to inform decision- in each of the identified sectors, supporting the making both in the public and private sector. government’s planning process during a pivotal The government is currently developing both phase in Ukraine’s economic development. The a medium-term plan (2024–2027) and a long- reforms and projections aim to support this term strategy for the country’s key economic planning process but they are not sufficient for sectors designed to anchor policy expectations the realization of private financing for Ukraine’s as Ukraine’s economic shifts toward European green and resilient reconstruction. 5 CHAPTER 2: THE COMMERCIAL SECTORS CHAPTER 2 The Commercial Sectors Prior to Russia’s invasion of Ukraine, private oil and meal, and livestock products, with firms dominated most commercial sectors, though agricultural exports reaching about 400 million distortions often inhibited open competition. people around the world.16 While the private sector is projected to play a major role in supporting a green and resilient In Kharkiv, Luhansk, Donetsk, Zaporizhzhia, reconstruction in these sectors, reforms will be and Kherson oblasts (regions), the invasion has vital to ensure an efficient allocation of resources. directly impacted areas that were responsible As documented in the 2021 Country Private for about 38 percent of agricultural production Sector Diagnostic, monopolistic or oligopolistic in 2021 (EU4Business et al. 2022). During conditions prevailed in multiple key markets, the 2021/2022 marketing year, these regions and while reform efforts are ongoing, continued produced 32 percent of Ukraine’s wheat, 29 efficiency gains will be crucial to maximize the percent of its sunflower seeds, 26 percent of its commercial sectors’ contribution to growth, barley, 25 percent of its vegetables, 23 percent of exports, and employment. its honey, 20 percent of its pigs, and 16 percent of its eggs. Due to invasion-related delays, 6 2.1 Agriculture percent of the corn crop went unharvested in February 2023. In 2022, the planting area for Prior to Russia’s invasion, the agricultural sector13 winter wheat declined by 25 percent, and many employed about 17 percent of the labor force, farmers switched to oilseed crops. contributed 11 percent to GDP, and was growing steadily at an annual rate of 4 percent (RDNA2 In the 2022/23 harvest year, production volumes and State Statistics Service of Ukraine 2023a for major grains and oilseeds fell by an estimated and 2023b). If agro-processing is included, the 35 percent relative to the previous year, and the gap sector’s share of GDP was some 15 percent. between export prices and farmgate prices widened Moreover, the agriculture, food, and beverages (Figure 1 and EU4Business et al. 2022). Higher industry accounted for almost a quarter of FDI, prices for fertilizer and other inputs, coupled with and agricultural products peaked at 49.1 percent input-supply disruptions, reduced crop yields. of merchandise exports in 2020.14 Reforms Meanwhile, lower farmgate prices discouraged the implemented in 2021 introduced a private land production and even harvesting of some outputs market for certain types of transactions, which (e.g., corn), and the invasion reduced the available empowered farmers and local communities to planting and harvesting areas. Land damage and leverage the value of their land while attracting contamination due to mines, unexploded ordnance, more private investment in agriculture.15 Pre- artillery fire, and the movement of heavy military invasion Ukraine ranked among the top 10 global equipment have also weighed on production. The producers and exporters of grains and oilseeds, 35 percent drop in production value (EU4Business 13 Including fisheries and forestry. 14 After the invasion, in 2022, agricultural products represented 57.2 percent of Ukraine’s goods exports, a historically high share. Based on trade data from the NBU for the years 2011 to 2022. 15 By September 2022, over 12,000 land contracts had been signed covering an area of almost 280,000 hectares. 16 For 2021/22, Ukraine ranked first in worldwide exports of sunflower, second in sunflower oil, and fourth in barley. 6 VOLUME 1: PRIVATE SECTOR OPPORTUNITIES FOR A GREEN AND RESILIENT RECONSTRUCTION IN UKRAINE et al. 2022) and 45 percent drop in farmgate prices the difference in gauge width between Ukraine for major grains and oilseeds (RDNA2) reduced and the EU. Higher costs of alternative forms of farmer revenue by 80 percent in 2022. Following transportation have impacted the profitability of Russia’s invasion, global wheat prices increased agriculture, as transportation of bulk goods is significantly and did not return to pre-invasion not economical. levels until the second half of 2022, yet prices in Ukraine remain far below pre-invasion levels The invasion caused agricultural exports receipts (Figure 2).17 to plunge by an estimated 15.6 percent in 2022 (National Bank Ukraine 2023a). Grain exports Logistical and transport challenges increased fell from a pre-invasion average of 5 million export costs by an estimated 400–500 percent. tons per month to just 500,000 tons per month Before Russia’s invasion in 2022, a significant in the first few months of 2022 (EU4Business share of goods was exported via ports, and et al. 2022). The port blockade cost Ukraine about 86 percent of agricultural products were an estimated $170 million per day in lost trade seaborne.18 From late February to July 2022, opportunities EU4Business et al. 2022). The Ukraine's major ports were blockaded, and, even Cabinet of Ministers’ restrictions on wheat while Russia participated in the Black Sea Grain and barley exports have been lifted since June Initiative (July 2022 to July 2023), Ukraine’s 2022,20 and exports of select products to Europe ports operated well below their maximum increased sharply during the year, but exports to capacity. Meanwhile, invasion-related congestion all other regions fell, contributing to an ongoing in the Black Sea has further slowed the delivery food crisis across much of the world (Figure 3). of Ukrainian exports.19 Railway transportation has been increasing, but multiple factors limit its Farmers and other private-sector stakeholders growth, including the low capacity of railway face a range of challenges, including inadequate border crossings with European countries and access to inputs, logistical constraints, changes Figure 2: Evolution of Global and Ukrainian Wheat Prices ($/ton) 500 Wheat SRW (US Gulf), USD Wheat Black Sea (CBOT, FOB), USD Wheat 3rd grade (EXW, Ukraine), USD 450 400 350 Price ($/ton) World 300 250 200 150 Ukraine 100 50 0 10/07/2020 10/03/2021 10/11/2021 10/07/2022 10/03/2023 Source: IFC elaboration based on data from APK-Inform. 17 Farmgate prices are determined by free-on-board export prices, as well as the costs of post-harvest, logistics, and freight—all of which increased drastically last year. For wheat, export prices were above farmgate prices for Ukrainian wheat exports by $32 per ton in 2021, and $147 per ton in 2022. Ukrainian farmers got $156 per ton for wheat shipped to Saudi Arabia in 2022, while Russian farmers got $252 and German farmers got $310 (Striewe 2022). 18 Based on data provided by the National Bank of Ukraine. Agricultural products refers to HS-2 codes from 01 to 23. 19 The ports of Mykolaiv, which are among the largest in the country, remain blocked. The Black Sea Grain Initiative, which allowed grain exports from Ukraine through the Black Sea under an agreement between the United Nations, Türkiye, Ukraine, and Russia, was terminated unilaterally by Russia on July 17, 2023. 20 Rye, oats, buckwheat, millet, and sugar, as well as live cattle, frozen beef, meat, and meat offal remain restricted. 7 CHAPTER 2: THE COMMERCIAL SECTORS Figure 3: Selected Ukrainian Agricultural Exports, 2021 and January-November 2022 ($ billions) Vegetable Fats Prepared Live animals and products and oils foods livestock products 12 5.4 2.1 1.3 -22% -23% -44% 0% 8.7 5.5 3.6 2.7 1.9 Europe 1.3 0.5 0.7 +35% +58% +32% +30% +36% 5.3 3.2 1.6 1.2 1.3 Asia 0.6 0.5 0.2 -64% -69% -63% -57% -37% 5.1 1.2 Africa 0.3 0.2 0.3 0.07 0.12 0.07 -60% -61% -39% -74% -40% 1.4 0.5 0.7 0.4 0.3 0.5 Middle East 0.12 0.3 -52% -66% -44% -59% -6% 2021 11M 2022 2021 11M 2022 2021 11M 2022 2021 11M 2022 Poland Top 5 export 0.730 Poland Saudi Romania Arabia destinations China 1.759 India China 0.373 Nether. 2.579 1.928 India 0.666 0.644 0.196 0.260 Turkey China 0.294 Nether. 1.272 Turkey 0.589 0.144 Egypt Rom. 0.131 Saudi Poland China Nether. 0.369 Poland 1.419 Mold. 0.121 China 0.073 Arabia 1.172 0.988 Rom. 0.356 0.307 Lithu. 0.093 0.208 Turkey UAE 0.064 Other 2.728 Belarus 0.295 Other 1,205 1.136 China 0.934 Nether. 0.76 Mold. 0.062 Poland 0.118 Nether. 0.780 Spain 0.851 Turkey 0.215 Other 0.813 Spain 0.471 Mold. 0.067 Indo. 0.754 Other 6.055 Poland 0.399 Georgia 0.169 Slov. 0.062 Other 8.734 Other 2.499 Other 2.319 Other 0.641 Source: EU4Business et al, 2022. in crop structure, and obstacles to carrying season and subsequent seasons will likely entail out technical operations. Input shortages and significant losses for farmers as they struggle rising prices for fuel, seeds, plant protection to procure inputs. The planting area for winter products, and fertilizers are negatively impacting crops has already decreased by 38 percent. production, and prepaid inputs in invasion- Vegetable production, about 25 percent of which affected areas are not being delivered. In some is concentrated in the southern and eastern regions parts of the country, applying fertilizer and plant- temporarily not under government control, protection products has become impossible, and is shifting to the western and central regions many farmers are switching to less-profitable (EU4Business et al 2022). Damage to energy crops that require fewer inputs. The 2023 growing infrastructure poses an especially significant 8 VOLUME 1: PRIVATE SECTOR OPPORTUNITIES FOR A GREEN AND RESILIENT RECONSTRUCTION IN UKRAINE challenge, as the storage and processing of most of whom were small-scale producers.21 Bank vegetables and fruits requires a reliable and lending to firms in the agriculture, forestry, and consistent source of electricity. The disruptive fisheries sector grew by 44 percent in nominal terms, impact of the invasion, combined with rising while loans to food producers increased by 13 percent prices of veterinary drugs and a lack of access (EU4Business et al. 2022). Demand for investment- to certain areas, has contributed to livestock project financing is limited as farmers prioritize losses. The invasion has complicated hay and working capital. EU pre-accession assistance may silage preparation, limited the flow of raw become available after 2027 if Ukraine successfully materials to processing plants, and disrupted aligns its legal framework for agriculture and rural the supply of electricity at key stages in the development with the EU Acquis.22 production process, sharply reducing livestock and poultry production. Over the longer term, the transition to CSA presents a wide range of attractive financing As of February 24, 2023, the invasion is opportunities both for the public and private estimated to have caused $8.7 billion in direct sectors. A tailored climate-policy framework damage to the agriculture sector, with aggregate aligned with EU regulations and initiatives such losses totaling $31.5 billion (RDNA2). Damage as the Common Agricultural Policy and the to machinery and equipment represented 53 Green Deal can help support business-to-business percent of the total, followed by stolen inputs decarbonization efforts and advance the country’s and outputs (23 percent) and damaged storage long-term climate agenda. The private sector facilities (15 percent) (RDNA2). Invasion-related could invest in CSA technologies to increase the damage increased almost fourfold between sector’s competitiveness in the EU and other June 2022 and February 2023 due to increasing markets that apply carbon pricing. Moreover, damage and the rising value of damaged assets climate-smart fertilizers, no-till practices, and (RDNA2). Almost half (46 percent) of total efficient data tools can cut emissions while helping losses resulted from falling farmgate prices for build resilience to shocks. However, financial export-oriented commodities such as wheat, constraints, limited knowledge and workforce barley, corn, and sunflower seeds, while another skills, and inadequate irrigation, transportation, 44 percent reflected diminished production of and logistics infrastructure can limit CSA uptake, annual and perennial crops (RDNA2). Reduced especially among small-scale producers, and the livestock and fishery production accounted for 6 invasion has exacerbated all of these challenges. percent of total losses, and increased production Invasion-related disruptions also affected foreign costs were responsible for 3 percent. equipment and solutions providers, who already faced high import tariffs. The ongoing land-reform Concessional lending from the government has process has yielded important gains, but effective expanded, and bank funding is growing. In 2022, implementation remains critical. $194 million in public spending on the state’s “Affordable Loans 5-7-9%” program mobilized Hostilities will continue to affect decisions $1.5 billion in agricultural loans, about half of which related to crops for the duration of the invasion. were partially guaranteed by the government. The Narrowing margins and transportation issues program provided loans to about 7,000 farmers, have prompted farmers to shift from grains to 21 Government of Ukraine data provided to the IBRD as part of the implementation support for the Program-for-Results on “Accelerating Private Sector Investments in Agriculture” (P166941). 22 Ukraine's government must establish the administrative structures required for EU’s Common Agricultural Policy (CAP), including extending the registration of farms in the state agrarian registry, expanding the state farm-support fund into a compatible paying agency, and establishing reliable systems for managing EU funds, as well as improving integration and data quality of the Land Parcel Identification System. Similarly, the government must develop the legal framework for a common-market organization that addresses market interventions and other key issues. 9 CHAPTER 2: THE COMMERCIAL SECTORS Table 3: Agricultural Risks and Risk-Mitigation Instruments Risk Definition Impact on the sector Mitigation measure Country Change in legislation Delays in implementing No sector specific land reform measures available Macroeconomic Inflation, exchange rate Volatile input prices and Hedging instruments for farmgate prices agricultural commodities Climate change Adverse/extreme weather More frequent droughts CSA technologies and events practices; investments in expanding and modernizing the irrigation system, insurance (for example, crop insurances) Commercial Mismatch between projected Uncertainty regarding future Contract agriculture and actual revenues or end prices (e.g., at the time agreements costs of harvest) Execution A failure to fully implement Slow adoption of CSA Agricultural extension programs and policies technologies and practices services that provide on schedule information on best practices and demonstrate their effectiveness Note: Sector-specific measures only. Source: IFC elaboration. oil-producing plants such as sunflower, rapeseed, land ownership will also be necessary to maintain and soy. However, the sudden pivot to vegetable competition while leveraging economies of scale. oil could overwhelm local processing capacity, and Risks and sector-specific mitigation measures are vegetable-oil exports would ultimately encounter presented below (Table 2). issues similar to those facing grain exports. In September 2022, the Ukrainian and Polish Based on historical data, private funding could governments signed a deal to create a pipeline cover around 80 percent of the agriculture capable of transporting 2 million tons of vegetable sector’s recovery and reconstruction needs, but oil per year for export via the port of Gdansk. government supported credit instruments will While this is a positive step, greater certainty play a vital role in mobilizing private capital. around export routes and logistics remains critical The government must also provide essential to attract investment in agriculture. public goods such as food safety regulations, sanitary and phytosanitary measures, Reforms are urgently needed to mitigate the laboratories, certifications, and compliance elevated risks facing the agricultural sector. verification, as well as other enabling factors Creating an efficient land market through such as agricultural research, agrometeorological continued liberalization of land sales and information, and a range of physical and digital strengthening of institutions for land governance infrastructure, inter alia. Estimates suggest that is recommended. Stronger protections for land with reforms, private financing could increase rights could encourage investments in soil quality by about 30 percent in 2023–2026 and by and enable landowners to borrow against equity. about 50 percent in 2027–2033 (WBG 2023 Measures to prevent the excessive concentration of forthcoming). To attract private financing, the 10 VOLUME 1: PRIVATE SECTOR OPPORTUNITIES FOR A GREEN AND RESILIENT RECONSTRUCTION IN UKRAINE government must continue to liberalize the land estimated at $10.9 billion (RDNA2). Population market; reform the irrigation subsector; ensure displacement reduced domestic demand, consistent access to the EU market and open while the diminished capacity of seaports and new markets for agricultural products; maintain overburdened rail networks limited access an efficient fiscal regime, including timely to foreign markets. Missile strikes on energy VAT reimbursements for exporters; simplify infrastructure forced enterprises to suspend and digitize the issuance of crop receipts; operations, decrease production, and/or invest in provide public credit guarantees, interest-rate costly energy generation, storage, and efficiency compensation, and matching grants; promote the measures. Moreover, the ongoing invasion adoption of CSA technologies in the context of continues to increase the total damages and EU accession; support the land decontamination losses suffered by industry and commerce. process; and upgrade the public administrative framework for utilizing EU pre-accession funds. However, Ukraine’s private sector has demonstrated a remarkable degree of resilience. 2.2 Industry and Commerce After the initial shock had passed, many businesses resumed operations, and some were Industry and commerce represent a combined able to reallocate their assets to safer regions. share of about a third of GDP. In 2021, Business surveys conducted during the first wholesale and retail commerce and the major half of 2023 revealed that managers were more industrial segments—the food and beverages optimistic than pessimistic, both in the industry industry, metal production, and engineering and and commerce sectors. Fuel shortages lasted machine building—accounted for 22.3 percent only a couple of months, and the electricity crisis of national employment and 34.6 percent of that began in October and November 2022 commercial employment (3 million workers), prompted firms to adapt and innovate. New 19 percent of capital investment, and 47 percent facilities are still being established, particularly of merchandise exports (State Statistics Services in the commerce sector: eight new shopping of Ukraine 2023f). Prior to Russia’s invasion, malls opened in 2022, and another seven are the industrial sector was largely composed of projected to open in 2023. Limited access to Soviet legacy assets that had been privatized but export markets has created new incentives to that remained integrated into post-Soviet value invest in processing capacity and other forms chains. Since 2014, Ukraine had been slowly of domestic value addition. The EU accession disconnecting from these markets, albeit with process has created opportunities to leverage mixed results. The 2021 Country Private Sector Ukraine’s strong industrial capabilities in areas Diagnostic highlighted constraints on private such as agricultural machinery and automotive sector development in manufacturing, including manufacturing. Moreover, the emergence of a lack of competition, the distortive presence of new businesses focused on military applications SOEs in the machine-building industry, limited will offer unique opportunities during the access to finance, and outdated infrastructure. reconstruction, as products such as drones and Despite these constraints, new industrial heavy trucks can be repurposed for civilian use segments have emerged, including automotive and export markets. manufacturing and information technology, as well as defense and aerospace. In contrast, the In addition to the uncertainty generated by the Ukrainian commercial sector, including retail invasion, industry and commerce are subject to trade, is modern, efficient, and rapidly growing. multiple domestic and external challenges. Metal production, for example, is highly vulnerable The invasion inflicted enormous damage and to blackouts. Ore mining also uses a significant losses on industry and commerce. Damages are amount of electricity, and some facilities such as 11 CHAPTER 2: THE COMMERCIAL SECTORS the Kametsal plant and Sukha Balka mine have 2.3 Culture and Tourism decreased production due to shortages. The food industry is closely tied to the agricultural sector, The tourism sector has significant development which faces decreased production volumes potential in urban and rural areas across and price volatility. Processed foods are also almost all regions of Ukraine, but investment vulnerable to potential EU import restrictions. opportunities are unrelated to reconstruction. The exodus of educated professionals caused The invasion has caused $2.6 billion in by the invasion may hinder the development damage to the culture and tourism sector, and of engineering, machine-building, and other reconstruction needs are estimated at $6.9 industries that require skilled labor.23 In addition, billion (RDNA2). Cultural assets have suffered these sectors are highly vulnerable to attacks most of the damage, and the private sector targeting infrastructure and productive assets. has a limited capacity to rebuild those assets. Prior to the invasion, and with the exception Private investment opportunities in the industry of the pandemic-induced shock in 2020, and commerce sectors are estimated at $18.1 operating profits in hotels and accommodation billion,24 covering almost 80 percent of the sectors’ were robust, exceeding 25 percent in 2019 combined reconstruction needs of $23.2 billion, in and 17 percent in 2021.25 However, the addition to significant opportunities unrelated to tourism sector is constrained by outdated reconstruction (WBG 2023 forthcoming). Under and dysfunctional regulations, inconsistent the current framework, the private sector will be policies, and a weak state-level institutional unable to address the damage suffered by SOEs in framework, which discourage investment. In the engineering and machine-building industry, but addition to investment in infrastructure, both further privatization or other reforms could enable general and sector-specific, tourism development private investors to fully cover the costs involved in will require a comprehensive, systematic, and the recovery. Reforms in metal production could balanced approach to attracting investment promote competition and diversification in this based around a clearly defined brand identity sector. Even without additional reforms, private and a coherent marketing strategy. Based on investors could finance the reconstruction needs interviews with managers of firms operating in of the agri-food and commercial sectors. The the sector, tourism offers $5 billion in private agri-food industry also presents $11.5 billion in investment opportunities, though none of these investment opportunities not directly related to opportunities addresses reconstruction needs reconstruction (WBG 2023 forthcoming). identified by the RDNA2. 23 The United Nations High Commissioner for Refugees’ (UNHCR) third Regional Intentions Survey (2023b) included refugees from Ukraine, most of whom are female. It found that over half of respondents had either a master’s degree or doctorate (29 percent) or a specialized degree (26 percent), while 19 percent had a technical or vocational degree, and 13 percent had a bachelor’s degree. Similarly, the UNHCR’s Regional Protection Profiling & Monitoring (2023c) found that 14 percent of refugees had a master’s degree or higher, 22 percent had a specialized degree, 30 percent had a vocational qualification, and 12 percent had a bachelor’s degree. 24 Assuming reforms and interventions (Table 2). 25 State Statistics Services 2023h. 12 VOLUME 1: PRIVATE SECTOR OPPORTUNITIES FOR A GREEN AND RESILIENT RECONSTRUCTION IN UKRAINE CHAPTER 3 Infrastructure Infrastructure is vital to the development of all from local credit funds and investments, 3 other economic sectors, and Russia’s invasion percent from foreign investors, and nearly 80 has badly damaged Ukraine’s transport, energy, percent from domestic transportation firms (State telecommunications, water and sanitation, and Statistics Services of Ukraine 2023d). irrigation systems. Because the transport and energy sectors contribute disproportionally Aging vehicles and low emissions standards to climate change, a green and resilient contribute to high levels of pollution and GHG reconstruction will accelerate economy-wide emissions. Even before the invasion, Ukraine’s growth while also significantly reducing highly inefficient transport sector weighed on greenhouse gas (GHG) emissions. By engaging its economic competitiveness (WBG 2021). In the private sector in financing and managing 2020, despite the economic slowdown caused infrastructure, the government can magnify the by the pandemic, the transport sector emitted impact of its limited resources while enhancing the equivalent of 31.8 metric tons of CO2, the allocative and technical efficiency of essential representing 10 percent of the country’s GHG public services. emissions. Road transport was responsible for 73.5 percent of these emissions, and in 3.1 Transport26 2021 road transport generated 26.6 tons of suspended particulates (State Statistics Services Ukraine’s transport sector is complex and diverse, of Ukraine 2023e). In addition, the off-road but decades of underinvestment and limited transportation of agricultural machinery strategic planning have slowed its development and industrial equipment accounts for 18.6 and undermined its efficiency. In 2016–2021, the percent of sectoral emissions (UNFCCC 2022). sector contributed an average of 6.2 percent of A green and resilient recovery will entail GDP, though this share dropped to 5.4 percent in shifting a portion of transport services from 2021 (State Statistics Services of Ukraine 2023a). roads to railways and waterways while also Transportation employs 961,000 workers, 28 decarbonizing road transport through fleet percent of whom work in the railway system, 22 modernization, electric mobility, and transit- percent in road freight, 20 percent in logistics, oriented urban development. and 10 percent in urban mobility (State Statistics Services of Ukraine 2023b and c). In 2021, the Ukraine has an extensive but largely undermaintained transport sector received $1.6 billion in capital transport network. The density of highways in investment, with about 7 percent coming from Ukraine (14.3 km/1,000 km²) is comparable to the state and local government budgets, 8 percent EU average (19 km/1,000 km²), but the density 26 This section discusses both private sector opportunities that are related to damages identified in the RDNA2 and other investment opportunities in this sector. Other investment opportunities are related to (i) underreported damages of private assets (using extrapolation of the reported data, e.g. railway and urban transport fleet) and (ii) opportunities not related to damages but required to maintain the same level of service (i.e. fleet renewal and infrastructure reconstruction) or improving efficiency and resilience of transport systems (i.e. investment opportunities in new infrastructure or assets, etc.). These estimates take into account the National Transport Strategy of Ukraine 2030, the Sustainable Logistics Strategy 2030, the Ukraine’s Recovery Plan Blueprint and the project cost estimates by the State Organization Agency on Support of Public-Private Partnership, the Ministry for Communities, Territories and Infrastructure Development of Ukraine, and the World Bank. 13 CHAPTER 3: INFRASTRUCTURE of all roads is significantly lower (281 v. 1,172 The state railway company, Ukrzaliznytsia km/1,000 km²), indicating insufficient regional JSC has a near monopoly on passenger and and local connectivity (Ministry of Infrastructure cargo transport, which stifles competition 2020; European Road Federation 2022; CIA and hinders the entry of private firms. World Factbook n.d.).27 About 51 percent of Nontransparent tariffs and long delivery times the network does not meet national rough- encourage the use of road transportation as road requirements, and 39 percent fails to an alternative to rail. The existing network meet strength requirements. In 2018, Ukraine of transshipment terminals is inadequate and scored just 2.4 out of 7 on the Organization fragmented (IFC 2021).28 for Economic Cooperation and Development’s (OECD)'s index of perceived road quality Ukraine’s seaports are crucial links to global (OECD 2018). Road freight accounts for almost markets, while the country’s inland waterways 70 percent of all domestic cargo by weight, or are underutilized. Ukraine has 18 international about 12 percent of all ton-kilometers (World seaports, including five in Crimea and 13 on the Bank 2018). Road transport plays a crucial role mainland. Prior to Russia’s invasion, the four in moving agricultural products such as grains, largest seaports—Pivdennyi, Odesa, Mykolayiv, vegetables, and fruits to consumers, processing and Chornomorsk—accounted for about 80 facilities, and export points. The top commodities percent of total capacity. The government had carried by trucks include metal ore and other successfully tendered concessions for two smaller mining products (41 percent), agricultural seaports, Olvia and Kherson, and had started products, food, beverages, and tobacco (24 preparing for the third, Chornomorsk. River percent), and chemical products (10 percent) transport on the Dnipro was primarily used to (World Bank 2018). The electrification of road connect major manufacturing and agricultural transport is still in its early stages. Electric vehicles centers with seaports,29 while shipping on the represent a small share of total vehicles and are Danube was limited before the invasion but concentrated in larger cities, while about 90 started to play a vital role once the Black Sea percent of charging stations are slow charging. ports were blocked. Most of Ukraine’s registered river shipping fleet is outdated, and in 2020 the The railway system is extensive but outdated. average vessel was 36 years old, exceeding the The country has about 21,700 km of rail maximum age for entry into EU ports. lines, 47 percent of which are electrified. Rail serves as the backbone for long-distance Prior to Russia’s invasion, the aviation sector freight transport, accounting for 54 percent of was an important driver of Ukraine’s economy, freight turnover and 27 percent of passenger contributing 1.1 percent to GDP and generating transportation in 2019 (World Bank 2018; 146,000 jobs (IATA 2018). The country has 20 Ernst & Young 2021). The Ukrainian railway commercial airports, most of which are owned by system is the fourth largest in Eurasia in terms the state or municipalities, as well as five privately of cargo traffic, with freight-traffic volume per owned airport terminals. Prior to the invasion, the kilometer being 3–5 times higher than that government was weighing various options to secure of other European countries (Castalia 2023). capital investments in airports, and in 2021 it began 27 Density of highways and roads is calculated as length of motorways or roads (km) / area of Ukraine or the EU * 1000 km. All roads include motorways, main and national roads, secondary, regional, and local roads. 28 Six private players operate 11 out of 16 multimodal hubs, while Liski, a state-owned subsidiary of JSC Ukrzaliznytsia, operates the other 5. 29 Since the invasion navigation on Dnipro has been limited due to its proximity to the frontline. In June 2023 Kakhovska dam on Dnipro River was destroyed causing massive flooding and likely long-term interruption of Dnipro navigation. However, while this report was being prepared no information was available to assess the level of damage and consequences for transport sector. 14 VOLUME 1: PRIVATE SECTOR OPPORTUNITIES FOR A GREEN AND RESILIENT RECONSTRUCTION IN UKRAINE preparing several for partial or full concessions. July 22, 2022 - July 17, 2023, has helped However, regulatory barriers exist to prevent mitigate about $1.3 billion in losses. However, bankable investment projects in the airport sector. even before the initiative was terminated by Russia in July 2023, it did not encompass other In 2021, 70 percent of Ukraine’s population forms of cargo, which have historically been lived in urban areas, which have extensive three times larger by tonnage than Ukraine’s but poorly maintained transport networks. seaborne grain exports. The EU’s Solidarity Productivity and service-quality indicators for Lanes Initiative, which ships goods by rail, has the country’s passenger transportation networks been instrumental in providing alternative trade lag EU standards due to outdated infrastructure, routes for these goods, but its precise impact low fares, and poor revenue oversight. Urban has not yet been determined. transport services are supervised by subnational (local) governments and delivered by a mix of Russia’s invasion of Ukraine has forced Ukraine public and private operators. These operators tend to reconsider the transport network, while at the to have narrow margins, as they bear the demand same time offering an opportunity to develop risk associated with government-regulated tariffs, a more resilient transport system. Ukraine’s but lack a proper compensatory framework. An progressive integration into European and inability to secure long-term financing and the transatlantic markets and value chains will uncertainty associated with the business model require the restoration, upgrading, and expansion inhibit investment in climate-smart technologies of multiple transport modes, as well as wholly (World Bank 2023a). Municipal financing is new investments in transportation systems and available for urban transportation if the city has infrastructure. Restoring access in invasion-affected sufficient borrowing capacity, but this capacity areas will not always entail rebuilding systems was already limited before the invasion. as they existed before the invasion. Meanwhile, policymakers must strengthen the resilience of the The transport sector has the economy’s largest national transport sector and invest in efficient, reconstruction needs at an estimated $92 billion.30 low-carbon infrastructure. To mobilize the funding Damages are estimated at $36 billion, primarily necessary to accomplish these objectives, the to road infrastructure (63.7 percent), followed government will need to augment its limited fiscal by rail infrastructure and rolling stock (19.2 resources through active engagement with the percent), private vehicles (10.2 percent), and private sector. The extent of private finance will urban transport systems (5.2 percent) (RDNA2). depend on the implementation of priority reforms The actual damage caused by the invasion may be and the availability of appropriate de-risking even higher due to limitations in assessing damage mechanisms. As the public sector’s capacity to to private transportation and logistics assets. invest directly in public infrastructure is limited, the government must expand service-delivery Losses are estimated at $32 billion, highlighting models that involve the private sector, such as the transport sector’s critical importance to PPPs, concessions, joint ventures, performance- domestic and international trade. The blockade based contracts, and commercial loans. At the of Ukrainian Black Sea ports has severely same time, the extent of private sector investment compromised exports, leading to massive will depend on the ability to address various risks, financial losses. The Black Sea Grain Initiative, such as availability of third-party infrastructure, which facilitated the maritime exportation of material loss and damages, demand and revenue 36.5 million tons of Ukrainian grain during risks, access to finance, etc. 30 Damages are largest in the housing sector, but reconstruction needs are largest in the transport sector. 15 CHAPTER 3: INFRASTRUCTURE Box 1 Mobilizing Private Financing for Public Investment under a Deferred Payment Structure A deferred Payment Structures (DPS) can attract private obligations can be bundled and sold to institutional contractors and mobilize financing for public investment investors in a customary securitization transaction. projects where risk allocation is challenging for private sector debt and equity. In emerging markets jurisdictions, In Ukraine, the infrastructure concession would need DPS programs have been used to finance highly complex to be structured on a DPS basis, and the government projects, including multibillion-dollar expansions of metro would need to commit to multi-year payments backed systems and roads in Latin America and the Caribbean. by payment support from foreign donor governments and development partners. At the start of the project, the Under DPS programs, granting authorities accept bids foreign partners would need to commit to the bulk of from the private sector for the construction, operation the obligations to the certificate holders. However, over and maintenance of public infrastructure projects, time, as Ukraine’s sovereign creditworthiness improves and private contractors perform discrete tasks (based and its payment capacity is restored, the government on milestones) in exchange for a stream of long-term could assume a larger share of the payment obligations deferred payment rights granted by the government. As under terms agreed upon in advance and embedded in each phase of the project is completed, contractors sell the language of the trust documentation. Consequently, these payment rights to generate liquidity for the next implementing a DPS in Ukraine would require especially phase, and the process repeats itself until the project close collaboration between the government, financial is complete. Such future payment streams, which can markets, and the international community. Because come 10–15 years after the completion of the project, are this report does not include financing mechanisms either authorized directly by the government or through that require a guarantee from the government or its a trust backed by the government. When structured in development partners, DPS arrangements are not a bankable manner, these government-backed payment included in the estimates for private financing. In the road sector, the introduction of PPPs improve emission standards. Reforms will be and concessions could enable the private sector necessary to align road transport regulations to mobilize the $5 billion in reconstruction with EU standards. financing estimated by the RDNA2 (about 10 percent of the identified road financing needs) Shifting the focus of passenger and cargo transport while also creating $4 billion in additional from roads to rail and waterway transport can yield road-related PPP opportunities.31 In a context sector-wide gains in decarbonization and overall of heightened risks, private investors will likely efficiency. In the railway sector, the government hesitate to make long-term commitments, and will need to continue increasing the efficiency of the government may need to take the lead in the UZ’s operations and opening new segments to early stages of reconstruction. DPSs can enable private-sector involvement. While public ownership the public sector to attract private financing even of railroad infrastructure will remain necessary, in an uncertain environment, but establishing the authorities can reform the tariff system, these structures will require securing substantial liberalize the railroad transportation market by donor support. While the private sector has allowing international operators to participate historically managed the long-distance passenger in it. Establishing connectivity with EU supply and cargo commercial road fleet, over $8 billion chains, including through the gradual development will be required to modernize vehicles and of the standard European gauge (1,435mm) 31 Total private sector opportunities in the road sector beyond the RDNA2 needs are $15 billion (Table 2 and World Bank Group 2023, forthcoming). 16 VOLUME 1: PRIVATE SECTOR OPPORTUNITIES FOR A GREEN AND RESILIENT RECONSTRUCTION IN UKRAINE infrastructure in Ukraine, will be critical to Ukraine’s Regulatory reforms could unlock $0.9 billion economic realignment. To further integrate the in private investment opportunities in the railway network and logistics centers into the airport system (WBG 2023, forthcoming). EU, the government should consider developing The government will need to develop a master a system of transshipment terminals linked to plan for reconfiguration the airport network the EU by the standard European gauge. While that includes strategies for attracting private adopting a new standard gauge is a massive and financing. Creating an airport development expensive undertaking that should remain within fund similar to the existing road fund could the purview of the public sector, the private sector help finance the redevelopment of regional can assume the risks involved in developing the airports over the medium and long term. logistics terminals. The private sector can also play The EU Green Deal’s objectives for reducing an important role in deploying new rolling stock CO2 emissions from aviation could offer to meet the requirements of the standard European opportunities to attract multilateral financing gauge.32 The railway sector offers about $2 billion for new airport infrastructure and catalyze in private investment opportunities, if an enabling the participation of private airlines in the environment for the private sector is created. system’s recovery. Leveraging these opportunities could accelerate the development of multimodal logistics services Establishing a new regulatory framework for (WBG 2023 forthcoming). urban transportation and exploring alternative financing models could create $15.5 billion in Privatization and infrastructure investment investment opportunities in urban transport will be vital to mobilize private investment (WBG 2023 forthcoming). Renewing the in water transport. The government should outdated and highly polluting vehicle fleet will continue the process for tendering seaport require: (i) developing new business models that concessions that began prior to the invasion. allow for the aggregation of demand and/or the No immediate regulatory changes are needed separation of asset ownership; (ii) technical and to resume the concession of seaports, though financial support for the transition to zero- further reforms may be required to keep port emissions technologies by public and private operations competitive. Further privatization of operators; and (iii) regulatory reforms to allow stevedoring companies and concessioning ports the establishment of long-term performance- along the Danube will increase the capacity of an based arrangements between private operators underutilized waterway with direct access to EU and public transport authorities. markets. Modernizing infrastructure along inland waterways will require public investment, though The transport sector is vulnerable to various the government should work with private firms to risks and will require complex regulatory identify opportunities for PPPs, concessions, and reforms and financial guarantees to attract similar arrangements. For example, a PPP could private investment. The insecurity of assets, support the modernization of infrastructure along the inability to forecast demand, an unreliable the Dnipro. Fleet renewal and investments in port energy supply with unpredictable costs, infrastructure could attract over $8 billion in incomplete compliance with EU regulations, and private financing, and most opportunities would the uncertainty surrounding the reform process be unrelated to reconstruction.33 will remain key risks for the private sector. 32 While greenfield projects to change the rail gauge would be highly expensive, private participation is feasible. The government and its would-be partners in the private sector can learn from the experience of Rail Baltica, a private-sector initiative to integrate the Baltic countries into the European network. 33 In June 2023, the Kakhovska dam on Dnipro River was destroyed, causing massive flooding and likely long-term interruption of Dnipro navigation. As of the publication date of this report, however, no formal assessment has been made of the level of damage and consequences for the transport sector. 17 CHAPTER 3: INFRASTRUCTURE 3.2 Energy and Extractives34 Ukraine has a diversified energy mix with significant potential to increase supply and improve The energy and extractives sectors are critical efficiency. In 2020, the primary energy supply engines of economic growth in Ukraine and offer consisted of natural gas (28 percent), coal and relatively high wages and export earnings, but peat (26 percent), nuclear (23 percent), oil (16 they are also the country’s largest sources of GHG percent), and renewables (7 percent). In 2020, emissions. In 2020, energy contributed 2.9 percent imports accounted for 36 percent of the primary to GDP, while extractives contributed another 4.6 energy supply (State Statistics Service of Ukraine percent (State Statistics Service of Ukraine 2022). In 2021). Most recent estimates indicate Ukraine's 2021, the energy and extractives sectors employed notable technical RES potential with 83 gigawatts 4 percent and 2.6 percent of the workforce, (GW) of photovoltaic (PV), 438 GW of onshore respectively. Wages in the energy and extractives wind power, 250 GW of offshore wind power sectors were 38 percent higher and 41 percent (NASU 2020 as quoted in Energy Charter 2022).38 higher, respectively, than the national average. Ukraine’s biomethane potential could replace its Together, the two sectors contributed 8.5 percent pre-invasion gas imports or supply 10-20 percent to total exports in 2020 (State Statistics Service of EU’s biomethane market (Amelin, et al. 2020; 2022). However, these sectors also accounted for a bne intelliNews 2023). The potential for energy combined 43 percent of Ukraine’s GHG emissions savings is greatest in the industrial sector (33 in 2020 (Ministry of Environmental Protection percent) and the residential sector (30 percent), and Natural Resources of Ukraine 2022).35 While while the public sector offers considerable scope the GHG intensity of GDP in Ukraine fell by 86 for efficiency gains (World Bank 2022b). percent between 1999 and 2019, it remains 2.5 times the global average and 4.6 times the average Ukraine is among the world’s leading producers for Europe and Central Asia (Climate Watch of a wide range of minerals. Although it covers n.d.).36 Similarly, although the energy intensity of only 0.4 percent of the Earth’s surface, Ukraine GDP fell by 60 percent between 1996 and 2020, contains an estimated 5 percent of the world’s it is still 1.5 times the global average and 1.9 times mineral resources (Liventseva 2022). These the average for European countries (IEA n.d.).37 resources include metallic and non-metallic raw 34 In the energy and extractives sector, the World Bank Group team estimated private sector opportunities based on energy demand and supply projections elaborated by the team taking into account Ukraine’s energy strategy and estimates by the IMF, IBRD, European Network of Transmission System Operators for Electricity, European Network of Transmission System Operators for Gas, European Union, International Energy Agency, International Renewable Energy Agency, Energy Community and the European Union Agency for the Cooperation of Energy Regulators. These estimates are indicative and could vary significantly depending on assumptions used. Other opportunities (beyond RDNA2) are estimated taking into account government of Ukraine’s goals for the development of energy and extractives sectors. The main difference from the RDNA2 is that the estimate of the baseline projection includes Ukraine’s goals (e.g., nuclear, natural gas, biomethane, exports, etc.) although the report’s projections are below the figures of the government of Ukraine energy strategy. This concerns especially the reform and intervention scenario which varies from the energy strategy in the areas of 10 GW wind, 5 GW electrolyzer, 2 GW peaker and 2 GW lithium-ion 2-hour battery energy storage. These investment opportunities include development of new or modernization of existing infrastructure and assets as well as development of local renewable energy equipment manufacturing capacity. (WBG 2023 forthcoming). 35 Energy industries include emissions from stationary fuel combustion in production of electricity and heat by thermal power plants, combined heat and power plants, heating plants, heat and power plants of enterprises, waste incinerators, petroleum refineries and gas processing plants, and fuel combustion at the enterprises that are engaged in production of energy materials and other energy industries. 36 GHG data include land-use change and forestry (LUCF). 37 Total energy supply per unit of GDP in megajoules in 2017 purchasing-power-parity terms. 38 National Academy of Science of Ukraine (NASU), Institute of Renewable Energy. Atlas of energy potential of renewable energy sources of Ukraine/ ed. S.O.Kudia, Kyiv, 2020, ISBN 978-966-999-034-1https://www.ive.org.ua/wp-content/uploads/atlas.pdf Aтлас енергетичного потенціалу відновлюваних джерел енергії України / за заг. ред. С.О. Кудрі. – Київ: Інститут відновлюваної енергетики НАН України, 2020. – 82 с. Energy Charter. Task Force on Cooperation for Restoring the Ukrainian Energy Infrastructure project, Ukrainian Energy Sector evaluation and damage assessment – IV (as of November 24, 2022), Brussels, https://www.energycharter.org/fileadmin/DocumentsMedia/Occasional/2022_11_24_ UA_sectoral_evaluation_and_damage_assessment_Version_IV.pdf 18 VOLUME 1: PRIVATE SECTOR OPPORTUNITIES FOR A GREEN AND RESILIENT RECONSTRUCTION IN UKRAINE Despite ongoing reform efforts, indicators of materials such as titanium, ball clays, ferro- the operational performance of the energy manganese and ferro-silicomanganese alloys, and extractives sectors remain well below EU gallium, lithium, graphite, and magnesium, as averages. Inefficiency in these sectors increases well as energy resources such as gas, oil and coal the cost of goods and services, while undermining (Liventseva 2022; IEA 2020). Ukraine’s lithium Ukraine’s international competitiveness. During deposits are among the largest in Europe. Its 2000–2021, the country’s renewable power proven reserves of titanium ores are among the generation capacity factor41 was significantly ten largest worldwide, and it accounts for 6 below the EU average, considering renewable percent of global titanium production (Ukrainian energy capacity factors are limited by technical Geological Survey 2021). capability, location and other factors (IRENA 2022a). In 2018, the electricity transmission and As the government continues to reform the distribution network had higher average technical regulatory framework, private firms are playing losses, more frequent service interruptions, and an increasingly important role in the energy longer periods without service than the average and extractives sectors. Ukraine became a for a sample of European counties (Council Contracting Party to the Energy Community of European Energy Regulators (CEER) 2020 Treaty in 2011 (OECD 2021b; Osinska et al. and 2022).42 In 2020, the average length of 2022). By the end of 2019, the government’s service interruptions varied across distribution feed-in tariff (FIT) support had enabled foreign companies, ranging from just 1 minute to over and domestic firms to invest $10 billion in 2,275 minutes (NEURC n.d.). renewable energy, making it one of the five sectors with the largest amounts of investment39 In 2017, the Ukrainian extractives sector’s (Kozakevich 2020). Most segments of the performance lagged European standards in terms electricity subsector are open to private investment, of value realization, revenue management, and except for the large hydropower and nuclear power governance. Moreover, key weaknesses were generation and transmission systems. However, observed in environmental, social and governance policymakers aim to open these subsectors to indicators (Natural Resource Governance some form of private-sector participation over the Institute 2017; Suprun 2023; EPL 2023). long term. The government currently limits the private sector from participating in district heating Weak governance and market mechanisms systems, except as an energy producer, though undermine the financial performance of private-sector engagement is a long-term objective. the energy sector. Market mechanisms face In the extractives sector, private investment in challenges to proper functioning, especially mining has increased: e-auctions for 362 mining in the electricity subsector, and private-sector licenses generated 3.8 billion Ukrainian hryvnia in participation is restricted in critical segments. nominal prices ($132 million in nominal prices) in Rather than promoting competition, low price caps public revenue between 2016 and 2022 (Ukrainian in electricity wholesale markets discourage private Geological Survey 2023).40 39 Assume dollar figures are nominal prices. 40 Assume hryvnia values are nominal prices. 41 Capacity factor is the ratio of the electrical energy produced by a generating unit over a period of time to the electrical energy that could have been produced at continuous full power operation during the same period. 42 Within CEER’s 35 countries, including Ukraine, 31 countries include non-technical losses either in distribution (10 countries) or in both distribution and transmission (25 countries). Ukraine incudes non-technical loss only in distribution. The year 2018 is the most recent data on transmission loss in the CEER report. 19 CHAPTER 3: INFRASTRUCTURE participation and fail to generate price signals that billion. Moreover, the disruption of electricity, would spur investment and innovation. Since July water, heating, telecommunications, and banking 2023, the government has taken steps to increase services has had deeply negative spillover effects the caps, for example, by up to €181/MWh or across the economy. The public sector’s estimated 7,200 UAH/MWh in the day-ahead and intraday reconstruction and recovery needs total $47 markets. In June 2023, the average household billion over 2023–2033. The power sector tariff nearly doubled to €66 per MWh43 but accounts for the largest share of reconstruction remained below the cumulated costs of generation, needs (78.8 percent), followed by fuel-oil transmission, and distribution (GlobalPetrolPrices. infrastructure (7.2 percent), gas transportation com. n.d). Similar mismatches between costs and and distribution networks (5.35 percent), district tariffs are evident in the district heating and gas heating systems (5.3 percent), and coal mining sector (OECD 2021a and b). operations (0.7 percent) (RDNA2). PSO mechanism, introduced by the government Private firms have been a critical source of in October 2021, reduces the financial viability resilience in the energy and extractive sectors. In of state-owned energy companies (OECD 2023). March 2023, the commercial energy operator The mechanism itself is a hybrid of physical and DTEK installed 114 megawatts (MW) of wind- financial models. In the fourth quarter of 2021, the power capacity in southern Ukraine (DTEK new PSO model was projected to cost 0.6 billion 2023a), and in April Ukraine’s first biomethane hryvnia ($28 million in 2023 prices) before VAT, production plant connected to the gas network but its actual cost was 3 billion hryvnia ($136 (Vodyanyi 2023). Other companies have relocated million in 2023 prices) (OECD 2023).44 Before assets, established new facilities, and opened doubling in June 2023 the highest household tariff businesses elsewhere in Ukraine and in neighboring was less than one-quarter of the average tariff in countries such as Poland and Romania. Despite the the EU. Under the latest version of the PSO for invasion, private firms in the raw materials industry households, Energoatom and Ukrhydroenergo are continue to operate. In 2022, 89 licenses were expected to sell electricity at market price and cover issued, generating $55 million in revenue (in 2023 price difference for households from their income. prices) (Ukrainian Geological Survey 2023). Ukrhydroenergo estimates that the financial compensation mechanism provides 30 percent of Attacks on critical energy infrastructure have its total revenue (OECD 2023). Delays in holding highlighted the importance of decentralized and auctions for renewable electricity generation and distributed generation and energy storage. The hybrid energy storage and generation continue to private sector, the government and development discourage private investment. Lower domestic gas partners are deploying solar-power systems prices and the PSOs assigned to the SOE Naftogaz to prevent blackouts and protect critical further reduce cost-recovery in the sector. infrastructure, and the solar PV market for the industry and commercial electricity consumers Damage to the energy and extractives sectors is growing. Cross-subsidization persists, with have had a devastating impact on the Ukrainian households paying regulated tariffs, while economy. Total damage to the two sectors reached businesses pay market prices, which are often 2–3 an estimated $10.6 billion in February 2023, with times higher. Consequently, firms have started invasion-related revenue losses exceeding $27 installing solar PV to offset consumption of grid 43 Regulation of the Cabinet of Ministers of Ukraine, link: https://zakon.rada.gov.ua/laws/show/544-2023-п#Text 39.0553 hryvnias per one euro as per official exchange rate by the Natonal Bank of Ukraine on 1 June 2023 44 The dollar equivalents assume hryvnia values in 2021 prices, with adjustment to hryvnia values in 2023 and converted into dollars using 2023 exchange rate used in the RDNA2 (36.5686). 20 VOLUME 1: PRIVATE SECTOR OPPORTUNITIES FOR A GREEN AND RESILIENT RECONSTRUCTION IN UKRAINE energy and increase price certainty in absence of integrity and transparency of the wholesale energy FITs (PV Magazine 2022). The commercial and market (Ukraine Recovery Conference 2023b). industrial sectors accounted for approximately The successful implementation of these reforms 58 percent of electricity demand in 2020, creating can help ensure markets provide the right price considerable opportunities for suppliers of signals, encourage efficient investment and help decentralized generating systems and energy- minimize costs. The private sector will be vital to efficient technologies, including direct-current a green and resilient recovery in Ukraine, but the appliances and battery energy storage systems magnitude of its contribution will be depend on (BESS) (Eurostat 2023). Given the GHG content the scope and scale of the government’s reforms. of grid electricity, distributed power generation from renewable energy sources could help firms Reconstruction needs include repairing damaged reduce their carbon footprint, making them more thermal power plants owned by the private competitive in EU markets. company DTEK, which may finance the process with private resources. The government could Private digital technology firms are helping the unlock additional private financing by opening energy industry protect against cyberattacks, more elements of the energy and extractives sectors enabling it to continue operating during the to private investment. Implementing market- invasion. Centralized data security and remote oriented reforms in the energy and extractive accessibility are crucial to business continuity sectors could enable private investment to cover as and disaster recovery. Prior to the invasion, much as 76 percent of reconstruction needs.45 Ukrenergo, upgraded its information and communication technology (ICT) and developed Raising excessively low price caps and introducing a business recovery plan, which helped it respond competitive forward markets could promote rapidly and modify its operations in response private-sector participation and spur competition. to the invasion. Working with ICT companies, The timely implementation of auctions for Ukrenergo has successfully strengthened its electricity from renewable energy sources and security and productivity platforms, bolstering from hybrid renewable energy sources with energy its resistance to continual cyberattacks (CEE storage could also attract private investors. These Multi-Country News Center 2022). auctions could feature long-term agreements with a feed-in premium mechanism, which would pay The EU accession process is accelerating reforms the auction winner the price difference when the in the energy and extractives sectors. The market price is lower than the auction contract Ukrainian government implemented sweeping price, and should require the winner to pay back regulatory changes in 2022–23, passing new the differences when the market price is higher laws on the development of energy storage than the contract price. This two-way arrangement systems, promotions of the development of small can ensure benefit sharing with taxpayers. distributed-generation systems and biomethane production, the liberalization of wholesale On the supply side, the authorities should electricity tariffs, and the corporatization of the adjust regulated tariffs to allow cost recovery SOE Energoatom. The authorities also issued in the electricity transmission, distribution a decree increasing the electricity tariff for and retail, district heating, and gas segments. households and adopted new regulations on the Strengthening competition and performance 45 Resolution of the Cabinet of Ministers of Ukraine No812 as of July 19, 2022 with latest amendment by the Resolution No896 as of August 8, 2023. On the approval of the procedure on public service obligations of natural gas market entities to ensure societal interests on the functioning of the natural gas market in relation to peculiarities of supplying natural gas to heat producers and to public institutions, link: https://zakon.rada.gov.ua/ laws/show/812-2022-%D0%BF#Text 21 CHAPTER 3: INFRASTRUCTURE regulations will also be crucial to reduce costs The telecommunications, postal services, and and improve service quality. These regulations broadcasting sectors are largely private. The may include mandatory ceilings on technical and telecommunications sector offers relatively nontechnical losses; maximum service delivery inexpensive internet services, but indicators of interruptions, competitive procurement rules, or service quality lag the levels of EU members environmental, social, and governance standards. (Speedtest Global Index. n.d). The Ukrainian digital sector ranked 2nd out of 35 European On the demand side, the authorities should countries in the 2022 European Open Data improve energy efficiency and promote Maturity report (European Commission n.d.) conservation. Encouraging private investment and 12th among 23 emerging European countries in energy-efficient buildings may require in the 2023 Information and Technology complementary public financing, guarantees, green Competitiveness Index (Emerging Europe 2023). financing instruments, or long-term financing The country’s postal services are digitalized and arrangements with interest payments waived until largely automated. The postal system provides the energy savings materialize. The government money transfers, and the quality of postal services should aim to contain non-commercial financing is comparable to the EU average (EIB n.d.; Nova support at levels comparable to the EU average. Poshta. n.d.). The two dominant players are the privately owned Nova Poshta, which holds Allowing competitive private-sector participation a 65 percent market share, and Ukrposhta, an in the energy and extractives sectors could improve SOE with a 25 percent market share. Ukraine is their operational and financial performance improving the quality of broadcasting services as while promoting innovation and expansion. The part of the EU accession process. government could allow potential commercial financing in suitable forms for electricity As the invasion drove a large share of transmission, large hydropower, nuclear power, and the population to relocate, increasing district heating system including biomethane. mobile connections offset a decline in fixed subscriptions. Network-sharing and Most of the above-mentioned measures are well redundancies offer opportunities for new players aligned with EU standards and market practices. to enter the market. The EU accession process EU alignment will help increase private investors will solidify pro-competition policies and offer confidence in Ukraine, increasing energy security, investors the opportunity to seek redress before resilience and export opportunities. the European Court of Justice. The government aims to increase the use of cloud technologies to 3.3 Telecommunications, Postal Services, deliver public services, possibly through a new and Broadcasting PPP (National Council of Recovery of Ukraine from the Consequences of the War 2022). Cloud Ukraine’s telecommunications sector is a fast- technologies have helped to ensure access to growing strategic contributor to GDP: postal electricity and other critical utilities. services are expanding into e-commerce and broadcasting remains a key source of news and Postal services have remained strikingly resilient information. In addition to offering well-paying during the invasion. In 2022, Nova Poshta jobs, the telecommunication sector is facilitating entered new markets in Poland and Lithuania. economic diversification and enabling the growth It launched air-mail services, modernized its of high-value exports. In 2022, ICT service exports infrastructure, and built new automated logistics grew by 5.8 percent to $7.5 billion, accounting for centers, reducing costs, delivery times, GHG 13.2 percent of total exports and 46.7 percent of emissions, and other forms of pollution (Nova services exports (NBU 2023). Poshta n.d.; The Odessa Journal 2023). Nova 22 VOLUME 1: PRIVATE SECTOR OPPORTUNITIES FOR A GREEN AND RESILIENT RECONSTRUCTION IN UKRAINE Poshta became the first issuer of corporate bonds pumping stations needed to be replaced. While in Ukraine during the invasion. Meanwhile, other the sector generates enormous economic and private postal and courier services companies public health benefits, it accounted for only have continued to grow (КАРІАТИ. n.d.). 0.35 percent of GDP and 0.85 percent of total industrial output in 2021 (Statistical Services of Opportunities are available for new private Ukraine, 2023g). broadcasting companies to enter the market. In February 2022, Ukraine’s largest broadcasters The private sector can participate in the water and many other channels switched to and sanitation sector through concessions or broadcasting the official newscast. Before the PPPs, but the engagement of private firms has invasion, Ukraine enforced legislation that limited been limited to date. Key obstacles to greater the activities of oligarchs in broadcasting and private-sector involvement in water and other media (ITU 2022). sanitation service delivery include fragmented sectoral governance arrangements, the absence Public investment and regulatory reform of a long-term vision for the sector, and the can further improve competition in the weak financial viability of service providers. telecommunications, postal services, and Most operators are small, with limited capacity broadcasting sectors. Key measures include: to invest in and properly maintain existing (i) completing the rollout of 5G; (ii) updating infrastructure. The sector also lacks incentives the radio-spectrum regulations; (iii) protecting for providers to consolidate the water and open internet access; (iv) mandating that sanitation network or otherwise deliver services infrastructure be shared with independent in a cost-effective way. operators; and (v) leveling the competitive playing field. Further strengthening of media As a result of Russia’s invasion, Ukraine’s water freedom could attract additional private and sanitation sector has sustained $2.2 billion investors. All three sectors can mobilize private in direct damages and total reconstruction needs finance through commercial finance, the are estimated at $7.1 billion. The scale of the establishment of PPPs, or the privatization of sector’s reconstruction offers opportunities to specific services and market segments. improve efficiency by increasing private-sector involvement. This assessment conservatively 3.4 Water and Sanitation Services assumes limited initial opportunities for private financing to support the reconstruction of the Prior to Russia’s invasion, Ukraine’s water water supply and sanitation sector, either with supply and sanitation sector struggled to provide or without reforms. The identified private universal access and maintain high service opportunities will likely take place on a pilot quality, with negative effects on human health, basis and include private investment in water the economy, and the environment. In 2021, and wastewater treatment facilities, water and more than 10 million people lacked access to sewage pumping stations, water supply and sewer safely managed water services, and more than 20 networks, as well as water reuse and laboratory million people did not have access to centralized research. During 2023–2026, water-treatment wastewater collection and treatment services. facilities and sewage-treatment plants offer $50 The country’s water and sanitation infrastructure million and $60 million in private investment was in dire need of upgrades and rehabilitation. opportunities, respectively. Over 2027–2033, About 40 percent of the existing water supply the water and sanitation sector could mobilize networks were assessed as being in critical an additional $50 million in private investment, condition, 35 percent of the water treatment and implementing reforms to the policy and facilities required upgrading, and 23 percent of institutional framework could increase this figure 23 CHAPTER 3: INFRASTRUCTURE to $155 million. Additional investment will be Ukraine’s existing irrigation infrastructure is required to expand service coverage and ensure highly exposed to invasion-related risks, as compliance with EU directives for drinking water most systems are in invasion-affected or areas and urban wastewater treatment.46 temporarily not under government control. An analysis of the 20 largest irrigation systems shows 3.5 Irrigation that in 2022 the amount of land under irrigation fell by 35,500 hectares, or about 13.5 percent, Irrigation is crucial to the development of the relative to its 2017–2021 average (WBG 2022). agricultural sector, but prior to the invasion The Kakhovka irrigation scheme in Kherson just 1.3 percent of Ukraine’s cropland was registered the largest drop in irrigation area. The irrigated. Irrigation networks are concentrated Nova Kakhovka dam on the Dnipro, the Pechiney in Zaporizhzhia, Odesa, Mykolaiv, Kherson, dam on the Svirsky Donets, and the Karachunov Dnipropetrovsk, and Crimea. These regions have reservoir dam in Central Ukraine have all been been directly affected by the invasion, and some damaged or destroyed, which could jeopardize are temporarily not under government control, the availability of water for current and future jeopardizing the entire Ukraine’s irrigation irrigation systems. infrastructure. The invasion has compounded preexisting challenges in the irrigation sector. The private sector can support development of Following the fall of the Soviet Union, much of the irrigation systems in large commercial farms, but country’s irrigation infrastructure fell into disrepair, further reforms will be necessary to expand the and deep structural changes will be necessary to scope of private engagement. The irrigation sector rehabilitate and expand irrigation systems. Pre- is undergoing major legislative and institutional invasion estimates suggest that of the 2.2 million reforms that may ultimately allow for greater hectares of land equipped for irrigation, only a participation by private firms. However, making an third can be irrigated without additional capital irrigation service provider profitable is a challenge, investment (World Bank 2022a). Climate change and the international experience offers very few poses a serious threat to water availability, with cases in which countries have succeeded in fully especially significant implications for southern privatizing irrigation services. While PPPs in the Ukraine, and irrigation could help bolster the irrigation sector are diverse and highly context- resilience of farmers facing reduced rainfall. specific, Morocco and Spain offer examples of Modern irrigation systems are a form of climate- broadly successful arrangements from which smart technology that brings economic benefits. Ukrainian policymakers could draw lessons. For example, drip and pivot irrigation could Privatizing existing irrigation schemes is unlikely help reclaim degraded land for agricultural use. to be commercially viable, especially if investments An analysis of the country’s 20 major irrigation in rehabilitation, expansion, or upgrading are not systems47 between 2017 and 2021 shows that subsidized. Nevertheless, private participation irrigation increased crop yields by between 6 and in irrigation could be feasible in systems built to 52 percent, depending on the scheme and crop serve large commercial farms, such as those in the composition (WBG 2022). Kharkiv oblast (Vidal et al. 2022). 46 Ministry for Community and Territorial Development of Ukraine, 2022. 47 Ministry for Community and Territorial Development of Ukraine, 2020. 24 VOLUME 1: PRIVATE SECTOR OPPORTUNITIES FOR A GREEN AND RESILIENT RECONSTRUCTION IN UKRAINE CHAPTER 4 Private Investment Opportunities in the Social Sectors Household savings accumulated since the start accumulated personal wealth. The invasion of the invasion can help finance investment in has also disrupted the housing value chain housing, municipal services, healthcare, and through increased physical risks, labor force education, but the corporate private sector is displacement, income losses, and the rising cost expected to play only a limited role in these of construction materials and transportation. sectors over the next ten years. Engaging the Total housing reconstruction and recovery needs corporate private sector in delivering these are estimated at $68.6 billion over the next ten services requires a consensus among users to years, of which $31.5 billion will be required pay for the services delivered, possibly with in the next four years (RDNA2). This damage public subsidies for low-income consumers. estimate is equivalent to about 8 years of pre- Because forging such a consensus takes time invasion construction output by value.49 Imports and requires pilot projects to build experience of glass, which have historically come mainly with PPPs and strengthen investor confidence, from Belarus and Russia, have ceased, and in the near term investment in the social sectors damage to road and rail links has caused supply will be financed primarily by the public sector bottlenecks and severely strained the domestic and by individual households. production and distribution of materials such as cement and steel. 4.1 Housing The invasion has triggered a crisis in an already Russia’s invasion of Ukraine has destroyed stressed housing sector. About 80 percent of the or damaged more than 1.5 million housing country’s housing units were built before 1980, units (WBG, et al 2023), or about 8 percent with modest unit sizes and poor insulation. of the national housing stock, and 5.1 million Many of these older units—especially privately internally displaced people (IOM 2023) are co-owned multifamily apartment buildings— faced with finding temporary shelter. While were showing signs of structural deterioration the destruction of housing assets and internal and inadequate maintenance and would not meet population dislocation have occurred throughout current seismic or energy-efficiency standards. the country, 82 percent of the direct damage Before the invasion, the housing market was has been concentrated in the eastern oblasts,48 developing slowly in much of the country, with and 1.4 million multifamily apartment units the exception of the Kyiv area, and new housing have sustained nearly 90 percent of the damage construction was limited. The market for end- (RDNA2). Damage to the housing sector severely user mortgage financing was underdeveloped, weakened the ability of affected households to and in 2021 the ratio of mortgage loans to house shelter from the elements and work productively, sales was low at just 5 percent. Some 10 percent and, in many cases, destroyed a lifetime of of mortgages issued for house purchases were for 48 Donetsk, Luhansk, Kharkiv, and Kyiv oblasts. 49 Between 2000 and 2020, an average 8.33 million m² of residential floor space was built per year (Shcherbyna, 2022), equivalent to around 185,000 average-sized (45m²) residential units (WBG, 2023, forthcoming). 25 CHAPTER 4: PRIVATE INVESTMENT OPPORTUNITIES IN SOCIAL SECTORS newly built properties on the primary market, to middle-income and lower-middle-income while the remaining 90 percent were to purchase households that may not be eligible for, or willing existing units on the secondary market. to apply for, long-term mortgage financing. About 95 percent of the housing stock is privately The extent of the private sector’s participation owned and largely debt-free following large-scale in the reconstruction needs will depend on the privatization in the early 1990s (RDNA2),50 but implementation of reforms. Without reforms, the sector has suffered from underinvestment private investment opportunities will amount to in social housing. In 2022, only 4 percent of an estimated $22.5 billion, equivalent to one- the total population, and about 6–7 percent in third of reconstruction needs. Reforms could larger cities, lived in social housing (Lomonosova boost private investment to $30.2 billion, albeit and Fedoriv 2019). State co-financing programs still less than half of total needs (WBG 2023 have incentivized housing purchases over other forthcoming).51 Developing a housing policy forms of tenure. Ownership-focused policies have framework is essential for improving housing proven unsustainable while also undermining the quality, ensuring access to affordable housing, and development of rental housing, which suffers increasing housing supply. Further streamlining from a lack of protections for both tenants urban planning and land administration will be and landlords. Further legal and administrative crucial to improve efficiency, consistency, and reforms are needed to remove constraints on transparency in land allocations and planning access to land and to streamline land-use and site development decisions. Simplifying zoning and rules. Preparation of comprehensive construction regulations and materials standards recovery plans is underway with additional aligning them with EU norms, would encourage support needed to supplement the resources of the development of domestic construction the smaller hromadas. industry and the entry of regional contractors. Private homeowners and small and medium 4.2 Municipal Services domestic contractors will continue to dominate the housing sector during and after the invasion. Ukraine’s subnational governments face rising A swift and efficient reconstruction process on expenditure needs and plunging revenues.52 the scale needed will require policy reforms, Chronic underinvestment had undermined the financial support from external partners, and the coverage and quality of basic local services entry of larger regional developers and financial even before the invasion. In 2020, a significant institutions. The entry of new firms will be vital to share of subnational spending went to cover ensure a supply of design and supervision services, payroll and other recurrent costs, while only a large-scale construction capacity, specialized small percentage was allocated to investment. technical and logistical capabilities, and the ability Enterprises owned by municipal governments to raise finance. PPPs with for-profit and nonprofit are responsible for providing a range of services. developers to construct large-scale social housing Their heavy reliance on central grants and could be supported by public subsidies through subsidies leads to inefficiency and inadequate availability payments targeting low-income asset maintenance, which in turn discourages households, while mass unsubsidized rental or household user payments, creating a vicious rent-to-buy housing could be made affordable cycle of low revenues and low service quality. 50 Since the housing stock is largely privately owned most investments will be made by households. Since some of the multifamily apartment buildings are on the balance sheet of the municipalities they are to be repaired and maintained in public areas by municipalities. 51 In addition to addressing RDNA2 needs, the reform scenario projects $60 billion in private investment in housing over 10 years. 52 The subchapter on municipal services excludes local transport, district heating systems, and water and sanitation services. 26 VOLUME 1: PRIVATE SECTOR OPPORTUNITIES FOR A GREEN AND RESILIENT RECONSTRUCTION IN UKRAINE Russia’s ongoing invasion has placed enormous PPP models, and the small market size of most stress on the municipal services sector, as municipalities. Targeted reforms could allow for subnational governments are at the forefront greater private-sector participation. Subnational of urgent response and recovery efforts such as government should be required to use the clearing debris, processing IDP, and maintaining standard e-procurement guidelines for the public basic public health and safety. The invasion sector, including the mandatory publication has also undercut the prospects for sustaining on e-government platforms of all pipeline traditional revenue streams such as property projects, bidding documents, and contract taxes, making it difficult for the largest cities to awards. Capacity-building support should be service their debts or access capital markets to offered, and sanctions for noncompliance with invest in rebuilding municipal infrastructure and national regulations could be used. Subsidized expanding services. The ability of smaller cities SOEs should be comprehensively reviewed, and to take on debt is largely unknown. the government should establish an ongoing program to commercialize their activities in From 2015 to 2020, Ukraine implemented areas where they compete with the private numerous administrative and fiscal decentralization sector. Finally, legislative reforms will be measures and governance reforms. As a result, the necessary to enable transparent and predictable subnational regulatory framework is relatively decision-making by subnational governments robust, but it is also complex, fragmented across in rezoning land for private-sector development multiple pieces of legislation, and unevenly or PPPs. Without reforms, an estimated $0.2 implemented across the country. The reforms billion in private financing could be mobilized have given local governments greater authority to for reconstruction over the next ten years. manage their finances and to establish PPPs for With reform, this estimate rises to $0.8 billion, providing public services and local infrastructure. though it remains far below the anticipated To date, the use of PPPs has been limited to reconstruction needs of $5.7 billion (RDNA2 performance-based arrangements with private and WBG 2023, forthcoming)—underscoring companies operating public assets and services the government’s indispensable role in providing under the oversight of subnational governments. municipal services. Although the private sector does not currently own a significant share of subnational government 4.3 Health assets, there are opportunities for future PPPs to engage in reconstruction activities and restore Ukraine has one of the worst health profiles in local service delivery. The private sector will play Europe, with low average life expectancy and an important role in enhancing the efficiency high rates of mortality, morbidity, and disability. of municipal services and supplementing their Lost productivity due to poor health outcomes coverage and quality, both during reconstruction was a key contributing factor to the country’s and over the long term. subpar economic performance prior to Russia’s invasion of Ukraine. The invasion has caused Key barriers to private investment in municipal approximately $2.5 billion in damage to the services include burdensome and opaque health sector, and total losses are conservatively procedures for obtaining land and building estimated at $16.5 billion.53 The actual level of permits, a lack of practical experience by damage is likely higher, given incomplete or missing subnational governments in managing different reports on private facilities and those located in 53 This conservative estimate of total losses includes the removal of debris and the demolition of destroyed facilities, income losses among private providers, losses from the financing of facilities, and additional losses associated with reduced health due to forgone care and increased public health risks. 27 CHAPTER 4: PRIVATE INVESTMENT OPPORTUNITIES IN SOCIAL SECTORS the temporarily occupied territories not under 4.4 Education government control. The limited implementation of structural reforms and inadequate investment Private investors could play a critical role over the last several decades have resulted in an in rebuilding Ukraine’s education system by inefficient healthcare system that largely fails to providing funding, innovation, and expertise. The deliver quality health services. The health sector’s cost of reconstruction in the education sector is organizational and financing arrangements estimated at $10.7 billion (RDNA2). Prior to the prioritize curative over preventive services, invasion, Ukraine had an extensive education hospitals over ambulatory services, and specialists system with relatively strong learning outcomes. over primary care providers. Private-sector Licensed private education providers are allowed participation in healthcare is highly fragmented, to operate in Ukraine and are even subsidized in with most services provided by a few large areas such as preschool and reskilling. However, corporations based in and around Kyiv. the private sector plays only a modest overall role in the provision of education services. Several obstacles inhibit the private sector’s participation in the health system, especially Multiple constraints limit the private sector’s financing constraints and the limited use ability to invest in the reconstruction and of private medical insurance. Regulations development of the education system. Ukraine’s designed to ensure the quality of care are legislative framework would allow for PPPs often ineffective, sanitary standards imposed to construct education facilities, but these on providers are opaque and overly complex, arrangements are underutilized. Private providers and e-health legislation is underdeveloped. lack incentives to participate in the construction These regulatory challenges are exacerbated by of educational institutions. Russia’s invasion of weak governance. In 2018, Ukraine launched Ukraine has displaced around 4.6 million children a comprehensive health-sector reform program while sharply reducing the ability of households designed to increase the efficiency of health to pay for education services (RDNA2). services by modernizing and transforming Meanwhile, regulatory standards for establishing healthcare, including through greater private- private preschools are difficult to meet, especially sector participation. Establishing PPPs to build for home-based providers. Internet disruptions and manage health facilities could accelerate the limited the scope for innovative online solutions reconstruction while reorganizing the facility that can help address learning gaps and support network around a more balanced model that displaced teachers and students. The sector emphasizes primary care. In addition, health- also suffers from a general lack of cooperation service PPPs could improve the provision of between public authorities and the private medical imaging and laboratory services, which providers at the national level. are essential for effective treatment. The private sector can help the government Precisely identifying the problem to be addressed improve access and quality at all levels of the and clearly defining a satisfactory solution will be education system. Establishing PPPs to rebuild vital to the success of health-sector PPPs. Capacity- education infrastructure and offering public building support to government counterparts may financial support to families enrolling their be necessary to ensure that PPPs are technically and children with private providers can accelerate the financially sound and implemented appropriately. reconstruction of the education sector. To rebuild Opportunities for pilot PPPs include a $200 million the capacity of the workforce, the private sector hospital, $10 million in diagnostic imaging services, could partner with local education institutions to and $2 million in laboratory testing services (WBG, provide pedagogical support and work-integrated 2023 forthcoming). 28 VOLUME 1: PRIVATE SECTOR OPPORTUNITIES FOR A GREEN AND RESILIENT RECONSTRUCTION IN UKRAINE training opportunities, expand the acceptance of local construction requirements and other factors, alternative credentials, and employ data analytics pilot PPP projects for constructing early childhood to better manage the deployment of human education facilities for 1,000 places could offer resources. Mobilizing the private sector will $100 million in investment opportunities, while be viable only in areas where there is sufficient investments in primary, lower secondary and stability to ensure the safety of the personnel and upper schools could total as much as $160 million assets involved in reconstruction. Depending on (WBG 2023 forthcoming). 29 CHAPTER 5: MOBILIZING DOMESTIC PRIVATE FINANCING CHAPTER 5 Mobilizing Domestic Private Financing Demand for private financing can be met by and the central bank revoked the licenses of six a combination of traditional sources. These banks that were declared insolvent. include within-company financing equal to about 10 percent of GDP and cross-border Despite limited physical damages, Russia’s financing equal to about 5 percent of GDP. invasion has had a large indirect impact on the The latter encompasses both FDI and portfolio banking sector. The sector’s losses are estimated investment. Household savings will boost private at $6.8 billion, driven by an increase in non- financing but will focus primarily on the housing performing loans (RDNA2). Non-performing sector. Domestic financial markets, including loans increased from 26.6 percent of total loans the banking and pension systems, are crucial in February 2022 to 38.8 percent in March 2023 to channeling domestic savings into corporate (NBU 2023d). Corporate and retail lending finance. The level of public trust in financial declined from 44 percent of total assets in service providers will largely determine how 2021 to 37 percent in 2022 as demand faltered, effectively savings are mobilized. provisioning increased, and overall risk appetite declined (NBU 2023c). Addressing both the 5.1 Finance and Banking impact of the invasion and the financial sector’s legacy challenges will be crucial to enable the Ukraine’s financial sector is small and dominated robust flow of financial resources necessary to by banks, with a small share of non-bank financial support a green and resilient recovery. institutions and shallow capital markets. The total assets held by financial institutions regulated by The expanding use of digital financial services the National Bank of Ukraine amounted to $85.9 has enabled the payment system to continue billion, 43 percent of GDP in 2021. Banks hold functioning despite significant damage to 88 percent of the financial assets, $75 billion.54 physical assets in the banking sector. Digital The small size of the financial sector limits access financial services have mitigated an estimated to credit. In surveys, almost half of private firms 20 percent reduction in the number of branches identify access to finance as a major constraint and a 16 percent decline in the number of (World Bank 2019). service points (NBU 2023c; S&P Global Ratings 2023). Deepening and expanding State-owned banks accounted for 50.6 percent digital financial services, including fintech, will of the banking sector in 2022. Privately owned be vital to mobilize private financing. Financial Ukrainian banks, which represent 19.9 percent inclusion exceeded 80 percent (World Bank of the banking sector’s assets, are generally small 2021) before the invasion and could be further and highly fragmented. Foreign-owned banks increased through fintech solutions, especially represent 29.5 percent of the sector’s assets in the context of widespread population and are larger than their domestic peers (NBU displacement. The country’s well-functioning 2023c). During the invasion, indicators of the credit reporting system offers an opportunity to banking sector’s health and stability deteriorated, expand banking services to small and medium 54 Staff calculations based on NBU 2023b. 30 VOLUME 1: PRIVATE SECTOR OPPORTUNITIES FOR A GREEN AND RESILIENT RECONSTRUCTION IN UKRAINE enterprises, and the nonbank financial sector supervision, and adopt international standards has significant long-term growth potential. could boost the credit-to-GDP ratio from 16.1 percent in 2022 (IMF 2023c) to 56 percent in Russia’s invasion increased the operational risks 2033, the average for low-and-middle-income faced by banks while macroeconomic conditions countries in the Europe and Central Asia region deteriorated. Timely action by the central bank in 2020 (World Development Indicators 2023). provided commercial banks with guidance to Further the authorities may opt for a significant manage risks. The central bank increased the reduction in state-owned banks’ market share policy rate from 10 percent to 25 percent in June (e.g., through accelerating the privatization 2022 (NBU 2022a ) and devalued the hryvnia process or aligning incentives for investors to by 25 percent to 36.57 UAH/$ in July 2022 attract private capital to the sector while enabling (NBU 2022b). Banks tightened risk management such banks to downsize/rightsize their market as interest rates rose, and loan volumes have shares). In this scenario, private financing for the contracted. Due to the current circumstances, banking sector could reach $27 billion. Without with reduced loan monitoring and bank reforms, private financing would amount to just oversight, the creditworthiness of borrowers will $15.1 billion, and the credit-to-GDP ratio would remain difficult to assess until the completion of be 25.8 percent (IMF 2023c). Bank credit and a comprehensive asset-quality review. other forms of financing that are external to the firm are particularly important for economic The large footprint of state-owned banks and efficiency and growth (Rajan and Zingales 1998). a weak debt-resolution framework distort private-sector participation and competition. 5.2 Pensions State-owned banks account for about half of the banking sector’s assets. Inefficient debt resolution Ukraine’s small private pension subsector does not and recovery processes negatively affect the currently offer opportunities to mobilize financing risk appetite of lenders, and the recovery rate for reconstruction, but it has considerable scope for is low at just 9 percent (World Bank 2020). development. The private pension system has been Poor enforcement of creditor rights results in place for 18 years, but by the end of 2022 the in wide risk premiums, weakening incentives country’s private pension funds managed just $113 to access banking services. In the absence of million, less than 0.1 percent of GDP.55 Moreover, market-based instruments to manage risk, banks only 8.2 percent of the employed population resorted to over-collateralizing, which limits participated in the pension system. Foreign the flow of credit into the economy and slows engagement in private pensions is also limited the growth of the private sector. In addition, to a single fund managing $10.5 million (UAIB, the regulatory framework does not yet conform 2022). Lack of trust in financial institutions to internationally accepted standards, which is an important obstacle to the expansion reduces the financial sector’s attractiveness to of private pension funds, but the passage of private investors. several laws currently being considered by the regulators could help bolster public confidence. Given an improving regulatory framework and The laws under consideration deal with state rising demand for credit, Ukraine’s financial sector regulation of capital and commodity markets, has the potential to attract substantial private and implement international standards in financing. Measures to strengthen creditor rights, asset management and pension supervision. If increase competition, tighten financial-sector approved, these laws could strengthen Ukraine’s 55 National Securities and Stock Market Commission (2023) and WBG (2023, forthcoming). 31 CHAPTER 5: MOBILIZING DOMESTIC PRIVATE FINANCING capital markets, opening a significant volume of could help mobilize domestic financial resources assets for investment in a wide range of financial for a green and resilient reconstruction. Some instruments. The development of private pension eight years after the proposed reforms are funds would allow for the creation of innovative implemented, the total stock of pension assets is pension products, and over time pension funds projected to be about 7.3 percent of GDP in 2033. 32 VOLUME 1: PRIVATE SECTOR OPPORTUNITIES FOR A GREEN AND RESILIENT RECONSTRUCTION IN UKRAINE Annex : Technical Team and Contributing Reviewers The report was prepared by a technical team Trofimova (Head of Sustainability, Kernel). Peer at the IFC led by Johannes (Han) Herderschee review comments from Jose Ernesto Lopez Cordova (Senior Economist, CELCE) and the overview (Lead Economist, ETIIC) and Heinz Strubenhoff and infrastructure chapters were co-led by (EU Consultant) are gratefully acknowledged. Patrick Avato (Principal Operations Officer, CN2UA). The team leaders also prepared the The section on industry and commerce was introduction and cross-cutting chapters. Authors prepared by Dmytro Goriunov (Kyiv School of individual chapters and contributions to of Economics, and Consultant CELCE) the final report are listed below. Team leaders with contributions from David Bassini Ortiz benefited from contributions from Zeinab Partow, (Consultant, CELCE) and Jose Ernesto Lopez (Lead Economist, CERCD), Natsuko Toba Cordova (Lead Economist, ETIIC). Peer review (Economist, CERCD), Elleanor Robins (Senior comments provided by Sunita Varada (Senior Investment Officer, CNGBU), Victoria Tetyora Private Sector Development Specialist, EECF2). (Associate Operations Officer, CEUA1), Vyacheslav Hordiyenko (Investment Officer, CN2UA), The section on tourism was prepared by Ivan David Bassini Ortiz (Consultant, CELCE), Oleg Liptuga (President of the National Tourism Kudashov (Senior Investment Officer CTAPU), Organization of Ukraine, and Consultant, Anna Zvolikevych (Consultant, CELCE), Iryna CELCE) with contribution from Victoria Tetyora Bondarenko (Consultant, CELCE), Svetlana (Associate Operations Officer, CEUA1) and Jose Ignatiuc (Program Assistant, CEUPK), Tatyana Ernesto Lopez Cordova (Lead Economist, ETIIC). Taran (Program Assistant, CEUVN), Tessa Peer review comments from Warren Paul Mayes Coronado Ulloa (Executive Assistant, CELCE), and (Lead Social Development Specialist, SSAS2) Milda Brazyte (Temporary, CEUVN). Zuzana Stanton-Geddes (Senior Disaster Risk Management Specialist, SCAUR), Alanna Simpson John Graham (Principal Industry Specialist (Lead Disaster Risk Management Specialist, CNGTR) contributed the work on deferred SCAUR) and Ellen Hamilton (Lead Urban payment structure. Jemima Sy (Lead Public Specialist, SCAUR) are gratefully acknowledged. Private Partnership Specialist, IPGPP) advised on PPP related issues. The introduction and The section on transport was prepared by a team the chapter on cross cutting issues benefited led by Olena Chernyshova (Consultant, CN2UA) from contributions from Florian Blum (Senior including Iryna Bondarenko (Consultant, Economist, EECM2), and peer review from CELCE), Karlygash Dairabayeva (Consultant, Omar Chaudry (Manager, CDII), Laurence CELCE), with extensive inputs from Elleanor Carter (Senior Advisor, CNGDR), and Karlis Robins (Senior Investment Officer, CNGBU), Smits (Lead Country Economist, EECDR). All Oleg Kudashov (Senior Investment Officer, comments are gratefully acknowledged. CTAPU), Sergey Mytarev (Principal Investment Officer, CNGTR). Peer review comments from The section on agriculture was prepared by Sergiy Sevara Melibaeva (IBRD-INF, Lead Transport Zorya (Lead Agriculture Economist, SCAAG) and Specialist, Program Leader, IECDR), Gregoire F. David Bassini Ortiz (Consultant, CELCE) with Gauthier (Senior Transport Specialist, IECT1), contributions from Oleg Nivievskyi (Kyiv School Simon David Ellis (Consultant, IECT1), Dominic of Economics, Consultant, CELCE) Oksana Varodi Pasquale Patella (Senior Transport Specialist, (Principal Investment Officer, CM2UA) and Marta IECT1), and Daniel Pulido (Lead Transport 33 ANNEX A: TECHNICAL TEAM AND CONTRIBUTING REVIEWS Specialist, IECT1), are gratefully acknowledged. The section on energy and extractives was The section on health was prepared by prepared by Natsuko Toba (Economist, CERCD) Luka Voncina (Consultant, CELCE), Aknur and Anna Zvolikevych (Consultant, CELCE). Jumatova (investment officer, CTAPU) and Peer review comments from Silvia Martinez Karine Bachongy (Principal Investment Romero (Lead Energy Specialist, IECE1), Koji Officer, CTAPH). Nishida (Senior Energy Specialist, IECE1), Roman Novikov (Energy Specialist, IECE1), The section on education was prepared by Manuel Berlengiero (Lead Energy Specialist, Juliana Guaqueta Ospina (Senior Education IECE1), are gratefully acknowledged. Specialist, CHEGE) and James Gresham (Senior Education Specialist, HECED). The section on telecommunication, postal and broadcasting services was prepared by The section on finance and banking was Natsuko Toba (Economist, CERCD) and Anna prepared by Rustu Harun Ergunes (Consultant, Zvolikevych (Consultant, CELCE). Peer review CELCE) Levent Karadayi (Senior Economist, comments from Sevara Melibaeva (IBRD-INF, CELCE) and Zarina Odinaeva (Operations Lead Transport Specialist, Program Leader, Officer, CEUA1). Peer review comments and IECDR) are gratefully acknowledged. advice from Johanna Jaeger (Senior Financial Specialist, EECF2) and Yevhen Hrebeniuk The section on water and sanitation was (Senior Financial Sector Specialist, EECF2) and reprepared by Irina Capita (Consultant, Umedjan Umarov (Senior Investment Officer CELCE) Peer review comments from Ellen CF258) are gratefully acknowledged. Hamilton (Lead Urban Specialist, SCAUR) are gratefully acknowledged. The section on pensions was prepared by Oleksandr Panchenko (Consultant CELCE). The section on irrigation was prepared by Peer review comments from Oleksiy (Alexi) David Bassini Ortiz in consultation with Ranu Sluchynskyy (Senior Social Protection Specialist, Sinha (Senior Water Resources Management HMNSP) are gratefully acknowledged. Specialist, SCAWA). The report was edited by Sean Lothrop, The section on housing was prepared by Colleen Oscar Parlback and Lesley Rogers Butcher-Gollach (University of Melbourne (Consultants, CELCE). Victoria Tetyora and Consultant, CELCE) and Victoria Tetyora (Associate Operations Officer, CEUA1) (Associate Operations Officer, CEUA1), with led the consultations with the government contribution from Johannes (Han) Herderschee of Ukraine. Cybil Maradza (Consultant, (Senior Economist, CELCE). Peer review CELCE) designed the layout of the report for comments from Ellen Hamilton (Lead Urban publication. Christopher Vellacott (Senior Specialist, SCAUR) are gratefully acknowledged. Communications Officer, CCOCO), Brian Beary (Communications Officer, CCOCO) The section on municipal services was prepared by and Irina Sarchenko (Communications Officer, Colleen Butcher-Gollach (University of Melbourne CCOCO) reviewed the document prior to and Consultant, CELCE). Peer review comments publication. Kateryna Chechel (Operations from Ellen Hamilton (Lead Urban Specialist, Officer, CEUPK) prepared the documentation SCAUR) are gratefully acknowledged. for dissemination. 34 VOLUME 1: PRIVATE SECTOR OPPORTUNITIES FOR A GREEN AND RESILIENT RECONSTRUCTION IN UKRAINE REFERENCES Amelin, A. A. Prokip and A. Umland 2020. The Forgotten Potential of Ukraine’s Energy Reserves. October 10, 2020. Harvard International Review. https://hir.h kraineedu/ukraine-energy-reserves/. APK-Inform. n.d. bne IntelliNews 2023. Ukraine’s first biomethane plant connects to gas network. April 17, 2023. https:// www.intel krainecom/ukraine-s-first-biomethane-plant-connects-to-gas-network-276013/. Castalia. 2023. Pre-war markets in the key infrastructure sectors in Ukraine. Unpublished draft. CEE Multi-Country News Center 2022. Ukrenergo: we couldn’t survive without the cloud. December 12, 2022. 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