Post-war Reconstruction of Economy: Case Studies

Post-war Reconstruction of Economy: Case Studies KPMG in Ukraine © 2022 KPMG-Ukraine Ltd., a company incorporated under the Laws of Ukraine, a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. Content 01 Executive Summary 02 The Economic Impact of Wars: Insights from the past 03 Russia’s invasion of Ukraine put the global economy at a spot of stagflation 04 Impact of the war on Ukraine – damage assessment in different spheres 05 How other countries assessed their damages? 06 How other countries financed reconstruction and rebuilding? 07 How were the reconstruction funds managed and organized? 08 Building back the economic resilience: Lessons from Countries That Rose from The Ashes of War © 2022 KPMG-Ukraine Ltd., a company incorporated under the Laws of Ukraine, a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. 3 Foreword The escalation of the eight-years conflict between Russia and Ukraine following the full-scale invasion of Ukraine at the end of February resulted in a rise in inflation while exacerbating supply chain pressures globally. The impact of the sanctions on Russia and the uncertainty around the supply of some key commodities from Russia and Ukraine was particularly felt in Europe and few other countries which used to have some of the strongest trade connections with both countries. The Russian invasion continues to cause massive destruction of Ukraine’s infrastructure – including water supply, sanitation, mobile and electricity networks thereby further endangering the Ukrainian citizens. According to a recent economic update by the World Bank, Ukraine’s economy is projected to shrink by 35 percent by the end of 2022. It is also expected that the number of people living in poverty in Ukraine will rise to around 25 percent by the end of this year, compared to 2 percent prior to the war. The World bank in collaboration with the Government of Ukraine and the European Commission have published an analysis of Ukraine’s reconstruction and recovery needs in the form of Rapid Damage and Needs Assessment (RDNA), which estimates the total cost to be $349 billion as of 1 June 2022. This figure is growing as the war continues. The Government of Ukraine with the support of international organizations like the World Bank, the European Union, and the European Bank for Reconstruction and Development (EBRD) as well as countries like USA, UK and others are committed to help Ukraine recover from the crisis and mitigate the economic and human cost of war. Since February 2022, the World Bank has mobilized around US$13 billion in financial support to Ukraine, of which about US$11.4 billion has been disbursed to date. The WB financing, supported by UK, the Netherlands, Denmark, Latvia and Lithuania of US$5.8 billion was mobilized under the Public Expenditures for Administrative Capacity Endurance in Ukraine (PEACE) Project, which supports continued government capacity, including the provision of core public services such as health, education, pensions and social protection. A strong collaboration among these stakeholders goes a long way to maintain the powerful message of hope of a better future to all the Ukrainian citizens. The report takes cues from the recovery and reconstruction efforts carried out in other war-torn economies such as Syria, Kosovo, Iraq, Croatia, and Kuwait and offers a robust analytical underpinning for a thorough financial and operational strategy and keen to help Ukraine's early recovery and longterm reconstruction. Ukraine must balance and prioritize needs and investments, explore financing options, develop standard systems and procedures to maximum efficiency, ensure the growth of the managerial and technical capacity of implementation units, raise funds for project preparation and create financial strategies for various economic sectors. On other hand, the scale of destruction and financial needs for reconstruction will require a comprehensive and complex coordination mechanism between different actors (IFIs, countries and alliances) that is still in development process. When prepared, all these efforts will truly catapult Ukraine on a path of inclusive, accountable, and sustainable reconstruction and recovery. Dmytro Romanovych Director, ESG Services, Government Relations, International Development Assistance Services KPMG in Ukraine © 2022 KPMG-Ukraine Ltd., a company incorporated under the Laws of Ukraine, a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. 4 01 Executive Summary © 2022 KPMG-Ukraine Ltd., a company incorporated under the Laws of Ukraine, a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. 6 1 Executive Summary Impact of Russia’s invasion of Ukraine on the global economy Ukraine’s road to recovery War-induced damages sustained by Ukraine The war disrupted global production and trade of commodities across multiple sectors •The war is estimated to have impacted more than 600,000 businesses globally and could slow down the global economic growth by 0.8 percent by the end of 2022 as compared to 2021. •The global economy was impacted due to disruptions in production capabilities of both the countries and global supply chains which in turn created a scenario of global inflation. Impact on global production • Due to the war, manufacturers across multiple sectors halted operations in Ukraine as well as Russia. • For instance, automobile manufacturer, Volkswagen, suspended operations in Russia, while automobile parts manufacturer, Sumitomo, shifted production from Ukraine to Romania and Morocco. Disruption of global supply chains • Blocking of Ukraine's Black Sea ports and diversion of cargo ships away from Ukrainian ports resulted in supply chain disruptions. • As a result, raw material supplies to car manufacturers all over the world were disrupted. • Fertiliser supplies were also majorly impacted. Rise in commodity prices and inflation • The war made the biggest impact to commodity markets in nearly 50 years in countries where Ukraine and Russia used to be the major exporters. • With an increase of 154.5 percent, fertiliser prices witnessed the highest increase amongst all the commodities between January-March 2022. • Prices of coal also shot up by 74.7 percent . US$252 billion • The value of total damages and losses due to the war is estimated to be US$252 billion. •It is further estimated that reconstruction and rebuilding cost could amount to more than US$349 billion. US$127 billion • The damages due to destruction of residential and non-residential buildings as of September 2022 is US$127 billion. •Between June and August, the war caused damages worth US$31.5 billion. 4.8 million • Total number of jobs lost in Ukraine since February is 4.8 million. •In the event of the war continuing, even more citizens could lose their jobs and millions could be pushed into poverty, which could counteract the country’s development efforts. © 2022 KPMG-Ukraine Ltd., a company incorporated under the Laws of Ukraine, a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. 7 Ukraine may follow a similar damage assessment methodology as other war-torn countries followed in the past Key sectors necessary to be included for damage assessment projects 1. Identification of priority sectors •Priority economic sectors identified based on the population impacted, factors of production (labor, capital, raw materials and the market for management or entrepreneurial resources), manufacturing capabilities, manufacturing capabilities, exports, imports, contribution to GDP etc. 2. Assessment of damages and losses •Assessment of damages and losses across the identified priority sectors. • The losses take into consideration the changes in economic flows into the sectors owing to the war. 3. Estimation of damages, loses and qualitative impacts •Each sector specified recovery needs are established which includes the cost of reconstruction of the destroyed assets. Education Agriculture Trade Energy Healthcare Housing Infrastructure © 2022 KPMG-Ukraine Ltd., a company incorporated under the Laws of Ukraine, a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. 8 Damage assessment approach adopted by Syria and Kosovo Assessment approach in Syria Assessment approach in Kosovo Role of international organisations and other countries in rebuilding economies of war-torn countries International organisations also play a key role in supporting war-torn countries through monetary, social, and humanitarian aid. As these aspects take a back-seat during the course of armed conflicts, their impact sets in during the later stages of the war, placing the country in a rather desperate situation. Remote-based assessment Six governances and five sectors assessed Three-phased assessment •Selection of assessment area: Damage assessment was carried out across six governorate capitals which were selected primarily based on population size. •Identification of priority sectors: Five priority sectors included housing, health, education, transport, and energy. •Three phases of assessment: Pre-war baselines were established in the first phase and in the subsequent phases, quantitative damage assessment was carried out. Assessment of 14 municipalities conducted Priority sectors identified On-ground data collection •Finalization of assessment area: Initially,14 municipalities were identified for assessment and later when other areas became accessible, 15 more municipalities were assessed. •Identification of strategic sectors: Key strategic sectors were identified which included housing, healthcare and educational infrastructure, transport, water supply and rural electricity. •Categorization of damage level: Based on the level of damages, educational and healthcare facilities were categorised into four groups. © 2022 KPMG-Ukraine Ltd., a company incorporated under the Laws of Ukraine, a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. 9 War-ravaged countries, in the past have also received aid from other developed countries which played a significant role in the recovery and reconstruction processes. The World Bank The World Bank maintains a rather non-political stand and focuses on redeveloping the economy of a war -torn country by prioritising the financial operations of the country through steps such as investment project financing, development policy financing and Program -for-results financing. International Monetary Fund The International Monetary Fund also operates in a similar fashion similar as the World Bank by providing loans to countries in need at concessional rates. The organisation also aids in the stabilisation of inflation, growth of GDP and stabilise the falling local currency . European Bank for Reconstructio n and Development (EBRD) EBRD’s Resilience and Livelihoods Framework provides assistance to the countries directly affected by war. It focuses on energy security, restoring municipal services and livelihoods for displaced persons, trade finance, and provision of liquidity for small and medium sized enterprises. The Bank has committed up to EUR3 billion over 2022 -23 to help restore Ukraine’s businesses and keep the economy functioning. Role of organisations in reconstruction In accordance with its United States Foreign Aid program, the US provides aids to its ally countries in form of financial and humanitarian sources. Of late, the middle east countries have been the largest recipient of financial aid by the US. Iraq received an aid of US$2.5 billion for humanitarian services in 2003 owing to the war it witnessed. This was followed by an aid of US$20.9 billion over a period of three and a half years for Iraq's reconstruction. USAID The European Union (EU) adopts an integrated approach to rebuilding a country affected by wars and crises. It is involved at all stages of a war, from prevention to crisis management and immensely contributes to sustainable peace. The EU works in close coordination with the member states and effectively combines war prevention, mediation, and peacebuilding. The EU pledged $US166 million to Iraq since 2016. It is committed to supporting stabilization efforts, bolstering the anti-corruption agenda and strengthening local institutions. European Union (EU) © 2022 KPMG-Ukraine Ltd., a company incorporated under the Laws of Ukraine, a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. 10 Ukraine can derive insights from the recovery and reconstruction programs of similar war-torn countries Although war-torn countries receive aid to overcome the consequences of a war, the journey to becoming a self-reliant nation is a multi-staged and time consuming process. Croatia’s Social and Economic Recovery Project (CSERP) Community Investment • The phase focused on funding goods, works and services for in-demand projects in the Croatian region Demining • Under the National Mine Action Plan, the stage focused on removing any land mines that had not detonated yet Institutional Development • This stage focused on funding consulting services, equipment and capacity building for central, regional, and local authorities Program Management • This segment of the program focused on addressing social cohesion and economic revitalisation 01 02 04 03 Bosnia and Herzegovina’s recovery program Emergency Farm Reconstruction Project Water, Sanitation, and Solid Waste Urgent Works Project Emergency Transport Reconstruction Project Emergency Education Reconstruction Project Emergency Recovery Project Essential Hospital Services Project Emergency Housing Repair and Reconstruction Project Emergency Electric Power Reconstruction Project Priority Reconstruction Program © 2022 KPMG-Ukraine Ltd., a company incorporated under the Laws of Ukraine, a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. 17 2.3 Debt and war have been the closest partners Just as a natural calamity leaves debris and destruction in its aftermath, war leaves behind debt in its wake. Since war entails a huge budget, there are times when a government does not have enough money to sustain it. In such a scenario, they end up borrowing from another country to finance it, leading to debts. Other methods of financing wars internally do exist such as increase in taxation and borrowing through issue of war bonds. However, these methods exhibit more negative consequences compared to borrowing. Increase in taxation would present citizens with reduced purchasing power and ability to invest, thus raising a rather anti-war sentiment in the nation. Borrowing on the other hand through the issue of war bonds, although effective, requires a rather larger time frame for the government to gather the funds through the purchase of these bonds. An increase in the influx of cash into the financial system of the country by printing more money would help finance the war in the short run. However, it is strongly likely that the country would soon plunge into a state of inflation. This would prove to be a catastrophe for a newly developing economy. Owing to such constrains, borrowing from other countries has been the one of the much sought after methods for countries engaging in war. 14% Yemen’s unemployment rate after the inception of Yemeni civil war US$15US$42 Oil price surge in 1990 after Iraq-Kuwait war 50% Decrease in industrial production in 1991 in Yugoslavia due to civil war US$975 billion Money spent by the US in the Afghanistan war 15% Highest GDP in tax revenue after the Burundian war 40.7% Food price spike in Ethiopia due to the Tigray war © 2022 KPMG-Ukraine Ltd., a company incorporated under the Laws of Ukraine, a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. 18 Countries have been plagued by war-induced debt in the past11,12, 13,14,15 Figure 1: Debts on account of the wars fought by the US, UK, Spain, and Iraq Wars not only affect the involved countries, but also have a global outreach in terms of inflation, debt, high unemployment and missed opportunities that could have been used to boost the economy. In the most recent times, the Russian invasion of Ukraine has a wider impact on the countries across the globe. It has sparked a global chain reaction of events where we are now witnessing a global economic stagflation with spike in commodity prices and unemployment. 11 “Vietnam to Repay U.S. for Loans to South”, Los Angeles Times, April 1997. Link 12 “Default, Rescheduling and Inflation: Public debt crises in Spain during the 19th and 20th centuries”, Core, May 2012. Link 13 “Tracing Iraqi Sovereign Debt Through Defaults and Restructuring”, London School of Economics and political science, December 2019. Link 14 “300 years of national debt”, Gather, May 2017. Link 15 “National Debt: 1950s–1960s”, Sutori.com. Link UK UK was pushed into a debt of nearly US$161 million in 1985 due to the Falklands war (1982– 85), a 46.5% increase in debt from 1980 US The US was pushed into a debt of nearly US$533 million after the Vietnam war (1955 –1975), a sharp 107% increase from the beginning of 1950s Iraq Iraq's debt to GDP ratio grew from 2.8 in 1985 to nearly 4.2 in 1990 to nearly 11 in 1995 after the Iraq–Kuwait war (1990– 1991), a 293% increase in debt from 1985 National debt to GDP ratio for Spain increased from nearly 60% in 1930 to nearly 72% in 1942 after the Civil war (1936–1939) Spain © 2022 KPMG-Ukraine Ltd., a company incorporated under the Laws of Ukraine, a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. 19 03 Russia’s invasion of Ukraine put the global economy at a spot of stagflation © 2022 KPMG-Ukraine Ltd., a company incorporated under the Laws of Ukraine, a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. 20 3 Russia’s invasion of Ukraine put the global economy at a spot of stagflation On 24 February 2022, Russia invaded Ukraine in a major escalation of the Russo-Ukrainian War that began in 2014. The invasion caused Europe's largest refugee crisis since the World War II, with currently over 7.9 million Ukrainians16 seeking refuge and one-third of the country’s population being displaced. The crisis put wider implications for the global trade and development as both the countries had a strategic importance in terms of supplies of food, energy, and certain industrial inputs. The global economy is expected to slow further in 2023 as the massive and historic energy crisis continues to put inflationary pressures, decrease household purchasing power and increase risks worldwide. The global economy is projected to grow well below the outcomes expected before the war – slowing to 2.2 percent in 2023 and recovering moderately to a still sub-par 2.7 percent in 2024.17 3.1 Disruption of the global supply chains and trade of commodities18, 19, 20, 21, 22, 23, 24 The Russia-Ukraine war impacted more than 600,000 businesses across the globe as both the countries were not only the leading suppliers of oil, gas, wheat, corn, sunflower seed, fertilizers, semifinished iron products, but also critical components such as neon gas for chips manufacturers25 and other staples26. 16 “Refugees from Ukraine recorded across Europe”, UNCHR, Link 17 “Russia’s war of aggression against Ukraine continues to create serious headwinds for global economy, OECD says”, OECD, Link 18 “European market outlook worsens, LMC Auto Blog, Link 19 “War in Ukraine adds to food price hikes, hunger in Africa”, AP News, Link 20 “Ukraine war squeezes food supplies, drives up prices, threatens vulnerable nations”, United Nations News, Link 21 “Ukraine war is upending central Europe's post-COVID car revival”, Automotive News Europe, Link 22 “Impact of Ukraine-Russia War on European Steel Market”, Beroeinc, Link 23 “Ukraine War Hits Farmers as Russia Cuts Fertilizer Supplies, Hurting Brazil”, The Wall Street Journal, Link 24 “How the War between Russia and Ukraine Might Affect Your Dinner in Latin America and the Caribbean”, Inter-American Development Bank, Link 25 “ Exclusive: Russia's attack on Ukraine halts half of world's neon output for chips”, Reuters, Link 26 “The Ukraine-Russia War’s Impact On The Supply Chain: Why MRO Optimization Is A Top Priority”, Forbes, May 2022. Link •Disruption of key transport Russian and Ukrainian routes connecting Asian and European markets •Restrictions on air space •Blockades and occupation of Ukraine’s Black Sea ports leading to fewer routes for Ukraine’s commodity exports, especially food •Diversion of cargo ships from Ukrainian ports to other destinations such as Constanţa, Romania, Tripoli, Lebanese Republic, Piraeus, and Greece due to increased risk •Unavailability of shipping crew to board and disembark •Lesser availability of merchant ships due to spiralling insurance costs • Reduced supply of inputs to the car manufacturers, especially electric wiring. The light vehicle sales forecasts in Europe were cut by 2 million units per annum over the next two years •Fewer grain shipments over longer distances leading to food shortages and price hikes •Cessation of iron and steel shipments leading to upward pressure on prices •The choking of fertiliser supplies to some of the world’s major agricultural producers What led to the supply chain disruptions? What was the impact? •Germany, Poland, Czech Republic, Hungary, Romania •Mauritania, Lebanese Republic, Congo, Somalia, Tanzania, Turkey, Egypt, Madagascar •UK, European Union, Belarus, Kazakhstan, Kyrgyzstan •Brazil, Peru, Ecuador, Suriname, Honduras, Costa Rica Countries majorly impacted © 2022 KPMG-Ukraine Ltd., a company incorporated under the Laws of Ukraine, a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. 21 3.2 Disruption in the production capacities27,28,29,30,31,32,33,34, 35 Leading manufacturers either paused or closed operations amid the hostile situation and infrastructure losses 3.3 Higher commodity prices drove global inflation Russia's invasion of Ukraine delivered the biggest shock to the commodity markets in nearly 50 years, with a disruption in the production and trade of several commodities including energy, fertilizers, and food grains. With an increase of 154.5 percent, fertilizers witnessed the highest price increase amongst all the commodities within the three-month period between January-March 2022. 27 “These are all the automakers that have pulled out Russian operations”, Techcrunch, Link 28 “Ukraine invasion hampers wire harness supplies for carmakers”, Reuters, Link 29 “Companies shut Ukraine plants in face of Russian invasion, putting supplies of goods from beer to cars to candy bars at risk”, Fortune, Link 30 “Bottler Coca-Cola HBC shuts Ukraine plant”, Reuters, Link 31 “Food Companies, Long Symbols of the West in Russia, Pause Operations”, The New York Times, Link 32 “Major Chemical Makers Halt Investments in Russia”, Powder & Bulk Solids, Link 33 “Ukrainian Entrepreneurs Struggle To Save Their Employees As War Threatens To Crush Their Businesses”, Forbes, Link 34 “Agriculture Giants Shut Ukraine Operations”, The Wall Street Journal”, Link 35 “Farm-machinery companies pull out of Russia”, Agri-View, Links Auto •Prominent automakers such as Volkswagen, Audi, Toyota, Daimler, Volvo, and Ford suspended their production operations and businesses in Russia. •The manufacturers of wire harnesses and other auto parts such as Sumitomo moved their production to Romania. Leoni, a company operating in the similar industry temporarily shut down its operations in Ukraine. It has, however resumed operations recently. Food and Beverages •McDonald’s, Starbucks, PepsiCo and Coca-Cola either closed their locations or stopped selling products in Russia. •The consumer goods companies such as AB InBev transferred its operations to Romania while the profits were being transferred to Ukraine, while Coca Cola resumed their beverage production in Ukraine in May. Chemicals and Pharmaceuticals •Major chemical industry players such as BASF, LyondellBasell, Clariant and Solvay halted operations and refrained from making further investments in Russia. •Companies such as Biosphere partially relocated its operations to other western European countries and planned on duplicating production abroad to work in foreign markets. Agriculture •Several global farm-machinery companies such as John Deere, Lely, and Caterpillar Inc. have closed their operations in Russia. •Companies such as Archer Daniels Midland, Bunge, CHS Inc., the giants in crop processing and trading, shipping and retail either stopped operating its facilities or suspended operations. © 2022 KPMG-Ukraine Ltd., a company incorporated under the Laws of Ukraine, a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. 22 Figure 2: Commodity price changes in countries where Russia and Ukraine were the key exporters (%), January-March 202236 Note: LNG stands for liquefied natural gas 3.4 Global impact of the war on key sectors 3.4.1 Food37 In relation to food, there were production and export challenges, associated with reduced raw material availability and price rises (food import bills are at record levels). Moreover, lower-income countries were significantly impacted with rising prices as they were heavily dependent on the wheat from Russia and Ukraine prior to the war. Figure 3: Combined share of Ukrainian and Russian imports of wheat in the total imports of wheat by the top 5 countries (%), 2019 36 “Commodity prices surge due to the war in Ukraine”, World Bank Blogs, Link 37 “The Crisis in Ukraine: Implications of the war for global trade and development”, World Trade Organization, Link 154.5 74.7 60.5 51.7 50 35.1 34.1 33.2 32.1 29.9 22.8 21.3 Potassium chloride Coal Wheat, US, SRW Nickel Natural gas, Europe Brent DAP Soybean oil Palm oil Wheat US, HRW LNG Japan Maize 87 73 53 52 49 050 100 Lebanese Republic Egypt Tunisia UAE Uganda • Africa and the middle east bore the brunt with imports of over 50 percent of their cereal needs coming from Ukraine and/or Russia. • Higher prices of wheat, sunflower, corn due to shortages. • Mounting pressure on the dependant countries to find other alternative sources of supplies. • The prices of substitute food products were expected to increase even if not exported by Russia and Ukraine, to fill the gap of the regular cereal imports. • Risk of social unrest, in low food security nations (for instance, Lebanese Republic). • Scenarios of undernutrition were anticipated in some of the dependant countries (for instance, Sub-Saharan Africa). © 2022 KPMG-Ukraine Ltd., a company incorporated under the Laws of Ukraine, a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. 23 3.4.2 Semiconductor Prior to the war, Russia and Ukraine were the major producers of neon and palladium used in semiconductor manufacturing. Ukraine supplied about 70 percent of the global neon gas38 while Russia catered to about 25-30 percent of the world’s palladium supply39. Figure 4: Share of Ukrainian exports of neon in the top 5 countries (%), 2021 Figure 5: Share of Russian imports in the total imports of palladium by the top 5 countries (%), 2019 3.4.3 Metallurgy and mining40, 41 Russia accounted for 4.6 percent of the global iron and steel exports while Ukraine was responsible for 2.2 percent of the steel shipments globally, prior to the war. Figure 6: Share of Russian imports in the total imports of steel by the top 5 countries (%), 2019 38 “Russia's Invasion of Ukraine Impacts Gas Markets Critical to Chip Production”, Centre for Strategic and International Studies”, Link 39 “Russia's Invasion of Ukraine Impacts Gas Markets Critical to Chip Production”, Centre for Strategic and International Studies”, Link 40 “The Crisis in Ukraine: Implications of the war for global trade and development”, World Trade Organization, Link 41 “Europe battles to secure steel following Russia’s invasion of Ukraine”, Financial Times, Link 41 28 14 7 3 020 40 60 United States South Korea Moldova Taiwan Japan 93 56 45 45 43 050 100 Indonesia Canada Italy Japan United States 50 46 43 39 32 020 40 60 Moldova Latvia Senegal Armenia Egypt • The global palladium prices soared by about 80 percent in March 2022 – an alltime high due to the financial sanctions on Russia. • The shortage in the supply of palladium vastly impacted the global automotive industry with leading automakers such as Mercedes, BMW and Volkswagen suspending production. • Ingas and Cryoin, Ukraine’s top neon producing companies halted production. • The suspension created a doubt over the worldwide output of chips, already in short supply after the COVID-19 pandemic. The shortage impacted the manufacturing of electronics, cars, computers, phones, new airplanes. • Russia and Ukraine accounted for 20 percent of the EU imports of finished steel products. The war disrupted the supplies and forced customers to source products from elsewhere. • The global prices of steel skyrocketed amid high demand and supply chain issues, along with imposed sanctions against Russia. © 2022 KPMG-Ukraine Ltd., a company incorporated under the Laws of Ukraine, a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. 24 3.4.4 Fuel 42,43,44,45 ,46,47 Russia was a significant supplier of crude oil to many countries in the EU. But due to barring of Russian crude oil by European refiners post Russian invasion of Ukraine, the Russian crude oil import dropped by 554,000 barrels per day(bpd) from 2.0 million bpd in March to 1.5 million bpd in May. Figure 7: Volume of Russian crude oil imports in the EU countries and China (in million barrels daily), 2021 42 “Export volume of crude oil from Russia in 2021 by major countries of destination”, Statista, Link 43 “Rystad: Russian crude oil diverted from Europe to India & China as war rebalances trade flow”, Offshore Energy, Link 44 How much of your country’s oil come from Russia”, Aljazeera, Link 45 “China May oil imports from Russia soar to a record, surpass top supplier Saudi”, Reuters, Link 46 “Data” In 2021-22 USA at 4th and Russia at 9th in India’s crude oil import”, Factly, Link 47 “India's Russian oil imports jump over 50 times since April: Official”, Business Standard, Link 0.6 0.5 0.3 0.3 1.4 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 Netherlands Germany Belarus Poland China • Countries such as Belarus, Cuba, Curacao, and Latvia, were importing 99 percent of their crude oil from Russia in 2019. • Ban on Russian oil imports created fuel price hike and challenge of meeting fuel demand, especially in these countries. • With deep discounts following the war, India and China emerged as the biggest buyers of Russian crude oil. China's crude oil imports from Russia rose 55 percent from a year earlier to a record level of 8.42 million tonnes in May 2022, displacing Saudi Arabia from the top of the list of suppliers. • India’s net crude oil import from Russia increased over 50 times in June since April. The Russian crude oil, which accounted for a meagre 0.2 percent of all the oil imports by India increased to 10 percent in April. © 2022 KPMG-Ukraine Ltd., a company incorporated under the Laws of Ukraine, a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. 25 04 Impact of the War on Ukraine – damage assessment in different spheres © 2022 KPMG-Ukraine Ltd., a company incorporated under the Laws of Ukraine, a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. 26 4 Impact of the War on Ukraine – damage assessment in different spheres 4.1 The production capabilities took a big hit The impact of Russia's invasion of Ukraine has been beyond just the human suffering. About 53 percent of the country's GDP used to be generated by the war affected regions (including the capital of Kyiv). One-third of the country's industrial and agricultural production and about a quarter of the total exports came from what are now war zones. According to the International Monetary Fund (IMF), Ukraine's economy will slowdown by 34.5 percent in the first quarter of 2023. The economic recovery will commence with a 6 percent growth in the second quarter; and 11.9 percent and 21 percent in the third and fourth quarters respectively.48 4.1.1 The war has reached deep into the fertile plains of the country49 The agriculture sector of Ukraine is of strategic importance to the country’s economy since it provides livelihoods to approximately 13 million Ukrainians residing in the rural areas. 50 Prior to the conflict in February 2022, the sector accounted for 11 percent of the country’s GDP, 20 percent of its labour force, and nearly 40 percent of the total exports51. As of June 1, 2022, Ukraine already witnessed direct damages worth over US$97 billion. Housing, transport, and commerce and industry were found to be the most affected sectors. The Government of Ukraine, the World Bank Group, and the European Commission in cooperation with development partners, launched a Rapid Damage and Needs Assessment (RDNA) which reported total losses amounting to US$252 billion. The damages and losses caused in Ukraine due to war is estimated to cost around US$349 billion for reconstruction and recovery, which is more than 1.6 times the GDP of Ukraine in 2021. Figure 8: Estimated damages in Ukraine by sectors (US$ billion), as of June 1, 2022 Note: The World Bank’s Rapid Damage and Needs Assessment (RDNA) team has defined damages as direct cost of destroyed or damaged physical assets. 48 “The IMF expects a fall in Ukraine’s GDP in the fourth quarter of 2022 by 40.5% y/y”, GMK Center, Link 49 “Ukraine Rapid Damage and Needs Assessment, August 2022”, World Bank, Link 50 “Agriculture Fact Sheet”, USAID, Link 51 “Agriculture Fact Sheet”, USAID, Link 39 30 10 3 3 2 2 2 010 20 30 40 50 Housing Transport Commerce and industry Eductaion Energy Agriculture Environment/forestry Municipal services © 2022 KPMG-Ukraine Ltd., a company incorporated under the Laws of Ukraine, a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. 33 5 How other countries assessed their damages? 5.1 Damage assessments done post-war The post-war environment in a country is complex and demanding as the most immediate task is to swiftly assess the humanitarian needs and provide life-saving relief assistance to the affected at the earliest. The country further requires a detailed assessment of the damages and destruction caused by the war and strategize a comprehensive recovery plan that would potentially lead the country back on a track of sustainable development. Being a mammoth task for any country, this requires support of several national and international organisations such as the World Bank Group, the European Union, United Nations Development Group, and International Monetary Fund. The assessments may range from the rapid assessment of immediate needs to the most elaborate assessment of long-term recovery and risk reduction requirements. An assessment is always backed by a discrete methodology, that brings clarity to the stakeholders as they plan the recovery phase. A detailed damage assessment study provides imperative data on several aspects66: Figure 12: Data provided by a detailed damage assessment A 3-step approach to carry out a detailed damages and needs assessment studies The first step to a damage assessment study is to identify the priority economic sectors of the country. The priority sectors may vary from country to country, based on certain conditions such as the population, factors of production (labor, capital, raw materials and the market for management or entrepreneurial resources), manufacturing capabilities, exports, imports, contribution to GDP etc. However, there are certain economic sectors that are largely common globally and have been integral part of the damage assessment studies carried out for the war-torn economies in the past. 66 “Damage Assessment”, Clermont County Ohio. Link Nature, scope and intensity of the event Identification of categories and seriousness of the disaster Individual and community impact Extent of impact on community and individual levels Additional resource needs The additional resources required to stabilize the situation Damage Assessment Disaster declaration and justification Proper declaration of disaster with an explanation Emergency information given to the public Relevant information given to the public from time –to–time to avoid panic induced crisis Future hazard addressal projects Relevant steps planned for future conflicts or hazards that may arise as an aftershock to the main event © 2022 KPMG-Ukraine Ltd., a company incorporated under the Laws of Ukraine, a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. 34 Figure 13: Important sectors which contribute to economy and thus important for damage assessment post a war The second step is to assess the damages and losses across the identified priority economic sectors. The losses take into consideration the changes in economic flows into the sectors because of the war, that occur until complete economic recovery and reconstruction is achieved. The third step involves the estimation of both damages and losses, as well as the qualitative impacts. The sector-specified recovery needs are established which includes the cost of reconstruction of the destroyed assets. The suggested sectoral priority interventions are then sequenced which includes the provision of services, improved specifications, and risk reduction measures. Estimates are made on a few other cross-cutting critical issues67 as well, such as: A two-tiered hybrid approach typically drives data collection, relying on both ground-based and remote-based data The data collection to a large extent depends on satellite imagery, supported by social media analytics and ground spot checks. However, the imagery usually lacks detail and finesse as it is strictly limited to what appears in the imagery frame. To add to this, security challenges on the ground also make it difficult for the damage assessment team to interact directly with the Government stakeholders, resulting in significant data collection delays. 67 Categorized by KPMG Global Services Housing Healthcare Energy Trade Agriculture Education Infrastructure Important sectors for war damage assessment Extent of damages to major industries Approximate time to reach pre-war GDP level Prioritization of reconstruction efforts Increasing the productivity levels of the nation Extent of infrastructural damage •Ground spot checks •Field assessments •Satellite imagery •Publicly available information •Social media analytics 1. Ground-based data 2. Remote-based data © 2022 KPMG-Ukraine Ltd., a company incorporated under the Laws of Ukraine, a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. 35 The data collected forms the cornerstone for the preparation of a needs and damages assessment. The assessment is then utilized to calculate the cost of recovery so that funds can be appropriately allocated to ensure faster and smoother recovery. The importance of damage assessment efforts can be further exemplified by analysing similar efforts in the aftermath of the wars in Syria and Kosovo. 5.1.1 Syria’s remote-based damage assessment68 The ongoing Syrian Civil war over the past seven years has left entire the Syrian cities in rubble. Syria’s Damage Assessment (DA) project was initiated to provide adequate relief to the regions based on the key analysis drawn from the assessment by the Syria Information and Research Initiative (SIRI) of the World Bank Group. The assessment was conducted in three phases, and covered six governorate capitals - Aleppo, Idlib, Dar’a, Hama, Homs, and Latakia. The objective was to provide information on the effects of the current crisis on population, physical infrastructure, and quality of service delivery in these cities. The rationale behind selecting the six cities was largely based on population size and one or more of the following criteria: Figure 14: Syrian cities selected for the damage assessment The emphasis was on five priority sectors of the Syrian economy The assessment involved the consolidation, processing and analysis of primary and secondary data collected for each of the priority sectors of the Syrian economy. The sectors were identified either based on the extent of damages or their vulnerability such that a need was felt for prioritisation in terms of protection and/or assistance. 68 “Syria Damage Assessment”, World Bank Group, March 2017. Link Extent of infrastructure damages Loss of basic resources such as food, water, and electricity Displacement of a large number of people Hama Idlib Aleppo Syria Cities selected for the damage assessment: • Aleppo • Idlib • Hama © 2022 KPMG-Ukraine Ltd., a company incorporated under the Laws of Ukraine, a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. 36 The assessment was conducted at three definite timeframes The assessment methodology The damage assessment was primarily based on the existing sources of secondary information. The data sources included remote sensing and satellite imagery; social media analytics; existing public information; and data obtained from the partner humanitarian agencies. The assessment methodology used a percentage-based model to deduce an approximate level of damages suffered by the various sectors and cities due to the absence of different sources for verification of the data. A four-point (or tier) rating system was established to give an accuracy rating against the data points discovered. Three key attributes were considered to determine the authenticity of the data. Priority sectors of the Syrian economy Process Energy •Initiatives: Phase 1 covered seven sectors including education, healthcare, water and sanitation, energy, transportation, and agriculture in the six cities. •Key findings: The assessment helped in establishing pre-crisis baseline data on assets and facilities and estimating damages across six cities and six sectors. Phase 1: The first assessment was conducted in December 2014 1 •Initiatives: This update covered six sectors which included education, health, water and sanitation, energy, transportation and housing and same cities as in Phase 1. •Key findings: The cumulative damage for all the six cities was estimated to be between US$5.9 billion to US$7.2 billion -Damages were estimated to have increased by 62 percent when compared to December 2014. Phase 2: An update of the Phase 1 assessment was conducted in March 2016 2 •Initiatives: The assessment covered the same sectors as those in Phase 2 (six sectors) but the geographical scope was limited to three cities – Aleppo, Idlib and Hama. •Key findings: As of February 2017, the total damages in the three cities – Aleppo, Idlib and Hama, was estimated to be between US$7.8 billion and US$9.4 billion -Aleppo was the most affected city, accounting for 80 percent of the total damages as of February 2017. Phase 3: The third assessment was conducted in October 2016 (updated in February) 3 © 2022 KPMG-Ukraine Ltd., a company incorporated under the Laws of Ukraine, a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. 37 Information verified by reputable organizations Visual evidence that is supported with imagery data or social media analytics Non-bias nature of the source of information For the cost of damage estimation, the average was calculated by taking into consideration the number of damaged facilities, their status (partially or fully destroyed) and the estimated pre-crisis unit cost for each of the assets based on the estimation of sectoral experts. The sectoral assessments Housing The damage assessment for the housing sector covered five asset classes: apartment buildings, popular housing (Sha’bi), villa, traditional arab homes (Dar’arabi), and country houses. The assessment only covers physical damages to the core housing structures and does not include the destruction of amenities inside the house, and losses resulting from looting. With approximately 58 percent of the total damage estimates, the housing sector was easily the most affected as was evident in the overall damage assessment. The stock of housing was categorized into three states: For the damage estimation, the average damage value was calculated based on the number of damaged facilities, their physical status (partially damaged or destroyed), and the estimated pre-war unit cost associated with each asset class. Costing of the assets impacted by the war The overall damage was subject to various factors including the percentage of damage repair already done and the conflict situation in the area which could cause a hindrance when trying to calculate the exact amount of damages done. Keeping these limitations in mind, the assessment was done using the percentage-based model and was found that the level of damages suffered was considerable. The losses and damages may be seen in Figure 15. Undamaged Partially damaged Less than 40% of the asset is damaged Completely destroyed More than 40% of the asset is damaged or the damage is structural Partially damaged assets 40% of the unit cost Destroyed assets 100% of the unit cost © 2022 KPMG-Ukraine Ltd., a company incorporated under the Laws of Ukraine, a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. 38 Figure 15: The cost of damages sustained in the three major cities (US$ million) The total range for low to high impact estimate for all cities falls in the range of US$4,509 million– US$5511 million. Aleppo was the worst impacted city based on the range and the very far difference from Idib and Hama cities as can be seen in Figure 15. Health The three cities of Aleppo, Idlib and Hama were surveyed to understand the damages sustained by this sector. After the assessment, the estimated damage was estimated to be between US$255 million - US$312 million, this was an increase from the Phase 1 and Phase 2 assessments conducted in 2014 and 2016 respectively. The city-specific cost of damages can be seen below: Figure 16: (a) Low damage city-specific estimates in the health sector (b) High damage city-specific estimates in the health sector (a) 0 1000 2000 3000 4000 5000 Aleppo Idlib Hama 4089 278 142 4998 339 174 Low impact estimates High impact estimates Total: US$254.91 million © 2022 KPMG-Ukraine Ltd., a company incorporated under the Laws of Ukraine, a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. 39 (b) Note: The high estimate is 10 percent higher than the estimated cost and the low estimate is 10 percent lower than the estimated cost From the figures above, it is clearly seen that Aleppo was by far the worst hit in the war with huge losses in the sector. Transport Information regarding the transportation sector was very limited for Syria making it difficult to establish a pre-crisis baseline for comparison. The country's roads were considered for the damage assessment and were compared based on the findings of the previous phases of assessment conducted as seen below: Figure 17: Comparison of different phases of the damage assessment for the transportation sector In phase 3b, the damage to bridges was also added to come up with an estimate. The totalled value for the three cities considered in phase 3b, Aleppo, Idlib and Hama, are provided in Figure 18. Total: US$311.55 million Phase 1 Aleppo, Daraa, Hama, Homs, Idlib and Latakia Phase 2 Aleppo, Daraa, Hama, Homs, Idlib and Latakia Phase 3a Aleppo, Hama and Idlib Phase 3b Aleppo, Hama and Idlib 18 (US$ million) 22 12 15 130 22 607 66 © 2022 KPMG-Ukraine Ltd., a company incorporated under the Laws of Ukraine, a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. 40 Figure 18: Comparison of different phases of the damage assessment for transport sector From the comparison above, Aleppo was observed to be the most severely affected city in terms of withstanding maximum damages suggesting a high intensity of war. Energy The intensity of damages done to the power sector infrastructure was covered for the three cities, namely, Aleppo, Idlib and Hama. The damage assessments were conducted in two steps: Step 1 Examining latest images for damage signatures Step 2 Using the publicly available resources and social media analytics 476 18 114 Aleppo Idlib Hama 0100 200 300 400 500 532 18 117 Aleppo Idlib Hama 0100 200 300 400 500 600 Low damage estimates (Phase 3b) High damage estimates (Phase 3b) The total figures for the estimates come out to be: • Low damage estimate: US$607 million • High damage estimate: US$667 million © 2022 KPMG-Ukraine Ltd., a company incorporated under the Laws of Ukraine, a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. 41 The results found after the analysis are as shown in Table 1. Table 1: Damage to different power sector facilities in the cities of Aleppo, Idlib and Hama Facility Classification Baseline Number (pre-crisis) Total damaged Completely destroyed Partially destroyed Power plant 4 4 2 2 Dam 1 0 0 0 Substation 27 14 3 11 Tower 765 77 68 9 Admin office 1 1 0 1 Total 798 96 73 23 From Table 1, It is evident that there were substantial damages to the power plants, substations, and admin offices as more than 50 percent of the facilities were damaged. Education The education sector took a big hit owing to this war. The estimates suggested that the damages ranged from US$169 million to US$207 million. A city-level damage assessment shown in Figure 19 underlines that Aleppo had the highest estimated damages followed by Idlib and Hama. Figure 19: Damage cost estimate ranges based on the assessment conducted in the cities From the overall sectoral damage assessments, it is evident that Aleppo took the hardest hit from the war among the three cities chosen for the Phase 3 of the assessment. 5.1.2 Damage assessment of the war in Kosovo The problems emanating from the Kosovo war were both widespread and numerous, despite only lasting for less than two years (February 1998 until June 1999). Along with the influx of refugees from the region, the war resulted in various unfortunate consequences which included damages to trade routes and transportation, an erosion of confidence in consumers and investors, weakened infrastructure and increased stress on the economy. The North Atlantic Treaty Organisation (NATO) had been leading a peace-support operation in Kosovo since June 1999 in line with the wider international efforts to ensure peace and stability in the region. Before the commencement of the NATO action, the European Commission sought the help of the International Management Group (IMG) to initiate an extensive damage assessment exercise 1.3 Low-end estimate(US$ million) Aleppo Hama Idlib 10 157 1.6 High-end estimate(US$ million) Aleppo Hama Idlib 13 192 © 2022 KPMG-Ukraine Ltd., a company incorporated under the Laws of Ukraine, a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. 42 in Kosovo. This assessment was finalized in February under which 14 damaged municipalities were assessed. Housing, transportation, healthcare, and educational facilities were among the priority sectors for undertaking a comprehensive damage assessment The comprehensive damage assessment identified the level of damages, the extent of assistance required for, and emergency measures required for the long-term reconstruction process. Few strategic sectors were identified for the entire exercise. Figure 20: Sectors taken into consideration The damage assessment methodology was driven by on-ground data collection The assessment exercise was carried out across the entire country of Kosovo. During the first phase of the assessment, 14 municipalities were visited by four IMG assessment teams in four-wheel drive (4WD) vehicles and the observed damages to infrastructure and housing was noted in the form of a report for future reference. As the conditions turned peaceful and the rest of the areas became accessible, another 15 municipalities were assessed to get a clearer picture of the damages. The different facilities have been allocated different categories to assess the level of damage as can be seen in Figure 21. Sectors considered Housing Infrastructure: Healthcare and Educational facilities Water supply Rural electricity Transport © 2022 KPMG-Ukraine Ltd., a company incorporated under the Laws of Ukraine, a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. 49 6.1.4 Role of European Commission in post-war reconstruction80 The European Commission works towards resolution of conflicts, maintain harmony and stability and address postcrisis situations across the globe. Rapid response actions are European Commission’s strategic approach to deal with short term crisis in post-war situation in fast and flexible manner. Various forms of approach include mediation, brokering, implementation of peace agreements, reintegration of civil mode of conducts and ensuring justice.81 The European Bank for Reconstruction and Development (EBRD) is a multinational development bank, established to help in rebuilding during post-war situations. It provides financial and technical support to member countries which includes 66 nations, the European Union and the European Investment Bank (EIB).82 80 “Topihematic Evaluation of European Commission Support to Conflict Prevention and Peace-building”, OECD, Link 81 “Conflict prevention, peace and stability”, European Commission, Link 82 “Coordination with the European Bank for Reconstruction and Development”, European Union, Link ILO’s aid to Kosovo During the 1999 war in Kosovo, apart from the political and economic crises, the region also suffered the impact of destruction of commercial activities, industrial complexes, public establishments, and population displacement. To improve the situation, the ILO partnered with the International organisation for Migration (IOM) to run trainings and workshops on employment and skill training of demobilized soldiers and other initiatives to train the youth of the region Key initiatives by the ILO Establishment of integrated economic development zones Reconstruction and extension of social protection Development of small and medium enterprises European Commission’s aid to Liberia During the period 2004-07, European Commission provided strategic support to Liberia to deal with post-war scenario. The strategy majorly focused on long-term strategies, with special focus on education sector. The European Commission’s volunteers ensured that the rehabilitation needs in wartorn Liberia were met. The Commission also contributed to UN Trust Fund for re-establishment by creating post-war livelihood opportunities and commence return of refugees. Key initiatives Financed more than 1,000 crisis response and conflict resolution projects in 10 years Worked with 63 partner countries to address chemical, biological, radiological and nuclear threats Funded more than 100 projects with an aim to cease violent extremism since 2013 © 2022 KPMG-Ukraine Ltd., a company incorporated under the Laws of Ukraine, a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. 50 6.1.5 Funding achieved through reparations International organisations such as the World Bank and the IMF aid the states with the calculation of what is called ‘war reparation cost’. Essentially, it is the cost that the attacking country must bear to ensure that the other is provided with assistance for its reconstruction and development through the disruption it experienced. International organisations such as the United Nations, the World Bank and the IMF help war-hit nations figure out the cost of reparation required. An instance of this is the reparation cost that Iraq had to pay for its invasion of Kuwait in 1990. The former was tasked to pay Kuwait a sum of US$52.4 billion83 by the United Nations Compensation Commission, a subsidiary of the United Nations that came into existence in 1991 to process claims for losses and damages incurred due to Iraq’s invasion. 6.1.6 The reparation cost attribution to Iraq post its invasion of Kuwait Kuwait incurred massive infrastructure and humanitarian losses with respect to infrastructure and humanitarian aspects owing to Iraq's invasion. But this was worsened by the retreat move made by the latter, when Iraq set more than 700 oil wells84 ablaze across Kuwait. Apart from exhausting the half of the natural fuel reserves, this released harmful and carcinogenic substances into the atmosphere, posing serious concern towards the climatic conditions in the gulf region85 : Role of the United Nations Compensation Commission A total of 2.7 million claims were submitted to the Commission, with a claimed value of US$352.5 billion86. Around 1.5 million successful claimants received a total of US$52.4 billion in compensation after the Commission finished processing claims in 2005. Governments, international organisations, businesses, and people made claims, which were examined and evaluated by 19 panels of commissioners. The US$52.4 billion in compensation awards were delivered to the 1.5 million claimants in full as of the January 2022 payment made to the final claim with an unpaid balance. Post-confirmation of Iraq’s responsibility towards losses and damage in Kuwait by Security Council, UNCC had the main task of fact-finding. The jurisdiction made by the Commission was based on two 83 “Iraq makes final reparation payment to Kuwait for 1990 invasion”, The World Bank, Link 84 “State of Kuwait”, UNCC, Link 85 “State of Kuwait”, UNCC, Link 86 “United Nations Compensation Commission”, UNCC, Link Impact of the invasion of Kuwait Numerous oil lakes and more than 26 million cubic meters of contaminants in 114 square kilometres of desert Contamination of freshwater aquifers in North Kuwait, specifically Raudhatain and Umm Al-Aish More than 800 miles of oil-contaminated coastline A lengthy, 4.7 km long, man-made oilfilled trench Military constructions 6.25 km in length destroyed the balance of the desert ecology Deposits of tarcrete cover 271.5 square kilometres 163 oil wellhead pits from blown-out onland oil wells © 2022 KPMG-Ukraine Ltd., a company incorporated under the Laws of Ukraine, a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. 51 wheels, the first was to identify who are eligible to claim damages and second was to segregate the type of damages directly linked to Kuwait’s invasion. The claims submitted by governments, international organisations, corporates and individuals were evaluated by panels with three independent experts. For verification and valuation purposes, the panel was assisted by the Commission’s secretariat, technical experts and consultants. Based on recommendations made by the panel of Commissioners, the Commission approved claims worth around US$52.4 billion, accounting 15 percent of the initial claim amount.87 Cost to Iraq for the invasion Although the war reparation cost was paid by Iraq, the rate at which it was paid back was subject to the conditions in the region as well as the geopolitical scenario. Iraq paid the debt to Kuwait through the revenue it made through oil sales. With a varying rate over 31 years, approximately 3 percent88 of the revenue generated through natural gas sale was utilized to pay off the debt to Kuwait. This was again met with a halt starting October 2014 until April 2018 owing89 to the budgetary and security restrictions faced by the Iraqi government in its fight against the Islamic state insurgents. 6.2 Role of developed countries in the reconstruction and rebuilding initiatives Developed countries have extended a friendly arm to states going through periods of armed conflict as an extension of their geopolitical interests as well as good will for a long time. Most initiatives involved the sanctioning of a loan or grant which serves the interests of both the parties while focusing on development of economy of the war-stricken one. 6.2.1 The United States Foreign Aid The US has also been a partner in aiding countries to overcome their state of financial instability set in due to armed conflicts by providing them with financial assistance through different channels. Known as the Marshall plan90, it was developed post the second world war to assist the European economy after the impact it had suffered. Although, different policies since then have come into effect supporting post-war aid, they operate on similar principles as the Marshall plan. The current plan in effect, known as the United States Foreign Aid, provides the US allies with necessary and essential assistance. USAID towards Iraq With the full-blown effect of the war in the region, Iraq’s need for rebuilding and reconstruction was more evident. In April 2003, the US Congress approved US$2.5 billion91 for immediate relief in the region through supplies such as food, medicine and water through the Iraq Relief and Reconstruction Fund (IRRF). The fund received further monetary adjustments, taking the total to US$18.4 billion, expanding the purpose to general reconstruction needs. Following Operation Iraqi Freedom in April 2003, the US Congress committed $20.9 billion in civilian monies to aid in the reconstruction of Iraq over the subsequent three and a half years, with an aim to use this reserve to kick-start Iraq's reconstruction and reform initiatives. 87 “UNCC at a glance”, UNCC, Link 88 “Iraq pays last chunk of $52.4 billion Gulf War reparations - UN”, Reuters, Link 89 “Iraq pays last chunk of $52.4 billion Gulf War reparations - UN”, Reuters, Link 90 “Marshall Plan (1948)”, National Archives, Link 91 “Rebuilding Iraq: U.S. Achievements Through the Iraq Relief and Reconstruction Fund”, US Department of State, Link © 2022 KPMG-Ukraine Ltd., a company incorporated under the Laws of Ukraine, a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. 52 Global USAID contribution By contributing to both military and economic needs, the US92 has been able to improve its ties as well as provide help to the countries in need of finances for redevelopment. Another evident instance of foreign aid with respect to restructuring and reconstruction is the aid provided by the US to the European Union post the second world war. The aid provided was valued at US$22 billion93, currently adjusted with inflation as US$182 billion in the 21st century. The aid by the US enabled stabilisation of the situation in the continent and jump-started its growth post the war. The US also actively invested in the development of Japan post the second world war by investing US$2.2 billion, currently adjusted with inflation as US$18 billion94 in the 21st century between the years 1946 and 1952. It’s participation in developing the region through financial aid has enabled it to have Japan as its close ally in the Asia Pacific region. 6.2.2 Japan as a source of foreign aid Such states have come forward time and again to assist war-torn countries through their process of rebuilding the economy and infrastructure. Japan as a nation, stands out in this aspect owing to their multiple instances of providing financial assistance to war-torn economies. Japan has been associated with 22 percent95 of all the aids that are provided worldwide which includes grants, net loans and contributions to multilateral agencies, making it evidently more generous when compared with the United States that contributes 13 percent and the European Union that cumulatively contributes 34 percent. Although Japan offers assistance to countries that are facing economic downfall through various channels such as bilateral grants, bilateral loans and grants through multilateral agencies such as the United National High Commissioner for Refugees and the Asian Development Bank, approximately half of the bilateral aid that is has provided to such economies has been through loans which are sanctioned at concessional interest rates with grace periods of 10 years and repayment periods of 30 years or more. 92 “Foreign Assistance”, Foreign Assistance, Link 93 “America's Proud History of Post-War Aid”, US News, Link 94 “America's Proud History of Post-War Aid”, US News, Link 95 “The Reconstruction of War-Torn Economies and Peace-Building Operations”, Suffolk University and Beacon Hill Institute, Link 1.22 1.25 0.16 0.77 3.66 3.33 0.46 1.30 0.18 Afghanistan Israel Jordan Egypt Iraq Figure 24: Top five recipients of foreign aid provided by the US, 2019 (US$ billion) Economic aid Military aid 43.7percent of the aid offered during 1991-2001 by Japan was received by countries in the Southeast Asian region, followed by 17.6 percent for South Asia and 16.7 percent for East Asia 30 percent of war aid offered by Japan during 1991-2001 was received by the transportation sector of different regions US$51 billion was spent by the US on foreign aid in 2020 © 2022 KPMG-Ukraine Ltd., a company incorporated under the Laws of Ukraine, a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. 53 Japan also maintains a pattern for the loans and agreement it has granted which is in line with its official policies such as the Overseas Development Assistance Charter96 and the medium-term Strategy for Overseas Economic Cooperation Operations. These charters dictate the pattern along which Japan sanctions its assistance to developing countries with priorities such as alleviation of poverty, economic development of the nation, push towards ‘knowledge assistance’ and more emphasis on renewable energy generation, amongst others. The approach may also be observed in terms of the way East, Southeast and South Asia have been a priority area for Japan with respect to offering of financial assistance. The aid to Kosovo An instance of assistance from Japan may be seen with reference to the Kosovo war97. Post the signing of the peace accords, with 80 percent of ethnic Albanian refugees returning home to devastated infrastructure, multiple Japanese NGOs had been stationed on ground to provide relief to the refugees, which included construction of 500 temporary housing units, distribution of essential goods, reparation of social infrastructure as well as provision of medical supplies. The reconstruction efforts directed at Iraq Iraq's stability, which is essential for stability of the Middle East, has been Japan’s focus. It has continuously helped Iraq's own state-building initiatives since 2003 in a variety of other sectors, including the restoration of its infrastructure. After the Iraq War, Japan announced in October 2003 that it would give Iraq up to US$5 billion in reconstruction aid, including US$1.5 billion in grant aid as "assistance for immediate needs" (with a focus on improving security and rebuilding the essential infrastructure for the Iraqi people, such as electricity, education, water and sanitation, health, and employment) and up to US$3.5 billion in Overseas Development Assistance (ODA) loans to support medium-term reconstruction needs (primarily to support the development of economic and social infrastructure). 96 “The Reconstruction of War-Torn Economies and Peace-Building Operations”, Suffolk University and Beacon Hill Institute, Link 97 “The Reconstruction of War-Torn Economies and Peace-Building Operations”, Suffolk University and Beacon Hill Institute, Link © 2022 KPMG-Ukraine Ltd., a company incorporated under the Laws of Ukraine, a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. 54 07 How were the reconstruction funds managed and organized? © 2022 KPMG-Ukraine Ltd., a company incorporated under the Laws of Ukraine, a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. 55 7 How were the reconstruction funds managed and organized? 7.1 Needs estimation helps mobilize funds and incentivize private sector investments A war-damaged country, once it receives funding, must have a proper plan to allocate and spend the money to restructure the sectors in order of priority to its economy. Step-by-step approach followed by countries to restore their economic sectors post-war A structured plan and international funding are required by every country which has been through war to get its economy back to the pre-war levels. Iraq followed a sectoral approach to perform needs assessment for each sector to gain funding while Bosnia and Herzegovina (BiH) too followed a sectoral approach to allocate funds efficiently to each sector. Iraq’s post DNA approach to rebuild its sectors and stabilize the GDP98 A Damage and Needs Assessment (DNA) was done for Iraq by The World Bank which followed a twotier approach, i.e., relied on both ground data provided by the Government of Iraq and data collected by remote methods. Based on the extrapolated data, a sectoral analysis was done considering the seven directly affected governorates. After the assessment, the overall damages were estimated post which they came up with the monetary needs of the identified priority sectors as can be seen in the sections below. Social Sectors 98 “Iraq: Reconstruction and Investment”, World Bank Group, January 2018. Link Total needs: US$17,441 million Short –term needs (year 1): US$4,988 million Medium –term needs (years 2–5): US$12,453 million Housing Total needs: US$4,365 million Short –term needs (year 1): US$873 million Medium –term needs (years 2–5): US$3,492 million Health Total needs: US$4,561 million Short –term needs (year 1): US$912 million Medium –term needs (years 2–5): US$3,649 million Education Total needs: US$6,373 million Short –term needs (year 1): US$1,641 million Medium –term needs (years 2–5): US$4,732 million Social protection Total needs: US$1,716 million Short –term needs (year 1): US$793 million Medium –term needs (years 2–5): US$922 million Tourism © 2022 KPMG-Ukraine Ltd., a company incorporated under the Laws of Ukraine, a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. 56 Sectors such as tourism were badly impacted majorly owing to the wiping out of jobs. Iraq held significant value with respect to its rich religious history. The tour guides and hotels who aided people visiting these sites were the primary revenue drivers who were hit by the war. Productive Sectors Note: Water resources are understood to be a part of the productive sector as irrigation channels are one of the leading applications of water, hence relating to the agricultural sector. Infrastructure sectors Industry and commerce Total needs: US$10,580 million Short –term needs (year 1): US$2,116 million Medium –term needs (years 2– 5): US$8,464 million Finance and markets Total needs: US$9,254 million Short –term needs (year 1): US$981 million Medium –term needs (years 2– 5): US$8,273 million Agriculture Total needs: US$3,393 million Short –term needs (year 1): US$1,017 million Medium –term needs (years 2– 5): US$2,375 million Water resources Total needs: US$207 million Short –term needs (year 1): US$143 million Medium –term needs (years 2– 5): US$64 million Water, sanitation and hygiene Total needs: US$2,442 million Short –term needs (year 1): US$1,709 million Medium –term needs (years 2–5): US$733 million Information and communication technologies Total needs: US$644 million Short –term needs (year 1): US$210 million Medium –term needs (years 2–5): US$434 million Oil and gas Total needs: US$7,209 million Short –term needs (year 1): US$736 million Medium –term needs (years 2–5): US$6,472 million Transport Total needs: US$3,960 million Short –term needs (year 1): US$1,188 million Medium –term needs (years 2–5): US$2,772 million Municipal Services Total needs: US$126 million Short –term needs (year 1): US$13 million Medium –term needs (years 2–5): US$113 million Power Total needs: US$9,112 million Short –term needs (year 1): US$4,556 million Medium –term needs (years 2–5): US$4,556 million © 2022 KPMG-Ukraine Ltd., a company incorporated under the Laws of Ukraine, a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. 57 Cross–cutting sectors Looking at the amount required by each sector and the subsectors and the overall amount as given above, we can see that the top four sectors which have the highest share in total needs in comparison to other sectors are: Recovery strategy employed by Iraq Based on the prioritization and needs estimation for each sector, three objectives were put forward to help Iraq move on the road to recovery: • By achieving this goal, the government of Iraq aimed to increase the reconstruction efforts’ transparency and accountability, which would help restore confidence. • It was expected to put a strong emphasis on promoting crucial policy changes needed to improve local level implementation capability, bringing development closer to the impacted populace. • The government aimed to enhance their ability to respond to crisis and prevent future wars. Short–term needs (year 1): US$16 million Medium –term needs (years 2 –5): US$5,482 million Short–term needs (year 1): US$959 million Medium –term needs (years 2 –5): US$411 million Governance Total needs: US$1,370 million Environment Total needs: US$5,498 million Housing Share of total needs: 19.8% . Power Share of total needs: 10.3% . Industry and commerce Share of total needs: 12% . Finance and Markets Share of total needs: 10.5%. Renew social contract © 2022 KPMG-Ukraine Ltd., a company incorporated under the Laws of Ukraine, a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. 58 • It was critical to boost economic activity, build productive capacity, and encourage private sector participation in the rehabilitation efforts. • Government of Iraq’s Vision 2030 focused on bringing about financial reforms, improving business environment, and creating more employment. • The Government was geared up to evaluate the best ways to efficiently use reconstruction efforts to create more employment in different sectors of the economy. • The devastation to the infrastructure sector had practically caused a standstill in other sectors like energy, transport, communication, housing, and irrigation. • The Government’s Reconstruction and Development Framework (RDF) was aimed at primarily helping restore damaged infrastructure, in turn enabling the recovery of other related sectors like housing and transport. This was expected to further facilitate economic growth. Further improvements in discussion The next steps in the strategy were to expand the number of governorates to 11 and feed into the reconstruction framework to provide a sound and systematic recovery approach and reduce any potential blind spots or gaps that could be missed in the future. Another such instance can be seen in the European Union’s approach to the reconstruction of Syria post war. Syria’s road to reconstruction under the wing of European Union The war had devastating effects on Syria, the reconstruction estimates of which ranged from US$250 billion to US$400 billion. It was evident that funding from international sources was necessary. The European Union put forward its stance in applying the EU strategy on Syria. Rebuilding Syria The losses had been severe and the decline in Syrian GDP had gone from US$61.1 billion in 2010 to US$17.1 billion in 2017. The EU had a peacebuilding framework to promote the rebuilding in Syria. Post-war peacebuilding has many definitions, but its earliest definition was given by the UN SecretaryGeneral in 1992: World Bank and the road to rebuilding Bosnia and Herzegovina A different approach can be seen in the World Bank’s reconstruction fund support to Bosnia and Herzegovina after the war ended. The Bank established a US$150 million Trust Fund for Bosnia and Herzegovina (TFBH) to grant funds for emergency projects99. The strategies of World Bank were: • To support reconstruction across all sectors from 1996–1999. • To establish a framework to transform the province’s economy from a socialist to a market one. • To develop and empower people by working on governance and social services. Post-war reconstruction period FY96–99 strategy of the World Bank 99 “Bosnia and Herzegovina: Post-conflict resolution and the transition to a market economy”, World Bank, September 2004. Link Promote economic and business recovery/development Rehabilitate major infrastructure and restore service delivery action to identify and support structures, which will tend to strengthen and solidify peace in order to avoid a relapse into conflict. Boutros Boutros -Ghali UN Secretary -General © 2022 KPMG-Ukraine Ltd., a company incorporated under the Laws of Ukraine, a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. 65 • The initiative funded services for demining and the provision of goods. The objective of this component was to ensure that community investment subprojects can achieve their intended potential without the risk of anti-personnel mine accidents. • It also funded the removal of mines on a demand-driven basis and where the presence of mines would prevent the implementation of community investment subprojects. • The institutional development initiative funded consultant services, equipment, and goods for capacity building for central, regional, and local authorities. • It also financed the preparation of five Regional Operation 20 Programs, the standard planning instrument utilized by the EU. • The initiative provided capacity building to staff involved in regional development at the Ministry of Sea, Tourism, Transport and Development. At the county level, the project supported and trained one person in each of the 13 counties in the ASSC in regional development, including project cycle management and EU procedures. • The program management initiative was built on the World Bank's experience in post-conflict reconstruction and therefore was consistent with OP 2.30 Development Co-operation and Conflict109, "to support economic and social recovery and sustainable development through investment and development policy advice. • This project addressed social cohesion and economic revitalization as mutually reinforcing development goals. The assessment conducted for the project indicated that agricultural cooperatives as well as associations suffer from a lack of social capital. • The evaluation of the pilot phases funded under the Post-Conflict Fund Grant indicated that cooperatives may be a means of strengthening social capital by bringing together groups of people with common objectives and interests in a process of collective decision-making. The project outcomes successfully met the social inclusion goals to support the economic and social revitalization of disadvantaged and war-affected areas 110: The CSERP successfully closed on 31 December 2010 with its objective of social inclusion fully met and was able to support the economic and social revitalization of disadvantaged and war-affected areas. The project yielded significant results in the 13 counties falling under the ASSC. • There were 427 sub-projects which were successfully completed. Of these, 125 were for social inclusion; 67 for small community infrastructure; and 211 in support of SMEs, crafts, and cooperatives. Over 84,000 beneficiaries residing in the ASSC directly benefitted from the completed sub-projects. • In terms of employment creation, 1,341 new jobs were created and an additional revenue of €11 million was generated by the SMEs, crafts activities, and cooperatives. A total of 763 women were directly employed, and 33,269 women were direct beneficiaries. • The demining initiative resulted in 12.2 sq.km of agricultural land getting completely demined and ready for cultivation and harvest. This enabled people to safely use their land without any fear. • 5,000 officials and civil society representatives were trained through a series of workshops in strategic regional planning, cost management, project management, business plans, and procurement. 109 OP 2.30 is based on Post-Conflict Reconstruction: The Role of the World Bank (Washington, D.C: World Bank, 1998), endorsed by the Executive Directors as A Framework for World Bank Involvement in Post-Conflict Reconstruction, May 1997 110 “Post conflict reconstruction”- Reliefweb; Link 3. Institutional Development (Total funding of EUR3.5 million with IBRD’s contribution of EUR2.5 million) 4. Program Management (Total contribution of EUR3.0 million with IBRD’s contribution of EUR1.0 million) © 2022 KPMG-Ukraine Ltd., a company incorporated under the Laws of Ukraine, a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. 66 8.2 Bosnia and Herzegovina’s recovery program111 The war in Bosnia and Herzegovina took place from April 1992 until September 1995 between Serbia and Montenegro on one side, the Republic of Bosnia and Herzegovina on the other, and Croatia on the third. A peace agreement was signed under the mediation of the United States, Britain, France, Germany, and Russia. The losses were already estimated at US$50-70 billion – 15-20 times the GDP in the first year after the conclusion of the war. The Priority Reconstruction Program (PRP) The Government of Bosnia and Herzegovina, with the support of the World Bank, the European Bank for Reconstruction and Development (EBRD), and the European Union, and with the broad endorsement of the international donor community, was instrumental in preparing a Priority Reconstruction and Recovery Program (PRP), that required US$5.1 billion of external financing over the next three to four years post the conclusion of the war. The PRP, in the first post-war year aimed at kick-starting the economy and creating avenues of domestic production, jobs, and incomes that, in turn, would generate domestic resources to channel the reconstruction effort and enable the country to gradually reduce its dependence on foreign aid. Several sectoral programs and projects were carried out as part of the PRP 111 “Bosnia and Herzegovina - The Priority Reconstruction Program”, The World Bank, Link Emergency Recovery Project The project aimed at restoring Bosnia and Herzegovina's severely damaged productive capacity and rehabilitate key infrastructure facilities, to support economic activities, particularly in the enterprise sector, and to establish a minimum level of institutional capacity in the government to implement Bosnia and Herzegovina's reconstruction program. The project was also designed to ease severe hardships faced by the vulnerable groups of the population in the immediate post-war transition period. Emergency Farm Reconstruction Project The project was aimed at supporting the post-war reconstruction program for the agriculture sector. It was designed to help kickstart agricultural production, improve food security, and create employment and income for the war-affected rural population, including the return of displaced persons. Water, Sanitation, and Solid Waste Urgent Works Project The project was intended for: (i) restoring water, sanitation, and solid waste services to the population using piped water supply and water-borne sewerage systems to a level that would mitigate public health risk in priority areas: (ii) assisting the development of a long-term sector strategy and the details of an emergency program consistent with that strategy; and (iii) rebuilding and strengthening the sector institutions so that the improvements are sustainable. Emergency Transport Reconstruction Project The project addressed the reconstruction and rehabilitation of roads, bridges, tunnels, and railways; civil aviation rehabilitation, including reconstruction of the Sarajevo Airport, equipment for the Mostar Airport, and air navigation system equipment; and, rehabilitation of the urban transit systems. © 2022 KPMG-Ukraine Ltd., a company incorporated under the Laws of Ukraine, a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. 67 The Priority Reconstruction Program (PRP) had a profound impact across different sectors Transport: The major transport bottlenecks were resolved, and the most essential road corridors and bridges were repaired along with the reopening of the Sarajevo Airport. The rail and urban transport were resumed and maintenance activities were re-established. Electric Power and Coal: The energy sector played a key role in the pre-war economy of Bosnia and Herzegovina, producing 8 percent of the GDP. The PRP aimed at restoring electric power generation, transmission, and distribution to a nominal level required for normal economic activity at the lowest cost. With certain investments, power sales to distribution companies reached 87 percent of the pre-war levels in 1998. Telecommunications: Bosnia and Herzegovina had about 15.3 lines per 100 people, comparable with other republics. The war damaged switching and transmission equipment and reduced the installed phone lines by more than 30 percent. The impact on the international lines was more than 90 percent. The PRP aimed at restoring the disrupted services to pre-war levels and modernize the backbone transmission infrastructure and restore international and inter-entity communication links. The services were restored to the pre-war levels within a span of just three years from 1996 to 1999. Housing: An estimated 30 percent of the country’s largely privately owned housing stock was damaged or destroyed during the war. The PRP aimed at creating favorable conditions towards facilitating return as well as rapidly expand the usable housing stock for the entire population. Almost 100,000 private houses and public apartment units received repair assistance along with the generation of employment and business activities. Emergency Education Reconstruction Project The project aimed at helping the restoration of classroom conditions thereby enabling effective teaching and learning, particularly in primary schooling, and building government implementation capacity at the entity, canton, and municipal levels. Essential Hospital Services Project The project was designed to support the strategies of the Ministry of Health for the medium-term to develop a modern, cost-effective, and fiscally sustainable hospital network. The project was expected to (i) strengthen essential hospital services, focusing on the most needy segments of the population; and (ii) establish and support the initial steps in health financing reforms. Emergency Housing Repair and Reconstruction Project The project aimed at supporting the government's effort to carry out urgent housing repairs on both publicly and privately owned housing, and contribute to the development of a framework to sustain the recovery and development of the housing sector through gradual introduction of cost recovery. Emergency Electric Power Reconstruction Project The project aimed at to restoring electricity services to acceptable levels in major cities for residential and industrial use by focusing on electric power generation and distribution, increasing coal production to supply fuel required for thermal power plants, reconfiguring the electric power network, and enhancing the institutional capacity and helping restructure the electric power and coal sectors. © 2022 KPMG-Ukraine Ltd., a company incorporated under the Laws of Ukraine, a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. 68 Water and Waste Management: The municipal water supply and sewerage networks served 75 percent of the urban population before the war. By 1996, half of the population no longer had access to 24-hour water supply and suffered from clogged sewer and drainage systems. The PRP aimed at immediately restoring water services and began upgrading the sewerage and solid waste services to strengthen the sector institutionally and financially. With certain investments, average urban water supply coverage nearly reached nearly the pre-war levels. Education: The country had a well-developed education system before the war which was severely affected by damages to schools and disruption of services. The PRP aimed at rebuilding the primary education facilities while providing support for teachers’ salaries, school maintenance, and educational tools. Most primary facilities were rebuilt and teaching and learning at all levels was being carried out at minimally acceptable standards. Health: Before the war, the country had a strong network of healthcare facilities, dominated by large hospitals and specialized clinics. The war not only caused significant damages to Bosnia and Herzegovina’s large network of healthcare facilities but also directly affected the population. After the war, hundreds of thousands of people were left with physical injuries and disabilities as well as psychological disorders such as post-traumatic stress diseases. The reconstruction of hospitals and establishment of rehabilitation centers for war victims advanced under the PRP with the provision of drugs and supplies. 8.3 Kuwait’s rebuilding strategies based on reconstruction of the petroleum sector and technology upgrades112 In approximately five years, Kuwait’s economic performance recovered to surpass what existed before the war. Upon the end of the war, the government established martial law and announced emergency conditions. Its primary focus included the rehabilitation of infrastructure, rebuilding the petroleum sector, restoring economic and social services, and addressing the structural weaknesses of the Kuwaiti financial system. Adopted measures achieved internal security, allowed foreign involvement in military and reconstruction efforts, achieved fiscal rebalancing, and changed the labour composition. Reform also encouraged privatization and financial stabilization. Approach towards reconstruction The most urgent priority for Kuwait was extinguishing the fires, which Kuwait Petroleum Corporation (KPC) commenced only six days after liberation with the help of contracted international experts and supporting companies. The process involved military assistance to clear the petroleum fields of unexploded land mines and munitions that were placed by Iraqi troops before their retreat. Rehabilitation of petroleum industry: The rehabilitation of the petroleum industry was another urgent priority for Kuwait between 1991 and 1992: • Expenditures between US$8 billion and US$10 billion were planned over 2 years solely to increase production to over 2 mbpd* (PAAC, 1999). Petroleum production resumed by June 1991 and local refineries were in operation by August 1991. • By mid 1992, Kuwait managed to repair or redrill the existing wellheads. By 1993, less than 2 years after the war, petroleum production was at 1.9 mbpd, exceeding the pre-war level of 1.4 mbpd, and its refinery capacity was fully re-established within another year. *Note: mbpd means thousand barrels per day 112 “An Extraordinary Recovery: Kuwait Following The Gulf War, The University of Western Australia, Link Kuwait now stands once again as one of the world’s largest petroleum producers and the 4th largest exporter with the 24th highest per capita GDP in the world © 2022 KPMG-Ukraine Ltd., a company incorporated under the Laws of Ukraine, a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. 69 The rebuilding of the petroleum industry allowed the economy to grow rapidly. The pre-war level of GDP per capita was again achieved by the end of 1992 and thereafter surpassed. Between 1994 and 2008, the Kuwaiti real GDP grew at an average rate of 5.2 percent per year. Only in 2009 did Kuwait experience a growth setback with the onset of the global financial crisis. On a per capita basis, the first 2 years following the war appear particularly impressive, largely due to the initial loss of much of its population. Kuwait’s terms of trade benefited from stability in the global petroleum price following the war. Sources of financing: The reconstruction process relied upon three primary sources of financing: Factors favourable to recovery The major contributor on the policy front after the war was the government’s focus on reconstructing the petroleum sector and the technology upgrades that were embodied in the new investment. Apart from the ability to generate petroleum wealth, this recovery was made possible through the interaction of the following three indispensable factors: Accumulated savings from Kuwaiti pre-war fiscal surpluses and SWF contributions Foreign debt: Partially through inward foreign investment Iraqi payments mandated by the UN Compensation Commission Kuwait spent approximately US$40-US$50 billion of its foreign investment portfolio. The production and exportation of petroleum allowed Kuwait to resume capital savings. The Kuwaiti government raised its debt ceiling to US$33 billion as part of the first phase of a five-year plan, the largest debt in the history of the country. This collective debt reversed the country’s pre-war net lender position for 5 subsequent years. The Food-for-Oil program required Iraq to make regular payments of 30 percent of its petroleum export revenues over a number of years to a UN fund. War reparations were managed by the UN and paid directly to Kuwaiti claimants, both individuals and (private or public) companies. •Migration of various tribes within central Arabia to the area forming contemporary Kuwait. •The political system maintained the local unity and sovereignty strengthened loyalty and cohesiveness, regardless of prewar political challenges to. •This led to large welfare payments for Kuwaiti citizens and large governmental expenditures during and after the war, despite the cessation of government revenue. Political economy © 2022 KPMG-Ukraine Ltd., a company incorporated under the Laws of Ukraine, a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. 70 The profound impact of the rebuilding strategies was prominently witnessed with the quick economic recovery The rebuilding of Kuwait’s petroleum industry enabled the country’s economy to grow at a rapid pace. The pre-war level of GDP per capita was achieved by the end of 1992 and thereafter surpassed. Between 1994 and 2008, the Kuwaiti real GDP grew at an average rate of 5.2 percent per year. On a per capita basis, the first two years following the war was particularly devastating, primarily due to the initial loss of much of its population. However, when the displaced population was subsequently restored in 1999, the level of per capita GDP fell only temporarily. On an optimistic note, the negative macroeconomic effects of the war reversed within just a few years as Kuwait’s terms of trade gained from stability in the global petroleum prices following the war. •Most crucial economic policy that helped a recovery was its savings of petroleum rents accumulated in its SWF. •Other important policies include new macroeconomic policies, trade liberalization and labor policies, enhancement of the role of the private sector through microeconomic reforms. •Kuwait faced a stark labor shortage following the war. New policies were intended to reduce the dependence on foreign labor and to establish a pool of local skilled workers. Policy reform and capital accumulation •Saudi Arabia, the world’s largest petroleum producer, exercised its self-assigned role as a stabilizer of global petroleum prices by increasing production to restore prewar levels. Other members of OPEC, namely Venezuela, Algeria, and Nigeria, as well as Qatar and the UAE also increased production. •Non-OPEC production also increased, which further contributed to stabilizing the market. Global petroleum-market response Document Classification - Dmytro Romanovych Director, ESG Services, Government Relations, International Development Assistance Services T +380444905507 x35205 E [email protected] Oleg Neplyakh Partner, Head of Deal Advisory, Head of Energy and Natural Resources T +380444905507 x34260 E [email protected] www.kpmg.ua The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should ac t on such information without appropriate professional advice after a thoro ugh examination of the particular situation. © 2022 KPMG -Ukraine Ltd., a company incorporated under the Laws of Ukraine, a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights re served. The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organization. Olena Makarenko Partner, Consulting, Head of Forensic and Sustainability T +380444905507 x34234 E [email protected] Contact us Acknowledgement Mark Fitzgerald International Development Assistance Services (IDAS) Global Head Pier Stefano Sailer Head, EMA Government and Public Sector Jonas Bylund Client Service Partner EBRD Priya Tripathi EMA Sector Executive, EMA Government and Public Sector Nipen Kumar Dutta Consultant, Capability Hubs-Research-GC&K