Galnaftogaz Expansion Phase II Open Joint Stock Company Concern Galnaftogaz (GNG or the company), an existing IFC client, is the largest independent (not tied to a refinery) operator of gas filling stations in Ukraine.  Galnaftogazs main business is distribution of petroleum products mainly gasoline and diesel through its network of filling stations and direct sale in the wholesale market.  GNG currently operates 15 storage terminals and about 206 stations, including 163 OKKO branded stations.  OKKO stations are high throughput and modern format gas stations which offer high quality fuel and a variety of related products and services (convenience store, car wash, auto repair, and fast food services).  GNG had sales of $515.9 million and EBITDA of $24.7 million in 2006 and was ranked fourth in Ukraine by number of stations and third by sales volume.

GNG requested IFC for financing package of $100 million ($50 million on IFCs own account and $50 million on account of participant banks) to fund the second phase of its expansion with estimated capital expenditures of $642 million over the next 4 years.  The expansion aims to increase the companys petroleum distribution network to about 358 OKKO stations through acquisitions of 170 stations and construction/upgrading of 188 stations (currently GNG operates 43 unbranded stations most of which will be converted, while the remainder will be sold or closed).  Besides the stations, the project involves investments in supporting infrastructure (storage terminals, petroleum trucks, acquisition of land under existing stations, etc.). - Development Impact

Access to high-quality petroleum products and services: 

The core of GNGs business strategy is providing high-quality petroleum products and ancillary products/services to its customers.  By expanding further in western Ukraine and entering in the eastern regions, Galnaftogaz will provide access to such services to its new customers and at the same time will lift the standards for other market players.

Economies of Scale and Competition: 

The project will enable GNG to gain greater economies of scale and improve its operating efficiencies.  Ultimately, the economies of scale and GNGs independence from any single refinery will lead to increased competition in the petroleum retail sector.

Employment: 

For each station put into operation, GNG will employ and train on average 8-12 Ukrainians depending on the type of station.  The jobs on full time and part time basis would become available to nearby population, including women, retirees, and students.  220 additional stations will result in creation/preservation of about 1,760-2,640 jobs.

Temporary and indirect employment: 

The project will on temporary basis create construction jobs as 1 station requires an estimated of 5,600 man-hours to build.  The project in total will create about 725 thousand man-hours of construction employment.  It is also likely to generate further positive downstream impacts through development of small entrepreneurs through outsourcing of supplies and services.

The key development indicators that are proposed to be monitored during the life of the IFC investment are:

- Direct employment (including % of women)
- Aggregate indirect employment during construction (in man-hours)
- Number of stations per region (OKKO and non-branded)
- Taxes to Government

Fit With World Bank Group Strategy:

The World Bank Groups 2004-07 CAS for Ukraine has seven objectives: 
- sustainable economic growth; 
- poverty reduction and the strengthening of the middle class; 
- comprehensive and harmonized human development; 
-  environmental sustainability;
- gradual integration into the world economic and financial systems; 
- reduction of regional imbalances; and 
- improvement of state administration.

IFCs role in this strategy is to strengthen private sector development to contribute to these objectives.  IFC is responding to recent improvements in economic management and legislation by stepping up its business development efforts, with an increasing focus on local companies both in the financial and real sectors.  In addition, IFC is continuing its large and very effective technical assistance program, which has been directed to improve the business environment, as well as to provide hands-on support to small and medium enterprises and farms.  The proposed investment fits well with the World Bank Group strategy for Ukraine.