Ukrainian Facility or 50 billion euros from the EU for recovery: what Ukraine should do

On Tuesday, 20 June, the European Commission published a draft Regulation establishing a separate special instrument to support the financing of Ukraine’s reconstruction needs with an indicative funding of up to €50 billion for the period 2024-2027 – the Ukrainian Facility.

All information provided in this article is based on the draft Regulation and published communication materials from the European Commission.

Prerequisites for the decision to establish the Ukrainian Fund

The proposal to establish the Ukraine Fund came just before the start of the International Conference on Ukraine’s Recovery, which is taking place this year in London (UK) on 21 and 22 June.

The creation of such a mechanism is part of the revision of the EU’s long-term budget – the Multiannual Financial Framework (MFF) for 2021-2027.

The need to change the priorities of EU budget financing is long overdue and is caused by several factors, such as russia’s full-scale invasion of Ukraine, migration, fighting the effects of the pandemic and inflation, and overcoming the economic and energy crises. To this end, the European Commission has proposed amendments to the current budget, one of which is the creation of the Ukraine Fund.

*For more information on other funds and instruments that exist in the EU and have the potential to be used by Ukraine, please see our material.

What is the Ukrainian Facility?

The Facility is a special instrument managed by the European Commission to provide short- and medium-term financing for Ukraine’s recovery and reconstruction needs over the period 2024-2027. The creation of such an instrument provides stable, predictable funding, which will have a positive impact on the macro-financial stability of the state.

In addition, the funds provided under the Ukrainian Facility will support the implementation of key reforms for the country’s rapid accession to the EU and transition to a green, digital and inclusive economy.

The Facility is a special instrument managed by the European Commission to provide short- and medium-term financing for Ukraine’s recovery and reconstruction needs over the period 2024-2027. The creation of such an instrument provides stable, predictable funding, which will have a positive impact on the macro-financial stability of the state.

In addition, the funds provided under the Ukrainian Facility will support the implementation of key reforms for Ukraine’s rapid accession to the EU and transition to a green, digital and inclusive economy.

Structure of the Ukrainian Facility

The areas of support under the Ukrainian Facility programme are as follows:

Table 1: Areas of support of the Ukrainian Facility. Source: European Commission.

Under the first pillar, the Government of Ukraine is to prepare a Recovery, Reconstruction and Modernisation Plan (Ukraine Plan) and detail the reforms and investments it intends to make as part of the EU accession process. Funds under this component of the Instrument will be disbursed based on the implementation of the Plan. The emphasis will be on public administration reform, good governance, the rule of law, the fight against corruption, and sound financial management.

The second component of support is designed to attract and mobilise public and private investment for the recovery and reconstruction of Ukraine in support of the implementation of the Plan. It will complement all existing instruments of support to Ukraine, such as blended finance and guarantees, with the possibility of expansion as conditions allow. The EU also commits to establish a dedicated Guarantee Facility for Ukraine.

The last pillar is technical assistance and other support, including mobilisation of reform expertise, support to municipalities, civil society and other forms of bilateral assistance normally available to countries under the Instrument for Pre-Accession (IPA). Support will also be provided to achieve the goals of the Ukraine Recovery Plan. Other initiatives may be funded under this component, including to ensure compliance with international law regarding crimes committed by russia on the territory of Ukraine.

Features of Ukrainian Facility financing

The mechanism will partially replace the existing bilateral support currently provided to Ukraine. These include the €18 billion Macro-Financial Assistance+ (MFA+) package and the Neighbourhood, Development and International Cooperation Instrument (NDICI). In the case of the latter, the programmes already adopted under the NDICI will continue to operate, but after the entry into force of the Regulation on the Ukrainian Facility, no new bilateral assistance will be provided under the NDICI. Other financial assistance instruments will continue to be available to Ukraine.

The novelty of the Ukrainian Facility compared to the current Macro-Financial Assistance+ (MFA+) package is that the financing will be based on the Recovery Plan proposed by the Government of Ukraine, which will link the disbursement of funds to sectoral and structural reforms, thus providing a coherent, medium-term vision of the expected recovery, reconstruction and modernisation measures closely linked to the EU accession perspective.

The plan will include conditions related to:

1. the main requirements that were also present in MFA+ (macro-financial stability, budgetary oversight, public financial management, etc;)
2. Sectoral and structural reforms.

The conditions will be broken down into intermediate steps with clear deadlines.

Disbursements will be made in accordance with a fixed quarterly schedule based on payment requests submitted by Ukraine and upon verification by the European Commission that the relevant conditions have been satisfactorily fulfilled.

Grants for the Ukrainian Facility components will be accumulated through a new special instrument, the Ukraine Reserve. The Reserve Fund should accumulate at least €2.5 billion annually. Under the second and third components of the Ukrainian Facility, grants will be awarded on the basis of submitted projects.

The loans will be guaranteed by the reserve fund, similar to the financing under the current Macro-Financial Assistance+ (MFA+). The loans are provided on very favourable terms with a maximum maturity of 35 years and principal repayments starting no earlier than 2034. In addition, the EU will cover the interest costs from 1 January 2024 to 31 December 2027.

The mechanism also opens up the possibility of using contributions from other donors. The allocation of contributions from other donors should be based on the work of the G7 multi-donor aid coordination platform.

Revenues generated from frozen russian assets could also be used as a contribution to the recovery and reconstruction of Ukraine.

Transparency and accountability in the use of funds

The Ukrainian Facility will be a system of transparency, audit and control measures with components in both the EU and Ukraine.

Firstly, as part of the reforms envisaged in the Ukraine Plan, the audit and control systems of the Ukrainian state should be significantly improved.

Ukraine also has to establish a monitoring system, and is expected to report annually to the Commission on the implementation of the Ukraine part of the Plan. This will include reporting on Ukraine’s internal control system and on any amounts that have been improperly paid or misused and eventually returned to the EU. Proportionate reporting requirements will be required of recipients of Union funding that have received funds under the second and third pillars of the Ukrainian Facility.

Ukraine will additionally be obliged to publish data on individuals and legal entities that receive funding exceeding the equivalent of €500,000 for the implementation of reforms and investments specified in the Plan.

Second, the European Commission will be granted the right to inspect projects for implementation of the Plan at any point in the project cycle.

The Commission will conclude a framework agreement with Ukraine for the implementation of the Ukrainian Facility with binding arrangements for the management, control, supervision, monitoring, evaluation, reporting and audit of funds, as well as measures to prevent and investigate irregularities, fraud, corruption and conflicts of interest.

The control mechanisms related to the Investment Programme of Ukraine and technical assistance will be based on the systems, rules and procedures of international financial organisations and implementing partners involved in the implementation.

Thirdly, a special independent audit board is being established to assist the Commission by regularly reporting on the use of funds spent to achieve the Fund’s objectives and providing recommendations to Ukraine.

What’s next?

The European Commission’s draft proposal for the establishment of the Ukrainian Facility is to be considered by the European Parliament and the Council of the EU in a package with other proposals for the revision of the multi-annual financial programme.

Once adopted, Ukraine will be asked to submit its Recovery Plan, outlining the reforms and investments it intends to undertake.

After assessing the plan, the European Commission will propose to the EU Council to adopt the plan and set conditions that Ukraine must fulfil in order to receive support.

The European Parliament and the Council of the EU are invited to consider this proposal as a matter of urgency and to put it into effect from the beginning of 2024.

The preparation of the Plan by Ukraine and the discussions between the European Commission and Ukraine will start in parallel to ensure that the Plan meets the requirements of the Regulation and can be approved quickly after its entry into force.

Conclusions

The EU’s proposal is based on the need to revise the Multiannual Financial Framework (MFF) for 2021-2027 and to shift funding priorities accordingly. One of the proposals to amend the budget is the creation of a new financial instrument managed by the European Commission called the Ukrainian Facility.

The Ukrainian Facility has 3 components of funding priorities: support for the implementation of the Recovery Plan for Ukraine, the Investment Programme for Ukraine, and the Support Programme.

The instrument is designed to meet the financing needs of Ukraine’s recovery process for 2024-2027. The Ukrainian Facility will replace two other instruments – the MFA+, which is valid until 2023, and the NDICI. In addition, the third pillar will make available the types of assistance normally available to countries under the Instrument for Pre-Accession (IPA). Thus, the fund replaces the support to Ukraine under the IPA.

Funding will be multi-channel and flexible. Funds will be provided in the form of grants, loans, contributions from other donors, and proceeds from frozen Russian assets.

Ukraine’s recovery plan should be submitted by the Government of Ukraine and include reforms that will meet the EU’s accession goals. Funds will be gradually disbursed as these reforms set out in the Recovery Plan are implemented.

Steps will be taken by both Ukraine and the EU to ensure transparent and accountable use of the funds from the Ukrainian Facility. For example, Ukraine will have to improve its control and audit systems and create a system for monitoring the use of funds. The European Commission, in turn, will be empowered to inspect projects at any stage. In addition, a special independent audit board will be set up to regularly report on the use of funds and provide recommendations to Ukraine.

You can read more about other instruments and funds that operate in the EU and which (potentially) can be used by Ukraine in our analytical material.

Author: Vitalii Nabok – Policy and Data Analyst at the Institute for Analytics and Advocacy