Ukraine Facility: what the EU’s 50 billion euro will be spent on and on which conditions

On 27 February 2024, the European Parliament approved the allocation of a €50 billion macro-financial assistance package to Ukraine within the programme Ukraine Facility – the instrument to provide predictable financial support for Ukraine over the 2024-2027 period. On the next day, February 28, the EU Council adopted the document.

Ukraine’s government hopes to EUR 4.5 billion in transitional financing from the EU as early as March within the framework of the new instrument.

It is worth taking a closer look at what the Ukraine Facility is. What share of Ukraine’s needs does it cover? What are the requirements that the Ukrainian authorities must meet to receive these funds?

Finally, what share of this assistance is provided in the form of loans?

Half of Ukraine’s needs

The Ukraine Facility is a new EU support mechanism for Ukraine. It is similar to the Recovery and Resilience Facility, which is used to provide financial support to EU member states.

Financial support under such programmes is provided according to approved action plans, in Ukraine’s case under the Plan for Ukraine. These plans are initially prepared by national governments with the involvement of the public and business, then coordinated with the EU and have a list of measures to strengthen the economy and macroeconomic stability.

The instrument provides Ukraine with €50 billion for over four years. It is not yet clear when and in what shares, it will be allocated, but there is hope that Ukraine will receive most of the funds at the initial stages (money front-loaded).

According to recent reports, the EU may provide Ukraine with €16 billion in 2024, compared to €18 billion in 2023.

These funds are critical to ensuring Ukraine’s macro-fiscal stability.

The need for external financing in 2024 amounts to $37.5 billion, and Ukraine Facility can cover approximately half of this amount. These funds are to finance state expenditures unrelated to defence and security.

Funding for the grant component and interest on Ukraine Facility loans is included in the EU budget.

Interestingly, potential sources of revenue for the Ukraine Facility may also include proceeds from frozen Russian assets, but this is most likely about additional funds to the already approved EUR 50 billion.

As for the second part of financial support for Ukraine, Kyiv may receive about $5 billion more from the IMF if it fulfils all structural benchmarks on time.

So far, Ukraine has been implementing the Programme in full and on time, and therefore a decision has been made at the expert level to review the Programme for the third time. A positive decision of the IMF Board on the results of such a review is expected in March, as a result of which Ukraine should receive the next tranche of $880 million.

The U.S. support is still a subject of heated debate, but we can hope that Ukraine will receive about $10 billion this year nonetheless.

Three pillars of support

The Ukraine Facility is organized around three pillars: 1) Direct financial support (budget support); 2) A specific investment framework for Ukraine; 3)Accession assistance (funds for subsidising interest rates and technical support). The funding will be allocated over a period of four years.

Budget support (Pillar I):

33 billion euros in loans and 5.27 billion euros in grants to the Ukrainian budget. The loans are provided for 35 years, and the repayment of the principal will start in 2034.

Taking into account the subsidy included in the third pillar, which will fully cover the interest on the loans, servicing these loans will not require any budget expenditures in the coming years.

Of this amount, up to 9 billion euros in loans should be available as early as January-June 2024 before the approval of the Plan of Ukraine. Then the funds will be provided quarterly depending on the fulfilment of obligations under the Plan of Ukraine.

An additional 20% of grants, or about one billion euros, are reserved to support local and regional recovery needs in Ukraine. This highlights the importance of decentralisation for EU politicians: the European Parliament and the Council of the European Union paid special attention to the role of local authorities when finalizing the Ukraine Facility document.

Investment framework (Pillar II):

Nearly €7 billion has been allocated to support investments in Ukraine, including to provide for possible payments under EU guarantees of €7.8 billion.

Another 15% of the guarantees, or €1.17 billion, is reserved to support small and medium-sized enterprises, including guarantees for loans from Ukrainian banks.

In parallel, at least 20% of the guarantees, or €1.56 billion, will be directed at green goals (climate change, biodiversity, environment).

Technical assistance and subsidies for interest rates on loans provided to Ukraine by the EU (Pillar III):

4.76 billion euros from the EU budget will be directed at covering interest on loans to Ukraine, including new loans and loans provided in 2022-2023. The funding will also be used for technical assistance and other areas of support for Ukraine, and will also cover some administrative costs for the EU program itself.

This component was slightly increased compared to the initial version from the European Commission, because otherwise the interest subsidy would “eat up” the entire amount. At the same time, it is important for the European Parliament and the Council of the EU to provide Ukraine with technical assistance for EU accession and to support civil society. This part of the document was given a lot of attention during revision.

Also, in the next four years, Ukraine will not pay interest on the loans it received earlier and will receive now, which will ease the fiscal burden.

How to receive funding?

The advantage of the adopted document is the possibility for Ukraine to receive transitional financing (bridge financing) in the total amount of EUR 9 billion by June this year, of which we hope to receive EUR 4.5 billion as early as March.

This approach will allow the government and the European Commission to agree on the text of the Plan of Ukraine as regards the implementation of reforms and changes.

The government must submit the Plan within two months after the Regulation on the Ukraine Facility enters into force. It should be in line with the steps of Ukraine’s accession to the EU, support social, climate, and environmental goals, the rule of law and gender equality, take into account the needs of local authorities, and explain in detail how the government will combat fraud and all forms of corruption, etc.

The Plan for Ukraine is now almost ready.

Since the announcement of the proposal to create the Ukraine Facility, the Ukrainian side has made efforts to develop a draft of the Plan, and to some extent consulted with civil society and business.

There have already been several iterations of the Plan agreed with the European Commission. The work on the Plan will be completed after the final requirements of the EU Regulation are taken into account and consultations with the Verkhovna Rada are held.

The Plan itself will be approved by the Cabinet of Ministers of Ukraine and submitted to the EU.

Then, the Plan for Ukraine will be assessed by the European Commission for compliance with the predefined criteria. The relevant Regulation provides that the implementation of the measures provided for in the Plan should contribute to the acceleration of Ukraine’s economic growth, reduction of social inequality, approximation of Ukraine to EU standards, and elimination of obstacles to Ukraine’s accession to the EU, as identified by the European Commission.

The European Commission will also assess the fulfilment of more than a dozen other criteria determined by EU’s lawmakers. The EU member states will use the assessment of the European Commission to adopt the Plan for Ukraine by a qualified majority. The Verkhovna Rada of Ukraine will most likely have to ratify financial agreements for each pillar of the Ukraine Facility.

The content of the Plan is important, as it will be used as the basis for Ukraine’s obligations to the EU, which will be a precondition for the provision of all subsequent tranches of budget support.

Completed homework equals receiving funds.

According to the available information, the Plan will contain both general reforms necessary to build economic sustainability and promote economic growth, as well as sectoral measures. In particular, it provides for steps to continue the reform of the public finance management system and the public administration reform, as well as further stages of development and strengthening of anti-corruption bodies.

Efforts will also be aimed at improving the investment climate, the regulation of the labour market, and human capital development. Horizontal priorities are defined as building a green economy (in line with the EU Green Deal) and further digitalization.

If Ukraine is unable to fulfil the conditions for the Ukraine Facility due to the war, the EU may provide exceptional financing for a period of up to three months. However, one shouldn’t count on it.

It is much better for Ukraine to present a viable and realistic Plan to its partners and to continue to fulfil all obligations on time.

Who evaluates the performance of tasks?

The European Commission will be responsible for the quarterly assessment of the performance of obligations. The results of the assessments and recommendations on the allocation of the next tranche and its amount (the amount will be lower in case not all obligations are fulfilled) will be sent to the Council of the European Union, which will have a month to prepare its own conclusion.

The Council of the EU may disagree with the conclusion of the European Commission, in which case these institutions will start a dialogue.

At the same time, similar to the implementation of tasks under traditional macro-financial assistance programs, the government will consult with the European Commission on the implementation of the planned obligations. The European Commission has the right to monitor the implementation of projects within the framework of the Ukraine Facility, including the procedures for selecting and providing funding for the implementation of individual programs or projects, conducting public procurement, and, accordingly, provide recommendations for their change.

The European Commission will develop an instrument to monitor the performance of the Plan for Ukraine – Ukraine Plan Scoreboard/Scoreboard, which will register progress made on the tasks. It will be available online and updated by the European Commission twice a year. The Scoreboard is expected to be ready by January 2025.

In addition, as it was earlier reported, a web portal for monitoring the transparency of financial operations in Ukraine was created. Ukraine undertook to publish data on funding recipients exceeding EUR 100,000 cumulatively over four years twice a year.

What is the investment framework in the Facility?

Investment is one of the pillars of the Ukraine Facility. To this end, a Framework Investment Program for Ukraine will be created with a steering board consisting of representatives of the European Commission and EU member states. The role of the steering board will be to advise the European Commission on ways to support Ukraine, identify risks, financial products for investment, etc.

The European Investment Bank will play an important role in the implementation of the investment pillar.

Discussions are still ongoing as regards the format of the respective support. However, the talk is about both providing guarantees and direct investments.

Individual EU member states, third countries and parties can also join the Ukraine guarantee instrument.

According to the available information on the investment pillar, more than 30% of the financial support will be provided in the form of grants, of which at least 20% will be directed to the rebuilding, reconstructing, and modernising regions, cities, and communities of Ukraine. At least 20% of EU guarantees under the programme will also be directed to green projects, and 15% of guarantees are reserved to support small and medium-sized businesses.

What kind of technical support will be provided?

The Ukraine Facility will replace some of the financial resources that the EU has traditionally provided to countries through other programmes, including the IPA (Instrument for Pre-Accession Assistance). The IPA provides pre-accession support to countries preparing to join the EU to harmonise legislation and implement reforms necessary to complete negotiation chapters.

The funds for technical assistance are currently included in the third pillar (Pillar III) of the Ukraine Facility. This pillar also includes support for civil society.

It is important to note that funding for programmes such as Horizon and other thematic EU programs which Ukraine has already joined will continue to be available under the “old” conditions, i.e., without being linked to the Plan for Ukraine and the Ukraine Facility.

* * * * *

Ukraine Facility is a critically important financial instrument of support for Ukraine. Its action will be comprehensive and will help to accelerate reforms in key sectors of the economy, improve business activity, increase economic resilience, and accelerate economic growth. It will also help the country to integrate into the European Union.

The lion’s share of the funding will directly depend on the performance of measures stipulated in the Plan for Ukraine (money in exchange for reforms). These reforms are primarily needed by Ukraine itself; they are important for the sustainability of the economy and for returning to economic growth.

Most of the funds are provided in the form of concessional loans, which Ukraine will repay in many years.

However, once Ukraine becomes a member of the European Union, it will also be able to take advantage of all EU programmes for member states.

The #RRR4U consortium will monitor the fulfilment of obligations under the Ukraine Facility, as this is important for Ukraine’s macro-fiscal stability.

Authors:

Oleksandra Betliy, Institute for Economic Research and Policy Consulting;
Vitaliy Nabok, Institute of Analytics and Advocacy;
Alyona Korohod, DiXi Group;
Maria Repko, Center for Economic Strategy.
Ihor Burakovskiy and Vitalii Kravchuk (Institute for Economic Research and Policy Consulting) also took part in the preparation of the article.

The article was written within the framework of the RRR4U consortium (Resilience, Reconstruction and Relief for Ukraine) – a union of four Ukrainian civil society organizations with financial support from the Open Society Foundations and the International Renaissance Foundation. The members of the Consortium are the Institute for Economic Research and Policy Consulting, the Institute of Analytics and Advocacy, DiXi Group and the Center for Economic Strategy.

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