Explanatory Memorandum to COM(2023)338 - Establishing the Ukraine Facility - Main contents
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This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2023)338 - Establishing the Ukraine Facility. |
|---|---|
| source | COM(2023)338 |
| date | 20-06-2023 |
1. CONTEXT OF THE PROPOSAL
• Reasons for and objectives of the proposal
On 24 February 2022, Russia launched a full-scale military invasion of Ukraine, with devastating consequences for Ukraine and its people. More than fifteen months of intense fighting, heavy artillery shelling and airstrikes have resulted in high numbers of civilian casualties and immense human suffering. Russia’s war of aggression has caused extensive damage to infrastructure and services across Ukraine and the wholesale destruction of cities and towns in some parts of the country. The resulting humanitarian crisis has displaced millions of Ukrainians from their homes and left many in desperate need of food, shelter and medical assistance. To this day, Russian aerial strikes continue to attack targets throughout the country. It will take years, if not decades, to heal the trauma of this senseless war.
The European Union, together with its Member States, has demonstrated unprecedented unity in condemning Russia’s actions and in providing support to Ukraine. The EU, its Member States and European Financial Institutions have together provided wide-ranging support to Ukraine and its people, amounting to EUR 70 billion by May 2023. This includes EUR 38 billion in financial, budget support and humanitarian assistance1, EUR 15 billion in military support, including through the European Peace Facility, and EUR 17 billion made available by the EU and its Member States to help cater for needs of people fleeing the war. In addition, the EU Solidarity Lanes established in May 2022 had by end May 2023 already provided EUR 31 billion in export revenue to Ukraine. EU Member States have also provided temporary protection for around 4 million people fleeing the country since the start of the war. This reflects the steadfast resolve of the Union to help Ukraine for as long as it takes.
Since the start of the war, the Union has also imposed unprecedented sanctions against Russia, adding to those imposed by the EU following the illegal annexation of Crimea in March 2014. Work is ongoing on the possible use of frozen assets to support Ukraine’s recovery and reconstruction.
In March 2023, the World Bank together with the Ukrainian Government, the European Commission and the United Nations presented the updated assessment of damages covering a full year of the unprovoked Russian aggression against Ukraine2. The assessment found that the estimated overall reconstruction needs of Ukraine over the next 10 years amounts to EUR 384 billion, and to EUR 142 billion for the period 2023-2027. For 2023 alone, the immediate fast recovery needs stood at EUR 13 billion for priorities identified by the Government of Ukraine, taking into account the country’s absorption capacity. These priorities include restoration and repair of energy and other critical and social infrastructure, housing, humanitarian demining, and support to the private sector.
In March 2023, the International Monetary Fund (IMF) Board approved a new extended arrangement covering the period 2023-2027 under the Extended Fund Facility of about EUR 14.5 billion. The IMF programme aims to anchor policies that sustain fiscal, external, price and financial stability and support economic recovery, while enhancing governance and strengthening institutions to promote long-term growth in the context of post-war reconstruction and Ukraine’s path to EU accession.
The Union has committed to play a major role in Ukraine’s reconstruction, and to support investments needed for rebuilding the country and reforms that will foster Ukraine’s EU accession path3. These reforms will gradually align Ukraine’s legislation with the Union acquis and foster its integration into the Single Market. They will in turn help attract investments in Ukraine by providing regulatory certainty and an improved business environment. The European Council invited4 the Commission to make proposals on this basis5.
Investment in Ukraine’s recovery and reconstruction cannot wait until the end of the war. Active combat has remained largely contained to the south and east of the country, where the greatest extent of damages has also been sustained. However, the broader economic and social impact of the war is extensive, affecting all of Ukraine. Supporting the recovery of the Ukrainian economy requires concerted efforts to help ensure that economic activity is sustained, and basic infrastructure is repaired and maintained. This in turn will ensure that conditions are in place for the economy to recover, generating revenues for the State budget, and thereby progressively lowering the volume of the international assistance needed. Supporting Ukraine’s reconstruction now also means maintaining or creating employment opportunities for Ukrainians, including the internally displaced and creating conditions for refugees to return to Ukraine.
The EU has already provided significant financial support to help Ukraine meet its short-term budgetary needs, and for Ukraine’s fast recovery, through highly concessional loans channelled respectively through the Emergency Macro-Financial Assistance (EUR 1.2 billion in 2022), the Exceptional Macro-Financial Assistance (EUR 6 billion in 2022), and the Macro-Financial Assistance Plus (MFA+) programme (EUR 18 billion in 2023) and a EUR 1 billion package that combines funds under the Neighbourhood, Development and International Cooperation Instrument – Global Europe (NDICI) and loans from the European Investment Bank backed by the EU budget.
The EU has eliminated custom tariffs under the Deep and Comprehensive Free Trade Area (DCFTA) and has included Ukraine in the EU’s Single Market Programme to support its small and medium-sized enterprises. A revised priority action plan for enhanced implementation of the EU-Ukraine DCFTA in 2023-2024 has been adopted to accelerate Ukraine’s integration in the Single Market.
The EU has opened the possibility for Ukraine to submit joint projects with EU Member States for the development of border-crossing points under the Connecting Europe Facility (CEF). Measures were swiftly taken to facilitate the participation of Ukrainian displaced persons to the Erasmus for Young Entrepreneurs programme, leading to the highest number ever of beneficiaries from Ukraine in 2022.
However, given the scale and complexity of the challenge ahead, a longer-term solution is needed to ensure that funding is well coordinated and used efficiently, and ties recovery and reconstruction to Ukraine’s accession track. To this end, the Commission proposes to create a new instrument, the Ukraine Facility (the ‘Facility’), that can cater both for short-term recovery needs and medium-term reconstruction and modernisation of Ukraine. The Facility is designed as a flexible instrument, adapted to the unprecedented challenges of supporting a country at war, while ensuring predictability, transparency, and accountability of the funds. This proposal reflects the risk of a prolonged conflict, and the need for continued macro-financial assistance.
Contents
1. Pillar I covers financial support in the form of both non-repayable support and loan support to Ukraine. For this support to be disbursed, the Government of Ukraine will prepare a Plan in close consultation with the Commission, which will be endorsed by the EU. This Plan will encompass Ukraine’s vision for the recovery, reconstruction and modernisation of the country and for the reforms it intends to undertake as part of its EU accession process. Funds will be provided based on the implementation of the Plan, which will be underpinned by a set of conditionalities and a timeline for disbursements. Significant emphasis will be placed on public administration reform, good governance, the rule of law, and sound financial management, including fostering efficient and effective management and control systems and a strong focus on anti-corruption and anti-fraud, but also other reforms and approximation to the Union acquis that would underpin the accession process and modernisation of the economy. Funds will be disbursed based on the fulfilment of these conditionalities.
2. Pillar II is a Ukraine Investment Framework, designed to attract private and public investments in Ukraine’s recovery and reconstruction, supporting the implementation of the Plan. It will complement all existing financial instruments for Ukraine (blending and guarantees), with the possibility of scaling them up, when conditions allow for it.
3. Pillar III provides technical assistance and other supporting measures, including mobilisation of expertise on reforms, grants to municipalities, and other forms of bilateral support normally available for pre-accession countries under the Instrument for Pre-Accession (IPA) supporting the objectives of the Plan. It may also support other measures aimed at addressing the consequences of the war, for example relating to war damages. Pillar III will also cover the interest rate subsidies for the loans provided to Ukraine under Pillar I.
The proposed instrument aims to equip the EU with a legal basis that would allow it to match its political ambition with its financial leverage, in line with its long-term commitment. With a Plan proposed by and agreed with Ukraine serving as the overarching framework for reforms and investments, the proposed instrument goes beyond what can be offered by existing instruments, such as macro-financial assistance and NDICI.
- essential requirements (macro-financial stability, budget oversight, public financial management, etc.). Conditions may be defined so as to reflect satisfactory progress towards the fulfilment of these requirements; and
- sectoral and structural reforms, and investments. The conditions will be broken down into intermediate steps with a timeline for completion.
Payments will occur according to a fixed quarterly schedule, based on payment requests submitted by Ukraine and following verification by the Commission of the fulfilment of the relevant conditionalities. In case a conditionality is not fulfilled, the Commission will deduct a corresponding amount from the payment. The disbursement of the corresponding withheld funds may take place during the next payment windows and up to one year after the original deadline set out in the Plan, provided the conditionalities have been fulfilled. The quarterly frequency of payment windows will ensure both predictability of support to Ukraine and a constant policy dialogue between the Commission and Ukraine.
Recovery and reconstruction is not only about rebuilding what was destroyed. It is about building a modern and vibrant Ukraine, ensuring that the recovery, reconstruction and modernisation is sustainable, resilient and future-proof, based on the ‘do no harm’ and ‘leave no one behind’ principles. It is about investing in the transition of Ukraine towards a green, digital and inclusive economy that is progressively aligning with EU rules and standards. Ukraine should rebuild its cities in a high-quality, sustainable and inclusive way, inspired by the New European Bauhaus.
Recovery and reconstruction is also about reconstructing and modernising the country, and integrating it into the EU’s Single Market, while ensuring that sub-national authorities, in particular municipalities, are closely associated and consulted in this process, and that the decentralisation reform is at the heart of it. The peer-to-peer cooperation between the EU and Ukrainian cities and regions and continued access to the cross-border cooperation programmes will also constitute a vital part of Ukraine’s recovery, reconstruction and modernisation. Involvement of private actors, notably businesses and investors, will be an essential component of the recovery and reconstruction.
The proposal is equipped with a strong system of audit and controls set out in a multilayer mechanism: first, the reform of the audit and control systems of the State will be needed as part of the reforms under the Plan; second, the Commission will be able to carry out checks of the implementation of the funds spent in relation with the Plan at any moment of the project cycle; third, an independent Audit Board will report to the Commission on possible mismanagement of funds under the whole Facility. Although this multilayer mechanism will apply to the overall Facility, control mechanisms related to the Ukraine Investment Framework and to technical assistance will be based on the systems, rules and procedures of the International Finance Institutions and implementing partners involved in the implementation.
Finally, donor coordination will be essential to ensure that available resources are spent in the most effective and targeted way to match the needs of Ukraine and its people. To this end, full use should be made of the G7 Multi-agency Donor Coordination Platform for Ukraine launched in January 2023. The Plan to be developed by the Government of Ukraine for the purpose of this Facility could also serve to guide other donors’ assistance programming to Ukraine.
• Consistency with existing policy provisions in the policy area
The support under this Facility will be consistent with and complementary to other forms of bilateral support for Ukraine provided through other EU instruments, including humanitarian aid6, and regional and cross-border, thematic, and crisis response funding under the Neighbourhood, Development and International Cooperation Instrument – Global Europe (NDICI)7. The Facility will not cover humanitarian aid, defence or support to people fleeing the war, which will continue to be funded via existing instruments. The Facility will replace existing bilateral support provided to Ukraine (MFA+, NDICI bilateral allocation). It will also replace support that Ukraine would have received under the Instrument for Pre-accession Assistance.
• Consistency with other Union policies
The implementation of the Regulation will be consistent with other areas of external action (e.g. humanitarian assistance, development cooperation). The integrated approach of the Ukraine Plan allows to cover the needs as regards recovery, reconstruction and modernisation of Ukraine and to tie them with Union accession requirements, to ensure consistency with all relevant EU policies.
2. LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY
• Legal basis
This proposal is based on Article 212 and Article 322 of the Treaty on the Functioning of the European Union. It is presented by the Commission in accordance with the procedure laid down in Article 294 of the Treaty on the Functioning of the European Union.
• Subsidiarity (for non-exclusive competence)
The size of damages caused to Ukraine by Russia’s war of aggression is such that Ukraine will require extensive and sustained support that no Member State could provide alone. The EU is in a unique position to deliver external assistance to Ukraine over the long term in a timely, coordinated and predictable manner. The EU can leverage its borrowing capacity to lend to Ukraine on advantageous terms and cover the costs of interest rates, as well as to provide grants and guarantees in a multi-annual perspective.
With its presence on the ground in Ukraine through its Delegation, the EU can ensure comprehensive access to information on developments affecting the country. The EU is also a party to most of the multilateral processes aiming at addressing challenges that Ukraine is facing. This allows the EU to be constantly aware of new needs and circumstances and, therefore, to adapt support according to evolving needs, coordinating closely with other national or international donors.
The objective of preparing candidate countries and potential candidates for Union membership can also be best addressed at Union level.
• Proportionality
The proposal complies with the proportionality principle in that it does not go beyond the minimum required to achieve the stated objectives at the European level and which is necessary for that purpose.
The Facility is proposed as a targeted response to the specific circumstances of Ukraine due to the Russian war of aggression. Its structure is based on either the continuation of existing support (e.g. NDICI bilateral support), or along the same model (e.g. guarantees and financial instruments), or based on existing, but simplified instruments (performance-based instruments), brought together under a single instrument to enhance coherence, effectiveness, efficiency and EU added-value.
• Choice of the instrument
In accordance with Article 212 of the Treaty on the Functioning of the European Union, which sets out the ordinary legislative procedure to be used to adopt measures for implementing cooperation with third countries, the proposal takes the form of a Regulation, ensuring its uniform application, binding nature in its entirety, and direct applicability.
3. RESULTS OF EX-POST EVALUATIONS, STAKEHOLDER CONSULTATIONS AND IMPACT ASSESSMENTS
• Stakeholder consultations
A formal stakeholder consultation could not be carried out due to the urgency of preparing the proposal so that it can be adopted in a timely manner by the co-legislators to render it operational as of beginning of 2024, when new needs will have to be met relating to the war and related damages, as well as for recovery and reconstruction.
The EU will ensure appropriate communication and visibility around the objectives and the actions delivered within the scope of this Facility, in Ukraine, within the Union, and beyond.
• Impact assessment
Due to the urgent nature of the proposal, which is designed to provide assistance to a country at war as of beginning of 2024, no impact assessment could be carried out. The ex ante assessment of needs proposed to be covered by the Ukraine Facility draw upon recent data from the International Monetary Fund and from the updated Ukraine Rapid Damage and Needs Assessment8, which was prepared by the World Bank together with the Commission, the UN and the Ukrainian Government. An analytical document in the form of a staff working document presenting the evidence behind the proposal and cost estimates will be prepared within three months of the initiative’s adoption.
• Fundamental rights
A pre-condition for granting support under the instrument is that Ukraine continues to respect effective democratic mechanisms and its institutions, including a multi-party parliamentary system, the rule of law, and to guarantee respect for human rights, including the rights of persons belonging to minorities. The commitment to reforms and the strong political will expressed by the Ukrainian authorities are positive signs, in particular as evidenced by the European Council granting candidate status to Ukraine in June 2022 and by the renewed successful completion of the structural policy conditionality attached to the recent macro-financial assistance (MFA) operations to Ukraine. Since the Russian aggression, the Ukrainian authorities have shown an impressive degree of resilience and have remained committed to pursue these reforms in a transparent manner, while working towards EU standards and in line with the country’s path towards EU integration.
4. BUDGETARY IMPLICATIONS
The maximum resources for the implementation of the Facility shall be EUR 50 billion (in current prices) for 2024-2027 for all types of support. The Facility will be funded by:
(a) loans guaranteed over and above the multiannual financial framework (MFF) ceilings;
(b) a new special instrument, over and above the ceilings of the MFF, the Ukraine Reserve, as part of the amendment to Council Regulation (EU, Euratom) 2020/2093. Such Reserve may support all expenditure other than in the form of loans, including non-repayable support, grants and provisioning for guarantees.
The amendment to the MFF Regulation9 also establishes that the Ukraine Reserve shall aim at providing at least EUR 2.5 billion in current prices as an annual indicative amount.
The Ukraine Reserve may be mobilised by the European Parliament and the Council in the framework of the budgetary procedure, provided for in Article 314 TFEU.
Member States, third countries, international organisations, international financial institutions or other sources may provide additional financial contributions to the Facility. Such contributions shall constitute external assigned revenue within the meaning of Article 21(2), points (a)(ii), (d), and (e) of Regulation (EU, Euratom) 2018/1046. Additional amounts received as external assigned revenue within the meaning of Article 21 i of Regulation (EU, Euratom) 2018/1046 under the relevant Union legal acts in relation to restrictive measures in view of Russia's actions destabilising the situation in Ukraine will be added to the resources for the Facility.
5. OTHER ELEMENTS
• Implementation plans and monitoring, evaluation and reporting arrangements
The Regulation sets out detailed provisions relating to monitoring and reporting.
The Commission will continuously monitor the implementation of the Facility. Specifically, a monitoring system should be put in place by Ukraine and Ukraine will be expected to report to the Commission annually on its implementation of the part of the Ukraine Plan covered by the Facility. This will include reporting on Ukraine’s internal control system and on any amounts unduly paid or misused, and eventually recovered by the EU. Proportionate reporting requirements will be required of recipients of Union funding implemented under the second and third pillars of the Facility.
The Commission will provide the European Parliament, the Council and the Committee referred to in Article 39 of the Regulation with an annual assessment of the implementation of funds provided under the Facility.
The Commission will also carry out an ex-post evaluation of the Regulation.
• Detailed explanation of the specific provisions of the proposal
This Regulation establishes the Ukraine Facility.
Chapter I (General provisions) covers the subject matter and structure of the Facility in three pillars (Article 1), the definitions (Article 2), the general and specific objectives of the Facility (Article 3), the general principles (Article 4) and the precondition for support (Article 5).
Chapter II (Financing and implementation) sets the financial envelope of the Facility in non-repayable financial support and loans (Article 6), and lays down the procedures for potential additional contributions from Member States, third countries or other sources (Article 7). Article 8 details the forms of implementation for the pillars of the Facility, i.e. direct and indirect management in accordance with the Financial Regulation. Articles 9 and 10 respectively cover the Framework agreement to be signed between the Commission and Ukraine laying down in particular the audit and control provisions, and the financing agreements to be signed under the first and third pillar, including obligations and conditions for the disbursement of payments. Rules on eligibility of recipients and provisions for carry-overs, annual instalments, commitment appropriations, surpluses from the budgetary guarantee, repayments and revenue generated by financial instruments are covered in Articles 11 and 12, respectively. Article 13 foresees the possibility of providing support to maintain the macro-financial stability of Ukraine under exceptional circumstances, especially related to the war, and subject to the fulfilment of the precondition under Article 5. This exceptional financing would cease as soon as the fulfilment of conditions becomes possible again.
Chapter III (Ukraine Plan) details the functioning of the first pillar of the Facility, beginning with the role of the Ukraine Plan (Article 14) as the overarching framework for the three pillars and to achieve the objectives of the Facility and the general principles for financing, including the types of conditions for disbursements (Article 15). Articles 16 and 17 present the Ukraine Plan to be submitted by Ukraine, the procedure for doing so, and the elements that the Plan should contain, including reforms and investments to be financed by the Facility, the involvement of the sub-national authorities, and the systems to prevent and correct irregularities, fraud, corruption and conflicts of interests, when using the funds provided under the Facility. The Commission will proceed to assess the Plan according to the criteria laid out in Article 18, and make a proposal for the Council implementing decision as described in Article 19, which will lay down, among others, the indicative non-repayable financial support and indicative amount of the loan support to be disbursed against the satisfactory fulfilment of the conditions, the time limit for such fulfilment, and the pre-financing for which Ukraine will be eligible. Article 20 provides for the possibility for the Commission or Ukraine to make a proposal to amend the Ukraine Plan. Article 21 covers the loan agreement to be signed between the Commission and Ukraine, and the rules governing the borrowing by the Commission on the markets. Article 22 provides for the possibility for Ukraine to request the Commission to bear the borrowing costs subsidy, which will be covered under the third pillar of the Facility. The rules for the payment of pre-financing to Ukraine, subject to the respect of the precondition described in Article 5, are laid out in Article 23. Article 24 provides the conditions and procedure for the disbursement to Ukraine of exceptional bridge financing. Article 25 details the procedure for the disbursements under the first pillar, upon fulfilment of the conditions set out in the Plan. Payments will take place on a quarterly basis, following the submission by Ukraine of a payment request demonstrating the satisfactory fulfilment of the relevant conditions. In case of a negative assessment by the Commission, a part of the amount corresponding to the conditions not fulfilled will be withheld. The payment withheld would only be disbursed once Ukraine has duly justified, as part of a subsequent payment request, that it has taken the necessary measures to ensure satisfactory fulfilment of the relevant conditions. Article 26 provides for the obligation by Ukraine to publish the data on persons and entities receiving amounts of funding exceeding the equivalent of EUR 500,000 for the implementation of reforms and investments specified in the Ukraine Plan, and the categories of data to be published.
Chapter IV (Ukraine Investment Framework) describes the second pillar of the Facility, which aims to support investments and provide access to finance conducive to the implementation of the Ukraine Plan. The scope and structure of the Framework are defined in Article 27. Article 28 provides for the possibility of additional contributions from Member States, third countries and third parties. The Chapter also details the Ukraine Guarantee (Articles 29 and 30) and sets its provisioning rate and the procedure for its review (Article 31).
Chapter V (EU accession assistance and support measures) covers the implementation of the third pillar of the Facility, which will support Ukraine’s progressive alignment to the Union acquis and progressive integration into the Single Market with a view to future Union membership, as well as strengthen the capacities of stakeholders and local authorities and provide funding for initiatives and bodies involved in supporting and enforcing international justice in Ukraine (Article 32).
Chapter VI (Protection of the financial interests of the Union) lays out the provisions to be followed by the Commission and Ukraine to ensure effective controls over the implementation of the Facility. Article 33 details the obligations to be reflected in the Framework, Financing and Loan agreements, which will include appropriate measures to prevent, detect and correct fraud, corruption, conflicts of interests and irregularities affecting the financial interests of the Union, to avoid double funding and to take legal action to recover funds that have been misappropriated, the collection of adequate data on the recipients of funds under the Facility and the rights to be granted to the Commission, the European Anti-Fraud Office (OLAF), and the European Public Prosecutor’s Office (EPPO) where applicable. Article 34 establishes an Audit Board to be composed of independent members appointed by the Commission, which will assist the Commission in protecting the financial interests of the Union and in ensuring the sound management by Ukraine of Union funding under the Facility.
Chapter VII (Work programmes, monitoring, reporting and evaluation) covers the work programmes through which assistance under the Facility will be implemented (Article 35), the provisions for setting out the indicators and results frameworks used in the monitoring and evaluation (Article 36), and the ex-post evaluation of the Facility (Article 37).
Chapter VIII (Final provisions) lays down the exercise of the delegation of powers with respect to the provisioning rate (Article 38), the comitology procedure (Article 39), the provisions on information, communication and publicity (Article 40) and on entry into force (Article 41).