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A New Pact for Ukraine: How to make EU aid work

Ukraine badly needs external aid from western donors, but that money should be spent well. An international donor conference is in the air, and the European Union proposed an aid package of around €11 billion, which can be deployed in the long term in cooperation with various other financial institutions in Ukraine. Even more important than the quantity is the quality of the aid. The situation in Ukraine is not so exceptional that past lessons are irrelevant.

March 14, 2014 - Elżbieta Kaca - Articles and Commentary

14.03.2014 ukraine

Catherine Ashton at the EU's special summit on Ukraine. Photo: Das österreichische Außenministerium (cc) commons.wikimedia.org

Since 2007, the EU has made direct transfers to the state budget to be spent on reforms under jointly-agreed conditions. Around 60 per cent of all EU bilateral aid in the years 2007-2013 was to be spent this way on reforms in energy, energy efficiency, trade facilitation, the environment, transportation and border management for an overall sum of €389 million. And yet Ukraine has received payments of not more than one-third of this amount (€111.14 million) due to limits on transfers imposed by the European Commission since 2011. The main reason for this was the significant deterioration in public procurement law and budgetary transparency, meaning the formal prerequisite of sound public finance management (PFM) was not fulfilled. Five lessons can be drawn:

Lesson 1: The real prerequisite is the existence of a reformist government.

EU budget support has brought very limited results. Evidently it helped Ukraine’s approximation to EU standards, but it did not ensure the implementation of the required legislation. The Ukrainian administration felt very much at ease drafting strategies and adopting legislation on paper (it fulfils 60-70 per cent of the indicators), but actual implementation lagged behind. The major reason has been a lack of political will at a higher level to push for comprehensive reforms.

Lesson 2: The capacity building of governance structure must be supported.

Implementation will also be ineffective in a system characterised by a high level of corruption, inefficient management, lack of planning staff, frequent turnover of top-level managerial positions and weak inter-ministerial coordination. But most troublesome, Ukraine still lacks an efficient mechanism for the coordination of international aid. The state funds through which international aid is transferred and distributed to ministries lack transparency.

Lesson 3: The EU conditions must be relevant.

The EU side is also to blame. The annual volume of budget support constitutes only a small part of the Ukrainian budget (around 0.1 per cent). This is not enough to trigger massive reforms, and the EU’s demanding agenda has thus required significant national funding. Whilst Ukrainian officials estimated that the cost of the national energy strategy could reach €100 billion, the EU budgeted just €145 million for energy and energy efficiency reforms. More worryingly, conditionality was applied inconsistently. The conditions covered too many areas, proved too ambitious or were simply formulated ambiguously.

Lesson 4: Advice given should be relevant.

Technical assistance, meaning EU experts advising Ukrainian officials, underpinned budgetary support. But, due to lengthy bureaucratic procedures, the missions were launched around one year after the start of the operation. In some sectors, EU experts lacked capacities in terms of drafting country-specific recommendations. The logical response was for the EU to hire experts for the reform negotiation phase, to frontload assistance during the cycle period of budget support and to contract more local experts.

Lesson 5: Popular support for reforms must be gained.

Budget-support operations remain opaque and therefore have undermined social approval for reform. In most cases the representatives of even EU-supported CSOs have limited access to information. The EU has thus found it hard to catch the attention of the media or society, as its aid is too abstract for most people. EU communication activities should have translated details about conditionality into a reader-friendly language to be passed to media and results of reform should have been communicated through campaigns, in close cooperation with the Ukrainian government. The EU should have financed watchdogs to monitor reform implementation, in particular PFM, as well as inviting CSOs to participate in joint committees monitoring EU aid.

In trying to implement these lessons, the EU faces tension between, on the one hand, the need to provide immediate funding for Ukraine’s economy and, on the other, the requirement to ensure the long-term effectiveness of conditionality. If sound governance structures are not in place before funding arrives, the money will simply be wasted. There is also a risk that any “shock therapy” demanded by donors could lead to social disapproval and increase political instability. The medium-term financial limits of both sides (up to 2016 at least) give an additional reason to focus on the long-term perspective.

All this means that the finances should be entrusted to Ukrainians on the condition that the new government implements previous commitments to the transparency of PFM and public procurement rules. A kind of reverse conditionality should also apply, with donors ratcheting up their long-term commitments in return for reforms related to building the rule of law and the democratic foundations of the country (for example, an independent judiciary and reform of the constitution). And the EU and other donors should empower Ukraine’s new government to decide on the medium and long-term pace of the reforms, limiting themselves to an advisory role. The EU can ensure that this approach is not undermined by other international donors by setting up a high-level advisory mission (based on experiences across the border in Moldova) involving the EU and other internationally-experienced experts (for example, from the United States) so as to set the tone.

Elżbieta Kaca is an analyst in the Polish Institute of International Affairs. She deals with European Neighbourhood Policy, the Eastern Partnership and France’s European policy. She studied political sciene in Warsaw and Bordeaux and finished a post-graduate diploma at the College of Europe in Natolin. She speaks English, Russia and French.

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