Why is the Commission proposing to set up a new Ukraine Facility?
Russia's war of aggression has devastating consequences for Ukraine - for its people, its economy, and its infrastructure. While fighting an existential war, Ukraine has also engaged in its EU accession path. Given the scale and complexity of the challenges both for the reconstruction and the reforms underpinning the enlargement process, Ukraine needs the EU's sustained support in addressing these challenges.
To this end, the Commission proposes to create a new instrument, the Ukraine Facility (the ‘Facility'), to provide predictable financial support for Ukraine over the 2024-2027 period. The Facility should cater both for short-term State and 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 and ensuring predictability, transparency, and accountability of the funds.
What are the key elements of the Ukraine Facility?
The Facility will be organised around three pillars:
-Pillar I - financial support in the form of grants and loans to the State: this will ensure stable and predictable funding, supporting the sustainability of Ukraine's finances while providing a solid framework for the protection of the EU budget. For the support to be disbursed, the Government of Ukraine will need to prepare a ‘Ukraine Plan', in close consultation with the Commission, detailing its vision for the recovery, reconstruction and modernisation of the country and the reforms it intends to undertake as part of its EU accession process. The Plan, which will be endorsed by the EU, will include structural reforms and investments aimed at lifting the growth potential of the Ukrainian economy. It will place significant emphasis on public administration reform, good governance, the rule of law, and sound financial management, including a strong focus on anti-corruption and anti-fraud, but also other reforms as well as investments that would underpin the accession process and the modernisation of the economy. Funds under the first Pillar of the Facility will be provided based on the implementation of the Ukraine Plan, which will be underpinned by a set of conditions and a timeline for disbursements. Payments will occur according to a fixed quarterly schedule, following verification by the Commission of the satisfactory fulfilment of the relevant conditions.
-Pillar II - a specific Ukraine Investment Framework designed to attract and mobilise public and private investments in Ukraine's recovery and reconstruction by providing guarantees and blended finance (a mix of loans and EU grants) in support of the implementation of the Ukraine Plan, with the possibility of scaling up this support when conditions allow for it.
-Pillar III - technical assistance and other supporting measures, including mobilisation of expertise on reforms, support to municipalities, civil society, and other forms of bilateral support normally available for pre-accession countries under the Instrument for Pre-Accession (IPA), also supporting the objectives of the Ukraine Plan. Interest rate subsidies for the loans support will also be covered.
What is the total budget of the Facility? Does it consist of grants or loans? How is it mobilised?
The overall amount of the Facility is proposed to be up to €50 billion for the period from 2024 to 2027 for all types of support.
This amount will be provided through a combination of both grants and loans as well as provisioning for budgetary guarantees, to be decided by the Member States and the European Parliament in the context of the adoption of the annual EU budget.
A new special instrument, the Ukraine Reserve, proposed in the context of the Multiannual Financial Framework (MFF) mid-term review, aiming to provide at least €2.5 billion as an annual indicative amount will cater for the grant part as well as provisioning for guarantees. The loans will be guaranteed by the ‘headroom', similar to the financing under the MFA+. The headroom is the difference between the own resources ceiling (i.e. the maximum amount of resources that Member States can be asked to contribute in a given year) and the funds that the Commission actually needs to cover the expenses foreseen by the budget.
This amount matches the EU's commitment to provide a significant share of the macro-financial and recovery support and will allow the EU to play a leading role in the reconstruction efforts. Other donors, such as third countries, International Financial institutions and international organizations, are encouraged to contribute and to support the implementation of Ukraine Plan, which could serve as an anchor for further support to Ukraine's recovery, reconstruction and modernisation. This coordination should build on the work of the G7 Multi-agency Donor Coordination Platform.
What is the scope of today's proposal?
The Facility will replace existing bilateral support provided to Ukraine (MFA+, NDICI bilateral allocation). It is nevertheless important to ensure that Ukraine can continue to benefit from regional, thematic, and other forms of support under the NDICI, including cross-border cooperation programmes. Programmes already adopted under NDICI will also continue to run as planned, but after the entry into force of the Facility, no new bilateral assistance would be provided under NDICI.
The scope of the Facility will not cover humanitarian aid, defence or support to EU Member States providing protection for Ukrainian refugees fleeing the war, which will continue to be funded via other existing instruments.
Why a single instrument?
The proposed Facility is aimed at equipping the EU with a legal instrument that would allow to ensure a consistent and transparent approach through a unified instrument. This would allow to provide a coherent and integrated policy response to the situation of Ukraine, considering the need for a flexible instrument, at the same time able to tie the recovery, reconstruction and modernisation efforts to Ukraine's EU accession path.
The Facility will also allow the EU to match its political ambition with its financial leverage, by providing a clear mid-term perspective, based on a flexible, yet predictable, funding spanning the 2024-2027 period. Such predictability is important for Ukraine, as well as for our partners and other donors.
The Ukraine Plan to be proposed by Ukraine and approved by the EU will provide a reference policy document to address the prioritisation of accession-related reforms and include investments compliant with EU policies. Reconstruction cannot be limited to rebuilding what was destroyed as it was before the war. The reconstruction offers an opportunity to support Ukraine in investing in its transition towards a green, digital and inclusive economy.
How does the Facility differ from existing instruments such as MFA+?
The Facility will replace existing support provided to Ukraine from the Macro-Financial Assistance Plus (MFA+) programme. The Ukraine Plan to be developed under the first Pillar of the Facility will include conditions linked to essential requirements that were also part of the MFA+ framework, such as macro-financial stability, budget oversight, and public financial management. However, the novelty lies in the Ukraine Plan, which will link the disbursement of funds to the delivery of sectoral and structural reforms and investments, thereby providing a coherent, mid-term vision of the expected recovery, reconstruction and modernisation measures, closely tied to the perspective of the EU accession path. Similar to the MFA+, the loan component of the support will be guaranteed by the EU budget headroom.
What makes the Facility a “flexible” instrument?
Given the uncertainties linked to Russia's war of aggression, the Facility is designed to enable the Union to support Ukraine's evolving needs through a diversified toolbox that balances flexibility and programmability. This includes financing of the Ukrainian State, support to short-term recovery and reconstruction, support to public and private investments through blending and guarantees, as well as technical assistance and capacity building. The financial architecture of the Facility, including the new Ukraine Reserve, is designed to cater for the needed flexibility.
Given the uncertainties, the Regulation will allow Ukraine to make a reasoned request to the Commission to amend or replace the Ukraine Plan. This would happen in particular where pre-established conditions appear to be no longer achievable, either partially or totally, by Ukraine because of objective circumstances.
In addition, the proposal caters for the possibility of exceptional financing under duly justified exceptional circumstances, in case of a significant deterioration of the war that makes it impossible for Ukraine to fulfil the conditions under the Facility.
Can reconstruction really start in Ukraine when the fighting is still ongoing?
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 (€1.2 billion in 2022), the Exceptional Macro-Financial Assistance (€6 billion in 2022), and the Macro-Financial Assistance Plus (MFA+) programme (€18 billion in 2023) and a €1billion package for fast recovery that combines funds under the Neighbourhood, Development and International Cooperation Instrument - Global Europe (NDICI) and loans from the European Investment Bank and the European Bank for Reconstruction and Development backed by the EU budget.
How will the funds be provided?
Funds under Pillar I will be provided via grants and loans, based on the implementation of the Ukraine Plan, which will be underpinned by a set of conditions and a timeline for disbursement. Funds will be disbursed based on the fulfilment of these conditions. The Plan will include conditions linked to 1) essential requirements (macro-financial stability, budget oversight, public financial management, etc.); and 2) 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 satisfactory fulfilment of the relevant conditions.
Under Pillar II and III, grants that will be available will be provided on a project basis.
How will the EU monitor the use of the funds and what obligations will Ukraine have to respect on its side?
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 Ukrainian 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 projects carried out 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.
The Commission will conclude a framework agreement with Ukraine for the implementation of the Facility, with legally binding arrangements for the management, control, supervision, monitoring, evaluation, reporting and audit of funds under the Facility, as well as measures to prevent, investigate and correct irregularities, fraud, corruption and conflicts of interest. The framework agreement will be complemented by financing agreements and loan agreements, under which Ukraine will be required to ensure the collection of, and access to, adequate data on persons and entities receiving funding for the implementation of measures of the Ukraine Plan.
The Commission will continuously monitor the implementation of the Facility. Specifically, Ukraine should establish a monitoring system 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.
Ukraine will be obliged to publish the data on persons and entities receiving amounts of funding exceeding the equivalent of €500,000 for the implementation of reforms and investments specified in the Ukraine Plan.
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.
The Commission will provide the European Parliament and the Council 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.
Is the Facility open to other donors or third parties?
Given the scale of the destruction from the Russian war of aggression, it is clear that supporting Ukraine's recovery, reconstruction and modernisation will require an international collective effort.
The Facility is open to other donors (e.g. Member States, partner countries, international organisations) and should facilitate cooperation and synergies with like-minded partners.
Work is also ongoing on the possible use of Russian assets for Ukraine's recovery and reconstruction.
Ukraine should present a comprehensive plan setting out its vision for a coherent and comprehensive response to the reconstruction needs identified so far. The medium-term perspective provided by this Ukraine Plan through a single instrument, and the emphasis on channelling investments and reforms toward the transition to a low-carbon, digital and inclusive economy, can help mobilise like-minded donors for multiannual contributions to support Ukraine.
What is the relation between the Facility and the G7 Multi-agency Donor Platform?
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. The G7 Multi-agency Donor Coordination Platform for Ukraine, launched in January 2023, is particularly relevant in that context, to foster exchanges and coordination across donors. The Plan to be developed by the Government of Ukraine could also serve to guide other donors' assistance programming to Ukraine, should they choose to do so.
When do you expect the Facility to be operational?
The European Parliament and the Council are invited to consider the proposal as a matter of urgency, to render it operational as of beginning of 2024
Preparations by Ukraine of the Ukraine Plan, and discussions between the Commission and Ukraine, will begin in parallel to ensure that the Plan can meet the requirements of the Regulation and be swiftly approved after its entry into force.
What is the estimate of Ukraine's needs?
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 Ukraine. According to this assessment, the estimated overall reconstruction needs of Ukraine over the next 10 years amounts to €384 billion (USD 411 billion), and to €142 billion (USD 152 billion) for the period 2023-2027. For 2023 alone, the immediate fast recovery needs stood at €13 billion (USD 14 billion) for priorities identified by the Government of Ukraine. These priorities include restoration and repair of energy and other critical and social infrastructure, housing, humanitarian demining, and support to the private sector.
In addition, on 30 March 2023, the International Monetary Fund estimated the State financing gap up to 2027 reached €75.1 billion, and agreed with Ukraine a 14.4 billion four-year programme to support economic stability and recovery, while enhancing governance and strengthening institutions to promote long-term growth in the context of post-war reconstruction and Ukraine's path of accession to the European Union.
How has the European Union been supporting Ukraine so far?
The European Union, together with its Member States, has demonstrated unprecedented unity in condemning Russia's actions and in providing support to Ukraine. Wide-ranging support to Ukraine and its people has been made available, amounting to over €70 billion as of May 2023. This includes €38 billion in economic assistance, €1.7 billion in humanitarian aid, and €15 billion in military support, including through the European Peace Facility. The EU Solidarity Lanes established in May 2022 have also provided €31 billion in export revenue to Ukraine until March 2023. 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.
How Russian assets will be used for Ukraine's reconstruction?
Work is ongoing on the possible use of frozen assets to support Ukraine's recovery and reconstruction.
For More Information
Factsheet: EU solidarity with Ukraine