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Brussels, 29.10.2009 SEC(2009) 1428 final COMMISSION STAFF WORKING DOCUMENT Ex ante evaluation statement Macro-financial assistance to Ukraine Accompanying document to the Proposal for a Council decision providing macro-financial assistance to Ukraine (COM(2009)580 final) EN
Ex ante evaluation statement Macro-financial assistance to Ukraine EN 2
TABLE OF CONTENTS Problem analysis and needs assessment ....................................................................... 4 Background................................................................................................................... 4 Recent economic developments and economic outlook............................................... 4 Macroeconomic policy framework............................................................................... 6 Ukraine's external financing needs............................................................................... 7 Objectives and related indicators of the macro-financial assistance ............................ 9 Objectives ..................................................................................................................... 9 Indicators .................................................................................................................... 10 Alternative delivery mechanisms and risk assessment............................................... 10 Delivery mechanisms ................................................................................................. 10 Risk assessment .......................................................................................................... 10 Added value of Community involvement .................................................................. 11 Genval criteria on macro-financial assistance ............................................................ 11 Exceptional Character and Limited Timeframe ......................................................... 11 Political pre-conditions............................................................................................... 11 Complementarity ........................................................................................................ 12 Conditionality............................................................................................................. 12 Financial discipline..................................................................................................... 13 Planning of future monitoring and evaluation............................................................ 13 Monitoring.................................................................................................................. 13 Evaluation................................................................................................................... 13 Achieving cost-effectiveness...................................................................................... 14 EN 3
Background 1 . In 2000, after a Recent economic developments and economic outlook On a per capita basis this figure is 85%, reflecting Ukraine's significant population loss EN 4
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Macroeconomic policy framework EN 6
during 2 Ukraine's external financing needs The Euopean Commission has organised several meetings between the IFIs (the IMF, the World Bank, the EBRD and the EIB), the European gas industry, Ukraine's government and Naftogaz and Russia's government and Gazprom on possible financing of the rehabilitation of the gas transportation network in Ukraine and possible support to Ukraine and/or Naftogaz for purchase of gas to ensure a smooth transit of natural gas from Russia to the EU. EN 7
Table 2: Ukraine external financing needs EN 8
3 Two thirds of the government expenditure goes into O BJECTIVES AND RELATED INDICATORS OF THE MACRO - FINANCIAL ASSISTANCE Objectives The general objectives of the proposed macro-financial assistance operation are to: · Contribute to covering Ukraine's external financing needs, including the needs of the banking and corporate sectors and the State budget; · Help Ukraine alleviate the financial constraints on the implementation of the reform programme especially in the energy sector supported by the stand-by arrangement with the IMF; · Facilitate and encourage efforts of the authorities of Ukraine to implement measures identified under the EU-Ukraine Action Plan and the Eastern Partnership; · Reinforce the EU role in the economic policy dialogue with the Ukrainian authorities. Linked to these general objectives of the programme, specific objectives in terms of financial and structural reforms will be detailed during the implementation of the programme and will be laid down in the Memorandum of Understanding that the Commission will negotiate with the authorities of Ukraine. The fiscal needs in 2009 comprise also the cost of the recapitalisation of banks, estimated to 2.8% of GDP. However, the bulk of these costs (2.6% of GDP) are expected to be covered by the issuance of domestic bonds. The net fiscal cost of the bank recapitalisation in 2010 is projected to reach 0.5% of GDP. EN 9
To monitor the fulfilment of the objectives of the programme throughout the implementation period of the assistance, the Commission will use two types of indicators: · Adherence to the IMF-supported programme, it will be a sine qua non for the implementation of the assistance; · Progress in the implementation of specific actions that will be part of the conditions for disbursement. Those actions will be specified in the aforementioned Memorandum of Understanding. They will be consistent with the policy lines anchored in the IMF programme, as well as with the priorities of the European Neighbourhood Policy and those of Eastern Partnership. A LTERNATIVE DELIVERY MECHANISMS AND RISK ASSESSMENT Delivery mechanisms Macro-financial assistance is an untied and undedicated macro-economic support instrument, which helps the beneficiary country meet its external financing needs, including through a reinforcement of gross international reserves. Macro-financial assistance can be provided either in the form of a loan, a grant or a combination of the two. Considering that Ukraine is a middle-income country, the Commission considers appropriate to provide the total of this assistance in the form of a loan. The euro-denominated loan will be paid to the National Bank of Ukraine and may be transferred to a Treasury account to cover external financing needs of the budget. Risk assessment There is a risk that the macro-financial assistance which is not dedicated to specific expenses (contrary to project financing, for example), could be used in a fraudulent way. In general terms, this risk is related to factors such as Central Bank independence, quality of management systems and administrative procedures, control and oversight functions in the financial circuits, security of IT systems, and adequate internal and external audit capabilities. To mitigate the risks of fraudulent use, several measures will be taken. The Memorandum of Understanding and the Loan agreement will comprise a set of provisions on inspection, fraud prevention, audits, and recovery of funds in case of fraud or corruption. Also, the assistance will be paid to clearly identified accounts at the Central Bank of Ukraine. Moreover, before the agreement on the Memorandum of Understanding is reached, the Commission services will assess the reliability of financial circuits and administrative procedures that are relevant to this type of assistance and will determine whether the framework for sound financial management of macro-financial assistance is sufficiently effective in Ukraine. In the light of this assessment, specific mechanisms applying to the management of the funds by the beneficiaries may be introduced in agreement with the national authorities. The Commission may also use other assistance instruments at its disposal to help the beneficiary authorities improve their public finance management systems if this area is not sufficiently covered by other donors. Finally, the assistance will be EN 10
While seriously taking into account this risk, the Commission services consider that there are sufficiently strong grounds to proceed with the MFA to Ukraine. The high financing needs faced by Ukraine plead in favour of an urgent action. The Commission services will maintain close contacts with the authorities during the implementation of the macro-financial assistance in order to address quickly any concerns that may arise. A DDED VALUE OF C OMMUNITY INVOLVEMENT The Community financial support to Ukraine's economic recovery reflects the country's strategic importance to the EU in the context of the European Neighbourhood Policy and of the newly established Eastern Partnership. The main financial support instrument to Ukraine is the European Neighbourhood Partnership Instrument that has three priority objectives: democratic development, administrative capacity building and infrastructure development. The instrument of macro-financial assistance is a policy-based instrument directed to alleviate short- and medium-term external financial needs. As a part of the overall EC package of assistance, it would contribute to support the European Union's objectives of economic stability and economic development in Ukraine. G ENVAL CRITERIA ON MACRO - FINANCIAL ASSISTANCE On 8 th of October 2002 the Council reconfirmed a set of principles for the use of the Community's macro-financial assistance (so called Genval criteria). The five criteria are: (i) the exceptional character of the assistance, (ii) its complementarity to financing of the International Financial Institutions (IFIs), (iii) the existence of policy conditionality attached to the assistance, (iv) the existence of political pre-conditions and, finally (v) strong financial discipline that needs to accompany the MFA. Exceptional Character and Limited Timeframe Ukraine's financing requirements in 2009-2010 result from the country's high external and fiscal imbalances that are closely related to the global economic crisis. The on-going economic adjustment and the conditionality of the IMF programme will contribute to reducing these imbalances over the medium term. The exceptional character of the foreseen MFA is further stressed by the limited timeframe of the programme. The current MFA proposal is only valid for 2009-2010 for the duration of the IMF SBA arrangement. Political pre-conditions MFA is reserved to the third countries that are geographically close to the EU territory, that respect democracy and human rights and with which the EU has important political, economic and commercial ties. Ukraine fulfils these criteria. First, it has direct borders with the EU. Second, its economic and political relations EN 11
Complementarity The proposed macro-financial assistance will be complementary to the existing EU financing, to the IMF financing and to the financial support of other international donors. The MFA programme is complementary to other EC financing, in particular to medium-term ENPI budget support implemented within the framework of the EU Country Strategy for cooperation. Thus, it can help increase the EU's leverage on Ukraine's policy making as well as help Ukraine to overcome the current deep economic crisis. The complementarity with the IMF programme is also assured. An MFA can only take place when a residual external financing gap is identified over and above the IMF resources and under the condition of a fair burden sharing. A residual external financing gap has been identified by the IMF, this assessment constitutes the basis for Commission's MFA programme proposal that would cover roughly one third of the external financing gap remaining after the IMF intervention. The MFA programme is also complementary to the external financing coming from the IFIs more generally. In particular, the MFA is provided in the moment when the EU is also helping to mobilise financing to support the reform of the Ukraine energy sector. The Commission, together with the World Bank, the EBRD and the EIB, intends, subject to the individual rules, capacities and conditions of the IFIs, to work together in the development of a support package to the Ukrainian authorities designed to assist in developing a sustainable solution to Ukraine's medium-term gas transit and gas payment obligations. The MFA under consideration is not intended to be directly linked to that package. However, it would support Ukraine's economic stabilization and reform, including reform of the gas sector and accompanying reform of the social safety net. Conditionality The disbursement of MFA assistance will be conditional on the IMF Board decisions to approve programme reviews under the SBA and on Ukraine's subsequent decisions to draw funds from the IMF financial facility. In addition, a Memorandum of Understanding (MoU) will be negotiated between the Commission and the Ukrainian authorities. The MoU will contain specific structural reform measures related to the fields of cooperation between the EU and Ukraine. For example, in the field of public finance management the Commission plans to build on the results of policy dialogue conducted in the framework of implementation of the EU-Ukraine ENP Action Plan. Furthermore, the conditionality should include the improvement of social safety net to offset the social consequences of the energy sector reforms. EN 12
The planned assistance would be provided in the form of a loan and should be financed through the borrowing operation that the Commission will conduct on behalf of the EU. The budgetary costs of the assistance will correspond to the provisioning, at a rate of 9%, of the amounts disbursed in the guarantee fund for external lending of the EU, from budget line 01 04 01 14 ("the provisioning of the Guarantee Fund"). Assuming that the loan disbursements will be made in 2009 for the amount of EUR 100 million and in 2010 for the amount of EUR 510 million and according to the rules governing the guarantee fund mechanism, the provisioning will take place in the 2011-2012 budget. Due to the constraints on the loan capacity at the time of the preparation of the relevant annual budget, the Commission may use additional commitment appropriations under the Heading 4 in 2012. To ascertain that the beneficiary has in place a sound financial management in line with the requirements of the Financial regulation, the Commission services continue regular monitoring and intend with the help of an external consultant - to carry out an Operational Assessment of the reliability of financial circuits and administrative controls of the different entities involved in the management of the EU funds, especially at the Ministry of Finance and at the Central Bank of Ukraine. P LANNING OF FUTURE MONITORING AND EVALUATION This assistance is of exceptional and macro-economic nature and its monitoring and evaluation will be undertaken in line with the standard Commission procedures. Monitoring The monitoring system will be ensured by the provision of reports and data by the authorities and by the organisation of review missions to Ukraine by Commission staff. Although this assistance is centrally managed, where appropriate, the EC Delegation in Kyiv will also be called to provide additional reporting. The monitoring of the action by the Commission services will take place on the basis of macro-economic and structural policy indicators which are to be agreed with the Ukrainian authorities in a Memorandum of Understanding. In this process, the Commission services may also monitor key areas of the public finance management system, to be identified in the update of the Operational Assessment so as to have the relevant information on any changes in the control environment. An annual report to the European Parliament and to the Council on the implementation of macro-financial assistance is foreseen in the proposed text of the Council Decision. Evaluation Two to three ex-post evaluations of macro-financial assistance operations are planned per year in the Multi-annual Evaluation Programme of the Economic and Financial Affairs Directorate-General. An ex-post evaluation of the proposed macro financial assistance to Ukraine will be launched upon the completion of the operation. A provision foreseeing the ex-post evaluation will be included in the EN 13
A CHIEVING COST - EFFECTIVENESS In implementing the programme, the Commission will be guided by the following principles: · As soon as the Council has adopted the proposal, the Commission will negotiate with the Ukrainian authorities a Memorandum of Understanding laying out the conditions for the release of the EU assistance, as well as a loan agreement. Each tranche of the proposed assistance will be made available by the Commission to Ukraine on the basis of a satisfactory track record of the implementation of the IMF programme and the economic policy and financial conditions attached to the assistance. · In negotiating specific policy conditions, the Commission will draw on all the expertise, including of the International Monetary Fund and the World Bank and of bilateral and multilateral aid agencies active in Ukraine. In addition, the Commission will aim at synergies with other Community policies and instruments (notably ENPI as indicated above) that could be used to support the implementation by the beneficiary of the relevant measures (notably in the area of public finance management). Where appropriate, links to any related action under the European Neighbourhood Policy or Eastern Partnership or findings of the Progress Reports would be established. EN 14
