EUROPEAN PLAN FOR Building a Story of Success

An outline of a joint Ukrainian- Lithuanian proposal for the consideration of international donors, EU&MS institutions, IFIs WHY THE NEW PLAN?

➤ Reforms and success of Ukraine are not irreversible. The EU has an experience of bringing long-term stability and winning the hearts and minds of people to keep the motivation for reforms. This was done by the soft power of Marshall Plan in 1947 or by the EU enlargement in 2004.

➤ Today, the EU is facing another challenge in the Eastern Neighbourhood of regional and political stability that can become an opportunity if addressed properly also by economic policy means. To this aim, grand narratives and incentives are necessary to sustain the momentum of reforms. Now, it is time for the Marshall Plan for Ukraine.

➤ In this light we should offer the European Plan for Ukraine to boost investments and economic development. According to the international experts a sizeable doubling of the volume of investment up to 5 billion EUR annually can result in 6 -8 % annual economic growth in Ukraine over the next 5 to 10 years.

➤ This initiative must be taken by a collective effort of Western community to mobilise investments, boost the institutional capacity and sustain the momentum of reforms. It must be instrumental, as institutions do matter and are smart in creating investment incentives, attracting private and public capital, packaging bankable investments and consolidating the instruments.

2 WHY THE NEW PLAN?

➤ The European Plan for Ukraine should use the experience and success of the Juncker Plan for Europe and the EU External Investment Plan. It should be based on the same assumptions as recently announced by the EU Commission regarding the mini Marshall Plan for Western Balkans, which aims at investing more than 13B EUR into development of infrastructure and real economy in the Western Balkans.

➤ The investments under the European Plan for Ukraine should be directed at the infusion of funds into real economy with conditionality on revitalising structural reforms and creation of investment friendly environment. The plan will not foresee inclusion of budgetary support. The investments shall be visible in order to win the support in Ukraine of ordinary people for reform efforts. To this aim we shall think globally and act locally on energy savings, road infrastructure, jobs, public services or reconstruction works.

➤ The investments under the European Plan for Ukraine will be channelled via appropriate absorption capacity, a development financial institution in Ukraine to manage and implement projects, make necessary governance changes, create investment friendly environment, especially, in financial, land, energy and SOE sectors. This will be done in meeting huge investment opportunities in Ukraine.

3 FAQ

➤ How to increase a slow disbursement of funds committed in Ukraine? How to improve absorption capacity in Ukraine? Around 10B EUR are committed out of 12.5B EUR pledged since 2014. Disbursement of committed funds in Ukraine is very slow. This issue can be addressed with an increased absorption of investment, especially in areas of MSMEs, large scale infrastructure projects, SOEs, regional development. To this aim the absorption should be institutionalised with centralised project management capacity (PMC), as for example reconstruction development agency, which gradually will be upgraded into an investment instrument – development financial institution (DFI). This institution will be financially regulated and will be a trusted partner of participating IFIs.

➤ How to ensure the new instruments will be investment friendly and with zero tolerance to corruption factors? PMC and later DFI will be mandated and managed by representatives of participating IFIs and donor agencies together with Ukraine authorities. PMC, DFI activities will be annually audited and based on transparency, OECD led corporate governance practices, common set of rules (procurement, standards) agreed with donors and investors. The DFI will be second tier market friendly, an independent, supervised and financially regulated institution.

➤ How to maintain the motivation of Ukraine authorities to continue reforms? How the conditionality of investment plan will work? The reform implementation will be periodically assessed by partner institutions – EU SGUA, IMF, IFI offices in . Every year a list of benchmarks will be produced to start the implementation of the next package of investment projects. Separate sections of large long term projects can be conditional as well. The reform roadmap (governance, investment climate) will be adopted at the kick-off event - Investor conference in Brussels and will be an integral part of a Compact (MoU) for investment mobilisation, institutional setup and reforms in Ukraine.

4 POTENTIAL AND PERSPECTIVE

2017: Ukraine sold 3B USD of Eurobonds in September, the first time since debt restructuring in 2015 plan for 2018: raising 8B USD on domestic and external markets with additional 2B USD via the IMF

2014: EU and IFIs pledged 11B EUR. 2017: 12.5B EUR pledged in total, of which around 10B EUR committed 2017-2020: EIB mid-term review of External Lending Mandate (ELM) - ? 2021-2027: the next EU multiannual financial framework - ??

5 LEARNING FROM JUNCKER PLAN FOR EUROPE

➤ Juncker Plan for Europe: expected to trigger 236B EUR in investments

➤ External Investment Plan: two regional investment platforms (Africa and EU Neighbourhood countries) with a one-stop-shop to receive proposals; a new guarantee (750M EUR), of which 100M EUR will come from European Neighbourhood Instrument, will be passed on to intermediary financing institutions, which in turn will lend support, via loans, guarantees, equity or similar products, to final beneficiaries; blending facilities to use existing funding (2.6B EUR), of which 1B EUR to come from Neighbourhood Investment Facility. Expected leverage - 44B to 88B EUR

➤ technical assistance to help local authorities and companies develop a higher number of sustainable projects and attract investors; regional development cooperation programmes targeted at improving the investment climate and the overall policy environment in the countries concerned MAKING A PLAN FOR UKRAINE (A ‘MARSHALL’ PLAN) ➤ Adoption of EU lending mandate for Ukraine investment platform and initiating credit lines from EIB, EBRD, other IFIs and international donors. Anchoring the 2014-2016 IFI investment portfolio as a starting position for a take-off (e.g. EIB with 3B EUR in 3 years or EBRD with 1B EUR per year)

➤ Investment support conditional to achieving structural reform and investment related benchmarks, especially in area of anti-corruption.

➤ Increasing investment absorption and establishing development financial institution founded by IFIs and Ukraine with adequate advisory, financial and project management in-house capacity; it will have direct cooperation with EIB, EBRD, IFC and other IFIs and international donors

➤ Juncker plan for Ukraine: expected leverage of 10 x 10 x annual 500M EUR by 2027 6 PROPOSAL ➤ Funding investments via IFIs and donors – IFI Compact

➤ Central project management capacity, Development Finance Institution (DFI) in Ukraine

➤ MSMEs, infrastructure, SOE and regional components

➤ Conditionality, funding in tranches according to agreed reform benchmarks (financial sector, justice, SOEs, red tape)

➤ Creating favourable environment to investors, technical component

➤ Building investor confidence, shared management with representatives of IFIs, steering by donors, in-house experts, annual audits, common rules of engagement, trusted pool of financial intermediaries

➤ Sub-loans, guarantees, equity investments, ranging from microfinancing to PPPs, risk sharing, marketing strategy

➤ Winning hearts of people, making investments visible

➤ Timeline: 10 years, until the end of the next EU financial framework

7 BRUSSELS CONFERENCE IFI COMPACT

➤ High-level IFI stakeholders Invest Ukraine Conference in Brussels (beginning of 2018) REFORM INSTITUTIONAL ROADMAP CAPACITY ➤ Investors Compact on Ukraine signed by EU, IFI, donor agencies and Ukraine representatives

FINANCE ➤ Roadmap to include the setting of central project management capacity (to be upgraded to DFI in Ukraine with MOBILISATION initial capital from IFIs, EU, EUMS and Ukraine) managed by Partners to be invited: trusted representatives from founding parties

➤ Investment support under the Compact on Ukraine will be conditional to implementation of reforms and creation of predictable environment to entrepreneurs and investors

as well as other donor agencies and IFIs

8 STEP 1: PROJECT MANAGEMENT CAPACITY

➤ Prioritisation of investment needs, upstream preparation of sector strategies (ownership), coordination of priorities with line ministries and IFIs, ensuring there is a commitment to reforms (labelling projects having a national interest), consideration of macroeconomic parameters, adequate staffing and expert outsourcing together with SGUA support to public administration reform

➤ Administration of investment projects (transparency, analysing and drafting programmes, planning projects, making ex-ante evaluation, public procurement and preparation of tenders, administering contracts and financial agreements, providing on spot checks and audits, controlling and reporting, working with publicity and visibility)

➤ Competence centre – advisory and technical assistance (investment support to MSMEs, Public-Private Partnerships, fund of funds, specialised funds, trust with financial intermediaries, investment climate check-list, asset management, hub advisors, reform roadmap, extension of Jessica and Jaspers models)

➤ Cooperation and trust with EU, international financial organisations, DFIs, donor institutions, including with EIB investment facility designed for this purpose, which is detrimental to the revision of EIB external lending mandate

9 STEP 2: DEVELOPMENT FINANCIAL INSTITUTION

➤ A mix of national, foreign and multilateral participation or ownership involving IFIs and other DFIs as part of development cooperation. A mix of funding sources, including raising money on capital markets, borrowing, budget allocations, using own equity; working with European Plan for Ukraine and EU External Investment Plan

➤ Subject to transparency, financial and supervisory regulations (obligation to provide adequate information, audits, standards similar to private financial institutions, NBU supervision, state aid and competition regulations, corporate governance)

➤ Mix of final recipients of investments to include private and state-owned firms, government, municipalities; selection through the competitive tender and further development of trusted financial intermediaries (second tier)

➤ A mandate to promote economic development of Ukraine, could be managed by AMC, adequate in-house capacity linked with EU SGUA, IMF, donors. Fund of Funds operations, using market friendly policy instruments

➤ A toolkit to include financing to MSMEs, housing, infrastructure, utilities, credit to local governments, access to finance, guaranties, venture, equity capital, securitisation, advisory, promotional services 10 INSTRUMENTS UKRAINE RECOVERY FUND FINANCIAL INTERMEDIARIES A proper management of SOE assets will have a profound An effective instrument in supporting investments into MSME effect on investment climate and would contribute to sector. Use of trusted financial intermediaries helps to reduce DFI attracting IFI and international donor investment support to costs, increases the access to finance for final recipients, Ukraine facilitates risk sharing and leverage of investments by private An increased marked value and profits of SOEs will companies contribute to DFI Ukraine investment support operations, Specialised funds in areas of energy efficiency, East Ukraine especially in areas of public services, infrastructure and reconstruction can operate as financial intermediaries under DFI regional development acting as Fund of Funds (FoF) to maximise the coverage of final Over time Recovery Fund shares can be sold to IFIs beneficiaries, including households. participating in DFI Ukraine to strengthen the partnership Use of FoF revolving funds will increase quality of projects, A proper management of SOE portfolio will create new access to capital and will reduce dependency on grants opportunities to guarantee instruments and equity investment The second tier lending model, involving financial intermediaries, by DFI aimed at increasing the resilience of Ukrainian is more competitive compared to only direct DFI financing companies

PUBLIC-PRIVATE PARTNERSHIPS AND INFRASTRUCTURE FUND Public-Private Partnerships between DFI and private companies to build, reconstruct, operate large-scale infrastructure projects in areas of transport, utilities, public buildings at state and municipality levels. DFI with IFIs to use blending instruments with loans and guarantees, to ensure transparency and competitive procurement, design, bankability of projects, to provide technical assistance and advisory services 11 IFI Compact on Ukraine Guarantees from EU Budget, EIB, EU Member States, other IFIs at High-level conference in Brussels, February 2018 (EBRD/KfW/CdD/IFC/ICO/CDC/ …) and International donors (US/CA/JP/ …)

Building Project Assembly of shareholders, Board with IFI and Ukraine Ukraine Development Financial Institution Management Capacity representatives, possibility together with IFIs to raise Subject to financial and transparency regulations, can (PMC) be managed by AMC, corporate governance practices funds, blend loans and guarantees, make equity (Step 1) investments (Step 2)

Conditionality test Trusted financial Funding in tranches according to agreed reform East Ukraine benchmarks (IMF, EU SGUA, EBRD Donor Account intermediaries PPPs, Fund to Recovery fund fund, etc.) in areas of EU association, financial, justice, land and funds (e.g. raise financing municipalities reform, SOEs, etc. Supported by technical assistance energy efficiency) to attract investments (e.g. investor rights, concession, risk management)

Investment assistance Reconstruction MSMEs, Infrastructure SOEs and returning of Human resources, in-house capacity, common rules of households engagement, transparency objectives IDPs, utilities

Visibility test Marketing strategy, branding, acting locally Regions

12 UKRAINE 2027 ➤ At least 50B EUR investment support from IFIs and international donors leveraged under European Plan for Ukraine for the period of 2018-2027

➤ SOEs alone, if managed properly, could make profits of up to 6B EUR per year with an increased market value; land reform, if accomplished, in a long-term perspective could generate a mortgage market of 40B EUR and give an additional impulse, in particular to MSMEs loan market; potential of energy efficiency savings up to 2B EUR per year (up to 60% of the total gas consumption for heating purposes)

➤ Financial sector, land, SOEs reforms, investment friendly environment with innovative support instruments to MSMEs, PPP and investor protection related regulations to create at least a fivefold effect on economy by aggregate amounts of up to 200B EUR in the period of 2018-2027.

➤ Over this period Ukraine Development Financial Institution operates with a full inventory of investment support financial instruments, among them diversified guarantees, securitisation or venture capital, applied via financial intermediaries/PPPs with a contribution of up to 6-8 % of annual economic growth

➤ Investment visibility stimulates public awareness and support to reform process (energy savings, road infrastructure, jobs, public services, reconstruction); reform orientated political parties being re-elected

13 INDICATIVE TIMELINE

Signing IFI Compact at MoU to establish Project Passing lending mandates Brussels Invest Ukraine Management capacity in (EU EIB, IFIs, EUMS DFIs, 3M 1M Conference Ukraine. Starting the US, CA (February 2018) recruitment (Step 1, PMC)

Starting MSMEs, Launching a first tranche of Selecting intermediary infrastructure, municipal, investment support financial institutions, reconstruction and 3M instruments and signing of launching specialised funds specialised funding projects, and partnerships with first capital investments contracts regions

Next group of MSMEs, Launching a second tranche infrastructure, municipal, of investment support 3M reconstruction and instruments and signing of specialised funding projects, contracts (Step 2, DFI) capital investments

14 FURTHER REFERENCES

LITHUANIA’S PLAN ON National Council of Reforms National Securities and UKRAINE IN 2017–2020 Stock Market Commission

Mr Stepan Kubiv, First vice-Prime Minister, minister for Economic Development and Trade Ms Hanna Hopko, Chairperson of Verkhovna Rada Committee on Foreign Affairs Government Mr Ostap Yednak, Member of Parliament, Secretary of Committee on Environmental Policy Strategic Advisory Group for National Investment Council Mr Borys Lozhkin, Secretary of the National Investment Council Support of Ukrainian Reforms Mr Dmytro Shymkiv, Secretary of the National Reform Council Ms Yulia Kovaliv, Head of the Office of the National Investment Council Mr Timur Khromaev, Head of National Securities and Stock Market Commission Ms Oksana Markarova, First Deputy Minister of Finance Ms Olena Zerkal, Deputy Minister of Foreign Affairs (European integration) Ms Nataliya Mykolska, Deputy Minister – Trade Representative of Ukraine Mr Ivan Mikloš, Co-Chairman of Strategic Advisory Group for Support of Ukrainian Reforms Mr Pavlo Kukhta, Deputy Chairman of Strategic Advisory Group for Support of Ukrainian Reforms Ministry of Economic Ms Ulyana Khromyak, Deputy Director of UkraineInvest Ministry of Foreign Affairs Ministry of Finance Development and Trade Mr Gediminas Kirkilas, Vice Speaker of Seimas, former Prime Minister of Lithuania (2006-2008) Mr Andrius Kubilius, Member of Parliament, former Prime Minister of Lithuania (1999-2000, 2008- BRUSSELS BERLIN PARIS LUXEMBOURG WASHINGTON LONDON VILNIUS 26 06 2017 FRANKFURT TOUR DES 2012) KYIV 19 06 2017 24 10 2017 18 07 2017 27 05 2017 06 07 2017 03 03 2017 10 10 2017 … CAPITALES … … … 11 12 2017 20 11 2017 … Mr Deividas Matulionis, Advisor to the Prime Minister of Lithuania Mr Ramūnas Stanionis, Advisor on Association Countries at the Ministry of Foreign Affairs of Lithuania 15