Directorate-General for Internal Policies of the Union Directorate for Budgetary Affairs Secretariat of the Committee on Budgetary Control Brussels, 13.02.2017 Report on the fact-finding mission of the Budgetary Control Committee to Ukraine 16-19 May 2016 Source: www.travellerspoint.com B-1047 Brussels - Tel +32 2 28 448869 - Fax 0032 2 28 46958 Summary and recommendations Since the Maidan revolution in 2014, the EU is providing a very substantial financial assistance to support Ukraine's stabilisation and reform process (3.4 billion euro of Macro- financial assistance, 900 million euro of bilateral development assistance, 500 million euro of regional assistance, 50 million euro for stability and peace, 60 million euro for humanitarian aid). This aid covers key areas such as fight against corruption, judicial and public sector reform as well as economic reform and private sector development. In addition, there are specific actions targeting civil society organisations, cross-border cooperation and humanitarian assistance. In the light of the above, the Budgetary Control Committee decided to send a delegation to Ukraine in order to verify: how EU money has been spent and what added value it brought; did the EU expertise helped tame corruption and brought the spill over effect of EU standards to Ukraine; did the EU financial aid in its direct neighbourhood helped stabilising the country; did the Eastern Partnership project improve the quality of the civil service in Ukraine. The program of the visit was split into two parts: The first part in the L’viv region in western Ukraine aimed to monitor EU funded projects and trans-border cooperation with the EU. The delegation visited projects not only in the regional capital of L’viv, but also in towns like Drohobych or Sambir and villages like Morshyn, Pisochna or Luky where EU funded projects have also been conducted. The second part of the delegation took place in the Ukrainian capital Kyiv where the Members met with the central authorities - the Verkhovna Rada (Ukrainian parliament) and the newly sworn in government. During the meetings they checked how Ukraine was coping with systemic corruption and how was it managing centrally the EU funds. In the Parliament, the CONT Delegation met with its homologue in the spirit of the recently signed cooperation agreement between the European Parliament and the Verkhovna Rada. The delegation also met with the anti-corruption bodies created after the Maidan revolution. Meetings with the civil society, anti-corruption watchdogs and investigative journalists were also included in the program. * * * On the bases of the meetings and visits of the projects, the delegation could note that: 1. General remarks: Despite progress achieved since 2014, several long-term issues remain: the risk of backsliding, for example in public procurement exemptions and budgetary transparency; Overall, as stated by the ECA in its special report on Ukraine, EU assistance to Ukraine has been partially effective in supporting the transformation of the country into a well-governed state in the area of public finance management and the fight against corruption. The assistance was also only partially effective in producing 2 tangible and sustainable results; the Commission however believes that even though the EU assistance was partially effective, important structural reforms in nearly all areas covered by the audit have been triggered or supported by EU programmes; 2. Macro Financial Assistance to Ukraine and European Neighbourhood Instrument: The EU response to the Ukraine crisis of 2014, although prompt, was an emergency solution and the EU acted without a predefined strategy following the rapid development of events; Monitoring of the implementation of EU assistance was largely effective. Suspensions of budget support payments advanced public finance management priorities in 2011- 2013; Frontloading of the Ukrainian sector budget support programmes designed over the 2007-2010 period contrasted with the weak track record of reform policy implementation in Ukraine and the relatively poor fulfilment of the variable tranche conditions; Frontloading of the MFA II loan to Ukraine, was in response to the risk of financial and political collapse of the country and was done in emergency mode; for example the Commission disbursed EUR 250 million (70% of the State Building contract) within a month of signing the contract; It is worth noting however that what has been done in the case of Ukraine is not at all outside normal EU practice and rules for budget support and is applied by the Commission to other countries as well; In the Public Finance Management section of MFA I and II, the Commission assessed half of the conditions as broadly fulfilled and only one as non-fulfilled. However, for disbursement purposes, the Commission used its margin of appreciation and positively assessed several PFM conditions even though implementation on the ground was affected by shortcomings; The Budgetary Control Committee agrees with the position of the ECA in its audit of Ukraine, that the EU budget support in Ukraine is not evaluated systematically; The Budgetary Control Committee agrees with the position of the Accounting Chamber of Ukraine, which stated in its conclusions on the audit of MFA funds, that: . central executive bodies did not manage to efficiently and timely use the budget support; . Ukrainian legislation regulating budget support operations needs to be improved; . Lack of coordination between ministries; . Central executive bodies responsible for implementation of sectoral budget support failed to fulfil many indicators therefore disbursement of various tranches was only partial; 3. Corruption: Significant steps to combat corruption were taken only after the Maidan revolution but further consolidation of the anti-corruption framework is needed, as are tangible results; Since 2014, the Ukrainian authorities have created three bodies aimed at combating corruption. Two years after their creation, some of these bodies are still more occupied with staffing and office equipment then they are with fulfilling their statutory duties; 3 Further improvements are needed to ensure full independence and integrity of specialised anti-corruption Prosecutor’s Office; Effective monitoring and coordination by the National Council on Anti-corruption Policy is still needed; The Ukrainian authorities have not yet produced a convincing track record of investigations and sanctions for high-level corruption cases; 4. Improvement of quality of civil service in Ukraine: Despite efforts of the Ukrainian authorities and despite seeing success stories implemented, the Ukrainian the quality of the civil service remains poor. This directly affects the possibility of effective disbursement of EU funds granted to the country; The Ukrainian civil service is underpaid, which results in a high turnover of staff, limiting the efforts to improve its quality; additionally, the underpayment of the civil service increases the risks of bribery, which can further hinder both Ukraine and the EU funds; It is worth noting that with the new civil service law (adopted in end of 2016) and the new PAR strategy and implementation plan (also adopted last year and in line with EU and OECD/SIGMA principles) there is a now some potential to improve the situation. On that basis, the EU has decided to launch a major PAR support programme (Special Measure II 2016 for budget of EUR 104 million). 4 1. Introduction Ukraine is one of the largest countries on the European continent (603 000 km2) and is home to 44 million inhabitants. The country gained independence in 1991 with the collapse of the Soviet Union. Since then it has conducted a multi-vector policy trying to balance between the European Union and Russia. This policy was questioned by the Ukrainian society in 2004 during the Orange Revolution and again in 2014 in the Maidan Revolution, during which Ukrainians clearly showed that they would prefer to cooperate closer with the European Union. Since the beginning of 2014, Ukraine’s territorial integrity has been seriously threatened. The Russian forces had annexed the Crimean Peninsula and the Russian-backed separatists are occupying parts of the Donetsk and Luhansk regions in the east of the country. Ukraine since 2004 is a direct neighbour of the European Union. It is an active member of the Eastern Partnership and receives EU funds via various channels. Firstly it received funding through the European Neighbourhood and Partnership Instrument (ENPI) and then since 2014 through its successor - the European Neighbourhood Instrument (ENI). Most of ENPI-ENI assistance (65%) was granted using a sector budget approach. Ukraine also received EU grants through the instrument for Nuclear Safety Cooperation and the Instrument contributing to Stability and Peace. In addition to grants, the EU has provided Ukraine with macro- financial assistance (MFA), i.e. loans which were released in several instalments (“tranches”) upon fulfilment of conditions related to macro-economic situation and sectorial reforms. In March 2014, the Commission announced an indicative Ukraine support package of EUR 11.2 billion, including up to EUR 8 billion of EIB and EBRD loans for the 2014-2020 period to support the reform process. Further detailed information on the various funds provided for Ukraine can be found in chapter 2. 5 2. Overview of EU support to Ukraine 2.1 Macro-financial assistance (MFA). Since 2014, the EU has committed