Special Report EU assistance  
to UkraineEN 2016  NO 32
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EU assistance  
to Ukraine
(pursuant to Article 287(4), second subparagraph, TFEU)Special ReportEN 2016  NO 32
02
 Audit team
The ECA’s special reports set out the results of its performance and compliance audits of specific budgetary areas or 
management topics. The ECA selects and designs these audit tasks to be of maximum impact by considering the risks 
to performance or compliance, the level of income or spending involved, forthcoming developments and political and 
public interest.
This performance audit was produced by Chamber III – headed by ECA Member Karel Pinxten - which specialises in exter -
nal action, security and justice spending areas. The audit was led by ECA Member Szabolcs Fazakas, supported by Márton 
Baranyi, Attaché of his private office; Beatrix Lesiewicz, Principal Manager, and Francis Joret, Principal Manager ad interim; 
Christian Geoffroy, Head of Task; Alina Milasiute and Balazs Kaszap, Auditors.
From left to right:  B. Kaszap, B. Lesiewicz, F. Joret, S. Fazakas, C. Geoffroy, A. Milasiute, M. Baranyi.

03
 Contents
Paragraph
 Abbreviations and acronyms
I-VIII  Executive summary
1-10  Introduction
1-3 Geographical and political background
4-5 Economic and financial situation
6-7 EU–Ukraine cooperation framework
8-10  EU financial assistance
11-25  Specific context of EU assistance to Ukraine
11-16  The unstable political, economic and administrative situation hampered EU–Ukraine cooperation
11 Negotiations for the Association Agreement reinforced EU–Ukraine dialogue
12-14  Political and administrative instability slowed the pace of EU–Ukraine dialogue and the progress of reforms
15-16  Since 2010, the Commission has increasingly emphasised the risks posed by the oligarchic system
17-22  The EU response to the Ukrainian crisis in 2014, although prompt, was an emergency solution
17-18  The Commission’s March 2014 financing package consisted mainly of potential loans
19-20  The Commission used special measures to address the crisis in Ukraine rapidly
21-22  The EU set up ad hoc structures to manage its greater involvement in Ukraine
23-25  Donors stepped up their coordination in response to the Ukrainian government’s weakness 
in  this area
23-24  The Ukrainian government was weak at donor coordination
25 Since 2014, the donor community has improved its internal coordination
04 Contents 
26-29  Audit scope and approach
30-73  Observations
30-63  Part I — Effectiveness of EU assistance to Ukraine in improving public finance management and 
the fight against corruption
31-37  EU–Ukraine dialogue on public finance management has significantly improved since 2013,  
and that on fight against corruption since 2011
38-44  The design of the assistance enabled rapid disbursements but did not always take sufficient  
account of the reforms to be achieved
45-49  Monitoring of the implementation of EU assistance has improved
50-63  The results of EU assistance remain fragile
64-73  Part II — Effectiveness of EU assistance in improving governance in the gas sector,  
and security of the EU’s gas supply via Ukraine
65-69  Inconsistent commitment and approach to reform hampered EU–Ukraine dialogue until recently
70 Conditions for EU assistance were broad in the early phase
71-72  EU assistance lacked high-quality data until 2014
73 EU assistance until 2014 had limited impact on the gas sector
74-84  Conclusions and recommendations
 Annex — Programmes examined
 Replies of the Commission and of the EEAS
05
 Abbreviations 
and acronyms
AAP : Annual action programme
ACU : Accounting Chamber of Ukraine
CRIS : Common Relex Information System
CSO : Civil society organisation
CSP : Country strategy paper
DG: Directorate-general
EAMR : External assistance management report
EBRD : European Bank for Reconstruction and Development
EEAS : European External Action Service
EIB: European Investment Bank
ENI : European Neighbourhood Instrument
ENPI : European Neighbourhood and Partnership Instrument
EUAM : EU Advisory Mission for Civilian Security Sector Reform
FAC : Fight against corruption
GDP : Gross domestic product
GRECO : Group of States against Corruption
IMF : International Monetary Fund
IFI: International financial institution
MFA : Macro-financial assistance
NABU : National Anti-Corruption Bureau of Ukraine
NIP : National indicative programme
OECD : Organisation for Economic Cooperation and Development
PCA : Partnership and cooperation agreement
PEFA : Public expenditure and financial accountability
06 Abbreviations and acronyms 
PIFC : Public internal financial control
PFM : Public finance management
SBC : State building contract
SGUA : Support Group for Ukraine
SIGMA : Support for improvement in governance and management
TACIS : Technical assistance to the Commonwealth of Independent States and Georgia
VAT : Value added tax
07
 Executive  
summary
I
Ukraine is one of the European Union’s largest and politically most important direct neighbours. Institutional and 
political instability, governance issues, and economic and financial difficulties predominate in the country. The 
conflict in eastern Ukraine has greatly exacerbated the economic and financial challenges. However, Ukraine has 
launched many significant reforms since the Maidan events of 2014.
II
EU–Ukraine cooperation is part of the European Neighbourhood Policy and its eastern dimension, the Eastern 
Partnership. After lengthy negotiations, the Association Agreement signed in 2014 will replace in its entirety the 
1994 Partnership and Cooperation Agreement once the former enters into force. The European Neighbourhood and 
Partnership Instrument, which was replaced by the European Neighbourhood Instrument in 2014, provided most of 
the bilateral assistance. During the audited period (2007-2015), EU financial assistance consisted of 1.6 billion euros 
in grants, half of which was in the form of budget support, and of 3.4 billion euros in macro-financial loans.
III
Over most of the period audited, the unstable political, legislative and administrative context limited the effective -
ness of EU assistance. EU–Ukraine cooperation advanced in the wake of the 2014 Maidan events, but the challenges 
faced by Ukraine still heavily affect the reform process and the risks posed by the oligarchs remain high. The EU 
response to the Ukraine crisis of 2014 (the 2014-2020 package of 11.2 billion euros), although prompt, was an emer -
gency solution. The EU was able to allocate and disburse large amounts of money rapidly and without a predefined 
strategy.
IV
The audit objective was to assess whether Commission and EEAS (European External Action Service) assistance was 
well prepared, appropriate and effective in supporting the transformation of Ukraine into a well governed state 
in the area of public finance management (PFM) and the fight against corruption (FAC),as well as in the gas sector 
during the 2007-2015 period. The audit scope included all EU budget support and macro-financial assistance pro -
grammes initiated since 2007, as well as the financial instruments from the Commission’s package launched in 2014.
V
Overall, EU assistance to Ukraine has been partially effective in supporting the transformation of Ukraine into a well 
governed state in the areas mentioned in paragraph IV.
Executive summary 08
VI
EU assistance to Ukraine was partially effective in producing tangible and sustainable results in PFM and FAC. PFM 
occupied a modest place in EU–Ukraine dialogue for most of the 2007-2013 period. Until 2014, the Ukrainian govern -
ment’s limited commitment to the reform process was reflected in incomplete and delayed outcomes. FAC has been 
reinforced by the 2011 Visa Liberalisation Action Plan and further accelerated by improved post-Maidan coopera -
tion. Despite the new impetus for reform since 2014, the results achieved so far remain fragile. In the case of FAC 
policy, the results of effective implementation remain to be seen. Certain shortcomings in the way conditions were 
stipulated or in the method their fulfilment was assessed affected the design of the budget support programmes 
and macro-financial assistance. Most budget support programmes in Ukraine were designed to disburse a signifi -
cant proportion of the allocated amount at the beginning of the programme once general conditions had been 
fulfilled. To address the critical situation of Ukraine in 2014, the Commission focused on rapid disbursement of 
assistance. Monitoring of the implementation of EU assistance was largely effective. Suspensions of budget support 
payments advanced PFM priorities in 2011-2013.
VII
EU assistance to Ukraine was partially effective in improving governance in the gas sector and in securing gas 
supplies via Ukraine. EU–Ukraine dialogue on gas covered a broad range of issues but was affected by Ukraine’s 
wavering commitment and by diverging views among EU stakeholders as regards the security of EU gas supplies 
via Ukraine. The design of the reviewed EU assistance to improve governance in the gas sector and the security of 
gas supplies via Ukraine included certain conditions that were vague and difficult to assess. Sometimes, monitor -
ing of the implementation of EU assistance lacked high-quality data and EU–Ukraine joint reporting did not provide 
a sufficiently detailed explanation of the difficulties experienced in the gas sector. Until 2014, EU assistance had 
limited impact on the functioning of the Ukrainian gas sector and produced mixed results as regards the security of 
the EU’s gas supplies via Ukraine. However, important milestones have since been achieved, notably the adoption of 
a gas law in April 2015 compliant with the EU third energy package.
VIII
This report sets out five recommendations for improving EU assistance to Ukraine.
09
 Introduction
Geographical and political background
01 
Ukraine covers an area of 603 000 km2 and was home to 44.3 million inhabitants 
in 2014. The country gained full independence in 1991 with the collapse of the 
Soviet Union. Since the 2004 enlargement of the European Union to central and 
eastern Europe, Ukraine has been one of the Union’s largest and politically most 
important direct neighbours.
02 
Political and institutional instability predominates in the country. Since 2004, 
three major events have occurred: the Orange Revolution of 2004, the presiden -
tial election of 2010 (which was held largely democratically and peacefully) and 
the Maidan Revolution1 of 2014.
03 
Since the beginning of 2014, Ukraine’s territorial integrity has been seriously 
threatened. At the time of the audit, the Ukrainian army was in conflict with 
Russian-backed separatists in certain areas of the Donetsk and Luhansk regions, 
and Russian forces had annexed the Crimean Peninsula2.
Economic and financial situation
04 
Ukraine has a track record of poor economic performance since it gained in -
dependence in 1991. Positive economic growth rates in the early 2000s were 
severely impacted by the 2008 global crisis and have struggled to recover ever 
since. Ukraine’s state finances have deteriorated over the years mainly because 
of mismanagement of public funds. In addition, the revenue side of the state’s 
budget is negatively affected by a significant shadow economy3. Despite reform 
efforts, Ukraine is still perceived as the most corrupt country in Europe4. Vested 
interests influence public policymaking. Oligarchic clans, which have developed 
considerably since the country became independent, continue to exert a  domi -
nant influence on Ukraine’s economy, politics and media.1 Other terms are also used, e.g. 
Euromaidan or the (Euro)
Maidan events, protests, 
demonstration or uprising, 
and the Revolution of Dignity.
2 Russia claims that Crimea is 
part of the Russian Federation 
on the basis of a referendum 
held on 16 March 2014, which 
was condemned as illegal by 
the Ukrainian Government, 
the European Union, the 
United States and the United 
Nations General Assembly.
3 Ukraine’s shadow economy, 
the largest in Europe, is 
estimated to account for 
around 44 % of GDP. See Igor 
Vinnychuk and Serhii Ziukov, 
‘Shadow Economy in Ukraine: 
Modelling and Analysis’, Yurii 
Fedkovych Chernivtsi National 
University, 2013.
4 Ukraine was rated 130 out of 
168 by Transparency 
International in 2015  
(and 142 out of 175 in 2014)  
(See http://www.transparency.
org/cpi2015/#results-table ).
10 Introduction 
05 
The conflict in eastern Ukraine has greatly exacerbated the economic and finan -
cial situation, absorbing the country’s limited financial resources and effectively 
destroying the most important industrial area of the country. In early 2014, the 
Ukrainian government identified their foreign aid needs to be at around 35 bil -
lion US dollars over the period 2014-2015. The deficit of the state-owned gas 
company Naftogaz has been an increasing drain on the state’s finances, rising 
from 1.9 % of GDP in 2013 to 5.7 % of GDP in 2014, when it was higher than the 
overall government deficit of 4.6 %5.
EU–Ukraine cooperation framework
06 
EU–Ukraine cooperation is part of the European Neighbourhood Policy and its 
eastern dimension, the Eastern Partnership . Cooperation progressed mainly with 
the signing of the Partnership and Cooperation Agreement (PCA) in 1994, the 
EU–Ukraine Action Plan in 2005 and the Association Agenda in 20096.
07 
In March 2007, the EU and Ukraine opened negotiations on a ‘New Enhanced 
Agreement’ (since September 2008 called Association Agreement) to replace the 
PCA; negotiations were concluded in December 2011 and the Agreement was 
initialled. As part of the preparations for signing the Agreement at the 16th EU–
Ukraine Summit in February 2013, Ukraine confirmed its determination to achieve 
tangible progress in three areas: remedying electoral shortcomings, addressing 
the issue of selective justice and preventing its recurrence, and implementing the 
reforms set out in the Association Agenda. On 21 November 2013, Ukraine decid -
ed to suspend preparations for signing the Association Agreement. This sudden 
reversal sparked the massive Maidan demonstration in support of political asso -
ciation and economic integration with the EU. In the wake of the Maidan events, 
the EU and Ukraine signed the political provisions of the Association Agreement 
on 21 March 2014 and the remaining provisions on 27 June 20147. The Agreement 
provides for the enhancement of EU–Ukraine relations in all areas of cooperation 
and also constitutes a reform agenda, based on a comprehensive programme to 
bring Ukrainian legislation into line with EU norms.5 IMF Country Report No 15/69, 
‘Ukraine: Request for 
Extended Arrangement Under 
the Extended Fund Facility 
and Cancellation of Stand-By 
Arrangement Staff Report’, 
International Monetary Fund, 
March  2015.
6 The 2009 Association Agenda 
was updated in 2011, 2013 and 
2015.
7 By mid-April 2016, the 
Association Agreement had 
been ratified by the 
Verkhovna Rada (Parliament of 
Ukraine), the European 
Parliament had given its 
consent to the conclusion of 
the agreement, and 27 
Member States had also 
ratified it (the Netherlands has 
not yet taken the final decision 
on the ratification following 
the negative outcome of 
a national referendum). Parts 
of the Association Agreement 
have been applied on 
a provisional basis.
11 Introduction 
EU financial assistance
08 
Financial assistance, in the form of grants to help Ukraine implement the Action 
Plan, was provided mainly by means of the European Neighbourhood and Part -
nership Instrument (ENPI)8, which was replaced by the European Neighbourhood 
Instrument (ENI) in 20149. ENPI bilateral assistance to Ukraine was programmed 
via the 2007-2013 Country Strategy Paper (CSP) and two national indicative 
programmes (2007-2010 and 2011-2013 NIPs). No new CSP or NIP has been an -
nounced since then due to the difficult situation. Most ENPI–ENI assistance (65 %) 
was granted using a sector budget support approach. Ukraine also received EU 
grants through the Instrument for Nuclear Safety Cooperation and the Instru -
ment contributing to Stability and Peace.
09 
In addition to grants, the EU has provided Ukraine with macro-financial assis -
tance (MFA), i.e. loans which are released in several instalments (‘tranches’) upon 
fulfilment of conditions related to the macro-economic situation and sectoral 
reforms. Table 1  shows the distribution of EU financial assistance to Ukraine in 
grants and loans during the 2007-2015 period.8 Regulation (EC) No 1638/2006 
of the European Parliament 
and of the Council of 
24 October 2006 laying down 
general provisions 
establishing a  European 
Neighbourhood and 
Partnership Instrument 
(OJ L 310, 9.11.2006, p. 1).
9 Regulation (EU) No 232/2014 
of the European Parliament 
and of the Council of 11 March 
2014 establishing a  European 
Neighbourhood Instrument 
(OJ L 77, 15.3.2014, p. 27).Table 1EU bilateral assistance to Ukraine, 2007-2015, allocation by instrument (million euro)
Total allocations1
Amount Share
Overall EU assistance to Ukraine (including MFA) 5 019 100 %
Total grants 1 609 32 %
ENPI/ENI 21 330 27 %
of which
Budget support3, 4794 16 %
Other ENPI/ENI grants 536 11 %
Instrument contributing to Stability and Peace 54 1 %
Instrument for Nuclear Safety Cooperation 225 4 %
Total macro-financial assistance (MFA) loans 3 410 68 %
MFA I 610 12 %
MFA II 1 000 20 %
MFA III 1 800 36 %
1 Data until 30 November 2015.
2 European Neighbourhood and Partnership Instrument/European Neighbourhood Instrument.
3 Includes State Building Contract.
4 Excludes 29 million euros that were allocated to complementary actions (technical assistance).
Source:  CRIS (Common Relex Information System) and DG Economic and Financial Affairs website (MFA).
12 Introduction 
10 
In March 2014, the Commission announced an indicative Ukraine support pack -
age of 11.2 billion euros, including up to 8 billion euros of EIB (European Invest -
ment Bank) and EBRD (European Bank for Reconstruction and Development) 
loans for the 2014-2020 period to support the reform process (see paragraphs 17 
to 18).
13
 Specific context of EU 
assistance to Ukraine
The unstable political, economic and administrative 
situation hampered EU–Ukraine cooperation
Negotiations for the Association Agreement reinforced EU–
Ukraine dialogue
11 
During the audited period, EU–Ukraine dialogue took place within a broadly 
structured framework which was shaped by negotiations and the subsequent 
provisional application of the Association Agreement. Current EU–Ukraine coop -
eration efforts are guided by the Association Agreement signed in 2014 and the 
2015 version of the Association Agenda. High-level cooperation was discussed 
at the annual EU–Ukraine summits and the EU–Ukraine Cooperation/Association 
Council meetings. To assist the Cooperation/Association Council, the EU–Ukraine 
Cooperation/Association Committee was set up, along with seven subcommit -
tees in charge of monitoring progress on the Action Plan and the Association 
Agenda10. Visits by Commissioners and senior officials also contributed to the 
dialogue process. Public finance management, the fight against corruption and 
energy were formally included within the remit of the dialogue process.
Political and administrative instability slowed the pace of 
EU–Ukraine dialogue and the progress of reforms
12 
Political instability in Ukraine strongly affected the EU–Ukraine cooperation and 
the implementation of EU assistance. Between 2004 and 2014, Ukraine exper-  
ienced three significant political changes (see paragraph 2), leading to major 
shifts in the political orientation of the country, especially towards its European 
aspirations. These changes had a significant impact on legislation, such as back -
tracking on accepted legislation and counter-revisions, and on the stability of 
public administration, especially at mid- and senior-management levels.
13 
Over the audited period, Ukrainian public administration underwent several at -
tempts at restructuring (e.g. in 2010-2011). Until 2014, the restructuring process 
was hampered by a lack of political will to comply with EU governance standards. 
It was carried out in an ineffective manner and affected the implementation of 
EU programmes on the ground. We found that at the time of the audit, there was 
a strong political commitment to public administration reform. However, the ro -
tation of mid and senior management jeopardised the reforms supported by EU 
assistance and the sustainability of results, while low salaries created a potential 
incentive to corruption.10 At the time of the audit, the 
new cooperation entities 
required by the Association 
Agenda were in the process of 
being established.
14 Specific context of EU assistance to Ukraine 
14 
We found that in the wake of Maidan, cooperation advanced in a number of areas 
that had been stagnating throughout the 2007-2013 period (e.g. public procure -
ment reform and reorganisation in the energy sector). However, the economic 
and geopolitical challenges faced by Ukraine heavily affect government priorities 
and the activities of the public services.
Since 2010, the Commission has increasingly emphasised the 
risks posed by the oligarchic system
15 
We found that since 2010, the Commission has been more outspoken about the 
risks posed by the oligarchic system in Ukraine, such as dysfunctional public 
administration, top-down corruption and public finances used to advance private 
goals11. The Commission assessed the risk of conflicts of interest at all levels of 
Ukrainian administration as very high, and sought to moderate the risk by means 
of formal dialogue and budget support suspensions. Hope was also placed in the 
implementation of the strategies for public finance management reform (2013) 
and anti-corruption (2014)12. Regarding the specific issue of privatisation, EU 
budget support and macro-financial assistance programmes did not include con -
ditions to ensure that future privatisations are open and fair. However, the Com -
mission supported the IMF’s (International Monetary Fund) privatisation goals by 
referring to IMF programme implementation in the MFA conditionalities.
16 
Legal initiatives since the beginning of 2015 have sought to break the oligarchs’ 
hold over Ukraine’s politics and economy. However, the level of risk remains high 
(see Box 1 ) and concrete results are still below expectations (see paragraph 63).11 EAMRs 2010, 2011, 2012 
(not  publicly available).
12 European Commission Risk 
Management Framework for 
Ukraine, Risk Register 
2012-2014 (not publicly 
available).Box 1Activation of the Ukrainian authorities’ campaign against the oligarchy
In 2015, the Ukrainian government initiated a campaign in line with EU requirements to loosen the oligarchs’ 
grip on the country’s economic and political system. Under this initiative, various investigations and prosecu -
tions were launched and the assets of some oligarchs were placed under scrutiny, in particular in the energy 
sector. However, these measures were sporadic and controversial, and faced strong opposition from past and 
current oligarchs. Some of the oligarchs took their own initiatives for proposing reforms for Ukraine13.
13 For example, the Agency for the Modernisation of Ukraine — a non-governmental organisation headquartered in Vienna and financed by 
a Ukrainian oligarch active in the energy sector — was launched in March 2015 to present an own, separate Ukraine modernisation action plan 
and establish a restoration fund. The Agency hired figures who had formerly been prominent at EU and Member State level. As the Agency’s 
activities largely duplicate those of the Ukrainian government and the EU, there is a risk of confusion with the EU’s official assistance to Ukraine.
15 Specific context of EU assistance to Ukraine 
The EU response to the Ukrainian crisis in 2014, 
although prompt, was an emergency solution
The Commission’s March 2014 financing package consisted 
mainly of potential loans
17 
On 5 March 2014, the Commission announced an indicative package of 11.2 bil -
lion euros for 2014-2020 (see Table 2 ) to help stabilise the economic and financial 
situation in Ukraine, assist with the transition process, encourage political and 
economic reforms, and support inclusive development14. Given the urgency of 
the situation, at the time of the political announcement (5 March 2014) the Com -
mission produced this package without a comprehensive analysis of the way 
the assistance had been calculated or of the arrangements for cooperating with 
other donors, and the financial risks for the EU were neither appropriately consid -
ered nor documented. Analysis and documentation followed later, accompanying 
the Commission proposals for legislative acts.14 See http://europa.eu/rapid/
press-release_IP-14-219_
en.htm  and, for further details, 
http://europa.eu/rapid/
press-release_MEMO-14-
159_en.htm .Table 2EU support for Ukraine — Indicative Package for 2014-
2020, as announced on 5 March 2014
Source of financingIndicative amounts  
(million euro )
I. EUROPEAN COMMISSION (2014-2020)
I.1 Overall development assistance (grants) 1 565
Bilateral allocation (mainly European Neighbourhood Instrument):
- Annual Action Programme (AAP) for 2014 140-200
- AAPs (average) - for 2015-2020 780
- Umbrella programme (‘more for more’) for 2015-2020 240-300
Neighbourhood Investment Facility 200-250
Instrument contributing to Stability and Peace (IcSP) 20
Common Foreign and Security Policy (CFSP) 15
I.2 Macro-financial assistance (loans)11 610
II INTERNATIONAL FINANCIAL INSTITUTIONS
EIB up to 3 000
EBRD 5 000
GRAND TOTAL 11 175
1 In addition, a new MFA loan (MFA III) of 1.8 billion euros was granted in 2015.
Source:  European Commission.
16 Specific context of EU assistance to Ukraine 
18 
In itself, the March 2014 financial package consisted mostly (71.5 %) of potential 
loans to Ukraine from the EIB and the EBRD. There is no certainty that EIB and 
EBRD allocations will be fully disbursed15. The package increased the value of 
grants to around 220 million euros per year until 2020, up from around 140 mil -
lion euros per year during 2007-2013. However, the grants under the umbrella 
programme (based on the ‘more for more’ principle) are not guaranteed as they 
are conditional upon proven progress in deepening democracy and respecting 
human rights. On the other hand, disbursements under MFA (2.21 billion euros 
out of 3.41 billion euros) already exceed the indicative amount of the package an -
nounced in March 2014. We found that the macro-financial assistance instrument 
managed by the Commission was the most effective means of rapidly disbursing 
the support promised to Ukraine for dealing with its difficult financial situation 
(see paragraph 43).
The Commission used special measures to address the crisis 
in Ukraine rapidly
19 
EU policy towards Ukraine is supported by a number of strategic documents set -
ting principal objectives and priorities and aiming to make EU policy consistent 
and effective. However, such strategic documents were not designed to guide 
policymaking in a crisis situation like the one that began in Ukraine in Novem -
ber 2013. The Commission was obliged to cope with radical changes quickly and 
without a predefined strategy.
20 
Due to the crisis, the multi-annual programming procedure for Ukraine was put 
on hold. The Commission could not use its standard Single Support Framework 
outlining priority sectors on a multi-annual basis to allocate assistance for 2014 
and 2015. As provided for in the regulation16 the Commission committed assis -
tance in the form of annual special measures.15 Since 2014, the EIB and EBRD 
have managed to contract 
around 940 and 
870 million euros of respective 
project loans (indicative 
amounts by end of July 2015).
16 Articles 2.5 and 2.1 of 
Regulation (EU) No 236/2014 
of the European Parliament 
and of the Council of 11 March 
2014 laying down common 
rules and procedures for the 
implementation of the Union’s 
instruments for financing 
external action (OJ L 77, 
15.3.2014, p. 95).
17 Specific context of EU assistance to Ukraine 
The EU set up ad hoc structures to manage its greater 
involvement in Ukraine
21 
In parallel to the significant increase in EU assistance to Ukraine in 2014, the EU 
established new entities calling upon additional expertise to advise Ukraine 
on the reform process. The two most notable initiatives are the Support Group 
for Ukraine (SGUA) from the Commission and the EU Advisory Mission for Civil -
ian Security Sector Reform (EUAM)17. Both the SGUA and the EUAM significantly 
enhance EU–Ukraine cooperation. They provide expertise in targeted sectors 
already being assisted by the EU Delegation. We found that there was there -
fore a risk of overlap with the EU Delegation’s activities and of confusion for the 
Ukrainian authorities, in particular in the fight against corruption, an area which 
lies within the remit of all three parties. In 2015, the Commission took steps to 
address this risk18.
22 
To secure the use of increased EU funding, in June 2014 the Commission also 
envisaged creating a  joint, independent body with the Ukrainian authorities to 
investigate fraud and corruption19. By the end of 2015, this joint body had not yet 
been created.
Donors stepped up their coordination in response to 
the Ukrainian government’s weakness in this area
The Ukrainian government was weak at donor coordination
23 
Donor coordination was poorly managed by the Ukrainian authorities. There was 
little communication among ministries, no interlocutor on the Ukrainian side and 
an unclear attribution of responsibilities. The 2006 and 2011 Public Expenditure 
and Financial Accountability (PEFA) assessments (see paragraph 46) also criti -
cally assessed flows of financial information on external assistance between the 
Ukrainian government and donors. Although the Ukrainian government made an 
attempt to centralise donor coordination in 2008-2009, clear mandates were not 
allocated and political support shifted quickly, meaning that the initiative failed.17 EUAM is a non-executive, 
unarmed, common security 
and defence policy (CSDP) 
mission supporting, advising 
and mentoring Ukrainian 
political and institutional 
stakeholders on Civilian 
Security Sector Reform (CSSR) 
at a strategic level.
18 E.g. to limit overlaps, the 
temporary solution found was 
that the EUAM would be 
working on the set-up of the 
anti-corruption bureau while 
the SGUA would be dealing 
with anti-corruption reforms 
at the level of the ministry of 
Justice.
19 Memo of 25 June 2014 on 
the European Commission’s 
support for Ukraine  
http://europa.eu/rapid/
press-release_MEMO-14-
279_en.htm .
18 Specific context of EU assistance to Ukraine 
24 
Since 2014, the Ministry of Economic Development and Trade has undertaken 
a number of donor coordination actions, but their outcomes and sustainability 
at this time remain uncertain20. The process of drafting the law on international 
technical assistance, started in 2012, has been suspended since 2014.
Since 2014, the donor community has improved its internal 
coordination
25 
The increasing donor involvement in Ukraine raises additional challenges in 
terms of coordination within the donor community, and strains an already weak 
absorption capacity on the ground. Since 2014 the Commission has met frequent -
ly with other major donors. Together they produced and are maintaining a map 
of assistance to Ukraine. We noticed that the donor map revealed parallel activi -
ties, such as EU and USAID (United States Agency for International Development) 
projects in the area of justice. While the Commission does not participate in the 
EBRD Multi-Donor Fund, mechanisms are in place to help the EBRD coordinate its 
project and programme decisions with the relevant Commission departments.20 At the time of the audit, donor 
coordination mandates had 
not yet been assigned and 
a clear donor coordination 
policy within the government 
of Ukraine had not yet 
emerged. A  high-level 
meeting to coordinate 
international support for 
Ukraine (with representatives 
from multiple donor countries, 
the EU, other key international 
institutions and donor 
organisations) was held on 
8 July 2014 in Brussels. 
A donors’ and investors’ 
conference was convened in 
autumn 2014 to examine the 
implementation of Ukraine’s 
Economic Recovery and 
Growth Agenda for 2014-2016. 
It was replaced by an 
International Conference on 
Support for Ukraine for the 
donor/business community 
and civil society in April 2015.
19
 Audit scope  
and approach
26 
For the 2007-2015 period, we examined whether Commission21 and EEAS assis -
tance, referred to hereafter as EU assistance22, was effective in supporting the 
transformation of Ukraine into a well-governed state. We focused on the area of 
public finance management (PFM) and the fight against corruption (FAC), and 
on the gas sector and energy efficiency. These areas, are particularly important 
to Ukraine’s reform process and have received significant EU assistance. The aim 
was to enhance governance by promoting the use of international standards and 
best practices23.
27 
The audit scope included all ENPI and ENI EU budget support and macro-financial 
assistance programmes initiated since 2007, as well as the instruments from the 
Commission’s financial package launched in 2014 in response to the crisis situa -
tion in Ukraine. The programmes examined are listed in the Annex .
28 
We carried out the audit work between June 2014 and December 2015. The audit 
centred on:
— the effectiveness of EU assistance to Ukraine in improving public finance 
management and the fight against corruption; and
— the effectiveness of EU assistance to Ukraine in improving governance in the 
gas sector and the security of gas supplies to the EU.
29 
The audit was based on interviews and exchanges of correspondence with the 
Commission, the EEAS and the EU Delegation to Ukraine, Ukrainian authorities 
and agencies, civil society organisations (CSOs), EU Member States24, international 
financial institutions, and the International Energy Agency, as well as documen -
tary review, including policy and strategy documents and other relevant reports 
from think tanks and CSOs. In addition, the audit included a 1-week visit to Kyiv 
in March 2015.21 Mainly DGs responsible for 
Neighbourhood and 
Enlargement Negotiations, for 
Economic and Financial Affairs 
and for Energy.
22 Up until the end of 2010 the 
European Commission was 
responsible for developing the 
ENP approach and then 
programming and 
implementing the assistance 
and the overall ENP 
cooperation framework. 
Following the establishment 
of the EEAS in December 2010, 
the EEAS became responsible 
for policy development and 
the overall cooperation 
framework and the EEAS and 
Commission shared 
responsibilities for 
programming assistance. 
Implementation of assistance 
remains the responsibility of 
the Commission.
23 Examples are: For PFM to 
implement Intosai standards 
and methods, harmonise with 
international standards for 
public internal control, and 
work towards approximation 
with the EU Aquis  in public 
procurement. For FAC ratify 
and implement the UN 
Convention against 
Corruption and the Council of 
Europe Criminal Law 
Convention on Corruption.
24 France, Italy, Hungary, Slovenia 
and Sweden.
20
 Observations
Part I — Effectiveness of EU assistance to Ukraine in 
improving public finance management and the fight 
against corruption
30 
We examined whether EU–Ukraine dialogue was effective in addressing issues 
of public finance management and the fight against corruption, whether EU as -
sistance was designed and monitored in such a way as to contribute effectively 
to the improvement of PFM and the FAC, and whether it produced tangible and 
sustainable results in these areas. The main documentary evidence used for our 
findings, and discussed with the auditees, were internal sources such as Commis -
sion internal management reports  — monitoring, annual progress and compli -
ance reports, and external sources such as PEFA, SIGMA, OECD and CSO reports.
EU–Ukraine dialogue on public finance management has 
significantly improved since 2013, and that on fight against 
corruption since 2011
EU–Ukraine dialogue on public finance management: 
a fragmented approach and no credible PFM reform strategy 
until 2013
31 
PFM and FAC were formally included within the remit of the dialogue structures 
(see paragraph 11). However, PFM occupied only a modest place in EU–Ukraine 
dialogue for most of the audited period. The key EU–Ukraine dialogue docu -
ments focused on a limited number of PFM components25. Both PFM and FAC 
barely featured in the 2007-2013 Country Strategy Paper and in the two national 
indicative programmes (2007-2010 and 2011-2013 NIPs).
32 
The 2010 Evaluation of the European Commission’s Cooperation with Ukraine26 
was highly critical of the way the PFM issue was addressed in Ukraine, noting 
that there was no framework for in-depth policy dialogue with the government 
of Ukraine on PFM issues. No specific subcommittee was dedicated to PFM as 
a whole. PFM components (e.g. audit, financial control and public procurement) 
were discussed in various relevant subcommittees. Neither the Joint Monitoring 
Groups created to assess progress on implementing the sector budget support 
programmes nor the Subcommittee on Economic and Social Affairs, Finance and 
Statistics, which met only once a year and covered a very wide range of topics, 
were considered by the evaluation an appropriate or sufficient structure for this 
purpose27.25 The select PFM components 
were public procurement, 
taxation, and — to a much 
lesser degree — public 
internal financial control 
(PIFC), external audit and 
budget planning.
26 ‘Evaluation of the European 
Commission’s Cooperation 
with Ukraine’, Evaluation for 
the European Commission 
carried out by ADE — Analysis 
for Economic Decisions, 
December  2010.
27 Ibidem, p. 87.
21 Observations 
33 
One long-standing issue was the lack of a credible PFM reform strategy. In 2007, 
the government of Ukraine adopted a PFM strategy that had been prepared 
with the assistance of the World Bank. The EU proposed a budget support 
programme in PFM during the audited period, in 2007 and 2010. Both proposals 
were cancelled because a 50 million US dollar World Bank project launched in 
January 2008 was expected to cover PFM issues in sufficient depth. However, the 
World Bank’s Public Finance Modernisation Project did not achieve its objec -
tives28. From 2010, several key studies and evaluations pointed out the weakness -
es of the Ukrainian PFM strategy29.
34 
In reaction to these criticisms, from 2011 the EU became much more explicit in its 
demand for PFM reform30. In 2012, the Ministry of Finance set up a working group 
on PFM in order to draft a reform strategy allowing for the resumption of budget 
support which had been suspended in 2011 as a consequence of slow progress 
on PFM, specifically in public procurement. The Commission — particularly 
through the EU Delegation in Kyiv — extensively helped the Ministry of Finance 
to develop an acceptable PFM reform strategy and action plan before the 2013 
Vilnius Summit.
EU–Ukraine dialogue on the fight against corruption: a slow start, 
limited progress despite EU efforts over most of the audited 
period and a new impetus in the wake of Maidan events
35 
FAC was mentioned in the action plans related to the EU–Ukraine Partnership 
and Cooperation Agreement of 1994 and was on the agenda for dialogue with 
Ukraine. After the 2004 Orange revolution, Ukraine made attempts to boost 
FAC by creating a new framework based on analyses and recommendations by 
international organisations. The EU urged Ukraine to join the Council of Europe’s 
Group of States against Corruption (GRECO) and implement its recommenda -
tions, and to ratify the UN’s conventions against corruption. Ukraine became 
a member of GRECO in 2006 and ratified the UN conventions in 2009. Progress on 
implementing international recommendations was slow until 201031.
36 
In December 2010, the newly elected Ukrainian parliament abolished the anti-
corruption legislative package and other measures which had been adopted in 
2009 but never implemented. In response, since 2011 the EU has included objec -
tives dealing with anti-corruption legislation and anti-corruption bodies in the 
Visa Liberalisation Action Plan.28 The final project appraisal 
from 2015 gives overall 
outcome rating of 
‘unsatisfactory’:  
‘Outcome: Relevance of 
objectives is rated Substantial, 
given the government’s 
agenda to reform public 
financial management. 
Relevance of design is rated 
Modest, as it is not clear that 
the project’s planned activities 
addressed the transparency 
objective. Achievement of the 
objective to strengthen public 
financial management in 
terms of operational efficiency 
was Modest. Achievement of 
the objective to strengthen 
public financial management 
in terms of transparency was 
Negligible. Efficiency is rated 
Modest. These ratings are 
indicative of major 
shortcomings in the project’s 
preparation and 
implementation, and 
therefore an Outcome rating 
of Unsatisfactory.’  
(See http://documents.
worldbank.org/curated/
en/2015/12/25709407/
ukraine-public-finance-
modernization-project ).
29 The SIGMA review published 
in 2011 noted that the strategy 
was mainly geared towards 
the goals of the World Bank’s 
PFMP while the coverage of 
other PFM areas was 
superficial. The scope of the 
strategy was also criticised in 
the Study on PFM issues in 
Selected Countries in the 
European Neighbourhood 
region and in the 2010 
Evaluation of the European 
Commission’s Cooperation 
with Ukraine.
30 Following the summit of 
19 December 2011, 
Commissioner for 
Enlargement and European 
Neighbourhood provided the 
First Deputy Prime Minister of 
Ukraine with a non-paper with 
PFM requirements to advance 
forward in budget support. 
The requirements included 
a creation of the PFM working 
group, the establishment of 
the PFM reform strategy and 
the development of the PFM 
Action Plan.
22 Observations 
37 
In the wake of the Maidan revolution, the EU took further steps to reinforce its 
FAC recommendations. Following the signing of the Association Agreement in 
2014, the 2015 EU–Ukraine Association Agenda listed more specific short-term 
priorities, in particular to implement the anti-corruption legal package adopted 
on 14 October 2014 and to set up and ensure the effectiveness of both the 
National Anti-Corruption Bureau and the National Agency for the Prevention of 
Corruption. Regarded as a key element in mitigating the risk of anti-corruption 
reforms being stalled, civil society organisations were more involved in the dia -
logue process.
The design of the assistance enabled rapid disbursements 
but did not always take sufficient account of the reforms to 
be achieved
Conditions on public finance management and the fight against 
corruption that were included in budget support programmes and 
macro-financial assistance had several shortcomings
38 
PFM reform is part of the general conditions for budget support32 that need to be 
deemed fulfilled before any disbursement. These general conditions are the only 
condition necessary for the fixed ‘tranches’. A  positive PFM assessment depends 
on satisfactory progress on implementing a PFM reform strategy33. However, fi -
nancing agreements for budget support programmes in Ukraine were not always 
clear as to what steps, based on specific milestones or outputs, constituted the 
required level of ‘satisfactory progress’34.
39 
In addition to the general PFM condition for disbursement of all tranches and to 
PFM and FAC projects, some programmes included specific PFM or FAC indicators 
for the disbursement of the variable tranches. The indicators accounted for a sub -
stantial portion (10-20 % overall) of the relevant variable tranches. The relatively 
modest fulfilment rate for those specific indicators reflected the limited added 
value of this approach in the PFM reform process (see paragraph 50).31 See OECD Anti-corruption 
Network for Eastern Europe 
and Central Asia, Istanbul 
Anti-Corruption Action plan, 
‘Second Round of Monitoring, 
Ukraine, Monitoring Report’, 
December 2010  
(https://www.oecd.org/
corruption/acn/istanbulac -
tionplancountryreports.htm ).
32 Sector budget support 
programmes are usually a  mix 
of fixed and variable 
instalments (tranches). Fixed 
tranches are linked to the 
fulfilment of general 
conditions and variable 
tranches are additionally 
linked to progress against 
specific indicators. General 
conditions apply to the 
disbursement of all tranches 
and comprise national/sector 
policies and reforms (‘public 
policies’), stable macro-
economic framework, public 
financial management, 
and — since 2012 — 
transparency and oversight of 
the budget.
33 E.g. border management 
budget support programme 
includes a  condition that only 
requires ‘progressive 
improvement in developing 
MTFF’; Energy II budget 
support programme of 2012 
also includes a very broad PFM 
condition  — mentioning 
unspecified programme to 
improve PFM.
34 See also the Court’s Special 
Report No 11/2010 ‘The 
Commission’s management of 
general budget support in 
ACP , Latin American and 
Asian  countries’  
(http://eca.europa.eu ).
23 Observations 
40 
Under macro-financial assistance programmes, the financing agreements do not 
allow the Commission to disburse the instalments in proportion to the degree of 
compliance with the conditions stipulated in the programme. It therefore ap -
plies a margin of appreciation to the wording of the conditions and the extent 
to which they have been assessed as fulfilled. However, this margin proved to be 
broad in some cases (see Box 2 ):
Sector budget support was generally frontloaded despite 
a relatively poor track record in structural reforms
41 
Sector budget support programmes were generally designed to disburse a large 
share of the allocated amount at the very beginning of the programme. Budget 
support frontloading, i.e. the initial fixed tranche paid in full and generally with -
out delay, ranged from 31 % to 49 % before 2012 (see Table 3 ).Box 2Flexibility in setting and assessing the fulfilment of MFA conditions
 οSome PFM conditions negotiated for the 2013 MFA I were worded in general terms, thus allowing 
considerable margin for assessing the extent of implementation35 (this also applies to the energy-related 
MFA I conditions; see paragraph 70).
 οAdditionally, all MFA loans to Ukraine include conditions that merge several subconditions into one for the 
purpose of assessing progress; this may complicate the assessment process if only part of the overarching 
condition is fulfilled36.
 οIn the case of macro-financial assistance conditions, the terms used to qualify the fulfilment stage varied 
from one programme to another37 and there were no clear cut-off points for partial assessments.
35 Examples of very general wording in MFA I: ‘continue to make progress in establishing a system of public procurement’, ‘appropriate increase in 
the number and quality of audits’ and ‘make significant progress towards strengthening the VAT administration system’.
36 MFA I 2 nd tranche — conditions 1, 2, 4 (PFM), condition 11 (energy); MFA II condition 4 (FAC); MFA III 2 nd tranche — conditions 5 (PFM), 6 (FAC), 
and 8 (state-owned enterprises); MFA III 3 rd tranche — conditions 7 (FAC), 13 (energy), 18 (trade), 19 (justice). In total, there are 12 composite 
conditions, accounting for 17 % of all Ukraine MFA conditions.
37 Fulfilled (MFA I and II), currently fulfilled (MFA I), broadly fulfilled (MFA I and II), partly fulfilled — progress made (MFA II), not fulfilled but good 
progress (MFA II).
24 Observations 
42 
Although within the general limits suggested by the budget support guide -
lines38, the frontloading of the sector budget support programmes designed 
over the 2007-2010 period contrasted with the weak track record of reform policy 
implementation in Ukraine39 (see also Figures 1  and 2) and the relatively poor 
fulfilment of the variable tranche conditions. The design of the two latest pro -
grammes (Energy II and Regional Development), which entails a smaller initial 
fixed tranche, takes greater account of the risk that high fixed tranches may lower 
the appeal of implementing the reforms upon which payment of subsequent 
variable smaller tranches is conditional.38 For example, budget support 
guidelines suggest a  sector 
budget support fixed-variable 
tranche mix of 60-40 %; with 
higher variable tranches for 
countries with greater risk and 
a poorer implementation 
record.
39 Based for example on annual 
progress reports, EAMR 
reports and analysis of the 
performance assessment 
reports prior to the payment 
of sector budget support.Table 3Ukraine: Sector budget support frontloading 
(initially allocated amounts)
Programmes1TotalFixed 
tranchesVariable 
tranchesFixed 
tranches
In million euro in %
Energy Efficiency (2008) 63 31 32 49 %
Energy I (2007) 82 40 42 49 %
Environment (2009) 35 15 20 43 %
Border Management (2010) 60 25 35 42 %
Transport (2009) 65 27 38 42 %
Trade (2008) 39 12 27 31 %
Regional development (2013) 50 6.5 43,5 13 %
Energy II (2012) 45 5 40 11 %
1 The amounts include only the budget support component and exclude the complementary 
support component (24 million euros in total for Energy I, Trade, Energy Efficiency, and 
Border  Management).
Source:  European Commission.
25 Observations 
In 2014 and 2015, the design of EU assistance focused on 
potentially rapid disbursement
43 
To address Ukraine’s critical balance of payments and fiscal position, the EU fi -
nancial assistance allocated since 2014 mainly consisted of rapidly approved and 
disbursed general budget support grants (State Building Contract — SBC) and 
macro-financial assistance loans (see Table 4 ). MFA loans (2.21 billion euros dis -
bursed) now dominate EU disbursements to Ukraine, dwarfing all other forms of 
EU aid, including cumulative budget support. This surge in MFA loans to Ukraine 
is also unprecedented for DG Economic and Financial Affairs, considerably ex -
ceeding their overall cumulative MFA disbursements from 2002-2014.
44 
The frontloading of the MFA II loan to Ukraine, together with less stringent condi -
tions than for MFA I, was in response to the risk of financial and ultimately politi -
cal collapse. Similarly, the Commission disbursed 250 million euros or 70 % of the 
State Building contract in June 2014, within a month of signing40, leaving 105 mil -
lion euros (30 % of the total) for the relatively condition-heavy variable tranche 
(8 conditions and 29 indicators).40 Source:  http://europa.eu/rapid/
press-release_IP-14-676_
en.htm .Table 4Ukraine: Rapid disbursement of MFA and SBC in 2014 
and 2015 (at 31.12.2015)
SupportProgrammes  
(year of signing)TotalDisbursed 
in 2014Disbursed 
in 2015Outstanding
In million euro
Macrofinancial 
assistance loansMFA I  (2013) 610 360 250 0
MFA II (2014) 1 000 1 000 NA 0
MFA III (2015) 1 800 NA 600 1 200
Total MFA 3 410 1 360 850 1 200
Budget supportState Building 
Contract  (2014)355 250 0 105
Grand total 3 765 1 610 850 1 305
Source:  European Commission.
26 Observations 
Monitoring of the implementation of EU assistance has 
improved
The EU and various international organisations regularly assessed 
the situation of public finance management and the fight against 
corruption in Ukraine
45 
Throughout the audited period, various EU and international organisations/in -
struments assessed the PFM41 and FAC42 sectors in Ukraine. The PFM sector and 
FAC status were also well known because of the implemented projects and the 
annual EU delegation management reports (EAMRs). European Neighbourhood 
Policy Progress Reports were also instrumental in designing EU assistance to 
Ukraine, although they have explicitly addressed the budget transparency issue 
only since 2015.
The monitoring framework for budget support has improved, but 
there is no systematic approach for independent budget support 
evaluations
46 
The 2006 and 2011 Public Expenditure and Financial Accountability reports were 
a prominent source of reference for the Commission’s positive PFM sector assess -
ments. This was despite Ukraine’s mediocre PEFA scores43 and some features of 
the PEFA itself: PEFA assessments are not frequent enough to monitor the use of 
EU funds and PEFA indicators do not entirely cover the PFM priorities targeted by 
EU policies. The budget support guidelines44 still designate PEFA as the preferred 
high-level PFM assessment instrument, but since 2010 the Commission has also 
used its own PFM Annual Report to assess yearly progress.
47 
Since 2012, the Commission has also strengthened its budget support monitoring 
framework by creating the inter-service Budget Support Steering Committee and 
establishing a  risk management framework.41 The main reference 
documents on PFM were: two 
DG Economic and Financial 
Affairs operational 
assessments (2009 and 2014); 
EU Delegation annual PFM 
reports since 2010; two PEFA 
assessments jointly by the 
World Bank and the EU (2006 
and 2011, see paragraph 0); 
and the SIGMA (Support for 
Improvement in Governance 
and Management) assessment 
published in 2011.
42 The main references for the 
FAC were the progress reports 
on the Visa Liberalisation 
Action Plan since 2011, the 
2013 United Nations Office on 
Drugs and Crime report, 
GRECO reports, Council of 
Europe and OECD 
(Organisation for Economic 
Cooperation and 
Development) reports, 
Transparency International 
surveys and the Istanbul 
anti-corruption action plan.
43 In both PEFA assessments, the 
ratio of strong (A and B) to 
average and weak (C and D) 
indicators was around 
40 %-60 %, with the 
proportion of Ds increasing in 
the 2011 report. Fundamental 
issues were the extent of 
unreported government 
operations, the oversight of 
aggregate fiscal risk from 
other public sector entities, 
the effectiveness of payroll 
controls and external audit. 
Source:  World Bank. 2012. 
Ukraine  — Public financial 
management performance 
report. Washington, DC:  
World Bank. http://documents.
worldbank.org/curated/
en/2011/01/16461565/
ukraine-public-financial-
management-performance-
report
44 Budget Support Guidelines for 
2007 and 2012.
27 Observations 
48 
We found that EU budget support in Ukraine is not evaluated systematically. For 
each programme, the Commission can establish the evaluation framework in the 
financing agreement. The Commission planned mid-term evaluations only for 
three sector budget support programmes in Ukraine: Energy I, Energy Efficiency 
and Border Management. No final ex post  evaluation was ever carried out, but the 
evaluation of overall budget support operations in Ukraine was finally completed 
in 201445.
The Commission’s suspension of EU assistance payments advanced 
public finance management priorities
49 
The outright suspension of budget support payments was effective as a ‘last 
resort’ attempt to advance EU priorities in the PFM sector. The Commission used 
it twice in 2011. In 2014 and 2015, postponing MFA disbursements also helped to 
ensure that certain conditions attached to the programme were implemented 
properly (see Box 3 ).45 IBF International Consulting, 
‘Evaluation and Budget 
Support Operations in 
Ukraine, Final Evaluation 
Report’, September 2014.Box 3Examples of payments being withheld to advance reforms
 οIn February 2011, disbursements under all budget support programmes were suspended in response to 
backtracking on the 2010 internationally acceptable procurement law. The suspension was reversed in 
September 2011 only after a public procurement law deemed compatible with international good prac -
tices was passed by Ukraine’s parliament in July 2011.
 οIn response to stagnating EU–Ukraine cooperation and the longstanding lack of a credible PFM reform 
strategy, all budget support payments requested in 2011 were suspended in December 2011. On 27 Nov-  
ember 2013, following the official adoption of the acceptable PFM reform strategy and Action Plan, the 
delayed budget support payments (nine tranches of a total of 87.9 million euros) were disbursed.
 οIt proved difficult to discern sufficient progress on conditionality for the MFA tranches paid in 2014 and 
2015. The Commission delayed disbursement of the final tranche of MFA I until April 2015. It also delayed 
payment of the second MFA II tranche until December 2014 when it was able to establish sufficient pro -
gress by the Ukrainian counterpart.
28 Observations 
The results of EU assistance remain fragile
Limited progress on reform and reluctance by the Ukrainian 
authorities affected the fulfilment of specific PFM and FAC 
conditions and delayed budget support implementation
50 
Over most of the period audited, incomplete fulfilment of general and specific 
PFM and FAC conditions in budget support programmes mainly reflected the 
Ukrainian authorities’ reluctance to implement concrete governance reforms. The 
first instalments were delayed on several occasions largely because the general 
PFM conditions had not been fulfilled (see paragraph 49). The disbursement 
rate for the variable tranches subject to specific PFM and FAC conditions ranged 
from 67 % for the Energy I programme to only 25 % for the Energy Efficiency and 
Border Management programmes. The fact that, in the programmes with several 
variable tranches, the second tranche generally had a  lower fulfilment rate than 
the first one also reflected the lack of momentum in the reform process.
51 
The pace of reform is also slower because the Ukrainian authorities channel 
the sector budget support funds disbursed by the EU through an extra-budget 
fund. Budget support funds are considered as revenue in a Special Fund and are 
disbursed over a lengthy 11-step procedure. For the first instalment of Energy I, it 
took 2 years to complete the procedure. This was criticised both in the mid-term 
evaluation of the Energy I programme and in the 2014 evaluation of the budget 
support programmes in Ukraine. According to the latter evaluation, by mid-2014 
only around half of the disbursed budget support funds had been transferred for 
budget execution.
The majority of public finance management conditions in macro-
financial assistance were assessed as broadly fulfilled, despite 
shortcomings in implementation
52 
In the PFM 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 pur -
poses, the Commission used its margin of appreciation and positively assessed 
several PFM conditions even though implementation on the ground was affected 
by shortcomings (see Box 4 ).
29 Observations 
The Ukrainian government achieved a number of legislative goals 
for public finance management, but many long-term issues remain
53 
The Commission generally considers the 2013 PFM reform strategy and Action 
Plan to be key PFM achievements for the audit period46. The Ministry of Finance 
has shown a relatively high level of commitment to the strategy. However, the 
sustainability of the reforms achieved and the visibility and continued relevance 
of the strategy directly depend on continued political commitment by Ukraine. 
Figure 1  gives an overview of developments in the main PFM areas over the audit 
period.
54 
Despite incomplete fulfilment of the conditions attached to EU and other donor 
assistance, a number of legislative decisions related to PFM were adopted be -
tween 2010 and 2012. However, the government of Ukraine did not pay enough 
attention to their proper enforcement: the related national legislation was of 
poor quality, insufficient funding was allocated; and controversial and regres -
sive legal amendments were enacted. Immediate implementation was there -
fore generally unsuccessful. Advancing PFM reforms in this period was all the 
more difficult because there was no structured PFM reform strategy until 2013 
(see  paragraph 34).46 Based on interviews with 
Commission staff and annual 
progress reports.Box 4Examples of shortcomings in the fulfilment of PFM conditions for MFA loans
MFA I second instalment:
 οCondition 2: Although the Anti-Monopoly Committee became operational, it faced budgetary uncertainty 
for 2015 and there is still a risk of significant constraints on resources.
 οCondition 4: Even though a training strategy for internal control officials had been adopted for all levels of 
government, the strategy had weaknesses (insufficiently elaborated, poorly devised, no specific timeline, 
lack of information on funding, no quantitative criteria and weak links to PFM sector reform). Internal audit 
certification had not been introduced.
MFA II second instalment:
 οCondition 1: Although a significant number of procurement bodies and contracting authorities did publish 
their procurement plans on time, the majority were insufficiently elaborated. In addition, the link between 
procurement needs and the state budget was questionable given the late adoption of the 2015 State 
Budget (29 December 2014).
30 Observations Figure 1PFM developments in Ukraine, 2010-2015
PFM areasPFM developments in 2010-2013PFM developments  
in 2014-2015Improvements Challenges/shortcomings
Public procurement •2010/2011 - New, relatively 
progressive procurement laws
 •2010 - Anti-monopoly Committee 
established •Controversial and regressive legal 
amendments, required heavy-
handed EU interventions.
 •Anti-monopoly Committee lacked 
funds. •New public procurement law, 
number of exceptions reduced,  
non-competitive awards declined.
 •Anti-monopoly Committee 
operational, but significant 
constraints and budgetary 
uncertainty.
Tax administration  •2010 - New Tax Code •New Tax Code considered by donor 
and business community to be of 
poor quality. •New reform of tax system.
 •VAT arrears have declined but risk of 
increase remains.
 •Electronic VAT implemented in 2015.
Public internal 
financial control •Draft law available in 2008
 •2011 - Legal basis for PIFC standards
 •2012 - Code of ethics/
methodological recommendations
 •From 2012 - Internal audit units in 
ministries and other government 
organisations •PIFC law implementation repeatedly 
postponed. •PIFC provisions clarified further, but 
not entirely compliant with EU PIFC 
standards.
 •New strategy for training state 
officials responsible for internal 
control and audit.
Accounting Chamber 
of Ukraine •2010 – ACU remit significantly 
reduced by excluding revenues. •ACU remit re-extended to revenues.
 •New ACU law extended ACU remit to 
state-owned enterprise transactions 
with the state.
 •Staff reductions from 550 to 386.
Budget transparency •Missed deadlines and lack of public 
consultation for the 2015 state 
budget.
Budget code  •2010 – New Budget code •Considered to have a number of 
weaknesses. •Budget code amended: focus on 
budget decentralisation.
 •Consolidation of three extra-
budgetary social funds.
Source : European Court of Auditors.
31 Observations 
55 
Reforms were given new impetus in 2014 and 2015, principally by a series of addi -
tional legislative decisions, followed by visible improvements in the management 
of public procurement, revenue administration and state budget procedures. In 
the area of public procurement, for example, the number of exceptions and the 
share of procurement contracts awarded on a non-competitive basis started to 
decline in 2014. In cooperation with the IMF, the government of Ukraine devel -
oped and began to implement a strategy to reform revenue administration. 
Furthermore, initial steps were taken in 2015 towards results-based budgeting 
and medium-term planning.
56 
Major progress in budget oversight was achieved with the adoption of a new 
law on the Accounting Chamber of Ukraine (ACU, the supreme audit institution 
of Ukraine), which entered into force on 9 August 2015. The ACU’s mandate was 
extended in order to fulfil the conditions set by the EU, the World Bank and other 
donors. Paradoxically, the ACU law also requires a reduction in the organisation’s 
resources47.
57 
Despite progress achieved since 2014, several long-term issues remain: the risk of 
backsliding (for example in public procurement exemptions and budgetary trans -
parency), a lack of funds for the Anti-Monopoly Committee, the risk of rising VAT 
(value added tax) arrears, and weaknesses in the PIFC approach.
Significant steps to combat corruption were taken only after the 
Maidan revolution but further consolidation of the anti-corruption 
framework is still needed, as are tangible results
58 
Figure 2  lists the EU’s main actions over the audited period to help Ukraine set up 
its legal and institutional anti-corruption framework.47 The ACU’s resources were 
a key issue that the 
Commission discussed with 
the Ukrainian authorities in 
January 2015 ahead of the 
decision to disburse the third 
tranche of MFA I. The draft 
ACU law required the 
organisation’s resources to be 
reduced by introducing a staff 
ceiling (a maximum of 250). 
This ceiling was raised 
substantially (when compared 
with the initial draft) to 386 in 
the final version of the ACU 
law, following intervention by 
the Commission when it 
reviewed the implementation 
of MFA conditionality.
32 Observations Figure 2Main anti-corruption developments in Ukraine, 2006-2015
EU actions Legislative decisions and institutional changes Comments
2015
2014 •MFA II and III conditionality
 •State Building Contract
 •EU Advisory Mission for Civilian 
Security Sector Reform (EUAM)
 •Support Group for Ukraine 
(SGUA) assistance to Ministry 
of Justice
 •Ongoing Visa Liberalisation 
Action Plan •Establishment of Specialised Anti-corruption Prosecutor’s 
Office (November 2015).
 •Laws strengthening the legislative framework for asset 
recovery (November 2015).
 •Laws on prevention and counteraction of political corruption 
and the funding of political parties (October 2015).
 •Coordination body: the National Council on Anti-corruption 
Policy (October 2014).
 •Anti-corruption legal package (October 2014) establishing: 
(1) Anti-corruption Strategy 2014-2017, (2) National Anti-
corruption Bureau of Ukraine (NABU) and (3) National Agency 
for Corruption Prevention.
 •Criminal Law on Corruption (June 2014). •The government blocked 
the law on prevention of 
corruption for 9 months.
 •Outputs in line with FAC 
priorities of the 2015 
Association Agenda.
 •Long-run impact will depend 
on genuine law enforcement.
2013
2012 •Ongoing Visa Liberalisation 
Action Plan •Several legislative amendments, e.g. concerning offences 
related to corruption and the confiscation of gains of 
corruption. •Some progress on aligning FAC 
with international standards.
2011 •Visa Liberalisation Action Plan
 •Budget support programme 
Public Administration Reform •Anti-corruption Law passed in April 2011 (partially replacing 
the anti-corruption package revoked in December 2010).
 •Budget support programme for Public Administration Reform 
not implemented  because the requisite Civil Service Law failed 
to meet basic EU principles. •Anti-corruption Laws did not 
fully comply with international 
standards.
 •Budget support programme 
de-committed in 2013.
2010 •MFA I Conditionality
 •Project Support to Justice 
Sector Reforms (Component 5 
Independence of the Judiciary 
and Component 6 Prevention 
and fight against corruption)
 •Border Management Budget 
support programme •Anti-corruption Strategy 2014-2017 .
 •Support for setting up the National Anti-corruption Bureau of 
Ukraine (NABU) since 2014.
 •Unsatisfactory results from Border Management programme 
(no progress demonstrated as regards the level of corruption at 
the Ministry of Revenues and Duties).Implementation delays:
 •MFA I launched in 2014;
 •Project Support to Justice 
Sector Reforms launched in 
2013.
2009-2006 •2006 TACIS Project Against 
CorruptionOutputs related to:
 •creation of a  strategic and institutional framework against 
corruption;
 •strengthening capacities for corruption prevention;
 •strengthening anti-corruption legislation. •Low impact due to 
abolishment of existing anti-
corruption package by the new 
Parliament in December 2010.
Source : European Court of Auditors.
33 Observations 
59 
The fight against corruption was on the agenda of the EU–Ukraine dialogue 
process (see paragraphs 35 to 37), but was rarely taken into account in assistance 
programmes before 2010. The overambitious48 2006 TACIS (Technical Assistance 
to the Commonwealth of Independent States and Georgia) Project against Cor -
ruption in Ukraine, launched in the wake of the Orange revolution, had minimal 
impact because in December 2010 political reasons led Ukraine’s parliament to 
revoke the first anti-corruption package of laws adopted in 200949.
60 
From 2011 onwards, the EU boosted legislative reforms by including benchmarks 
in the Action Plan on Visa Liberalisation offered to Ukraine in December 2010. 
The anti-corruption legislation adopted in April 2011 and subsequent legisla -
tive amendments passed in 2012 and 2013 were a positive development as they 
brought Ukraine’s anti-corruption laws into line with recommendations made 
by the Commission and GRECO. However, although substantial progress was 
achieved in 2013, further improvements were necessary to complete the anti-
corruption framework50. In particular, the Commission drew attention to the poor 
quality of Ukraine’s legislative process and to the fact that the reforms lacked 
a comprehensive strategic approach51. The anti-corruption institutions in place 
until 2014, i.e. the National Anti-corruption Committee and the Government 
Agent on Anti-Corruption Policy, had been dysfunctional and were unable to 
carry out their mandate properly.
61 
In 2014, the Ukrainian government began to cooperate closely with civil society 
on anti-corruption legislation. Important laws were passed in 2014 and 2015. 
Legislative and institutional progress continued in December 201552. There was 
also progress when new institutions were established in 2014 and 2015, i.e. the 
Anti-corruption Bureau (NABU)53, the specialised anti-corruption Prosecutor’s 
Office in charge of overseeing NABU’s investigations, the National Agency for the 
Prevention of Corruption and the National Council on Anti-corruption Policy.
62 
By 2015, Commission and OECD regarded Ukraine’s anti-corruption framework 
as closely aligned with international standards and EU benchmarks. At the same 
time, a number of additional results were yet to be achieved to make the frame -
work effective, including54:
— allocation of proper budget resources to ensure that anti-corruption institu -
tions function well and that the anti-corruption strategy and related action 
plan are implemented;48 Based on monitoring reports.
49 OECD, ‘Anti-corruption 
reforms in Ukraine’, 
Monitoring of the Istanbul 
Anti-corruption Action Plan, 
March 2015, p. 17. The first 
anti-corruption package of 
laws consisted of (1) the Law 
on principles for preventing 
and counteracting corruption, 
(2) the Law on the liability of 
legal persons for corruption 
offences and (3) the Law on 
amendments to certain 
legislative acts of Ukraine 
regarding liability for 
corruption offences.
50 COM(2013) 809 final of 
15 November 2013, p. 11, 
‘Third progress report on the 
implementation by Ukraine of 
the Action Plan on Visa 
Liberalisation’.
51 Ibidem, p. 14.
52 SWD(2015) 705 final f 
18 December 2015, p. 6, 
‘Sixth  progress report on the 
implementation by Ukraine of 
the Action Plan on Visa 
Liberalisation’.
53 NABU is an investigative 
agency dealing with 
corruption by senior public 
officials and corruption 
involving significant bribes 
even if no high-level public 
official was involved. NABU is 
formally a state law 
enforcement authority, and is 
not subject to government 
control.
54 See SWD(2015) 705 final and 
OECD, Monitoring of the 
Istanbul Anti-corruption 
Action Plan, progress updates, 
7-9 October 2015.
34 Observations 
— further improvements to the legal framework in order to ensure the full inde -
pendence and integrity of the specialised anti-corruption Prosecutor’s Office;
— improvement of legal provisions regarding the National Asset Recovery Of -
fice and the Asset Management Office;
— clarification and coordination of the specific anti-corruption tasks of institu -
tions such as the Security Service of Ukraine and the Accounting Chamber of 
Ukraine; and
— effective monitoring and coordination by the National Council on Anti-cor -
ruption Policy.
63 
As well as the creation of adequate structures, the main challenges are genuine 
law enforcement and the independence of Justice. At the end of 2015, the politi -
cal will to combat corruption as proclaimed by the post-Maidan government had 
not yet produced a convincing track record of investigations and sanctions for 
high-level corruption cases. Experts point out that FAC in Ukraine was stalling 
because enforcement institutions were not sufficiently independent of the gov -
ernment and oligarchs were exerting influence over political parties55. Ukraine’s 
poor track record on high-level corruption is jeopardising its international rescue 
package56.55 See, for example, the National 
Integrity System Assessment 
Ukraine 2015, Transparency 
International, 2015 which was 
produced as part of the 
EU-funded project ‘National 
Integrity System Assessment 
in the European 
Neighbourhood East region’.
56 See e.g. Statement by 
Christine Lagarde, Managing 
Director of the International 
Monetary Fund (IMF), Press 
Release No 16/50, 10 February 
2016.
35 Observations 
Part II — Effectiveness of EU assistance in improving 
governance in the gas sector, and security of the EU’s 
gas supply via Ukraine
64 
We examined whether EU–Ukraine dialogue addressed gas and energy efficiency 
issues in an effective way, whether EU assistance to improve governance in the 
gas sector and the security of the EU’s gas supply via Ukraine was appropriately 
designed and monitored, and whether it produced tangible and sustainable re -
sults. We assessed governance aspects in the gas sector against the EU objectives 
of developing a  competitive, transparent and non-discriminatory gas market, in 
convergence with EU rules and standards57. This included consumer information 
and protection, price transparency, accountability of utility companies, trans -
parent reporting on gas market and promotion of energy efficiency. The main 
documentary evidence used for our findings, and discussed with the auditees, 
were the joint EU–Ukraine reports on the implementation of the Memorandum 
of Understanding on energy cooperation, Council conclusions, EU Parliament 
reports, the Commission strategy and programming documents, and Commis -
sion management reports. Reports from external sources such as International 
Energy Agency, Oxford Institute for Energy Studies, World Bank, IMF and CSOs 
were also  used.
Inconsistent commitment and approach to reform hampered 
EU–Ukraine dialogue until recently
Gas sector dialogue was broad but of limited effectiveness
65 
The Memorandum of Understanding (MoU) on energy cooperation signed by 
the EU and Ukraine in 2005 establishes roadmaps and addresses the main energy 
issues58 in Ukraine. We consider it a major achievement that Ukraine became 
a contracting party to the Energy Community Treaty59 in February 2011. Moreo -
ver, since 2014 it has made efforts to fulfil its commitments under the Treaty, in 
particular by implementing the 3rd EU legislative energy package60 a key EU–
Ukraine energy cooperation priority.57 Based on Chapter I of Title V of 
the Association Agreement.
58 Including, for the gas sector, 
price reforms, social security 
nets, energy efficiency, 
diversification of supply and 
modernisation of 
infrastructures.
59 The Treaty establishing the 
Energy Community was 
signed in 2006. The parties 
commit themselves to 
liberalise their energy markets 
and implement key EU legal 
acts in the area of electricity, 
gas, environment and 
renewable energy.
60 The latest round of EU energy 
market legislation, known as 
the third package, was 
enacted in 2009 in the EU to 
improve the functioning of the 
internal energy market and 
resolve structural problems.
36 Observations 
66 
Until 2014, high-level EU–Ukraine dialogue on energy cooperation was of limited 
effectiveness in terms of restructuring the gas sector due to a lack of genuine 
commitment by the Ukrainian partners. Many of the same major issues arose in 
the period 2007 to 2015 and progress on modernising the gas transit system was 
limited. The Commission’s efforts to bring Ukraine’s energy prices to economi -
cally justified levels or to reduce the Naftogaz deficit were unsuccessful in the 
2007-2013 period. However, the Commission was successful in avoiding major 
disruptions to the EU’s gas supplies in 2014 and 2015 despite the crisis between 
Ukraine and Russia (see paragraph 68).
Gas sector dialogue suffered from EU stakeholders’ diverging 
views and wavering Ukrainian commitment
67 
There were diverging views among the Member States, as well as between Mem -
ber States and the Commission, regarding priorities for the security of the EU’s 
gas supply via Ukraine and the need for urgent action. ‘Speaking with one voice’ 
on such priorities therefore remained a  challenge, despite the Commission’s ef -
forts. The high-level EU communication clearly advocated the strategic nature 
of Ukrainian gas transit. At the same time, the communication was not explicit 
about how the frail economic and financial situation both of the country and of 
the state energy company Naftogaz, exacerbated by systemic corruption in the 
gas sector, could affect Ukraine’s reliability as a gas transit country.
68 
Gas transit via Ukraine is hugely important for the security of supplies in cen -
tral, southern and eastern Europe and it also has important economic, financial 
and social consequences for Ukraine itself. In 2014, the EU reacted swiftly when 
Gazprom stopped gas deliveries to Ukraine and a potential threat emerged to the 
security of gas transit through Ukraine: the EU offered alternative solutions for 
gas supplies to Ukraine by facilitating reverse flows and supporting new inter -
connections in order to secure continued transit through the country.
69 
The persistent lack of a sufficiently stable Ukrainian energy strategy (except for 
Ukraine’s gas transit role) and fluctuating political will made it more difficult for 
the Commission to adopt a consistent approach to the EU–Ukraine gas dialogue 
in a complex geopolitical environment.
37 Observations 
Conditions for EU assistance were broad in the early phase
70 
Some conditions included in the 2007 Energy I budget support programme were 
not precise enough to avoid conflicts of interpretation with the Ukrainian au -
thorities61. Given this lack of precision and the fact that the programme allowed 
only three different completion rates for the fulfilment of the condition (0-50-
100 %) the Commission sometimes had to be accommodating in its assessment62. 
Furthermore, due to urgent macro-economic and political considerations, many 
energy conditions agreed by the Commission and the Ukrainian Authorities in 
MFA I were also defined in a broad way63.
EU assistance lacked high-quality data until 2014
71 
Ready-to-use and reliable data, even in adverse conditions, are essential for well-
founded, evidence-based decision-making. Until 2014, the availability of ready-
to-use and reliable data was problematic, e.g.:
— Gas flows transiting Ukraine on a daily basis;
— Regular data on gas transit fees actually collected by Ukraine64;
— Comprehensive summary statistics on actual gas and heating tariff hikes.
Some improvements were noted in 2014 as regards Commission access to data on 
gas transit via Ukraine and since 2015 Ukraine’s Transmission System Operator has 
been making information on daily gas transit flows available online.
72 
The joint EU–Ukraine annual progress reports on the implementation of the 2005 
energy Memorandum of Understanding provided a  useful forum for regular po -
litical dialogue on key energy challenges. However, we found that they were not 
critical enough and did not fully reflect the Commission’s perspective.
EU assistance until 2014 had limited impact on the gas sector
73 
Until early 2015, EU assistance was not successful in producing a breakthrough in 
the Ukrainian gas sector65, but important milestones/progress have since been 
achieved (see also Figure 3 ):61 See, for example, the 
‘No increase in the quasi-fiscal 
deficit in the energy sector 
compared to 2006’ condition. 
The Commission and the 
Ukrainian partners interpreted 
the condition differently and 
proposed a fulfilment rate of 
0 % and 100 %, respectively.
62 E.g. for indicator 6 (Finalisation 
with the international financial 
institutions (IFIs) of the 
financing agreements for 
priority infrastructure 
projects), indicator 5.3 
(Presentation for 
commissioning the gas 
metrology line in the Regional 
Metrology Centre in Boyarka) 
and indicator 8 (Design and 
construction of a  pilot 
international gas metering 
station at an entry point into 
the gas transit system of 
Ukraine).
63 Examples are ‘increase 
substantially the overall 
collection rate of Naftogaz’, 
‘achieve substantial progress 
in the implementation of 
Ukraine’s obligations under 
the Energy Community 
Treaty’, ‘make substantial 
progress towards achieving 
EITI (Extractive Industries 
Transparency Initiative) 
compliant status’, ‘strengthen 
in a targeted manner the 
social safety net’ and 
‘substantially expand the 
utilisation of individual gas 
meters’.
64 Fee collection can be 
calculated, but only in theory 
by using an established 
formula based on gas transit 
contracts.
65 To illustrate this point, the 
related EU energy sector 
budget support conditions 
(Energy I  and Energy 
Efficiency) were only partially 
fulfilled, i.e. at a rate of 59 %. 
The Commission and the 
Ukrainian authorities 
disagreed in numerous cases 
over actual fulfilment rates.
38 Observations Figure 3Energy and gas sector developments in Ukraine, 2007-2015
Areas/  
sub areasDevelopments  
in 2007-2013Developments  
in 2014-2015Comments
(a) Gas sector 
reformGas law •Incremental progress with no 
breakthrough.
 •Better integration of Ukraine 
into the EU’s energy market 
is given impetus by Ukraine’s 
accession to the Energy 
Community Treaty. •Adoption of a comprehensive 
gas sector reform action plan 
(March 2015) and the Ukrainian 
gas law of April 2015. •2015 was a positive turning 
point in gas sector reform. 
After the April 2015 gas law, the 
preparations for unbundling 
Naftogaz commenced in line 
with the EU third energy 
package.
Gas and heating 
prices •Insufficient increases between 
2007 and 2013 (despite EU and 
IMF requirements). •Utility prices increased 
substantially. •Further substantial increase in 
gas prices in April 2016.
 •No reduction in Naftogaz’s 
deficit. •Naftogaz’s deficit decreased 
significantly in 2015. •Naftogaz’s deficit should 
disappear by 2017.
Social safety net •Unsuccessful efforts to set up 
a robust system to compensate 
the poorest members of society 
for energy price increases. •Social compensation scheme 
was improved to counterbalance 
the vast scale of energy price 
hikes in 2015. •Robustness of the compensation 
scheme is yet to be seen.
Metering 
throughout the 
gas supply chain •Significant progress on installing 
gas meters in individual 
households. •The 2015 gas sector reform 
action plan aims to improve 
metering throughout the gas 
chain. •Installation of gas meters 
for all remaining unmetered 
households and at least one 
heating meter per building to be 
completed by April 2017.
(b) Energy efficiency •Not a priority in the Ukrainian 
energy reform programme 
(despite Commission’s efforts). •Some recent positive 
developments (new EU projects 
and programmes with EU 
support). •More efforts in this area 
since  2015.
(c) Modernisation of the gas 
transit system •No modernisation triggered by 
EU assistance (loan conditions 
not met by the Ukrainian 
partners). •First pipeline modernisation 
works to start in 2016 (funding 
guaranteed partially by EU). •Gazprom threatens to put an 
end to the Ukrainian transit of 
Russian gas in 2019.
(d) Security of gas supply 
via Ukraine •Crisis situations in 2005-2006, 
2009. •Difficulties in 2014-2015 but gas 
transit and deliveries sustained 
thanks to the EU’s efforts (via 
interconnections, reverse flows 
and mediation with Gazprom 
and Naftogaz). •Other rival transit projects 
attempt to bypass Ukraine.
 •Improvement in gas sector 
governance and better 
integration into the EU’s energy 
market.
Source : European Court of Auditors.
39 Observations 
(a) Gas sector reform: Despite EU efforts, progress between 2007 and 2013 was 
slow. However, the implementation of the assistance conditions set by the EU 
and its partners has relaunched the gas sector reform since 2014 (see Box 5 ):
(b) Energy efficiency: The Ukrainian authorities did not consider energy effi -
ciency a  priority in their energy reform programme, despite its prominence 
in the 2005 EU–Ukraine Memorandum of Understanding on Energy Coopera -
tion. Since 2015, the Ukrainian authorities have paid more attention to energy 
efficiency.
(c) Modernisation of the gas transit system: from 2006 onwards, the Commis -
sion attempted to generate financing through international financial institu -
tions’ (IFI) loans to modernise the gas transit system. In 2012 the Commission 
financed a  preparatory study which concluded that modernisation would 
cost 2.5-5.3 billion euros, depending on gasflow scenarios. The EIB and the 
EBRD were able to sign the first IFI loan agreements with Ukrtransgaz67 — for 
150 million euros for either IFI68 only in December  2014 when Ukraine was 
deemed to have made sufficient progress on certain key conditions agreed in 
the Joint Declaration of 2009. Construction will start in 2016 and is expected 
to end in 2018 under the first phase of a large-scale project to modernise the 
Urengoy-Pomary-Uzhgorod transit pipeline.67 Subsidiary of Naftogaz in 
charge of transmission and 
storage of gas.
68 The EIB loan is covered by 
a comprehensive EU 
guarantee.Box 5Developments since 2014 in the gas sector
 οA comprehensive gas sector reform action plan establishing specific time-bound actions was adopted, as 
was a new gas law.
 οAfter insufficient attempts during a difficult period of economic crisis and an increase in Russian gas prices, 
charges increased by approximately 300-600 % for household gas and by about 70 % for district heating 
at the beginning of 2015. The hikes are due to continue until 2017 until prices reach market parity level. 
Naftogaz’s deficit was significantly reduced in 2015 and should disappear by 201766.
 οIn 2015, an existing social compensation scheme was extended to offset the vast energy price hikes im -
posed on the poorest members of society. However, further incremental improvements — or a reform — 
are needed in order to cope with future price increases and to create more effective energy-efficiency 
incentives.
 οThe 2015 gas sector reform action plan aims to improve metering throughout the gas chain.
66 An IMF objective.
40 Observations 
(d) Security of gas supplies via Ukraine:
(i) During the audited period, the security of the EU’s gas supply via Ukraine 
was still at risk due to the country’s political, administrative and economic 
instability. This further worsened the crisis situations in 2005-2006 and 
2009, with further difficulties in 2014-2015. In addition, it is uncertain that 
gas will continue to transit to EU countries through Ukrainian territory: 
Gazprom is threatening to put an end to the Ukrainian transit of Russian 
gas in 2019 when the current Gazprom-Naftogaz contract expires. Fur -
thermore, alternative gas transit projects (e.g. Nord Stream II, Turkstream, 
Southstream) endeavoured or are endeavouring to bypass the country. 
However, the EU’s objective is to maintain gas transit through Ukraine.
(ii) The Commission’s recent efforts to maintain gas transit via Ukraine in 
2014-2015 were successful, significantly reinforcing the security of EU 
and Ukrainian gas supplies via interconnections and reverse flows, and 
mediating between Naftogaz and Gazprom in negotiations for the so-
called 2014-2015 ‘winter package’. Ukrainian storage facilities, which are 
indispensable for the security of eastern EU gas supplies, were success -
fully replenished in the 2015-2016 winter package using Naftogaz own 
resources and also an IFI loan facility69.
(iii) Gas sector reform is expected to improve gas sector governance in 
Ukraine, thereby containing the governance risk element of the secu -
rity of Ukrainian gas transit. Another success for the Commission was 
Ukraine’s accession to the Energy Community Treaty in 2011, which aims 
to integrate the country more fully into the EU’s energy market, thereby 
helping to stabilise Ukraine’s gas sector in the long term.69 300 million USD provided by 
the EBRD, supported by 
a Ukrainian sovereign 
guarantee, to be followed up 
by a World Bank facility of up 
to 520 million USD, 
guaranteed by the EIB and 
therefore by the EU.
41
 Conclusions and 
recommendations
74 
On the basis of our audit work, we conclude that, overall, EU assistance to Ukraine 
has been partially effective in supporting the country’s transformation into a well 
governed state in the areas of public finance management, the fight against cor -
ruption and the functioning of the gas sector.
Effectiveness of EU assistance to Ukraine in improving 
public finance management and the fight against 
corruption
75 
EU assistance to Ukraine was partially effective in improving public finance man -
agement and the fight against corruption.
76 
During most of the audited period, PFM occupied a modest place in EU–Ukraine 
dialogue. However, from 2011 the EU became more demanding as regards PFM 
reforms and helped Ukraine to develop its 2013 PFM reform strategy and action 
plan (see paragraphs 31 to 34). FAC has regularly been on the EU–Ukraine dia -
logue agenda. It has been reinforced by the 2011 Visa Liberalisation Action Plan 
and further accelerated by improved post-Maidan cooperation (see paragraphs 
35 to 37).
Recommendation 1 — Place greater emphasis on public 
finance management in the dialogue process with Ukraine
In order to maintain the PFM reform momentum created by the adoption of the 
2013 PFM strategy, the Commission and EEAS should consolidate policy dialogue 
on PFM issues. The Commission should also explore the possibility of launching 
a specific programme to ensure PFM reform is implemented effectively as soon 
as possible.
42 Conclusions and recommendations 
77 
The design of EU assistance was partially effective in contributing to improve -
ments in PFM and FAC. The Commission incorporated the need to strengthen 
PFM and FAC into the design of the budget support programmes and MFA for 
Ukraine, albeit sometimes with shortcomings in the way conditions were stipulat -
ed or the method fulfilment was assessed (see paragraphs 38 to 40). Most budget 
support programmes in Ukraine were designed to disburse a significant propor -
tion of the allocated amount at the beginning of the programme once general 
conditions had been fulfilled. This approach may lessen the incentive to imple -
ment the reforms upon which subsequent smaller payments depend. To address 
the critical situation of Ukraine, the Commission focused on rapid disbursement 
of assistance in 2014 (see paragraphs 41 to 44).
Recommendation 2 — Improve the design of conditions for 
and disbursements of financial assistance
The Commission should build on the experience acquired in Ukraine to improve 
the way future assistance is designed:
(a) For budget support and MFA loan conditions, all selected indicators should 
be clearly defined to avoid any disputes during the assessment process.
(b) Future loan and grant conditions should complement and reinforce each 
other.
(c) When negotiating and setting conditions, the Commission should work 
closely with other donors, in particular international financial institutions, so 
as to increase incentives for reform.
(d) The programmes should seek a reasonable balance between policy lever -
age aspects and the need to disburse assistance rapidly. Furthermore, in the 
case of budget support, the amounts attached to PFM and FAC conditions in 
variable instalments should be significant enough to ensure conditions are 
fulfilled.
78 
Monitoring of the way EU assistance was implemented was largely effective and 
improved during the audited period. EU and international organisations regularly 
assess the situation of PFM and FAC in Ukraine and, since 2012, the Commission 
has strengthened its budget support monitoring framework. However, there is 
no systematic approach for evaluating budget support programmes (see para -
graphs 45 to 48). Suspensions of budget support payments advanced PFM priori -
ties in 2011-2013 (see paragraph 49).
43 Conclusions and recommendations 
Recommendation 3 — Strengthen monitoring of the way EU 
assistance is implemented
To deepen and speed up PFM and FAC reforms, the Commission should rein -
force its monitoring in some areas and place greater emphasis on beneficiary 
accountability:
(a) The Commission’s approach to evaluating the budget support programmes 
implemented in Ukraine should be streamlined.
(b) Given the results obtained by suspending payments, the Commission should, 
where duly justified by lack of satisfactory progress in reforms, make use of 
budget support payment suspensions.
79 
EU assistance was partially effective in producing tangible and sustainable results 
in PFM and FAC. Until 2014, the Ukrainian government’s limited commitment to 
the reform process was reflected in the incomplete and delayed achievement of 
expected results (see paragraphs 50 to 51). Despite the new impetus for reform 
since 2014, the results achieved so far remain fragile. In the MFA programmes, the 
Commission used its margin of appreciation to conclude that the majority of PFM 
conditions had been broadly fulfilled despite some shortcomings in implementa -
tion (see paragraph 52). In the case of PFM and FAC, most of the results achieved 
take the form of legislative and institutional changes (see paragraphs 53 to 63). 
For FAC policy, the results of effective implementation remain to be seen.
Recommendation 4 — Place greater emphasis on the 
effective implementation and sustainability of reforms
As well as advocating legislative changes, the Commission, in cooperation with 
civil society organisations, should make further EU assistance conditional on ef -
fective implementation of key PFM and FAC reforms. This relates in particular to 
the PFM reform strategy and action plan and the financial sustainability of opera -
tional impartial bodies fighting corruption. Disbursement conditions should be 
strictly assessed.
44 Conclusions and recommendations 
EU assistance to improve governance in the gas sector 
and the security of the EU’s gas supply via Ukraine
80 
Overall, EU assistance to Ukraine was partially effective in improving governance 
in the gas sector and the security of the EU’s gas supply via Ukraine.
81 
EU–Ukraine dialogue on energy issues was affected by wavering Ukrainian com -
mitment until recently and by diverging views among EU stakeholders as regards 
the security of the EU’s gas supply via Ukraine. The same major issues arose in the 
period 2007 to 2015 (see paragraphs 65 to 69).
82 
In the early phase, the design of reviewed EU assistance in the gas sector and the 
security of gas supplies via Ukraine included certain conditions that were vague 
and difficult to assess (see paragraph 70).
83 
Monitoring of the implementation of EU assistance lacked high-quality data until 
2014 and EU–Ukraine joint reporting sometimes did not provide the full back -
ground for the difficulties experienced in the gas sector (see paragraphs 71 to 72).
84 
Until 2014, EU assistance had limited impact on the functioning of the Ukrain -
ian gas sector and produced mixed results as regards the security of the EU’s 
gas supplies via Ukraine. Important milestones have been achieved since 2014 
(see  paragraph73).
45 Conclusions and recommendations 
Recommendation 5 — Take steps to make EU assistance to 
Ukraine in the area of gas more effective
The Commission should take without delay steps to improve monitoring of EU 
strategic gas cooperation with Ukraine and make it more effective. In particular, 
greater emphasis should be placed on data collection, verification and analysis. 
The Commission should systematically collect more accurate and verifiable infor -
mation, even in adverse conditions. This is of vital importance for well founded, 
evidence-based decision-making.
This report was adopted by Chamber III, headed by Mr Karel PINXTEN, Member of 
the Court of Auditors, in Luxembourg at its meeting of 8 November 2016.
 For the Court of Auditors
 Klaus-Heiner LEHNE
 President

46
 Annex
Programmes examined
Table 1 — Ukraine: Budget support programmes, 2007-2015
Allocated Disbursed
(in million euro)
Sector Budget Support Programmes1 (abbreviation, decision year) 588 259
Support for implementation of Ukraine’s energy policy (Energy I, 2007) 87 73
Support for implementation of Ukraine’s strategy in the area of energy efficiency and renewable sources of 
energy (Energy Efficiency, 2008)70 52
Promoting mutual trade by removing technical barriers to trade between Ukraine and the EU (Trade, 2008) 45 29
Support for implementation of an Environmental Strategy in Ukraine (Environment, 2009) 35 24
Support for implementation of Ukraine’s transport strategy(Transport, 2009) 65 27
Support for Border Management Sector Policy in Ukraine (Border Management, 2010) 66 49
Continued support for implementation of Ukraine’s Energy Strategy (Energy II, 2012) 45 5
Sector Policy Support Programme — Support for Ukraine’s Regional Policy (Regional, 2013) 55 0
Reform to Ukraine’s Administrative Legal Framework and Civil Service (2011) 70 Cancelled
Budget Support for Ukraine’s Regional Development Policy (2012) 50 Cancelled
State Building Contract2355 250
1 The amount includes the complementary support component (technical assistance, audit, programme reviews and evaluations).
2 Of the 355 million euros for the SBC, 232 million euros were new funds and 123 million euros were absorbed from the 2013 Annual Action 
Programme allocations (i.e. from two new Sector Policy Support Programmes for Removing Barriers to Trade and for implementation of an 
Environmental Strategy in Ukraine (55 million euros each), and 13 million euros from a budget increase initially meant for the environment 
sector).
Source : CRIS as at 31.12.2015.
Table 2 — Ukraine: Overview of EU macro-financial assistance, 2007-2015
Decision year Audit abbreviationAllocated Disbursed
(in million euro)
2002MFA I1106102010 500
2014 MFA II 1 000 1 000
2015 MFA III 1 800 600
Total 3 410 2 210
Source:  DG Economic and Financial Affairs as at 31.12.2015,  
http://ec.europa.eu/economy_finance/international/neighbourhood_policy/ukraine_en.htmAnnex
47 Annex 
Table 3 — Ukraine: examined projects for the 2007-2015 period
Title (contract year)Allocated Disbursed
(in million euro)
Public Finance Management (PFM)
Twinning ‘Strengthening the enforcement of competition law and policy in Ukraine (2007)’ 1 0.9
Twinning ‘Assisting the Main Control and Revision Office of Ukraine (KRU) in implementing the new system 
of Public Internal Financial Control’ (2007)1.1 1.1
Harmonisation of competition and public procurement systems in Ukraine with EU standards (2008) 4.4 4.4
Strengthening NBU potential through the approximation to EU standards of central banking (2009) 1.1 0.6
Supporting Ukraine’s Ministry of Finance in the fields of Public Debt Management and Budgetary 
Forecasting (2010)1.7 1.5
Development of the fiche for the Twinning project on risk-based supervision of non-bank financial 
institutions (2011)0.1 0.1
Supply of IT equipment for integrating the regional network of Ukraine’s Antimonopoly Committee in 
support of the EU–Ukraine 2006 Action Plan project ‘Harmonisation of Competition and Public Procurement 
systems in Ukraine with EU standards’ (2010)0.2 0.2
Extension of contract 147-509 ‘Harmonisation of Competition and Public Procurement Systems with 
EU standards’ (2011)1.1 1.1
Development of three twinning projects in the area of public finance management in Ukraine (2013) 0.1 0.1
Harmonisation of Ukraine’s public procurement system with EU standards (2013) 4 2.7
What the State Costs: Promoting Public Monitoring of the State Budget Process (2013) 0.3 0.2
Civil society and media for transparent local budgets (2013) 0.3 0.1
Creation and implementation of the ‘Open Budget’ system for monitoring the use of public funds (2013) 0.3 0.2
Independent monitoring of resource and finance flows from the development of conventional and 
unconventional hydrocarbons in Ukraine within Production Sharing Agreement (2013)0.2 0.2
Total PFM 15.9 13.4
Fight Against Corruption (FAC)
Support for Good Governance: Project against Corruption in Ukraine (2006) 1.5 1.4
Project to Support Justice Reforms in Ukraine (2013) 8.6 2.4
Total FAC 10.1 3.8
Source : CRIS as at 31.12.2015.Annex
48 Replies of the Commission 
and of the EEAS
Executive summary
III
The dramatic events in Ukraine at the end of February 2014, namely the ousting of former Ukrainian President Yanu -
kovich on 28 February 2014 and the illegal Russian annexation of Crimea in the following days, required a decisive 
and swift response to mitigate to the extent possible the effects of a dire and unexpected situation.
Although doing so did not provide the Commission with sufficient time to develop a predefined, long-term strategy 
before announcing an important aid package for Ukraine in March 2014, longer-term planning began in the immed-  
iate aftermath and ample strategic discussions have taken place since, also including the involvement of interna -
tional partners.
V
The Commission considers that, even though EU assistance was partially effective, important structural reforms in 
nearly all areas described in paragraph IV have been triggered or supported by EU programmes.
VI
The Commission had to negotiate and assess Macro-Financial Assistance and budget support conditionality in an 
exceptional political, economic and financial context in Ukraine.
Most budget support programmes include a fixed tranche component to be disbursed at the beginning of the pro -
gramme upon fulfilment of the standard general conditions for budget support operations.
VII
Cooperation with Ukraine in the energy sector over the past 10 years was based on the 2005 Memorandum of 
Understanding on Cooperation in the Field of Energy and focused on ensuring the security of gas supplies to 
Europe via the Ukraine pipeline system and the introduction of wide-ranging reforms in the energy sector.  This was 
also the main objective of the Joint Declaration on the Modernisation of the Ukrainian Gas Transit System of March 
2009. The 2009 gas crisis further increased the relevance and timeliness of this initiative, even though its implemen -
tation was difficult due to the complex political situation in the country and the continued geo-political tensions.  
Progress made allowed EIB and EBRD to sign a first set of loans for the modernisation of the gas transit system in 
December 2014. The efforts to improve the governance of the gas sector in Ukraine as well as the overall security of 
supply were   impaired until 2014 by Ukraine’s dependence on Russian energy supplies. Since then, the significant 
progress achieved in gas market reforms in Ukraine is widely recognised.
Since March 2015 a wide ranging gas sector reform plan is being implemented. Further to the new gas law, the 
government adopted the plan for the unbundling of Naftogaz from the transmission system operator in July 2016 
which should be implemented by 2017.   
The Commission, together with the Energy Community Secretariat and other partners, will continue to push for the 
completion of the gas sector reforms, to improve transparency and ensure full competitive conditions, including 
enabling new entrants to the market and increasing the security of gas supply and the reliability of Ukraine’s transit 
system.
Replies of the Commission and of the EEAS 49
Introduction
04
Since mid-2015, Ukraine’s economy has witnessed signs of economic stabilisation following a particularly deep 
recession that was largely driven by the confidence loss and damage of production capacity associated with the 
armed conflict in the east. The stabilisation reflected a combination of factors such as a strong macroeconomic 
policy response that was used to address long-term imbalances and large-scale international financial and technical 
support that was instrumental for reining in the confidence crisis.
Following contraction of 6.6 % in 2014 and 9.9 % in 2015, the economy is expected to return to growth (projected at 
1-2 %) in 2016 on the back of gradually improving consumer and investor confidence. GDP increased by 0.1 % in real 
terms in Q1 2016 and rose by 1.3 % in Q2.
08
Due to the situation in Ukraine, ENI assistance since 2014 has indeed been provided in the form of annual 
‘Special Measures’. Preparations have now started to return to normal multi-annual programming in the form of 
a Single Support Framework starting from 2018.
13
The Commission agrees that the reform commitment of the Ukrainian authorities has greatly improved since 
2014. In particular, the current Ukrainian administration is showing a strong commitment to Public Administration 
Reform  (PAR).
The Commission is building on and encouraging this reform momentum. Work is ongoing to design a  major EU 
assistance programme in this area to support and sustain this reform commitment. The third MFA programme also 
contains important PAR commitments, concerning both legislation and implementation
15
MFA does not duplicate IMF conditionality but complements it. MFA can only be disbursed if the complementary 
IMF programme is on track and IMF reviews continue to be concluded. This implies that the beneficiary must con -
tinue to meet IMF conditions in order to benefit from MFA disbursements.
Box 1 — Activation of the Ukrainian authorities’ campaign against the oligarchy
The Commission considers that the role and relevance of the Agency for Modernisation are overstated and that 
there was no risk of confusion with the EU’s official assistance to Ukraine.
17
The dramatic events in Ukraine at the end of February 2014, namely the ousting of former Ukrainian President Yanu -
kovich on 28 February 2014 and the illegal Russian annexation of Crimea in the following days, required a decisive 
and swift response to mitigate to the extent possible the effects of a dire and unexpected situation.
Replies of the Commission and of the EEAS 50
Although doing so did not provide the Commission with sufficient time to develop a predefined, long-term strategy 
before announcing an important aid package for Ukraine in March 2014, longer-term planning began in the immed-  
iate aftermath and ample strategic discussions have taken place since, also including the involvement of interna -
tional partners.
In addition, following the announcement of the support package, which was of major political relevance, specific EU 
support programmes were thoroughly designed taking into account and documenting financial risks as well as the 
activities of other donors.
18
The objective of the March 2014 financial package was to send a strong signal of political support and at the same 
time to mobilise short-term budgetary and fiscal as well as more long-term investment and advisory support. It 
hence addressed short- as well as medium- to long-term needs, the latter indeed being subject to sustained reform 
commitment on the side of the Ukrainian authorities.
It should be noted that only EUR 1.61 billion of MFA were part of the March 2014 financial package (combined 
volume of MFA I and MFA II). The proposal for a third MFA operation for Ukraine (with a volume of EUR 1.8 billion) 
was adopted by the Commission in January 2015, i.e. it was additional to the March 2014 package based on a com -
prehensive assessment of the assistance provided up to that point, its impact on economic and financial stability in 
Ukraine since the beginning of the crisis, and in view of the deteriorating financial situation in Ukraine in early 2015.
20
The return to multi-annual programming in the form of a Single Support Framework is foreseen as from 2018. Pre -
paratory work has already started.
21
While there might have been some initial coordination challenges, activities of the EU Delegation in Kiev, the Sup -
port Group for Ukraine and the EU Advisory Mission are now closely coordinated and fully complementary. This is 
evidenced, e.g. by the joint design of a new anti-corruption support programme, that has been adopted earlier this 
year (June 2016).
22
This initiative has not been further pursued. The Commission further supports Ukraine in the fight against corrup -
tion and fraud through other initiatives, e.g. inter alia support to Ukraine’s new anti-corruption bodies through the 
anti corruption programme mentioned in the reply to paragraph 21, and support to reform of the judiciary.
24
Donor coordination by the Ukrainian governments was indeed relatively weak over most of the audited period. The 
current Ukrainian government is however taking steps to address and improve the situation and this is starting to 
have positive effects.
Replies of the Commission and of the EEAS 51
25
The Commission has coordinated from the beginning with the EBRD Multi-Donor Fund and has now also adopted 
a decision (July 2016) to contribute to the Fund.
Observations
34
The EU has indeed been very active to support the development of a PFM strategy in 2012 and 2013 which resulted 
in the adoption of a good quality document before the Vilnius Summit. Work is currently underway — again with 
the help of EU and OECD SIGMA experts — to update and further improve the PFM strategy.
38
Conditions on Public Financial Management and the fight against corruption were at the very centre of a number of 
EU support programmes, e.g. the State Building contract. The Commission will continue to improve the way and the 
criteria used to assess PFM progress.
40
The Commission considers that it used its margin of appreciation appropriately given the exceptional political and 
financial circumstanes in Ukraine.
Box 2 — Flexibility in setting and assessing the fulfilment of MFA conditions
The MoU for MFA I was mainly negotiated in 2010-2012 with a much less reform-oriented Ukrainian government and 
only ratified by the Ukrainian Parliament in 2014. Despite difficult negotiations, the Commission still managed to 
introduce some broad PFM conditions into this MoU.
The approach of including more than one deliverable in a condition renders it possible to state an overarching 
objective in a specific reform area in order to provide strategic orientation, while still providing clarity and specific -
ity regarding the policy measures that are expected.
Common reply to paragraphs 41 and 42
The Commission considers that the proportion of frontloading of Sector Budget Support fixed tranches remained in 
the margins recommended by the Budget Support Guidelines and was justified by the situation in Ukraine.
43
The Commission considers that in 2014, Ukraine was on the brink of financial and ultimately political collapse. In 
tandem with the IMF and other international donors, the EU responded swiftly to the financial crisis in Ukraine, in 
particular in 2014 and the first half of 2015. Given the depth of the economic crisis in Ukraine and the size of the 
country (by far the biggest of the EU’s eastern neighbours), it was necessary to provide significant amounts of 
macro-financial assistance.
Replies of the Commission and of the EEAS 52
46
Budget support disbursements are indeed since 2010 based on a comprehensive PFM assessment which takes into 
account all relevant analytical material including PEFA assessments.
48
The Commission considers that the 2014 evaluation of budget support operations in Ukraine provided a  compre -
hensive and comparative overview and assessment.
51
The Commission is aware of this issue which was also highlighted by the budget support evaluation and is advising 
the Ministry of Finance to find better ways to channel EU resources.
52
The Commission considers that its assessment ‘broadly fulfilled’ means that, even though not every aspect of the 
MFA condition has been implemented, the reform objective of the condition in question has been achieved to an 
extent that it would not be justified to delay the related MFA disbursement.
Common Commission reply to paragraphs 67-69
The Commission maintained throughout the audited period a coherent policy in view of the strategic role of the 
Ukrainian gas transit system and, related to this, the need for fundamental reforms in the gas sector.
Member States largely supported the efforts of the Commission. The Commission acknowledges however that the 
priorities of some Member States with regard to cooperation in the gas sector were not always fully aligned with 
those of the Commission.
Following the crisis of 2006 and of 2009, the Commission did conduct internal risk assessments and sought to assess 
the lessons learned from the interruption of gas supplies in a Staff Working Paper (Commission Staff Working Paper 
{COM(2009) 363} SEC (2009) 997).
The Commission considers that gas transit interruptions in 2006 and 2009 were a direct result of a commercial dis -
pute between Gazprom and Naftogaz, influenced and exacerbated by the political tensions between Ukraine and 
Russia.
The Commission had to take into account the sensitivity of the related information and considers it could, under 
these circumstances, not have been more explicit.
70
The Commission acknowledges that the design of assistance programmes relating to the gas sector could have 
been in some cases better but points to the weak administrative capacity of the concerned Ukrainian ministries in 
formulating assistance programmes.
Replies of the Commission and of the EEAS 53
71
The Commission considers that access to data gradually improved during the audited period. Since 2015, relevant 
data regarding gas transit flows as well as market information concerning the Ukrainian gas sector are now publicly 
accessible, thanks to the cooperation between Ukrainian authorities, the Commission and ENTSO-G (European Net -
work Transmission System Operator-Gas).
73
The Commission considers that progress was already made in 2014, including for example the drafting of the new 
gas law by the government, that enabled the signature of first EIB/EBRD loans for the modernisation of the Gas 
Transit System in December 2014.
(c) 
The Commission’s efforts to help Ukraine in the modernisation of the gas transit system only generated major con -
crete investment decisions towards the end of 2014 mainly because previous governments were not forthcoming in 
implementing key reforms agreed in the Joint Declaration of 2009.
(d) (i)
The Commission and EEAS consider that the security of the EU’s gas supply via Ukraine was also at risk because of 
external actors (Russia).
Conclusions and recommendations
74
The Commission and EEAS consider that the EU assistance played a key role in promoting the political association 
and economic integration of Ukraine with the EU. Since the onset of the crisis in 2014, the EU assistance played also 
a key role in stabilising the situation in Ukraine and in triggering important structural reforms across a wide range of 
areas and sectors.
76
The Commission considers that the fight against corruption and Public Financial Management are key issues in 
the EU’s dialogue with Ukraine. As a consequence, over the last years a number of important reforms have been 
launched and are showing important results.
Recommendation 1 — Place greater emphasis on public finance management in the 
dialogue process with Ukraine
The Commission and EEAS accept the recommendation.
A specific PFM support programme is currently under consideration as a 2017 Special Measure. PFM issues are 
already key elements of all ongoing budget support programmes and an update of the PFM strategy is underway 
with the help of EU and OECD-SIGMA experts.
Replies of the Commission and of the EEAS 54
77
The Commission considers that quick mobilisation and disbursement of assistance was crucial in 2014 and 2015 due 
to the critical situation in Ukraine. All budget support payments were based on a thorough assessment to ensure 
that the general conditions for budget support were being met.
Most budget support programmes include a fixed tranche component to be disbursed at the beginning of the pro -
gramme upon fulfilment of the standard general conditions for budget support operations.
Recommendation 2 — Improve the design of conditions for and disbursements of 
financial assistance
The Commission accepts the recommendation.
(a) 
The Commission has already started to define policy objectives in a more precise and targeted manner, as can be 
seen in the evolution of Memoranda of Understanding (MoU) with Ukraine in particular between MFA II and III. The 
Commission will make further efforts for clarity and precision in the future.
However, MFA conditionality is always an outcome of a negotiation with the beneficiary country. In particular where 
these negotiations take place in an exceptional geopolitical and financial context, the Commission may, also in the 
future, have to strike a balance between urgency considerations as well as the extended timeframe of assistance on 
the one hand and precision and clarity on the other.
(c) 
The Commission will continue for all its MFA programmes, as it has always done in the past, to coordinate closely 
with the IMF and other donors.
(d) 
The Commission will also continue to strive for a reasonable balance between leverage and speed of disbursement. 
In 2014 the exceptional geopolitical and financial context in Ukraine justified, on occasions, to err on the side of 
rapid disbursement of MFA. As economic stabilisation started to take hold in Ukraine in late 2015, the Commission 
has been more demanding with respect to implementation of MFA conditions. This is underlined by the fact that 
the second tranche of MFA III has been on hold since October 2015 as implementation is as yet incomplete.
The Commission will continue to monitor implementation closely, with a view to making best use of the lever -
age function of its assistance. At the same time, it cannot be ruled out for the future that MFA tranches might be 
disbursed in a context of a good implementation record overall, even when a small number of conditions are not 
fulfilled.
78
The Commission considers that the 2014 evaluation of budget support operations in Ukraine provided for a  compre -
hensive and comparative assessment.
Replies of the Commission and of the EEAS 55
Recommendation 3 — Strengthen monitoring of the way EU assistance is implemented
The Commission accepts the recommendation.
The Commission will continue to work on strengthening monitoring of EU assistance implementation and will use 
all tools at its disposal to speed up progress in reforms.
79
The Commission considers that its assessment ‘broadly fulfilled’ means that, even though not every underlying 
detailed aspect of the MFA condition has been implemented, the reform objective of the condition in question has 
been achieved to an extent that it would not be justified to delay the related MFA disbursement.
Recommendation 4 — Place greater emphasis on the effective implementation and 
sustainability of reforms
The Commission and EEAS accept the recommendation.
For MFA, when assessing the disbursement conditions, the Commission will restrict itself to the assessment catego -
ries ‘fulfilled’, ‘broadly fulfilled’ and ‘not fulfilled’.
80
Cooperation with Ukraine in the energy sector over the past 10 years has focused on ensuring the security of gas 
(and oil) supplies to Europe via the Ukraine pipeline system. The efforts to improve the governance of the gas sector 
in Ukraine as well as the overall security of supply were impaired by the political situation and Ukraine’s depend -
ence on Russian energy supplies. The high-level energy dialogue carried out in the context of the Memorandum of 
Understanding of 2005, provided in this regard an essential and useful forum.
81
The Commission maintained throughout this period a coherent policy in view of the strategic role of the Ukrainian 
gas transit system and the need for fundamental reforms in the gas sector. This has been acknowledged also by the 
Council in a number of conclusions on this matter. While Member States largely supported the efforts of the Com -
mission, the priorities of some Member States with regard to cooperation in the gas sector was not always aligned 
with those of the Commission.
82
Despite shortcomings, the Commission considers that both the budget support programmes as well as related 
technical assistance projects allowed some  progress to be made on the critical reform agenda in the gas sector as 
well as in increasing security of supply, despite often adverse political conditions. See also Commission reply to 
paragraph  70.
83
The Commission considers that communication and access to data gradually improved as the energy dialogue 
evolved (see also Commission reply to paragraph 71). The Commission addressed the key challenges experienced in 
the gas sector in its regular energy dialogue, even if the joint reporting did not always provide the full background.
Replies of the Commission and of the EEAS 56
Recommendation 5 — Take steps to make EU assistance to Ukraine in the area of gas 
more effective
The Commission accepts the recommendation and has already started implementing it.
Significant steps have already been taken to make EU assistance more effective, including the establishment of 
a team of energy experts within the Support Group for Ukraine, improved and closer coordination of assistance with 
the Energy Community Secretariat as well as with other stakeholders (donors, ENTSO-G,etc.).
The Commission is in the process of upgrading its Memorandum of Understanding on the cooperation in the 
energy field with Ukraine and intends to sign a Strategic Energy Partnership by the end of 2016 with a view to 
further intensifying its energy dialogue with Ukraine and enhancing the effectiveness of cooperation in the energy 
sector.
The Commission also continues its efforts to mediate in the ongoing gas dispute between Russia and Ukraine, 
including through a close monitoring of gas transit flows. An early warning system is in place under the Association 
Agreement with Ukraine.
Further actions will be taken to improve the quality of statistical data collected on Ukraine, in particular through the 
statistical component of the EU4Energy project launched in June 2016 with the International Energy Agency and the 
Energy Community.
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Event Date
Adoption of the Audit Planning Memorandum/Start of audit 7.10. 2014
Official sending of draft report to Commission (or other auditee) 20.7.2016
Adoption of the final report after the adversarial procedure 8.11.2016
Official replies of the Commission and the EEAS received in all languages 24.11.2016
In this report the Court examines whether Commission 
and European External Action Service assistance was 
effective in supporting the transformation of Ukraine into 
a well-governed state in the areas of public finance 
management and the fight against corruption, as well 
as in the gas sector during the 2007-2015 period.
Overall, EU assistance to Ukraine has been partially 
effective in these three domains. Until 2014, EU assistance 
had limited impact. Despite the new impetus for reform 
since 2014, the results achieved so far remain fragile. 
This report sets out five recommendations for improving 
EU assistance.
EUROPEAN
COURT
OF AUDITORS