Commission staff working document -Ex ante evaluation statement Macro-financial assistance to Ukraine Accompanying document to the Proposal for a CouncilDecisionproviding macro-financial assistance to Ukraine (COM(2009)580 final)
Date: 2009-10-29
Institutions: European Commission
Subjects: EU aid, European neighbourhood policy, Ukraine, aid evaluation, economic situation, economic stabilisation, financial aid, macroeconomics

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COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 29.10.2009 
SEC(2009) 1428 final 

COMMISSION STAFF WORKING DOCUMENT 

Ex ante evaluation statement Macro-financial assistance to Ukraine 

Accompanying document to the 

Proposal for a Council decision providing macro-financial assistance to Ukraine 

(COM(2009)580 final) 

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Ex ante evaluation statement 

Macro-financial assistance to Ukraine 

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TABLE OF CONTENTS 

1. 

1.1. 

1.2. 

1.3. 

1.4. 

2. 

2.1. 

2.2. 

3. 

3.1. 

3.2. 

4. 

5. 

5.1. 

5.2. 

5.3. 

5.4. 

5.5. 

6. 

6.1. 

6.2. 

7. 

Problem analysis and needs assessment....................................................................... 4 

Background .................................................................................................................. 4 

Recent economic developments and economic outlook .............................................. 4 

Macroeconomic policy framework .............................................................................. 6 

Ukraine's external financing needs .............................................................................. 7 

Objectives and related indicators of the macro-financial assistance............................ 9 

Objectives..................................................................................................................... 9 

Indicators.................................................................................................................... 10 

Alternative delivery mechanisms and risk assessment .............................................. 10 

Delivery mechanisms ................................................................................................. 10 

Risk assessment.......................................................................................................... 10 

Added value of Community involvement .................................................................. 11 

Genval criteria on macro-financial assistance............................................................ 11 

Exceptional Character and Limited Timeframe......................................................... 11 

Political pre-conditions .............................................................................................. 11 

Complementarity........................................................................................................ 12 

Conditionality............................................................................................................. 12 

Financial discipline .................................................................................................... 13 

Planning of future monitoring and evaluation ........................................................... 13 

Monitoring.................................................................................................................. 13 

Evaluation .................................................................................................................. 13 

Achieving cost-effectiveness ..................................................................................... 14 

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1. 

PROBLEM ANALYSIS AND NEEDS ASSESSMENT 

1.1. 

Background 

Ukraine's  transition  from  state  planned  to  market  economy  was  comparatively  difficult:  in 
2008  Ukraine's  real  GDP  still  represented  only  74%  of  its  1990  level1.  In  2000,  after  a 
prolonged  contraction,  growth  resumed;  Ukraine  registered  an  average  growth  rate  of  6.9% 
during 2000-2008.  

The on-going global economic and financial crisis had a very significant impact on Ukraine, 
probably the strongest in the European Union's eastern neighbourhood. To counter the effects 
of  the  crisis,  the  authorities  have  put  in  place  a  strong  programme  of  economic  adjustment, 
and secured a large financing from the IMF. Also, the Ukrainian authorities have approached 
a large number of bilateral donors and creditors, including the European Union, for financial 
support. 

In  this  context,  the  Commission  proposes  to  the  Council  to  provide  to  Ukraine  a  macro-
financial assistance (MFA) package amounting to EUR 610 million. The EU support would 
consist of the activation of a EUR 110 million loan from a previous MFA operation agreed by 
the Council in 2002 (Council Decision 2002/639/EC on 12 July 2002) but not implemented 
and  of  a  new  operation  amounting  to  EUR  500  million.  The  2002  MFA  can  be  activated 
without requiring a new Council decision, already before the formal adoption of the decision 
on the new amount. The reactivation of the assistance decided back in 2002 would require the 
preparation  of  a  new  set  of  contractual  documents,  including  the  Memorandum  of 
Understanding  setting  forth  the  economic  and  financial  conditions  of  the  operation,  and  the 
loan agreement (see below). 

1.2. 

Recent economic developments and economic outlook  

Until  mid-2008,  Ukraine's  economic  performance  was  quite  positive,  and  the  country  was 
successfully catching up after the initial hardship of transition to market economy. However, 
since  the  onset  of  the  global  crisis,  the  economic  situation  of  the  country  has  deteriorated 
dramatically (see Table 1, on next page). In 2009, Ukraine's real GDP growth decelerated to 
2.5%, and in the first quarter  of 2009,  GDP is  estimated to have contracted by around 20% 
year-on-year. For the period January–June 2009, industrial output decreased by 27.5% year-
on-year,  while  manufacturing  industry  contracted  by  31.4%.  The  latest  IMF  projections  for 
the current year point to a drop of real GDP by as much as 14%. 

The  transmission  mechanisms  through  which  the  global  economic  and  financial  crisis 
impacted  on  Ukraine's  economy  are  broadly  the  same  as  for  other  countries  of  the  region: 
firstly,  an  abrupt  halt  in  access  to  international  finance  for  the  domestic  financial  system, 
leading to the reduction of domestic credit growth (Ukraine relied  on external  financing  for 
credit growth much more than its neighbours, which partially explains why it was hit harder); 
secondly,  a  trade  shock  resulting  from  the  fall  in  commodity  prices  (steel  prices  dropped 
between July 2008 and early 2009 by 65%) and from the fall in demand from Ukraine's main 
trading partners. Thirdly, the fact that imports became more expensive, led by the increase in 
natural gas prices charged by Russia, which is phasing out its remaining gas subsidies.  

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On a per capita basis this figure is 85%, reflecting Ukraine's significant population loss 

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Table 1: Ukraine - Selected economic and social indicators 

Source: IMF 

Since  the  agreement  between  the  Ukrainian  authorities  and  the  IMF  on  a  crisis-related 
financial  package,  Ukraine's  current  account  has  substantially  improved,  from  a  deficit  of 
7.2% of GDP in 2008 to an expected surplus of 0.5% of GDP in 2009 – this on the back of the 
narrowing  trade  deficit.  Trade  deficit  was  reduced  as  imports  have  been  falling  faster  than 
exports. In the first six months of 2009, exports in goods and services decreased by 42.3%, 
while imports decreased by 49.8%. The narrowing of the trade deficit reflects a stronger than 

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anticipated  recession,  and  at  the  same  time  the  improvement  Ukraine's  competitiveness 
following the devaluation of the domestic currency by 35% since September 2008.  

Yet,  while  the  current  account  balance  is  projected  to  achieve  a  small  surplus  in  2009, 
Ukraine has been suffering a capital account deficit: loss of confidence meant capital flight, 
reversal of capital inflows and a reduction in foreign direct investment. Strong pressures on 
the capital account produced strong pressures on international reserves that could only be kept 
at  an  appropriate  level  due  to  the  financing  provided  by  the  IMF  under  a  Stand-by 
Arrangement (SBA - see below). The international reserves of the National Bank of Ukraine 
(NBU) increased from USD 24.5 billion in April to USD 27.3 billion in end-June 2009, after 
the disbursement of the second tranche of the IMF's SBA (and they will increase again with 
the disbursement of the third tranche of the loan in late July 2009). Yet, the country's reserve 
position remains fragile: although its exchange rate regime is now more flexible, Ukraine still 
might need to use its reserves for the interventions on the foreign exchange markets. 

Also,  the  lower  economic  activity  is  resulting  in  a  significant  shortfall  in  fiscal  revenue 
leading  to  the  widening  budget  deficit.  The  latest  projections  made  in  the  context  of  the 
second SBA programme review (see below) point to a budget deficit target of 8.6% of GDP in 
2009.  This  figure  included  for  the  first  time  the  operating  loss  of  the  state  owned  energy 
utility Naftogaz. 

After the very strong economic contraction of the first quarter of 2009, there have been some 
signs of a modest economic stabilisation. Since May 2009, industrial production indices show 
positive, albeit limited, month-on-month growth. Furthermore, some signs of stabilisation can 
be  found  in  the  hryvnia  exchange  rates:  interbank  market  rates  appreciated  by  around  5% 
since May 2009, after an almost 50% depreciation in 2008.  

The  inflation  outlook  has  also  been  improving  with  consumer  price  inflation  going  down: 
while year-on-year CPI was 22.3% in January 2009, it decelerated to 15% in June 2009. For 
2009 average, inflation is expected to be 16.3%. Also, for the first time since September 2008, 
real deposits into the Ukrainian banking system have increased (albeit by only 0.6% m-o-m), 
leading  to  a  suspension  of  restrictions  on  the  withdrawal  of  term  deposits.  Net  FDI  inflows 
also increased, reaching an estimated USD 2.1 billion up to June 2009, largely as a result of 
significant recapitalisation effort by foreign banks with operations in Ukraine. 

1.3.  Macroeconomic policy framework  

The request from the Ukrainian authorities led to an agreement with the IMF on a 24-month 
stand-by arrangement for USD 16.5 billion which was approved in early November 2008. The 
exceptional access to IMF resources (the amount made available by the Fund represents 802% 
of  Ukraine's  quota)  was  justified  by  a  severe  current  account  and  capital  account  crisis  that 
Ukraine  was  facing  in  late  2008.  The  adverse  terms-of-trade  shock  related  to  the  falling 
demand for  such Ukrainian products  such as steel coincided  with the shortfalls  in financing 
related to the banking crisis and reduced depositor confidence. Further factors that made this 
exceptional  access  to  IMF  financing  possible  included  (i)  a  sustainable  position  as  far  as 
external and public debt is concerned, (ii) good future prospects of Ukraine to regain access to 
private capital markets, and (iii) the domestic commitment to policy reforms. 

The  conditionalities  of  the  original  IMF  SBA  programme  have  focussed  on  three  policy 
fields: (i) monetary and exchange rate policy, (ii) banking sector, and (iii) fiscal policies. In 
the  first  field,  IMF  programme  demanded  a  more  flexible  exchange  rate  regime,  abolishing 

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foreign exchange tax, and making the Central Bank sufficiently independent by reforming its 
Council.  In  the  second  field,  bank  resolution  and  financial  support  to  systemic  banks  was 
required, while in the third field, fiscal target of zero general government deficit was set out 
as a programme condition.  

The  two-year  IMF  programme  is  considerably  frontloaded.  The  first  tranche  of  a  USD  4.5 
billion  loan  was  disbursed  directly  after  the  IMF  Board  decision.  However,  the  second 
disbursement was delayed due to disagreements between the government of Ukraine and the 
IMF on issues concerning the benchmark of budgetary deficit, exchange rate regime and the 
degree of the independence of the Central Bank. An agreement could only be reached in April 
2009; it led to the disbursement of the second tranche of USD 2.8 billion in May 2009. The 
second review of the SBA was completed on 28 July 2009 unlocking the disbursement of the 
third loan tranche of USD 3.3 billion. 

A large part of the second tranche under the SBA (USD 1.9 billion) and the full amount of the 
third tranche were channelled directly to the budget in order to help Ukraine meet the general 
government’s external payment obligations. In particular, a part of the third SBA instalment is 
expected  to  be  used  to  cover  sovereign  bonds  as  well  as  Eurobond  obligations  of  Naftogaz 
maturing in August and September 2009.  

The  IMF’s  Board  had  conditioned  the  completion  of  the  second  programme  review  and  the 
release  of  the  third  instalment  under  the  programme  to,  inter  alia,  the  adoption  by  the 
parliament of a number of amendments to banking laws and the law on the NBU that would 
increase  the  transparency  and  regulation  of  the  banking  sector,  as  well  as  to  several  energy 
sector  reforms,  in  particular  to  the  increases  in  gas  tariffs  of  Naftogaz  for  households  and 
utilities  (by  20%  in  autumn  2009,  in  January  2010  and  quarterly  increases  hereafter  during 
2010).  The  gas  sector  reform  is  aimed  at  creating  conditions  for  a  development  of  a 
sustainable  gas  sector,  capable  of  ensuring  a  sound  functioning  of  Ukraine’s  gas  pipeline 
network.2 

1.4. 

Ukraine's external financing needs 

The  current  IMF’s  projections  of  Ukraine’s  residual  financing  external  needs  in  2009  (see 
Table  2  on  next  page)  point  to  a  financing  gap  of  about  USD  2.8  billion  not  covered  by 
already  existing  financing  commitments  from  the  IFIs  (the  IMF,  the  World  Bank  and  the 
EBRD) and existing budget support (from the EU, under the ENPI). Out of these needs, some 
USD 560 million are expected to be covered by official debt restructuring and other sources, 
while the financing sources for the remaining USD 2.25 billion were still not identified by the 
time of the second programme review. The external financing needs for 2010 are expected to 
be lower than those for 2009. 

The  European  Commission  is  requested  to  provide  MFA  to  cover  part  of  these  financing 
needs. The EU MFA would cover external financing needs either of Ukraine’s state budget, 
along  with  financing  forthcoming  from  the  World  Bank  (DPL  -  Development  Programme 

2 

The Euopean Commission has organised several meetings between the IFIs (the IMF, the World Bank, 
the EBRD and the EIB), the European gas industry, Ukraine's government and Naftogaz and Russia's 
government and Gazprom on possible financing of the rehabilitation of the gas transportation network 
in  Ukraine  and  possible  support  to  Ukraine  and/or  Naftogaz  for  purchase  of  gas  to  ensure  a  smooth 
transit of natural gas from Russia to the EU. 

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Loan) and the IMF, or balance-of-payments needs of Ukraine’s banking and corporate sector, 
through reserve build-up. 

Indeed,  Ukraine’s  external  financing  needs  reflect  the  financing  needs  of  both  the  general 
government and the economy (enterprises and households). The bulk of the external financing 
needs  of  the  non-government  sector  (including  state-owned  corporate  entities)  are  the 
refinancing needs of the banking sector. In late 2008, the financial account experienced large 
outflows of short-term capital and a large drop of foreign direct investment. The deterioration 
of the financial account would have been even stronger if the roll-over rates on private sector 
debt had not held well since the beginning of 2009, in particular for corporations. The banking 
sector remains under great strain: depositor confidence is  low and 20% of all bank deposits 
were withdrawn between October 2008 and March 2009. Repayment of loans by households 
and corporates deteriorated significantly as a large share of loans has been denominated in the 
foreign currency while hryvnia experienced a strong depreciation. A certain stabilisation was 
achieved  in  April  2009  as  banks  started  restructuring  their  debt  denominated  in  foreign 
currency. However, bank credits are still expected to contract in real terms in 2009, as banks 
still prefer to hoard liquidity. 

Table 2: Ukraine – external financing needs 

Source: IMF 

The  external  financing  needs  of  the  government  sector  are  also  substantial  given  that  the 
overall  financial  requirements  of  the  general  government  are  not  matched  by  the  domestic 

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financial resources. The general government deficit is expected to reach 6% of GDP in 2009 
and 4.5% in 2010. Also, in 2009, the government will need to spend 2.6% of GDP to cover 
the  operational  losses  of  Naftogaz,  the  state  owned  major  utility  company.  For  2010, 
additional budgetary costs related to Naftogaz recapitalisation are estimated at 1.0% of GDP. 
The  fiscal  deficit  including  the  costs  related  to  the  Naftogaz  operations  is  thus  estimated  to 
8.6% of GDP in 2009 and 5.5% in 2010.3 Two thirds of the government expenditure goes into 
public  wages  and  social  transfers,  which  implies  that  if  external  financing  were  not 
forthcoming, further cuts in social spending and in capital investment would be needed. Also, 
the necessary reforms in the energy sector – in particular reforms related to the functioning of 
Naftogaz  –  are  expected  to  lead  to  high  social  costs  for  the  Ukrainian  population.  These 
reforms need to be accompanied by important reforms in the social safety net.  

Finally, in line with the Memorandum of Understanding on co-operation in the field of energy 
between  Ukraine  and  the  European  Union  signed  on  1  December  2005,  the  Ukrainian 
authorities  are  also  planning  the  safety  upgrade  of  all  nuclear  units  in  the  country  to 
internationally  recognised  nuclear  standards.  In  this  context,  the  Ukrainian  state  owned 
nuclear  utility  Energoatom  has  indicated  its  intention  to  apply  for  a  Euratom  loan  from  the 
Community. 

2. 

OBJECTIVES AND RELATED INDICATORS OF THE MACRO-FINANCIAL ASSISTANCE 

2.1. 

Objectives 

The general objectives of the proposed macro-financial assistance operation are to:  

•  Contribute to covering Ukraine's external financing needs, including the needs of 

the banking and corporate sectors and the State budget; 

•  Help  Ukraine  alleviate  the  financial  constraints  on  the  implementation  of  the 
reform  programme  especially  in  the  energy  sector  supported  by  the  stand-by 
arrangement with the IMF; 

•  Facilitate  and  encourage  efforts  of  the  authorities  of  Ukraine  to  implement 
measures  identified  under  the  EU-Ukraine  Action  Plan  and  the  Eastern 
Partnership; 

•  Reinforce  the  EU  role  in  the  economic  policy  dialogue  with  the  Ukrainian 

authorities. 

Linked to these general objectives of the programme, specific objectives in terms of 
financial  and  structural  reforms  will  be  detailed  during  the  implementation  of  the 
programme  and  will  be  laid  down  in  the  Memorandum  of  Understanding  that  the 
Commission will negotiate with the authorities of Ukraine.  

3 

The fiscal needs in 2009 comprise also the cost of the recapitalisation of banks, estimated to 2.8% of 
GDP. However, the bulk of these costs (2.6% of GDP) are expected to be covered by the issuance of 
domestic bonds. The net fiscal cost of the bank recapitalisation in 2010 is projected to reach 0.5% of 
GDP. 

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2.2. 

Indicators 

To  monitor  the  fulfilment  of  the  objectives  of  the  programme  throughout  the 
implementation  period  of  the  assistance,  the  Commission  will  use  two  types  of 
indicators:  

•  Adherence  to  the  IMF-supported  programme,  it  will  be  a  sine  qua  non  for  the 

implementation of the assistance;  

•  Progress  in  the  implementation  of  specific  actions  that  will  be  part  of  the 
conditions for disbursement. Those actions will be specified in the aforementioned 
Memorandum  of  Understanding.  They  will  be  consistent  with  the  policy  lines 
anchored  in  the  IMF  programme,  as  well  as  with  the  priorities  of  the  European 
Neighbourhood Policy and those of Eastern Partnership.  

3. 

ALTERNATIVE DELIVERY MECHANISMS AND RISK ASSESSMENT 

3.1. 

Delivery mechanisms 

Macro-financial  assistance  is  an  untied  and  undedicated  macro-economic  support 
instrument,  which  helps  the  beneficiary  country  meet  its  external  financing  needs, 
including  through  a  reinforcement  of  gross  international  reserves.  Macro-financial 
assistance can be provided either in the form of a loan, a grant or a combination of 
the  two.  Considering  that  Ukraine  is  a  middle-income  country,  the  Commission 
considers appropriate to provide the total of this assistance in the form of a loan. The 
euro-denominated  loan  will  be  paid  to  the  National  Bank  of  Ukraine  and  may  be 
transferred to a Treasury account to cover external financing needs of the budget.  

3.2. 

Risk assessment 

There is a risk that the macro-financial assistance which is not dedicated to specific 
expenses (contrary to project financing, for example), could be used in a fraudulent 
way.  In  general  terms,  this  risk  is  related  to  factors  such  as  Central  Bank 
independence,  quality  of  management  systems  and  administrative  procedures, 
control and oversight functions in the financial circuits, security of IT systems, and 
adequate internal and external audit capabilities.  

To  mitigate  the  risks  of  fraudulent  use,  several  measures  will  be  taken.  The 
Memorandum  of  Understanding  and  the  Loan  agreement  will  comprise  a  set  of 
provisions on inspection, fraud prevention, audits, and recovery of funds in case of 
fraud or corruption. Also, the assistance will be paid to clearly identified accounts at 
the Central Bank of Ukraine. Moreover, before the agreement on the Memorandum 
of  Understanding  is  reached,  the  Commission  services  will  assess  the  reliability  of 
financial  circuits  and  administrative  procedures  that  are  relevant  to  this  type  of 
assistance  and  will  determine  whether 
the  framework  for  sound  financial 
management of macro-financial assistance is sufficiently effective in Ukraine. In the 
light  of  this  assessment,  specific  mechanisms  applying  to  the  management  of  the 
funds  by  the  beneficiaries  may  be  introduced  in  agreement  with  the  national 
authorities. The Commission may also use other assistance instruments at its disposal 
to help the beneficiary authorities improve their public finance management systems 
if this area is not sufficiently covered by other donors. Finally, the assistance will be 

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liable to verification, control and auditing procedures under the responsibility of the 
Commission,  including  the  European  Antifraud  Office  (OLAF),  and  the  European 
Court of Auditors. 

While seriously taking into account this risk, the Commission services consider that 
there are sufficiently strong grounds to proceed with the MFA to Ukraine. The high 
financing needs faced by Ukraine plead in favour of an urgent action.  

The Commission services will maintain close contacts with the authorities during the 
implementation  of  the  macro-financial  assistance  in  order  to  address  quickly  any 
concerns that may arise.  

4. 

ADDED VALUE OF COMMUNITY INVOLVEMENT 

The  Community  financial  support  to  Ukraine's  economic  recovery  reflects  the 
country's  strategic  importance  to  the  EU  in  the  context  of  the  European 
Neighbourhood  Policy  and  of  the  newly  established  Eastern  Partnership.  The  main 
financial support instrument to Ukraine is the European Neighbourhood Partnership 
Instrument that has three priority objectives: democratic development, administrative 
capacity building and infrastructure development. The instrument of macro-financial 
assistance is a policy-based instrument directed to alleviate short- and medium-term 
external financial needs. As a part of the overall EC package of assistance, it would 
contribute  to  support  the  European  Union's  objectives  of  economic  stability  and 
economic development in Ukraine.  

5. 

GENVAL CRITERIA ON MACRO-FINANCIAL ASSISTANCE 

On 8th of October 2002 the Council reconfirmed a set of principles for the use of the 
Community's macro-financial assistance (so called Genval criteria). The five criteria 
are:  (i)  the  exceptional  character  of  the  assistance,  (ii)  its  complementarity  to 
financing of the International Financial Institutions (IFIs), (iii) the existence of policy 
conditionality attached to the assistance, (iv) the existence of political pre-conditions 
and, finally (v) strong financial discipline that needs to accompany the MFA. 

5.1. 

Exceptional Character and Limited Timeframe 

Ukraine's  financing  requirements  in  2009-2010  result  from  the  country's  high 
external and fiscal imbalances that are closely related to the global economic crisis. 
The  on-going  economic  adjustment  and  the  conditionality  of  the  IMF  programme 
will contribute to reducing these imbalances over the medium term. 

The  exceptional  character  of  the  foreseen  MFA  is  further  stressed  by  the  limited 
timeframe of the programme. The current MFA proposal is only valid for 2009-2010 
for the duration of the IMF SBA arrangement. 

5.2. 

Political pre-conditions 

MFA  is  reserved  to  the  third  countries  that  are  geographically  close  to  the  EU 
territory,  that  respect  democracy  and  human  rights  and  with  which  the  EU  has 
important  political,  economic  and  commercial  ties.  Ukraine  fulfils  these  criteria. 
First, it has direct borders with the EU. Second, its economic and political relations 

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with  the  EU  are  strong:  it  is  an  active  EU  partner  in  the  European  Neighbourhood 
Policy as well as in the recently established Eastern Partnership. Since March 2007, 
Ukraine  negotiates  an  Association  Agreement  with  the  EU  that  would  replace  the 
existing  Partnership  and  Cooperation  Agreement  and  that  includes  a  deep  and 
comprehensive  free  trade  area.  Third,  Ukraine  has  demonstrated  a  good  record  of 
macroeconomic management and economic reforms in the recent past and it respects 
democracy and human rights. 

5.3. 

Complementarity  

The proposed  macro-financial assistance will be complementary to the existing EU 
financing,  to  the  IMF  financing  and  to  the  financial  support  of  other  international 
donors.  

The  MFA  programme  is  complementary  to  other  EC  financing,  in  particular  to 
medium-term  ENPI  budget  support  implemented  within  the  framework  of  the  EU 
Country  Strategy  for  cooperation.  Thus,  it  can  help  increase  the  EU's  leverage  on 
Ukraine's  policy  making  as  well  as  help  Ukraine  to  overcome  the  current  deep 
economic crisis.  

The  complementarity  with  the  IMF  programme  is  also  assured.  An  MFA  can  only 
take  place  when  a  residual  external  financing  gap  is  identified  over  and  above  the 
IMF resources and under the condition of a fair burden sharing. A residual external 
financing  gap  has  been  identified  by  the  IMF,  this  assessment  constitutes  the  basis 
for Commission's MFA programme proposal that would cover roughly one third of 
the external financing gap remaining after the IMF intervention.  

The MFA programme is also complementary to the external financing coming from 
the IFIs more generally. In particular, the MFA is provided in the moment when the 
EU is also helping to mobilise financing to support the reform of the Ukraine energy 
sector.  The  Commission,  together  with  the  World  Bank,  the  EBRD  and  the  EIB, 
intends, subject to the individual rules, capacities and conditions of the IFIs, to work 
together  in  the  development  of  a  support  package  to  the  Ukrainian  authorities 
designed to assist in developing a sustainable solution to Ukraine’s medium-term gas 
transit and gas payment obligations. The MFA under consideration is not intended to 
be  directly  linked  to  that  package.  However,  it  would  support  Ukraine’s  economic 
stabilization  and  reform,  including  reform  of  the  gas  sector  and  accompanying 
reform of the social safety net.  

5.4. 

Conditionality 

The disbursement of MFA assistance will be conditional on the IMF Board decisions 
to  approve  programme  reviews  under  the  SBA  and  on  Ukraine's  subsequent 
decisions to draw funds from the IMF financial facility. In addition, a Memorandum 
of  Understanding  (MoU)  will  be  negotiated  between  the  Commission  and  the 
Ukrainian  authorities.  The  MoU  will  contain  specific  structural  reform  measures 
related to the fields of cooperation between the EU and Ukraine. For example, in the 
field of public finance management the Commission plans to build on the results of 
policy  dialogue  conducted  in  the  framework  of  implementation  of  the  EU-Ukraine 
ENP Action Plan. Furthermore, the conditionality should include the improvement of 
social safety net to offset the social consequences of the energy sector reforms. 

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5.5. 

Financial discipline 

The  planned  assistance  would  be  provided  in  the  form  of  a  loan  and  should  be 
financed  through  the  borrowing  operation  that  the  Commission  will  conduct  on 
behalf  of  the  EU.  The  budgetary  costs  of  the  assistance  will  correspond  to  the 
provisioning,  at  a  rate  of  9%,  of  the  amounts  disbursed  in  the  guarantee  fund  for 
external lending of the EU, from budget line 01 04 01 14 ("the provisioning of the 
Guarantee  Fund").  Assuming  that  the  loan  disbursements  will  be  made  in  2009  for 
the amount of EUR 100 million and in 2010 for the amount of EUR 510 million and 
according  to  the  rules  governing  the  guarantee  fund  mechanism,  the  provisioning 
will take place in the 2011-2012 budget. Due to the constraints on the loan capacity 
at the time of the preparation of the relevant annual budget, the Commission may use 
additional commitment appropriations under the Heading 4 in 2012. 

To ascertain that the beneficiary has in place a sound financial management in line 
with the requirements of the Financial regulation, the Commission services continue 
regular monitoring and intend – with the help of an external consultant - to carry out 
an Operational Assessment of  the reliability of financial  circuits and administrative 
controls  of  the  different  entities  involved  in  the  management  of  the  EU  funds, 
especially at the Ministry of Finance and at the Central Bank of Ukraine.  

6. 

PLANNING OF FUTURE MONITORING AND EVALUATION 

This assistance is of exceptional and macro-economic nature and its monitoring and 
evaluation will be undertaken in line with the standard Commission procedures.  

6.1.  Monitoring 

The  monitoring  system  will  be  ensured  by  the  provision  of  reports  and  data  by  the 
authorities  and  by  the  organisation  of  review  missions  to  Ukraine  by  Commission 
staff.  Although  this  assistance  is  centrally  managed,  where  appropriate,  the  EC 
Delegation  in  Kyiv  will  also  be  called  to  provide  additional  reporting.  The 
monitoring of the action by the Commission services will take place on the basis of 
macro-economic  and  structural  policy  indicators  which  are  to  be  agreed  with  the 
Ukrainian  authorities  in  a  Memorandum  of  Understanding.  In  this  process,  the 
Commission services may also monitor key areas of the public finance management 
system, to be identified in the update of the Operational Assessment so as to have the 
relevant information on any changes in the control environment. 

An  annual  report  to  the  European  Parliament  and  to  the  Council  on  the 
implementation of macro-financial assistance is foreseen in the proposed text of the 
Council Decision. 

6.2. 

Evaluation 

Two  to  three  ex-post  evaluations  of  macro-financial  assistance  operations  are 
planned  per  year  in  the  Multi-annual  Evaluation  Programme  of  the  Economic  and 
Financial Affairs Directorate-General. An ex-post evaluation of the proposed macro-
financial  assistance  to  Ukraine  will  be  launched  upon  the  completion  of  the 
operation.  A  provision  foreseeing  the  ex-post  evaluation  will  be  included  in  the 

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Memorandum  of  Understanding.  Financial  resources  for  this  evaluation  will  be 
drawn from the macro-economic assistance budget line. 

7. 

ACHIEVING COST-EFFECTIVENESS 

In  implementing  the  programme,  the  Commission  will  be  guided  by  the  following 
principles:  

•  As soon as the Council has adopted the proposal, the Commission will negotiate 
with  the  Ukrainian  authorities  a  Memorandum  of  Understanding  laying  out  the 
conditions for the release of the EU assistance, as well as a loan agreement. Each 
tranche of the proposed assistance will be made available by the Commission to 
Ukraine  on  the  basis  of  a  satisfactory  track  record  of  the  implementation  of  the 
IMF programme and the economic policy and financial conditions attached to the 
assistance.  

•  In  negotiating  specific  policy  conditions,  the  Commission  will  draw  on  all  the 
expertise, including of the International Monetary Fund and the World Bank and 
of  bilateral  and  multilateral  aid  agencies  active  in  Ukraine.  In  addition,  the 
Commission will aim at synergies with other Community policies and instruments 
(notably  ENPI  as  indicated  above)  that  could  be  used  to  support  the 
implementation by the beneficiary of the relevant measures (notably in the area of 
public finance management). Where appropriate, links to any related action under 
the  European  Neighbourhood  Policy  or  Eastern  Partnership  or  findings  of  the 
Progress Reports would be established.  

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