Kyiv School of Economics presented a Policy Brief for the European Commission: Recommendations For Enhancing Financing Mechanisms For Ukraine’s Recovery. It provides recommendations on improving the Ukraine Investment Framework, the investment pillar of the EU’s Ukraine Facility program. 

The document is the result of discussions held with the Ukrainian government, business, and international financial institutions (IFIs), organised jointly with the Ministry of Economy of Ukraine. The main goal of the discussion was to strengthen the capacity of mechanisms and programs within the Ukraine Investment Framework to finance viable projects in the face of financial, structural, and human resource challenges experienced by Ukrainian businesses.

In the Statement on the Ukraine Investment Framework, the Ministry of Economy of Ukraine emphasized that the launch of the Ukraine Investment Framework (UIF), a key component of the Ukraine Facility supported by the European Union, marks a significant milestone in expanding available financing for businesses. With a dedicated budget of €9.3 billion, the UIF aims to improve Ukraine’s business financing landscape.

“The economic reforms and incentives are designed to benefit businesses. However, it is the entrepreneurs, whether large corporations, small or medium-sized enterprises, or startups, who can truly translate these reforms and incentives into real economic recovery and growth,” noted Deputy Minister of Economy of Ukraine, Volodymyr Kuzyo.

Kyiv School of Economics has conducted an in-depth analysis revealing significant funding gaps in proposed recovery investment projects. Financial support is urgently needed for small and medium enterprises as well as large national projects, particularly in sectors such as agriculture, energy, transport, green steel, and critical materials, which have high multiplier effects on the broader economy and substantial export capabilities. 

To achieve the strategic goals of the Government of Ukraine, an estimated $292 billion in investments over the next decade is required. However, as of May 2024, submitted project applications from both state-owned and private companies total only $148 billion, with only 28% of projects ready for implementation. This leaves a substantial deficit of new projects amounting to $144 billion, with the energy sector requiring the largest investment (-$72.2 billion), followed by transport (-$27.8 billion), and the agro-industrial complex (-$27.1 billion).

KSE has also identified a number of obstacles that may limit the availability of new programs for business. In order to overcome the existing funding gap and accelerate Ukraine’s economic recovery, the experts propose additional steps aimed at optimizing financing processes, strengthening institutional capacity, and using innovative solutions.

“Building a dialogue among the government, business and international financial organizations is a necessary basis for the implementation of the Ukraine Investment Framework. In our analysis, we have identified key recommendations, the implementation of which will improve the existing instruments and introduce new ones in line with the current business needs,” said Natalia Shapoval, Head of KSE Institute.

Therefore, the policy brief includes 12 recommendations: 

1. Increase the availability of grants or tools to reduce effective interest rates through introducing blending instruments. While the tools in IFI’s proposals address the collateral issue, they do not tackle the problem of high interest rates. It’s important to develop and deploy de-risking instruments and financial support mechanisms to enhance interest rate affordability across all sectors.

2. To provide special funding programs/grants for private companies to bolster the resilience of critical infrastructure against war-related risks, including acquiring emergency equipment to sustain services in sectors such as telecommunications, energy, and medical services.

3. Implement specialized initiatives for SMEs operating in de-occupied regions and areas with high shelling risks.

4. Introduce specialized financing initiatives for industrial parks to facilitate business return, including compensation for interest rates, connection to engineering networks, and special tax regimes.

5. Develop project financing to fund industrial projects at the initial stages, for both SMEs and large national projects, which could include grace interest periods.

6. Create a support system for startups to encourage innovation and growth by engaging private equity and venture funds, specifically in the tech sector.

7. Promote project finance and development finance to stimulate equity investments and support capital and working capital needs.

8. Involve more international and domestic financial institutions, as well as credit agencies, to diversify funding sources.

9. Extend the financing limits of IFIs to cover the gap between local banks (projects of 2.5 – 5 million EUR) and IFIs (projects over 10 million EUR), enabling funding for projects valued at 5 – 10 million EUR.

10. Enhance technical assistance and financing support for feasibility studies, specifically for critical materials and extraction industries, to ensure projects are investment-ready. Introduce measures to guarantee that technical assistance benefits the recipients, rather than serving as an additional income stream for IFIs.

11. Include Export Credit Agencies into the scope of Pillar II to facilitate the insurance coverage. 

12. Enforce a no-refinancing policy under Pillar II to ensure financing is directed towards new projects rather than refinancing existing credit lines.

The implementation of the recommendations presented in the document will significantly improve the Ukraine Investment Framework mechanism, expand the presence of IFIs that can contribute to the process of Ukraine’s recovery, and attract more potential participants from Ukrainian businesses to the program to implement investment projects. 

Kyiv School of Economics urges the European Commission to consider these recommendations when developing programs and support mechanisms under the Ukraine Investment Framework.