Understanding the European Union’s Ukraine Facility

October 1, 2024

The European Union's Ukraine Facility is a significant support mechanism designed to aid Ukraine in its recovery, reconstruction, and modernization efforts from 2024 to 2027.

This initiative underscores the EU's commitment to supporting Ukraine amid the ongoing war and on its path towards EU membership. The Facility provides up to €50 billion in financial support, structured around three main pillars: direct financial support, a specific investment framework and accession assistance. (See: Ukraine begins work on Ukraine Facility)

Key objectives of the Ukraine Facility

The European Union's Ukraine Facility has several key objectives aimed at supporting Ukraine, among them:

• Recovery and reconstruction: Rebuilding vital infrastructure and revitalizing the economy
• Modernization: Enhancing societal resilience and aligning with European standards
• Financial support: Ensuring the continuity of essential services
• Investment mobilization: Facilitating investment flows for rapid economic recovery
• Social support: Mitigating the humanitarian impact of the war and promoting social cohesion

These objectives are designed to help Ukraine recover, build a more resilient and modern society and move closer to EU membership.

How private investors can benefit

Private investors have a unique opportunity to engage with the Ukraine Facility, particularly through its investment framework:

• Investment opportunities: The Facility aims to attract and mobilize investments in Ukraine's private sector, creating opportunities for private investors to participate in the country's economic recovery and growth. This includes sectors like infrastructure, energy, technology, agriculture and others.
• Stable financial environment: With up to €50 billion in support, the Facility ensures a stable financial environment, reducing risks for private investments. The EU's backing provides a level of predictability and security that can be attractive to investors.
• Incentives for reforms: The Facility supports Ukraine in implementing further necessary reforms, which can create a more favorable business environment. This includes improvements in governance, transparency and regulatory frameworks.
• Access to EU markets: As Ukraine aligns more closely with EU standards and moves towards EU membership, investors can benefit from easier access to the broader European market.

Requirements and limitations

• Compliance with EU standards: Investments must align with the EU's standards and values, including respect for democratic mechanisms, the rule of law and human rights.
• Oversight and accountability: The Facility includes stringent oversight mechanisms to ensure funds are used appropriately. This includes regular audits and reporting-to counter fraud, corruption and conflicts of interest.
• Conditional support: Financial support is conditional upon Ukraine's progress in implementing its recovery and reform plan. This means that investors need to be aware of the political and economic landscape and how it might impact their investments.

Opportunities for investors

• Infrastructure projects: There are significant opportunities in rebuilding Ukraine's infrastructure, including transportation, energy and telecommunications.
• Green energy: Investments in renewable energy projects are encouraged, aligning with both Ukraine's and the EU's sustainability goals.
• Technology and innovation: The modernization efforts include a focus on technology and innovation, providing opportunities for investments in tech startups and digital infrastructure.
• Public-private partnerships: The Facility promotes public-private partnerships, offering a collaborative approach to investment and development projects.

Financing projects through the Ukraine Facility

The Ukraine Facility offers a structured approach for private investors to obtain financing for their projects, primarily through the Ukraine Investment Framework (UIF). Here's an outline of how this works:

How to obtain financing

• Application process: Investors can apply for financing through the UIF, which is designed to mobilize investments for Ukraine's recovery and development. The application process typically involves submitting a detailed project proposal that aligns with the Facility's objectives, such as infrastructure development, green energy or technology innovation.
• International Financial Institutions (IFIs): Financing is administered through various IFIs and bilateral development agencies. These institutions play a crucial role in implementing projects and providing the necessary financial support.
• Risk-sharing instruments: The UIF includes risk-sharing instruments like the Ukrainian Guarantee, which covers financial risks and insures IFIs against potential losses. This mechanism helps to attract more investments by reducing the perceived risk.
• Blended finance and grants: The UIF also offers blended finance options and grants, combining public and private funding to support larger projects. This approach leverages additional resources and provides more comprehensive financial support.

Administration of financing

• European Commission: The European Commission oversees the overall administration of the Ukraine Facility, ensuring that funds are allocated appropriately and that projects align with the EU's standards and objectives.
• Audit and oversight: A dedicated Audit Board assists the Commission by regularly reporting on the use of funds. This ensures transparency and accountability, helping to counter fraud, corruption and conflicts of interest.

Role of banks

• Local and international banks: Banks play a pivotal role in the financing process. They can act as intermediaries, facilitating the flow of funds from the UIF to the project implementers. Banks may also provide additional financing or guarantees to support projects.
• Loan guarantees: The UIF includes a substantial portion allocated for loan guarantees, which banks can utilize to offer more favorable loan terms to investors. This reduces the financial risk for banks and encourages them to participate in the financing of projects.
• Support for SMEs: A specific portion of the guarantees is reserved to support small and medium-sized enterprises (SMEs), particularly those affected by the war in de-occupied and front-line regions. This includes guarantees for loans from Ukrainian banks, helping to stimulate local economic growth and development. This support aims to stimulate local economic growth and development.

Several banks and financial institutions in Europe have already publicly announced their participation in the Ukraine Facility and the UIF. Key players include:

• European Investment Bank (EIB): The EIB has committed to supporting the Ukraine Facility by providing financial backing and guarantees. They are involved in various de-risking programs to encourage investments in Ukraine.
• European Bank for Reconstruction and Development (EBRD): The EBRD is actively participating in the UIF, offering financial support and risk-sharing instruments to facilitate investments.
• International Finance Corporation (IFC): Part of the World Bank Group, the IFC is also involved in providing financial support and guarantees under the Ukraine Facility.
• Kreditanstalt für Wiederaufbau (KfW): The German development bank KfW has announced its support for the Ukraine Facility, focusing on providing guarantees and financial assistance to investors.
• Bank Gospodarstwa Krajowego (BGK): Poland's national development bank, BGK, is participating in the UIF, offering financial support and guarantees to encourage investments.

Key updates and projects

• Ukraine Recovery Conference: On June 11, 2024, during the Ukraine Recovery Conference in Berlin, the European Commission signed €1.4 billion in new guarantee and grant agreements. These agreements are part of the UIF and are designed to support Ukraine's recovery and attract private sector investments. The agreements include €1 billion in loan guarantees and €400 million in blended finance grants, focusing on energy infrastructure, transport, and support for SMEs. (See: Ukraine Recovery Conference 2024 - Summary)
• Energy infrastructure: A significant portion of the new agreements signed in June 2024 focuses on the repair, rehabilitation and development of Ukraine's energy infrastructure. This sector has been heavily targeted by Russian attacks, making its reconstruction crucial for Ukraine's resilience.
• Green energy and technology: The Better Futures Program, part of the UIF, aims to accelerate investments in renewable energy projects, such as wind power and battery energy storage systems. It also targets the digital sector and industrial investments, including steel production and construction materials.
• UIF applications now being accepted by Ukraine: This month, Ukraine officially began accepting applications from businesses to participate in the UIF program. Minister of Economic Development and Trade Yuliya Svyridenko announced the expectation that the allocation for the guaranteed loans under the program will include 15 percent for small and medium-sized businesses, 20 percent for green projects, and 25 percent for the state sector of the economy. Moreover, the primary sectors for investment are energy, critical materials, transport, industry, agri-food and IT.

The European Union's Ukraine Facility presents a robust framework for supporting Ukraine's recovery and development while offering substantial opportunities for private investors. By aligning with EU standards and leveraging the stability and predictability provided by the Facility, investors can play a crucial role in Ukraine's economic resurgence. In addition, by leveraging the support of international financial institutions, risk-sharing instruments and blended finance options, investors can access substantial financial resources. The involvement of banks further facilitates the flow of funds and reduces financial risks, making it an attractive opportunity for those looking to invest in Ukraine's future.