USAID/Ukraine - COUNTRY STRATEGIC PLAN FOR FY 2003 – 2007
United States Agency for International Development
Regional Mission for Ukraine, Belarus and Moldova
Approved September 2002
ACRONYMS
CEUME Consortium for Enhancement of Business Management Education
CHAP Community Humanitarian Assistance Program
CIDA Canadian International Development Assistance
CSO Civil society organization
DFI Direct foreign investment
DFID Department for International Development of the British Embassy
GDA Global development alliance
GDP Gross domestic product
GOU Government of Ukraine
EBRD European Bank for Reconstruction and Development
EC European Commission
E&E Bureau USAID’s Bureau for Europe and Eurasia
EPAC Environmental Public Advocacy Center
EUR/ACE Bureau for European and Eurasian Affairs, Office for U.S. Assistance to Europe and Eurasia
EU-TACIS European Union-Technical Assistance to Commonwealth of Independent States
FY Fiscal year
GDP Gross domestic product
GIS Geographic information system
GOU Government of Ukraine
IAS International accounting standards
IBRD International Bank for Reconstruction and Development (World Bank)
IFES International Federation of Electoral Systems
IMF International Monetary Fund
IR Intermediate result
IRF International Renaissance Foundation
LEAP Local environmental action plan
MOE Ministry of Economy
MOF Ministry of Finance
MPP Mission Performance Plan (of the U.S. Embassy)
NBU National Bank of Ukraine
NGO Non-government organization
OECD Organization of Economic Cooperation and Development
OYB Operational Year Budget
OSCE Organization for Security and Cooperation in Europe
PAUCI Poland-America-Ukraine Cooperation Initiative
SME Small and medium enterprise
SME/AG Small, medium and agricultural enterprises
SO Strategic objective
SOE State-owned enterprise
STI/HIV/AIDS Sexually transmitted infections/human immunodeficiency virus/acquired immunodeficiency syndrome
UNDP United Nations Development Program
ULRMC Ukrainian Land and Resource Management Center
UNICEF United Nations Children’s Fund
USAID United States Agency for International Development
USAID/Ukraine USAID’s mission in Ukraine
USG United States Government
VAT Value added tax
WTO World Trade Organization
Executive Summary
The overarching goal of the new strategy is to “improve the economic and social well being of all Ukrainians within a framework of democratic governance.” Analysis showed that for this goal to be achieved, improvements are needed in the following five areas: (1) investment climate; (2) growth of SMEs and agriculture; (3) increased engagement of Ukrainians in building their democracy and economy; (4) the effectiveness and accountability of government institutions; and
(5) delivery of social services.
USAID’s operating environment has greatly changed since the former 1999-2002 strategy was developed. The former strategy was formulated amid the 1998 collapse of Russia’s financial system and reflected great concern over its impact on Ukraine’s economy, which had already experienced seven years of progressive decline. Ukraine lagged behind in overall macroeconomic and structural reforms, and the executive branch dominated significant spheres of economic activity. In this context, the former strategy was driven by a new focus on local governance, and pressed for the most fundamental reforms in the market transition process within the overall context of the IMF program. Strengthening institutions for a functional democracy was seen as critical, along with support for the social safety net.
Ukraine’s economic performance has improved. Strong economic growth in 2000 and 2001 can be partly attributed to important structural reforms in such key sectors as energy and agriculture. The breadth and depth of the recovery – across economic sectors, for consumption as well as for investment, and for domestic consumption as well as for exports – suggest the economic recovery can be sustainable. On the political governance side, Parliament has begun to play a more independent role relative to the executive, local government has been strengthened, though the presidency remains dominant, and civil society organizations are beginning to take an active role in public life. March 2002 parliamentary elections showed a marked decline for communist and leftist forces, providing an opportunity for a pro-reform legislative agenda. While fundamental problems remain, the new strategy is being developed in a far more propitious and hopeful environment. Under the new strategy, USAID will help Ukraine consolidate progress made so far and build on that progress to assure the country’s future as a democratic state with a market-oriented economy.
To some extent, activities under the proposed strategy represent movement to fine-tune existing activities building on previous successes. For example, in banking supervision, USAID succeeded in creating a respected supervision institution. However, the rapidly growing banking sector now requires supervision through more sophisticated techniques such as risk-based internal controls. Similarly, USAID succeeded under the previous strategy in obtaining parliamentary and presidential approval of a Land Code. Assistance in implementing the land titling provisions of the law is now required to make private ownership of land a reality for Ukrainians. A new activity proposed by the Mission is support for agribusiness marketing, in part to acknowledge the strides Ukraine has made in reforming its agricultural policies, and the resultant high level of growth in that sector. The basic institutions of civil society were strengthened under the previous strategy. Now, more multi-faceted assistance is required to make civil society institutions more effective.
Proposed new strategic objectives are:
SO 1: Improved Investment Climate, to sustain Ukraine’s economic growth will require higher levels of investment, including foreign investment. This will address economic growth issues at the macroeconomic level.
SO 2: Accelerated Growth of SMEs and Agriculture, will address economic growth issues at the micro-economic level by promoting growth of SMEs and farms. Support will also be provided to assist business organizations to become more effective advocates on policy and regulatory matters in addition to SMEs and agricultural producer groups.
SO 3: Citizenry Increasingly Engaged in Promoting their Interests and Rights for a more Democratic Market-Oriented State will seek to strengthen democracy in Ukraine from the grass-roots level. Assistance will be provided to civil society organizations and NGOs in advocacy techniques and coalition building so that issues of public policy receive broad public hearing, and pressure to reduce corruption and improve accountability of public organizations is intensified. Assistance will be also provided to strengthen the professionalism of an independent media.
SO 4: Government Institutions Are More Effective, Transparent and Accountable to their Citizens will assist Ukraine’s parliament in becoming a more effective counterweight to executive power, while also strengthening local governance. It will also improve the legislative process, which has been an important impediment to economic transition by imposing excessive delays in passage of needed legislation. Enabling adherence to the rule of law will also be a central component of this objective.
SO 5: Improved Social Conditions and Health Status will address pressing problems of pension reform, trafficking of human beings, the spread of HIV/AIDS and tuberculosis, and reproductive health.
Special Objectives: The Mission will continue its environmental protection activities through 2004 as a special objective. It also proposes to implement three cross-cutting initiatives that support other strategic objectives such as: (1) the Poland-America-Ukraine initiative (PAUCI), designed to assist Ukraine in benefiting from Poland’s experience in economic and social transition; (2) participant training; and, (3) the Kharkiv Partnership which is designed to assist in the revitalization of the Kharkiv Oblast economy.
PART I: ANALYSIS OF ASSISTANCE ENVIRONMENT AND RATIONALE FOR STRATEGIC CHOICES
Following a particularly difficult transition period from 1991 to 1999, Ukraine is now showing steady progress in building a viable nation-state based on democratic principles and a market economy. Ukraine’s progress in establishing a legal, fiscal and regulatory environment conducive to private sector growth and the creation of a viable market economy is clearly evident. Less certain is whether Ukraine is making as much progress as it could in establishing sound democratic practices and institutions. While there are promising signs of reform in local government, Parliament and the judiciary, corruption and unequal enforcement of rule of law cast serious shadows over Ukraine’s democratic transition. The media, civil society organizations, political parties and other civic associations are still in a nascent stage of development and many social service providers retain inefficient, Soviet-era structures that are unable to meet the needs of the general populace.
USAID/Ukraine’s FY2003-2007 strategy builds on past successes in the economic arena and places more emphasis on empowering Ukraine’s emerging civil society and democratic institutions. The Mission’s overall strategic goal, increased social and economic well-being of all Ukrainians within a framework of democratic governance, will be addressed by fostering economic reforms that encourage investment and growth; by directly reaching Ukrainians through programs in agriculture and small and medium enterprise development; by strengthening both government institutions and civil society to improve democratic governance; and by protecting the health and welfare of the population through systemic reforms and targeted interventions.
The strategy outlined in this document fully supports the United States Government’s Mission Performance Plan (MPP) for Ukraine. Specifically, it supports achievement of two of the Embassy’s three goals: democracy and market-oriented economic growth. These same political and economic objectives are shared by the vast majority of Ukrainians, as well as reform-oriented government officials who want Ukraine to take its rightful place in the European community through accession to the World Trade Organization (WTO) and by joining the European Union. This strategy is also consistent with Agency and Bureau pillars, goals and strategic objectives.
Country Conditions
Economic Situation: Although gross domestic product (GDP) declined for nine years following independence, in the last two years Ukraine has seen a remarkable, broad-based economic recovery. GDP grew 5.9 percent in 2000 and 9 percent in 2001, with strong growth in both domestic demand and exports, agriculture as well as industry, and investment as well as consumption. This strong growth has been accompanied by macroeconomic stability. While inflation reached 10,000 percent in the mid-1990s, it was down to 25.4 percent in 2000 and 6 percent in 2001. At the same time, the Government of Ukraine (GOU) reduced the budget deficit to under 1.7 percent in 2001, well within guidelines set by the International Monetary Fund (IMF). These official statistics most probably understate Ukraine’s growth in personal income levels and GDP since 40 to 60 percent of GDP is generated by the informal sector, and therefore not yet recorded in official GDP statistics. Forecasted economic growth for 2002 ranges from 4.5 to 6.0 percent.
To a great extent, privatization of urban real estate and industries has stimulated this recent growth. In the agricultural sector, the collective farm system has been eliminated and 6.75 million former collective farm members have received the right to hold land titles. More industry is also being privately managed, particularly in agribusiness, where privatization of medium-sized companies is now virtually complete. Given these successes, it is not surprising that Ukraine’s highest growth in exports for 2001 was in agribusiness.
Payments discipline in the economy also improved, especially in the energy sector, and there are signs that public confidence in the banking system is beginning to return. The level of deposits in the banking system, which at 11 percent of GDP in 1998 was one of the lowest among NIS countries, had since risen to 18 percent of GDP by 2001. There is also evidence of strong growth in lending to the private sector and a huge increase in lending to agriculture. The World Bank estimates that if the banking system continues to improve at its present pace, the system will mobilize an additional $1-2 billion in resources each year by 2005.
In the energy sector, the GOU privatized six of the country’s 27 district electric distribution plants in 2001 and signaled its intent to proceed with privatization of another 9 plants in 2002. Once these are privatized, the GOU plans to privatize its generating plants.
Social Trends: Ukraine had an estimated population of 49 million at the end of 2000, almost 54 percent of which are women. Since independence, Ukraine’s population has declined by approximately 2 million people due, in large part, to a declining birth rate. The average number of children born to women during their childbearing years dropped from 1.7 in 1991 to 1.1 in 1999. It is believed that this decrease is due to the economic decline during this period, with young couples postponing having children until the economy improves. Emigration has also had a negative impact on Ukraine’s population.
Because of the low birth rate, emigration and other historical factors, approximately 15 percent of all Ukrainians are over 65, a high ratio compared with most other middle-income countries. The large elderly population presents special challenges for Ukraine. Low wage workers, already living on the margin, must frequently support aging family members; the elderly require more health care; and the high number of pensioners strains the pension system. Because of their longer life expectancy, a large proportion of the elderly are women.
The death rate in Ukraine increased from 12.9 percent in 1991 to 14.8 percent in 1999, while life expectancy declined from 70.1 years in 1970-75 to 66.1 years in 1995-2000. The United Nations ranked Ukraine 74th, just ahead of Kazakhstan, in its Human Development Index for 2001. Although Ukraine’s expenditures on health care are in line with those of comparable countries in the region, in absolute terms, Ukraine spends about half as much per person per year as the average middle-income country. The social and economic costs of inadequate health care are reflected in not only the life expectancy statistics, but also in the rising rates of tuberculosis, HIV/AIDS infection, alcoholism and substance abuse. Domestic violence and human trafficking are also serious concerns. Social issues continue to contribute to high rates of maternal and infant mortality, complicated pregnancies, and miscarriages, all of which are twice as high in Ukraine as in developed western countries. Due to the high cost of contraceptives and lack of knowledge, abortion continues to be the most common form of birth control.
GOU/World Bank/United Nations Development Program (UNDP) poverty assessments indicate that almost 30 percent of Ukraine’s population lives below the poverty line (defined as hryvnya 268 or approximately $50/month). Lack of jobs is a critical issue. An estimated 12 percent of the available labor force is unemployed and an even higher percentage is underemployed. In July 1999, 70 percent of those officially registered as unemployed were women. In 2001, an estimated 40 percent of the population received either social insurance or social assistance benefits. Fourteen million pensioners are supported by 23 million workers; 4 million poor families receive housing subsidies; 2.7 million jobless receive unemployment compensation; and 2.9 million families (with 4.3 million children under 18) receive family allowances.
Ukraine’s population is highly educated, with universal adult literacy. Both men and women have equal access to education. The transition, however, has placed great strains on the education system, which is now characterized by unmotivated, low-paid teachers, dilapidated buildings and outdated textbooks and teaching methodologies. As a result, the education system is unable to prepare youth for the challenges of living and working in a free market and democratic society.
Political Situation: Between 1999-2001, Ukraine continued its uneven, halting progress in political and economic reforms. President Leonid Kuchma was re-elected to a five-year term in 1999, and though the vote likely reflected the will of the electorate, the election was marred by unbalanced media coverage and efforts by the administration to influence voters by pressuring local leaders and officials. In by-elections for 10 parliamentary seats in 2000, the opposition complained of voting irregularities.
In an April 2000 referendum, which observers described as marked by inappropriate government involvement in voter turnout, voters approved changes to the Constitution that would have created a bicameral legislature and expanded presidential power to dissolve the 450-member Parliament. Though the Constitutional Court ruled that the president’s subsequent draft law to amend the Constitution was constitutional, Parliament has hedged on passing legislation that would undermine the separation of powers. While a full-blown Constitutional crisis has been averted, the president has vowed that he will pursue implementation of the referendum.
In late 1999 President Kuchma appointed Victor Yushchenko, former chairman of the National Bank of Ukraine, as Prime Minister. His government pushed through reforms, with the help of a short-lived pro-reform coalition in Parliament that dramatically decreased wage arrears and moved away from barter and non-cash payments, particularly in the energy sector. However, as of result of intense political competition, the Parliament voted no-confidence in Victor Yuschenko in April 2001 and confirmed Anatoli Kinakh as the new Prime Minister in May 2001. Given Ukraine’s remarkable macro-economic stabilization over the last two years, including real growth in GDP, a low budget deficit and low inflation, the Kinakh government has not veered significantly from the reform course set by its predecessor.
The results of the 2002 Parliamentary elections were surprising. The Socialist Party and the Tymoshenko bloc were not expected to clear the hurdle of obtaining at least four percent of the vote to qualify for parliamentary representation. However, six parties/blocs cleared the four percent, including the Tymoshenko bloc, the Socialists, the Yushchenko Our Ukraine Bloc, the pro-presidential For United Ukraine, the Communists, and the Social Democrats. The other notable aspect of the 2002 election was that the Communists, the largest force in Ukraine’s parliament since independence, saw its representation cut nearly in half, from 113 deputies in the previous assembly to 66 members. This new parliament, with Communists no longer representing the largest bloc, is expected to be generally pro-reform and to support Ukraine’s European integration. At issue is whether the pro and anti-presidential reform groups will be interested in and able to form together a coalition to adopt reform legislation, especially with Presidential elections looming on the horizon in 2004 and potential candidates competing for the limelight in Parliament.
Democracy and Governance: In June 2001 the Parliament adopted the so-called “small judicial reform,” which saw amendments to 12 laws and changes in the Civil and Criminal Procedures Codes. The reforms represent the first tentative steps toward an independent judiciary, though political interference from the executive branch and entrenched corruption remain serious roadblocks. In February, 2002, the Law on the Judiciary was finally passed. The new law strengthens the judiciary by redesigning the court structure, establishing standards for judicial candidates, allowing a judicial council to initiate recommendations for seats (rather than the President unilaterally appointing judges), defining disciplinary proceedings, and resolving procurement issues.
While there have been improvements in access to objective public information and in press and media freedom, much remains to be done. Critical journalists are often subject to harassment in various forms, from frequent inspections by tax authorities to interventions by police and other state authorities. Libel laws are abused to intimidate journalists, and in some cases have resulted in the closure of publications. The bases for granting and revoking media licenses are nontransparent. During the last several years two well known journalists have been murdered. Despite this intimidating environment, new voices are emerging in the non-state media, and coalition-building and wider coverage are encouraging signs of political dissent.
Government scrutiny of and pressure on media and local officials intensified in the run-up to the March 2002 parliamentary elections. There were also serious allegations of anti-presidential opposition candidates and blocs being denied equal access to media and of supporters and campaign workers being harassed.
Civil society was more involved than ever in the 2002 parliamentary/local elections. Community groups are also working in conjunction with business groups and local governments to improve responsiveness and transparency at the local level. Unfortunately, at the national level, there is still not a nurturing environment in place which encourages and promotes the establishment of a strong civil society. The recently completed Civil Society Assessment confirmed that while tremendous progress has been made in laying the foundation for a vibrant civil society in Ukraine, its roots are still shallow. Corruption remains a serious development challenge in Ukraine. Ukraine ranks 83 out of 91 countries surveyed by Transparency International in the 2001 Corruption Perception Index (the higher the number the higher the perception of corruption). Azerbaijan was the only former Soviet state ranked as more corrupt.
Despite the poor ranking in 2001 Ukraine had moved up the scale from its previous ranking of 87 in 2000. A nation-wide 2001 Public Opinion Survey of Ukrainian citizens showed that Ukrainians viewed corruption as less problematic in 2001, a year that saw the first upturn in the economy, than in previous years. However their lack of confidence in government institutions remains, and is linked to perceptions of corruption in these institutions.
USAID/Ukraine’s Achievements: 1999-2002
USAID has been providing assistance to Ukraine since 1992 to facilitate its transition from a centrally planned and authoritarian society to a market-based and democratic one. In the earliest years, the main focus of the USAID program was on macroeconomic stabilization, laying down the basic precepts of commercial law and on dismantling state control of resources through privatization. However, progress in working with central government policy reform was disappointingly slow, and this was reflected in the continuing economic stagnation. Thus the 1999-2002 strategy proposed a new direction.
USAID/Ukraine’s strategy for 1999-2002 was written during one of the bleakest periods of Ukraine’s transition. The economy, which had spiraled downward since independence, was being further threatened by the economic crisis in Russia. Ukraine’s pace of structural reforms had been disappointing. People were frustrated as the standard of living declined and disappointed that democracy produced limited tangible benefits. In this environment, USAID developed a strategy which, while continuing to emphasize the importance of economic stabilization, (particularly in complying with the IMF program), adopted a greater emphasis on programs at the local level as a means of improving people’s lives and building demand for reform from the bottom up. A review of USAID’s results under this strategy reveals that, for the most part, the goals of the strategy were met.
Economic Restructuring: USAID/Ukraine’s activities and long-term partnership with GOU counterparts contributed to the markedly improved economic situation in Ukraine since 1999. In the area of fiscal management, USAID helped to build capacity in policy formulation and budgeting, culminating in the passage of a significantly improved Budget Code, which for the first time transfers resources to local governments on a transparent basis. USAID assistance in banking supervision led to nearly all banks complying with National Bank of Ukraine reserve, loan loss and security requirements. With USAID assistance in tax policy and administration, the GOU introduced a value added tax (VAT) and an enterprise profit tax, which provide the GOU with improved sources of revenue for the state budget and encourage entrepreneurs to move from the shadow to the formal economy.
Legal Reforms and Strengthening of Creditor Rights: To promote more prudent lending, USAID advisors developed in 1998 an amended law and an operational pledge registry for movable property that is subject to claims of creditors. This registry is now in use by banks and notaries on a nationwide basis and provides rapid, low-cost information to inform lenders whether property in question has already been pledged.
Agriculture: Ukraine’s agricultural sector was radically transformed by the elimination of the collective farm system. USAID assisted in this effort by supporting the restructuring of collective agricultural enterprises and the issuance of some 224,657 land titles. To complement the privatization effort, USAID helped establish 10 national farmer associations, which now represent private sector agricultural interests to the GOU. These associations were instrumental in the development and passage of the landmark Land Code, which lays the groundwork for the creation of a land market and limits government control over land and the future land market. USAID assistance was also instrumental in the preparation, adoption and coordination of over 200 reform-oriented pieces of agriculture-related legislation. In addition, USAID launched an extension program and established several partnerships to help transfer technologies and stimulate the growth of agricultural support industries.
Private Sector Development: With USAID assistance for accounting reform, Ukrainian Accounting Standards, based on International Accounting Standards (IAS), were adopted and are increasingly being used by private enterprises. In addition, 200,000 students were trained in business education. USAID’s focus on small and medium enterprise (SME) development resulted in significant improvements in the SME policy environment. Critical achievements include the streamlining procedures that reduced the average business registration processing time from 24 days to 6 days and the average cost of registration from $480 to $186, streamlining business licensing procedures reduced the cost of obtaining a license from $618 to $250; and restricting business inspections by government agencies to 14 per year per business. In addition, a multi-year deregulation effort culminated in 150 outdated, conflicting, or unlawful regulations being repealed or amended USAID support for the EBRD’s Microfinance lending program resulted in the granting of about 1000 loans per month for a total of $14.5 million. Sixty-eight percent of the loans finance businesses with less than 10 employees and the repayment rate for loans has been over 99 percent.
Energy and Environment: Largely due to USAID’s leadership, reform in the energy sector is, in many respects, greater than anywhere else in the region. Six electric distribution companies were privatized in April 2001 and nine more should be sold by the end of 2002. In addition, USAID played a key role in helping the Ministry of Fuel and Energy focus on cash collections, rather than payment in barter or in-kind, thus significantly improving the financial condition of the energy sector. USAID was instrumental in building capacity in and consolidating the independence of the Independent National Energy Regulatory Commission (NERC).
In 2000 and 2001, increases in cash payments for energy at municipal and industrial facilities combined with their need to replace outdated capital stock and to reduce pollution fees to create a favorable climate for investment in energy efficient environmental improvements, helped USAID leverage local resources to make environmental investments or management changes at over 25 facilities and promote reductions in greenhouse gas emissions in another 25 projects prepared for investment. USAID small grants to environmental NGOs also demonstrated that modest results could be achieved to improve environmental quality at the local level and build partnerships between citizens and local authorities. USAID’s legal assistance supported almost 50 successful challenges against violations of environmental laws.
Democracy and Governance: USAID programs achieved demonstrable success in promoting democratic reform and decentralization. Success was most evident at the municipal level where USAID and other donors helped produce an environment in which cities were increasingly autonomous. The passage of key legislation, including the Law on Local Self Governance and the Budget Code, which provided for transparent, formula-based budget transfers from the national government to municipalities were the culmination of many years of effort. USAID support, available to the 448 designated Ukrainian cities, resulted in 365 cities joining the Association of Ukrainian Cities, 152 cities establishing permanent citizen advisory boards, and 121 cities regularly holding public hearings on local issues. A majority of the larger cities have also installed USAID-developed budget and financial management systems.
USAID also helped the Parliament become increasingly independent and transparent, with improvements in the committee system and internal management. In the judicial sector, the new “Small” Judiciary Reform legislation and the February 2002 passage of the Law on Judiciary offer renewed hope for judicial reform.
USAID played a key role in the March 2002 parliamentary elections, becoming engaged in the elections well beforehand by supporting the development of the civil society groups and the training of political parties. USAID contributed to more objective reporting by media, NGOs informed more voters, political parties were more attuned to constituents needs, and the election process was more transparent through election monitoring and USAID-financed training of 28,000 poll commissioners. OSCE noted the significant improvement in the conduct of the elections over 1998. An important conclusion was that people voted their minds; their votes were not based on pressure from central authorities. It is now important to consolidate these improvements.
USAID’s civil society programs strengthened civic groups, associations, traditional NGOs and non-partisan think tanks and also encouraged citizens to be more active in political and economic decision-making. USAID’s support for an independent media helped to provide citizens with better access to information so that they could be constructively involved in decision-making.
Social Sector: The USAID-funded network of Women’s Wellness Centers, five neonatal resuscitation centers and National Infection Control Training Center contributed, among other things, to a 50 per cent reduction in the abortion rate. Other USAID-funded programs improved Ukraine’s ability to screen for birth defects, screen victims of the Chernobyl nuclear accident and prevent the spread of tuberculosis and STI/HIV/AIDS. Health partnerships between American and Ukrainian health facilities and communities helped strengthen modern family medicine. The 10 model clinics opened with USAID funding were the catalyst for the establishment of 129 family medicine clinics by 2001. In addition, USAID provided a broad array of humanitarian aid, including disaster relief, supplies for orphanages, and commodities for vulnerable groups.
USAID also helped design and implement several social protection programs, including housing subsidies, models to forecast unemployment insurance, employment fund revenues and expenditures, and a new system for reporting wages and contributions to the State Pension Fund. Pension reform activities resulted in 14 million public pensioners receiving benefits on time. USAID also helped the GOU initiate a broad-based public awareness and anti-trafficking program. Three counseling centers and five women’s business training centers have helped 15,000 women since 1998.
A Framework for USAID Assistance, FY2003-2007
USAID/Ukraine believes that Ukraine’s recent strong economic performance represents the product of years of sustained effort for economic and democratic reforms by Ukrainians, USAID and other donors. The Mission’s strategy for FY2003-2007 builds upon these reforms and seeks to move Ukraine beyond transition to a new period of sustainable economic growth in which all Ukrainians benefit from new social, economic and political systems. The Mission defines this new strategic goal as increased social and economic well-being for all Ukrainians within a framework of democratic governance.
Improving Ukrainian’s well-being is contingent on continued, broad-based economic growth. Sustained growth cannot occur unless the investment climate in Ukraine improves sufficiently to attract increasing levels of both domestic and foreign investment. Significant investment is needed to modernize equipment, update technology and make Ukrainian enterprises more competitive. The Mission has identified agriculture and SMEs as the two key sectors of the economy in which USAID could play a significant role. To accelerate Ukraine’s democratic transition, the Mission will continue to work on two fronts: 1) empowering civil society so that Ukrainians themselves could increasingly demand transparency and accountability from their government, and 2) improving the responsiveness of government institutions to constituent needs and strengthening the democratic system of checks and balances, particularly by strengthening the rule of law as a foundation for economic and political life. Finally, the Mission will support interventions in the social/humanitarian sector that are critical to meet both the short-term needs of the population and to improve the long-term efficiency of social service delivery. The USAID program for 2003-2007 will have five strategic objectives, presented in the Mission results framework and discussed below, which are necessary and sufficient to achieve the Mission’s overarching goal.
SO1 Improved investment climate.
SO2 Accelerated growth of SMEs and agriculture.
SO3 Citizenry increasingly engaged in promoting their interests and rights for a more democratic, market-oriented Ukraine.
SO4 Government institutions more effective, transparent and accountable to the citizens.
SO5 Improved social conditions and health status.
Four critical assumptions underlie the developmental hypothesis presented in this strategy: First, that the GOU will remain committed to economic and political reform; second, the GOU will continue to allow donor support for nongovernmental and civil society organizations; third, that macro-economic stability and recovery of the economy will continue; and, fourth, that the GOU will remain committed to meeting the political and economic prerequisites for full integration with European institutions.
Improved Investment Climate: USAID/Ukraine’s emphasis on the “investment climate” as a strategic objective represents an evolution from the previous strategic plan for 1999-2002. In that plan, the Mission’s objectives were related to establishing “a more competitive and market oriented financial sector” and “legal systems that better support…market reforms.” Those objectives reflected the concerns with dismantling the Soviet economic and political system of central planning and autocratic rule that characterized the early transition period. While remnants of that system continue to exist, a focus on dismantling alone is no longer appropriate. The new USAID emphasis has shifted to focus on the top priority in Ukraine today—helping to ensure that the economic growth that resumed in 2000 can continue and is broad-based. Specifically, the Mission determined that sustainable growth is constrained by the poor investment climate, which inhibits both domestic and foreign investment needed to allow private enterprise to flourish and become competitive.
To improve the investment climate, the Mission determined that an integrated approach to addressing fiscal, energy , financial, and commercial legal constraints was necessary.
Accelerated Growth of SMEs and Agriculture: USAID involvement in small/medium enterprise development and agriculture are critical to achieve the Mission’s goal. The decision to combine the two into one strategic objective was made due to the similar problems encountered by both sectors, e.g. a difficult legal and regulatory environment, shortage of management skills, lack of access to land and credit and lack of organized markets, etc. SME/AG growth is expected to create jobs and increase income, which will contribute to improved standards of living for a wide sector of the population.
Citizenry Increasingly Engaged in Promoting their Interests and Rights for a More Democratic Market-Oriented Ukraine: While this new SO continues to address many of the same constraints to civic activism that were targeted under the previous strategy – lack of access to information, weak civil society organizations and political parties, and lack of credibility and competition in the electoral process – there are two significant differences. Whereas the previous strategy strove for citizen participation in policy discussions, this strategy raises expectations of citizen involvement to a higher level by galvanizing them to assume a proactive role in defending their rights and interests. Second, this strategy structures the intended results and indicators to capture actions by not only formal, but also non-formal organizations to defend rights and promote government accountability.
Government Institutions More Effective, Transparent and Accountable to their Citizens: Progress in democratic development in Ukraine requires not only a vibrant civil society, but also the responsive and accountable government that ensures adherence to the rule of law. Rather than viewing each government institution separately, as was the case in the previous strategy, this strategy approaches good governance as a coordinated objective, reflecting the very real political and economic synergies between the various branches and levels of government. This approach reflects, from a citizen’s perspective, that the basic tenets of good governance (transparency, accountability and effectiveness) are not unique to a particular level or branch of government. Rather, the public expects all government services to be provided in the context of good governance.
The lack of a system of checks and balances within and between the branches and levels of government is one of the greatest constraints to effective, transparent and accountable governance in Ukraine. The new strategy focuses on strengthening the independence of the legislative, executive and judicial branches of power, and promoting decentralization and empowerment of municipalities.
Improved Social Conditions and Health Status: To achieve the Mission’s goal will require improvement in the basic quality of life for Ukrainians, including social protection, health and humanitarian and disaster assistance. These programs were melded into one strategic objective. Efforts to reform the health sector and improve family health care will continue. But increased emphasis has been placed on preventive measures to reduce the risk and the spread of tuberculosis, HIV/AIDS infection and other communicable diseases, and alcoholism and substance abuse.
Given this broader approach, anti-trafficking activities are now incorporated into this SO. By 2004, USAID humanitarian assistance should be completed, freeing up resources to launch a new program to address the growing numbers of street children, orphans and others susceptible to exploitation, violence, discrimination and neglect.
Special Objective: Increased Environmental Protection: Under the previous strategy, USAID provided assistance to Ukraine in developing environmental policy related to global climate change, and in preparing projects to reduce greenhouse gas emissions. A more modest level of assistance was provided for improving environmental management at enterprises, and promoting citizen environmental action at the local level. In this strategy, given the more limited availability of funds, USAID has determined that national-level environmental policy activities are no longer within its manageable interest, and that environment would not be a strategic objective, but rather a special objective. Environmental protection activities at the local level will continue.
Special Objective: Program Support Initiatives: USAID/Ukraine will continue to implement selected activities, including the Kharkiv Partnership, the Poland-America-Ukraine Cooperation Initiative (PAUCI), and participant training. These are all activities which support multiple Mission objectives and, therefore, are consolidated into the Mission’s second Special Objective.
Prospects for Transition
Compared to the situation in 1999, USAID is cautiously optimistic about Ukraine’s future. After two years of economic growth, the Ukrainian people are also becoming more optimistic. There is a general feeling that the worst may be over. Entrepreneurs and farmers are making money. Pensioners are receiving their pensions on time. Government revenues are increasing. Civil society is now much more engaged than during the previous strategy period, but their gains need to be strengthened and consolidated. These factors should make it easier for the GOU to adopt reforms. At the same time, it is clear that Ukraine’s reform process in the social and democratic spheres will take longer than expected. Capacity at all levels -- from government officials to farmers -- continues to be weak.
The recent 2002 Parliamentary elections, as well as the outcome of the Presidential elections in 2004, will influence the pace of Ukraine’s transition and integration into Europe.
Other Donor Activity
USAID and its programs have both a direct and indirect impact on World Bank and IMF lending in Ukraine. USAID/Ukraine consults directly with these institutions as they formulate, evaluate and monitor their programs and provides input to USAID/Washington on new lending proposals and loan conditions. USAID technical assistance also improves the ability of the GOU to meet conditionalities set under IBRD and IMF lending programs.
The European Bank for Reconstruction and Development (EBRD) is currently the largest donor organization in Ukraine. It supports a diversified portfolio in micro-enterprise lending, enterprise development, privatization, financial sector reform, rehabilitation of infrastructure and rationalization of the energy sector. The World Bank is the second largest donor, with over half of its portfolio in the areas of public sector management, community development, institutional development and rural finance. The UNDP funds programs in democracy and governance, poverty reduction, conflict prevention (particularly in the Crimea), agricultural policy and HIV/AIDS.
USAID is Ukraine’s largest bilateral donor, followed by the European Union-Technical Assistance to Commonwealth of Independent States (EU-TACIS). The EU-TACIS concentrates in three areas: institutional, legal and administrative reforms; economic reform and private sector development; and ameliorating the social consequences of transition. Germany provides assistance in SME development, agriculture, energy and the social sectors. Canada supports programs in agriculture and the social sectors. In addition, two non-profit organizations have fairly large programs in Ukraine. The Soros Foundation is working mainly to build civil society and develop independent media, while the Mott Foundation is actively supporting programs to build civic society and improve ethnic relations.
Donor coordination in Ukraine is excellent. A number of working groups and task forces, including those on elections, power, anti-trafficking, HIV/AIDS and local government, meet regularly for coordination and information sharing. The Mission cooperates with the EU and Germany in the energy sector, the World Bank and EU-TACIS in policy reform, the World Bank and the EU in the social sectors, the UNDP on HIV/AIDS, the EBRD in SME development, and with Canada, UNDP, Germany and the EU-TACIS in agriculture.
USAID coordinates closely with other USG agencies that manage large programs in Ukraine. The DOJ has a $4 million judicial reform program it is designing. Treasury provides assistance to the banking sector and macroeconomic reform. USDA cooperates closely with USAID on development of the USG overall agricultural strategy. USDA provides short term training for mid and senior level agriculture specialists. USDA also sponsors faculty exchange programs which provide 6 months training at US Land Grant Universities. In democracy, USAID coordinates closely with the Public Affairs section of the Embassy on their international visitors program, the PAS managed Democracy Commission small grants and their media fund.
Both Annex G and the individual SO sections of the strategic plan contain more detailed discussions of other donor programs and USAID donor coordination efforts.
Other Issues
The Global Development Alliance: Under its new strategy, USAID/Ukraine will continue to support a number of Global Development Alliance (GDA)-like activities that have already been initiated, while searching for additional opportunities. GDA-like activities that will continue are, for the most part, public-private alliances. Examples include:
• USAID has established seven U.S.-Ukraine energy utility partnerships to support the privatization process through exchange visits, workshops, internships and the exchange of information.
• Under the Consortium for Enhancement of Business Management Education (CEUME), the University of Minnesota contributes 30 percent of the costs of strengthening the 47 Ukrainian business schools and universities participating in the program.
• Winrock International contributes 33 percent of the costs of a program that is helping women to become more active participants in the Ukrainian economy and advocate for the transition to a market-based economy.
• The Community Humanitarian Assistance Program (CHAP) leverages humanitarian resources from both private donors in the U.S. and NGOs in Ukraine. The target for the 2001-2004 program is for 50 percent of all donated commodities to be donated by private donors. Given that the program expects to deliver $7 million of commodities per year, annual private donations equal $2-4 million.
• The Community Partnerships for Training and Education activity incorporates cost-sharing from both the implementing agency and the Ukrainian cities and training centers receiving assistance. In addition, the program assists partners in finding other sources of funding for partnership activities such as sister-city relationships.
• The Health Partnerships program is helping to establish and promote sustainable U.S./Ukraine health partnerships that foster more effective and efficient delivery of health services in the region.
Areas of Potential Conflict: In spite of its large size and diversity, Ukraine is relatively untroubled by the ethnic and linguistic conflicts that plague many of its neighbors. Only the Crimean Tatars issue and the issue of social stratification are judged to presently have potential to cause internal unrest.
As discussed more thoroughly in Annex E, the Crimean Tatars, who returned to their homeland in the early 1990s following almost 50 years of exile, continue to struggle with repatriation and reintegration. While some of their problems have been resolved, lack of representation in the Crimean government and lack of legal recognition of the Crimean Tatars as “indigenous people” remain key outstanding issues. A number of international organizations are working in the Crimea to help facilitate reintegration of the Crimean Tatars through economic development activities, mediation and capacity building. EUR/ACE has financed humanitarian activities in Crimea. USAID has made a commitment to assist with land titling efforts in the region once agreement is reached between the Crimean Tatars and the Crimean government regarding privatization of state-held land.
The second possible area of potential conflict is the fact that the general population believes that a small number of Ukrainians are conspicuously benefiting from the transition process while most people perceive themselves poor. This inequity is contributing to a lack of confidence in the future and uncertainty about democracy and free market economics for many Ukrainians. Although this issue has caused no major incidents to date, unless broad-based economic growth occurs and the benefits of this growth are spread more widely, a backlash is possible.
The third potential area for conflict is Eastern Ukraine. Economic depression in the region due to increasing unemployment and underemployment in the coal and steel sectors could provoke social unrest. The coal industry, in particular, has a history of being a hot spot for social unrest.
The Environment: In 2001, USAID carried out a biodiversity analysis as required by FAA 119. A summary of this analysis is attached to and forms part of the Environmental Annex to this strategy. Although USAID did not agree with all of its conclusions, the analysis did identify what is required to conserve biodiversity in Ukraine. In spite of the fact that biodiversity conservation is not a central theme of this strategy, several programs will help meet some of the biodiversity conservation needs identified in the analysis.
PART II: STRATEGIC OBJECTIVE PLANS
SO1: IMPROVED INVESTMENT CLIMATE
During the first 10 years of independence, Ukraine was faced with the task of dismantling the centrally planned economy, as well as developing a whole new set of institutions, which did not exist in the former Communist system. It was a period of economic contraction, macroeconomic instability and a risky, unpredictable financial and regulatory environment, which provided a poor climate for private investment in the economy. Beginning in 1999 and increasingly during 2000 and 2001, Ukraine made some notable improvements in the investment climate. As a result, GDP grew by 6 percent in 2000 and by a further 9 percent in 2001, led by a vigorous expansion of Ukrainian exports and industrial output. USAID helped lay the foundation for this economic recovery by its sustained support over the previous seven years of training and technical assistance which promoted the fiscal, monetary, structural, and macroeconomic reforms that led to this growth. The GOU also achieved a more consistent degree of control over the level of government spending, reduced the fiscal deficit, and, with sound monetary policy, reduced inflation to 6 percent in 2001. Finally, many important legal changes occurred to clarify the rights of investors and creditors, to protect businesses against arbitrary inspections by tax and regulatory authorities and to reduce rent-seeking behavior by government officials. In response to these developments, gross fixed investment in Ukraine increased substantially in 2000-01, primarily due to domestic investment. Foreign direct investment remains less than 10 percent of Ukraine’s gross fixed investment and actually declined in 2001. Among former Soviet states, the OECD notes that only Belarus has a lower level of cumulative foreign direct investment than Ukraine’s $83 per capita.
I. Problem Analysis
The major issues and problems constraining investment in Ukraine are the lack of an independent court system, weak shareholders’ rights, a capricious tax system, an inadequate legal framework, weak tax and budget management, distorted structural economic policies, such as price and payments distortions in the electric power sector, and inefficient allocation of resources in the financial sector. These problems are briefly summarized below. Additional background information and more in-depth analysis can be found in Annexes K, L, and M.
Legal framework. Ukraine’s commercial legal framework continues to inhibit investment. Major problems relating to the adequacy of existing laws in the areas of collateral, bankruptcy and company law remain. In the area of collateral, major defects remain in the laws pertaining to mortgages of real property, especially the lack of clear rights and procedures for foreclosure by creditors in the event of default. Conflicts exist among patchwork commercial laws that raise doubt about the validity of contracts and enforcement. In the area of company law, “red directors” of companies that were privatized in the past, or are to be privatized in the future, have so far blocked passage of a company law that would protect minority shareholders’ rights, require disclosure, and facilitate future mergers and acquisitions.
The weakness in Ukraine’s legal framework is compounded by unreliable enforcement mechanisms in both court judgments and alternative private enforcement mechanisms. While an improved bankruptcy law was adopted in 2000, Ukraine needs to improve awareness and skills in managing the bankruptcy process. A regrettable 95 percent of bankruptcy cases in Ukraine are still resolved by liquidation of the company. In the great majority of those cases, through a debtor-led bankruptcy proceeding, the economic and employment losses could have been minimized by preserving the company as an ongoing concern.
Tax and budget policy. Even though the government has reduced total government spending and the budget deficit to reasonable levels since 1999, the design and execution of budget policies should be more realistic, more transparent, and less heavily concentrated in the hands of central-government decision-makers. Budget planning and execution still seldom reflect priorities of the constituents, are only beginning to be decentralized and often do not use the government’s scarce resources efficiently. Expenditure and revenue targets are often not met, as the Ministry of Finance (MOF) lacks a sound planning strategy for the budget, such as multi-year budget planning.
Because of a combination of excessive tax preferences and weaknesses in tax administration, the GOU must maintain excessively high effective tax rates. The USAID-funded SME Survey Update identified the existing tax system as the most important problem for businesses in Ukraine in 1999 and the second most important problem in 2001.
Structural policies. Improved structural policies are needed to correct price distortions and state management practices that lead to wasted resources in the parts of the economy that remain under state control (e.g., about 25 percent of industry; about 40 percent of the entire economy). This is particularly true in the energy sector. Direct and indirect subsidies alone are estimated to constitute at least 10 percent of budgetary resources. In addition, state-owned enterprises (SOEs) often block or inhibit the development of competing or independent private enterprises that otherwise could grow rapidly. Furthermore, poor investment choices are often made in the state-owned sector of the economy because SOEs are not required to generate profits or to base their investment decisions on valid “feasibility tests” that a private enterprise would require.
Mobilization of financial resources. Inefficiencies in both attracting deposits and lending practices result in investment resources not being allocated to the most productive uses in the economy. The widespread losses suffered by depositors during the early and mid 1990s caused the public to lose confidence in Ukraine’s financial institutions. The perception of high risk remains, leaving the public unwilling to deposit funds in these institutions. Meanwhile, the small amounts of funds that banks and other financial institutions do attract are generally re-lent to enterprises at very high rates of interest (partly reflecting high non-repayment). In addition, despite partial acceptance of international accounting standards, the lack of business skills in enterprises, including the limited number of certified accountants and unreliable auditing, leads to a lack of transparent, accountable financial records, resulting in unreliable financial reports and to greater risks in bank lending.
Energy sector. Unrealistic pricing continues to be the major problem in Ukraine’s energy sector, especially in the electric power sub-sector. Average tariffs charged in Ukraine in 2000 were 2.0 cents per kilowatt-hour for households and 2.3 cents per kilowatt-hour for industry, compared to EBRD estimated, real long-run marginal cost of 8 cents per kilowatt-hour. This pervasive under pricing leads to waste, inadequate incentives to make energy-saving investments and over reliance on energy imports.
A second major problem in the power sector is the lack of payments discipline in the retail electricity market, resulting in high levels of nonpayment or non-cash payment by major customers. This, in turn, leads to insufficient cash flow either to adequately cover the operational and maintenance costs of electricity generating and distribution companies or to provide an incentive for new capital investment. The third problem is that the government often interferes directly in the wholesale electricity market to deal with financial “problems” that will not and cannot be fully resolved until tariffs are raised to realistic levels.
In the gas and coal sectors, distortions are also severe, but hidden behind a mask of state ownership and non-transparent transactions between state enterprises and powerful enterprises controlled by private ‘oligarchs.’ In the gas sector, this system results in the ‘dissipation’ of valuable state resources (such as the ‘transit gas’ from Russia, in lieu of cash payments) into inefficient or corrupt uses – rather than accrual of cash to the state treasury.
II. Proposed Program
The Mission believes that an integrated approach to fiscal, energy, financial, and commercial legal constraints is required to improve Ukraine’s investment climate. Specifically, achievement of this SO is dependent upon a) establishment of a legal foundation that clearly delineates the “rules of the game,” secures property rights and provides predictable, formal and enforceable means of redress; b) tax and fiscal policies that provide a more transparent and efficient system of expenditures and taxes; c) structural adjustment policies that promote private development and reduce the web of direct and indirect state subsidies; d) a financial sector that mobilizes resources for investment and gives financial intermediaries and capital markets a key role in guiding investment to the highest and best uses in the economy; and e) development of an efficient and unsubsidized market for energy that minimizes distortions in pricing of energy and government interference in retail and wholesale markets
At the SO level, results will be measured by the investment climate index that is prepared annually by the EBRD. This is a systematic, quantified assessment of conditions, including liberalization of markets, the commercial legal environment, the quality of financial institutions, macro stabilization, privatization, reduction of subsidies and effective regulation of infrastructure industries.
Improved legal framework and mechanisms to enhance the business investment environment. USAID will help to develop key pieces of commercial legislation and remove conflicts between Soviet-era or patchwork commercial laws and the new Civil Code, vetoed by President Kuchma in February 2002, but expected to be revised and enacted later in 2002. New or amended legislation will help ensure the power and effectiveness of financial regulatory agencies, produce a mortgage law with effective foreclosure provisions and refine laws on insolvency, enterprise restructuring, and the prevention of fraudulent conveyance of property.
USAID will work with the GOU and State Enforcement Service, the courts, and other legal institutions to improve legislation for judicial enforcement by clearly defining deadlines for enforcement actions, setting a procedure for appealing action of the state executory officer, and establishing mechanisms for controlling the cost of the enforcement process. In addition, technical assistance will clarify regulatory procedures, provide the public with an opportunity to comment on regulatory changes, introduce restrictions on conflicts of interest between regulatory bodies, and establish an expedient and cost-effective process of appeals.
One possible indicator of Ukraine’s progress will be its ranking (now 3 on a scale of 1 to 4+) on the EBRD Index of the Legal Environment – designed to measure annually the “extensiveness” and “effectiveness” of the commercial legal system in each EBRD recipient country. The Mission will also track key pieces of Ukrainian legislation – such as the Joint Stock Company and Mortgage Laws – in key areas where current laws are deficient.
Improved tax and budget management. During Ukraine strategy period, USAID will focus on budget policy and tax reform. Program budgeting and multi-year budgeting will be introduced to central and local government decision-makers to enable them to make more realistic and sustainable budget choices. If additional resources are made available, USAID will extend this technical assistance to key local government decision-makers as well. To have the greatest potential impact on the quality of the investment climate, USAID should stand ready to support intensified, high-level assistance to improve all of the major taxes, including value-added, income, excise, and payroll taxes. However, counterparts in the Executive and Parliament must agree on sound tax legislation and the elimination of poorly targeted tax preferences and privileges. If resources are available, tax policy interventions by USAID may also extend to the development of a property tax as a pillar of the municipal revenue base.
USAID budget policy assistance will improve the efficiency of the government in providing services and making possible more adequate funding for social programs. The tax program will help improve compliance and thus make possible the reduction of effective tax rates that impose a heavy burden on honest tax-paying enterprises. Achievements will be measured by tracking the budget deficit.
Improved structural economic policies. USAID activities during 2003-2004 will continue to build capacity within the Ministry of Economy (MOE) to develop and analyze policies that promote competition and private market development, that minimize economic distortions by reducing direct and indirect subsidies, and that impose more market discipline on SOEs. For example, government-owned steel companies should not only be expected to pay their workers and suppliers, but should also generate profits for the government. Looking beyond 2004, the Ministry of Economy will need to strengthen its capabilities – and to push faster structural reforms – relating, for example, to: agricultural-credit interventions; competition in railroad and other transport sub-sectors; and the debunking of “national security” arguments for maintaining government control over steel and other manufacturing industries.
Given that the donors leading the dialogue on structural policies (the World Bank and the IMF) have little grant technical assistance to offer after 2004, the outlook for ongoing donor technical assistance in this area is unpromising. The Mission should ther
Биографии знаменитых людей
Publication of 10 9, 2006.
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