Communities Now Have Simplified Access to Liquidation Fund

Although the Fund for the Liquidation of the Consequences of Armed Aggression was created in 2022, it was launched less than a year ago, when the relevant budget program was transferred from the Ministry of Finance to the Ministry of Development of Communities, Territories and Infrastructure of Ukraine.

Since the approval of the new version of the Procedure for the Use of Fund Resources in April last year, the total amount of funding allocated for 2023 amounted to UAH 58.2 billion. They were channeled to implement local and regional restoration projects, eliminate the consequences of the blow-up at the Kakhovka HPP dam, compensate for damaged and destroyed housing, construct and protect energy infrastructure facilities, experimentally restore a number of settlements.

But the Procedure still contains corruption risks from the previous version. The key ones include:

–       the lack of a clear and transparent mechanism for selecting projects to be financed by the fund;

–       local self-government bodies lacking the status of applicants regarding requests for the financing of their restoration projects;

–       excessive powers of regional state/military administrations in terms of verifying the requests of local self-government bodies for the allocation of funds.

In late January, the government introduced a number of significant changes to the procedure for allocating resources from the fund for liquidating the consequences of armed aggression. They neutralized some of the above risks, but others were exacerbated.

Strengthening the agency of communities and excluding intermediaries

Last April, local governments were allowed to apply for financing for their reconstruction projects from the fund. They submitted such appeals to the regional state or military administrations, which checked them and the materials attached to them for completeness. Subsequently, the administrations formed new appeals on their basis and submitted them for consideration to the relevant ministries, depending on the direction of funding.

That is, local self-government bodies did not have the status of full-fledged applicants, which are central executive bodies and regional state administrations (regional military administrations). This limited LSGBs because their powers were not clearly regulated in the Procedure for the Use of Fund Resources.

In addition, the RSAs (RMAs) retained significant influence on local authorities because, in accordance with the Procedure, they accepted and verified communities’ appeals for the allocation of resources from the fund and, in fact, made decisions on which local projects to submit for further consideration.

However, the Procedure did not contain:

–       requirements for LSGB appeals and their completeness (because LSGBs are not applicants within the meaning of clause 7 of the Procedure, where such requirements are defined);

–       timeframes of verification of such appeals;

–       the order of actions of the RSA (RMA) in identifying shortcomings in the completeness of such appeals.

In the end, the Cabinet of Ministers corrected this situation and provided communities with the opportunity to submit their appeals for the allocation of funds directly to the ministries without intermediaries in the face of the RSA (RMA).

Financing transitional projects

In 2023, the government allocated resources to the fund to implement both short-term and long-term projects, for example, the comprehensive reconstruction during 2023–2025 of six settlements affected by the armed aggression.

According to the Ministry of Finance, the total amount of state budget expenditures under the programs within the fund in 2023 amounted to UAH 38 billion. The balance of the Fund for the Liquidation of the Consequences of Armed Aggression as of January 1, 2024, was UAH 23.7 billion. However, due to the peculiar nature of the budget process, since the beginning of the new year, applicants need to apply again to extend the financing of projects.

According to the changes, transitional projects, the list of which was approved in 2023, should be submitted as a matter of priority, but must include justification for the feasibility of their further implementation.

Such clarification is especially important because in 2024, the fund for the liquidation of the consequences of armed aggression remained without guaranteed income, and the only source of its filling would be the funds from the sale of confiscated property of the Russians and their accomplices. Therefore, the state cannot afford inefficient use of limited resources for reconstruction.

Allocation of funds in manual mode

One of the key changes to the Procedure was the possibility for the Cabinet of Ministers to allocate resources from the fund to urgently finance the projects related to the liquidation of the consequences caused by Russia’s armed aggression against Ukraine, or to meet the needs of defense, construction and/or protection of critical infrastructure objects only at the request of the applicant. However, such an appeal may not meet the requirements for the availability of mandatory information (direction of use of funds, their volume, justification and calculation of funding, list of projects), and will not be subject to consideration by the relevant central executive body and the working group.

The government described this innovation as a “simplification” of the procedure for allocating funds. However, this is a significant step backward in ensuring transparent and high-quality prioritization of recovery projects.  

This provision effectively provides for the possibility of financing outside the general selection procedure for any reconstruction project, since all of them are directly (or at least should be) related to the elimination of the consequences caused by Russia’s armed aggression against Ukraine.

In practice, the Cabinet of Ministers can quickly respond to emergencies without having such special powers, in accordance with its regulations. This happened in the case of allocating funds to eliminate the consequences of the destruction of the Kakhovka hydroelectric power plant on the day of the disaster. Then the government, at the suggestion of the Ministry for Restoration and the Agency, adopted a separate decision, by which it directed resources from the fund to a pilot project to construct main water supply pipelines outside the approved procedure for allocating funds. Part of the resources can really be channeled to time-critical projects that arise because of the war, but most of the finances should be distributed according to clear rules.

Last October, the Ministry of Development of Communities, Territories and Infrastructure approved a methodology for prioritizing projects to eliminate the consequences caused by the armed aggression of Russia against Ukraine, which was developed by World Bank experts. TI Ukraine assessed this document with restraint because it is quite complex, the approach proposed by it is relative, and most importantly, it is only advisory in nature. But the vector was definitely correct. However, the amendments to the Procedure negate the prioritization of projects, which should be the main safeguard against possible abuses because it gives the Cabinet the opportunity to choose any project for funding.

We call on the Cabinet of Ministers of Ukraine to abandon the manual selection of individual projects for funding, as this may have negative consequences for both the efficiency of spending and the trust of international partners. Instead, a government decision is needed to approve the methodology for prioritizing recovery projects, which will be mandatory in the procedure for their selection for further financing.

The publication was prepared with the support of USAID / UK aid project Transparency and Accountability in Public Administration and Services/ TAPAS