Ukraine is getting down to reconstructing the Donbas

KOZAK Donbas reconstruction program

Ukrainian government plans to spend USD1.8bn on a program of massive reconstruction of Donbas, the war-torn region but it's hard to believe that the ruined region could be revived.

The Ministry for Temporarily Occupied Territories published a draft of the program for the reconstruction of the war-ravaged Donbas for the years 2017-2020. According to government plans, the hundreds of projects to be implemented in part of the region still remaining under the control of Kiev authorities will cost UAH48.7bn (USD1.8bn), out of which UAH23.7bn (USD877m) will come from the central budget, UAH3.8bn (USD140.6m) from local budgets, and UAH21.1bn (USD780.8m) will come from „other sources” ‒ described by the officials as „international financial and technical assistance, and other sources not prohibited by the law”. In Ukraine, no one sees such clarifications as odd.

“The implementation of the program will enable us to raise the standard of living and expand the capabilities of the local communities in the eastern regions, to create mechanisms of social inclusion of the refugees into the communities welcoming them, to ensure their professional adaptation and social integration, to create new jobs, primarily through the development of micro, small and medium-sized businesses,” this is how the Ministry presented the objectives of the program in an official statement.

The Ministry expects that, as a result of the program’s implementation, the GDP of Ukraine’s eastern regions will grow by 3.5 per cent annually, the exports of goods and services – by 10.9 per cent, the imports of goods and services – by 11.5 per cent, and labor productivity – by 2.7 per cent.

In October 2016, the representatives of the Ukrainian government, the United Nations and the International Bank for Reconstruction and Development signed a memorandum in Kiev on the establishment of a special-purpose multi-partner fund that will be collecting money for the reconstruction of Donbas from war damage.

“This is an extremely important document, which opens the possibility of a significant acceleration of the real reconstruction of the liberated areas of the Donetsk Oblast and Luhansk Oblast. The mechanism launched by the fund will also be necessary to help people after the liberation of the occupied territories,” Artur Gerasimov, the presidential envoy in the Ukrainian parliament, commented on the signing of the document.

Already in the autumn of 2014 Ukraine took out a EUR200m loan from the European Investment Bank (EIB) for the reconstruction of the Donbas. An additional amount of UAH2bn (USD73.7m) was also provided by the government of Japan and the United Nations Development Program (UNDP).

Unfortunately, previous experience shows that the Ukrainian officials, responsible for the reconstruction of the infrastructure, are entirely unable to ensure the rational allocation of the collected funds. Most of the funds which the Ukrainian parliament allocated in June 2016 for the reconstruction (UAH3.6bn, USD133.2m) have not been used.

“The effects of the previous activities related to the liquidation of war damages in the part of the Donbas controlled by the government leave much to be desired,” admitted Iryna Gerashchenko, the Deputy Speaker of the Ukrainian parliament.

Work was launched in only half of the 750 projects that planned for implementation last year. At the beginning of January 2017, the government appointed an interdepartmental commission which was supposed to examine the effectiveness and desirability of the spending allocated for the reconstruction of the Donbas. Its initial findings are not very optimistic.

According to the data of the State Treasury Service responsible for transferring the funds from the State budget, by the end of 2016 in the Donetsk Oblast only UAH134m (USD5m; i.e. slightly more than 5 per cent of the planned amount) were spent on 61 objects out of 584 intended for financing.

The situation is slightly better in the Luhansk Oblast, where UAH143m (USD5.3m) were spent (i.e. almost 14 per cent of the available resources) to finance works on 100 objects out of 150 included on the list.

In addition UAH252m (USD9.3m) was lost as a result of inflation, which is almost as much as the actually spent amount. The Donetsk Oblast lost UAH181m (USD6.7m), while the Luhansk Oblast lost UAH71m (USD2.6m).

The head of the presidential administration of the Donetsk Oblast Pavel Zhebrivskij claims  that bureaucratic procedures impede the utilization of the funds allocated by the government. There is also a shortage of contractors; in his opinion those who are available are only able to perform 10-15 per cent of the required work.

Iryna Herashchenko sees things differently. The minimal level of utilization of the funds stems from problems with rigged tenders, which are frequently cancelled as a result.

A closer analysis of the investment program developed by the Ministry shows that it often does not coincide with the stated objectives, and there is much to be desired with regard to the rationality and priorities set for the spending of both budget funds and those from Ukraine’s Western partners that the authorities want to obtain for this purpose.

Only UAH122m (USD4.5m) was allocated to support entrepreneurship ‒ presented by the government as one of the priorities ‒ in the form of compensation of credit interest and micro-loans for small businesses in the war-torn areas. While UAH1.5m (USD55,500) was allocated for the creation of a center of psychological support for victims of war in the ruined city of Shchastya, the planned expenditures for the construction of a cycling path in that city amount to USD3m.

In Berdyansk in the Zaporizhzhia Oblast (a city with 116 thousand inhabitants located on the Azov Sea), the Ministry of Social Policy intends to organize training courses for UAH784m (USD29m) from the State budget and additional UAH175m (USD6.5m) from the local budget. An additional amount of UAH348m (USD12.9) from the State budget and UAH175m (USD6.5m) from the local budget will be spent on „computer courses for pensioners and disabled persons”.

At the same time, for the ruined city of Mariupol with a population of 460 thousand people, UAH520,000 (USD19,241) from the State budget and the same amount of money from the budget of the local government was allocated for the creation of temporary jobs and public works for the unemployed, while UAH4.2m (USD155,411) was allocated for the creation of humanitarian aid centers. The two „social” projects from Berdyansk are worth as much as the program allocates to the reconstruction of 7475 damaged and dilapidated apartment blocks and single-family houses in the Donetsk Oblast and over two times more than the expenditures for this purpose in the Luhansk Oblast. It’s also more than is allocated for the overall reconstruction of Mariupol’s road network along with a general renovation of bridges and viaducts and the purchase of modern machinery for the production of bituminous surface, which will cost a total of USD770m.

In accordance with the published draft, the government intends to allocate UAH2.9bn (USD107.3m) from the EIB loan granted for the general renovation of a municipal administration building in Bakhmut in the Donetsk Oblast. That’s more than the total amount allocated for the renovation of the damaged heating network with a length of 264km in the Donetsk Oblast (UAH155m, USD5,7m), the cleaning of 379km of river banks of the Siverskyi Donets river and its tributaries (UAH540m, USD20m) and the modernization of 1,550km of water and sewage networks in the entire Donetsk Oblast along with the infrastructure elements of the Siverskyi Donets-Donbas channel (UAH1.1b, USD40.7mn).

Josh Cohen, a longtime employee of USAID dealing with the issues of post-Soviet states, argued on the pages of Foreign Policy that the management of the reconstruction of Donbas and the funds allocated for this purpose should not be carried out by the authorities in Kiev and should be handed over to an independent entity. “Kiev is too corrupt to do this alone,” stated Cohen.