High-quality institutions and transparent procedures are key to Ukraine's reconstruction

Ukraine’s economy has been largely destroyed by the war.

For all its disadvantages, this opens up opportunities for post-war extended recovery, accompanied by modernisation – both technica, including more modern technologies and approaches to construction, and institutional.

Ukraine's partners are committed to helping with this, including but not limited to by financing the reconstruction, mostly at the expense of Russia as the aggressor state.

At the same time, the partners are interested in Ukraine not only winning on the battlefield, but also in quickly rebuilding its economy on a new basis and simultaneously implementing the reforms necessary for a further rapid economic breakthrough.

The main tool for achieving these goals is post-war reconstruction. If successful, it could provide the social and institutional transformations needed for further sustainable rapid development and successful harmonisation with the EU.

It could also lay the groundwork for an ‘economic miracle’ that would allow Ukraine to quickly catch up to at least the EU average level of prosperity, eliminating the need for further assistance from partners.

But a number of obstacles may stand in the way.

First, it is the traditionally relatively high propensity for corruption and, more broadly, patronage, due to deep-rooted systemic institutional weaknesses and related bad practices. This will be compounded by the lack of established mechanisms for the transparent and efficient allocation of funds on such a scale.

Adding to the worries is the centralised system of the ‘power vertical’, not typical for Ukraine but inherited from the Soviet Union and so favoured by many influential people. Meanwhile, partner countries’ societies and governments are very sensitive to possible corruption scandals involving Ukraine aid due to – partly exaggerated – perceptions of the level of corruption in our country.

There are also a number of non-institutional challenges that may also hinder successful reconstruction, including a lack of legal means of confiscating Russian funds, a shortage of labour due to en masse emigration, and a lack of Ukrainian businesses’ readiness to compete with those from developed countries for reconstruction contracts under equal and transparent rules, etc.

However, the current situation in Ukraine, although less favourable than in post-war Western Europe, compares favourably with Asian and African countries where reconstruction programmes have failed.

This includes, in particular, proven mechanisms for transparent procurement of goods and services, such as ProZorro; a functioning system of prosecution for corruption offences; a high level of intolerance to corruption in society; and relatively high trust in the public sector and local government, as well as entrepreneurs and their associations.

However, all of this still needs to be made use of.

In addition, success requires a systematic, comprehensive, and strategy-oriented approach, as opposed to the unfortunately widespread practice of superficial and fragmentary simplified vision of problems and their solutions.

Accordingly, think-tank experts have formulated proposals on which Ukraine’s reconstruction programme should be based.

1. Financial assistance for reconstruction and further development should be part of a larger comprehensive assistance package aimed at accelerating systemic social and institutional transformations. This will, among other things, allow for the establishment of allocation mechanisms that will work in Ukraine's context.

2. Funding should be channelled not only to the public sector, including for infrastructure, but also to the private sector, where the primary task is to compensate for direct material losses to both households and businesses.

3. The distribution of the remaining money should be

• at the lowest possible level
• collective, under the control of mixed commissions, which must include representatives of the local business community, civil society and independent observers from international organisations
• fully open at all stages, with live video broadcasts and recordings
• distributed to local authorities when it is not directed for reconstruction purposes, but primarily as annual long-term subventions for targeted programmes that should be aligned with government programmes and ensure job creation
• determined through open and transparent mechanisms, primarily ProZorro
• through quasi-market mechanisms when it comes to aiding businesses without directly compensating for their losses, with the involvement of commercial banks and private investors through the mechanism of blended finance, accompanied by war risk insurance mechanisms

4. Along with the reconstruction per se, one of the priority areas of assistance should be expanding the logistics bottleneck and solving other problems of access to foreign markets for Ukrainian businesses, as well as imports of materials and equipment necessary for the reconstruction.

5. At the same time, it is necessary to avoid practices and policies that create potential corruption risks, such as selective support for certain enterprises or sectors of the economy, protectionism, granting privileges, etc. In addition, the programme should provide for levelling the playing field for all contractors, including

• compliance by foreign participants with Ukrainian legislation, which allows only individuals and legal entities that are residents of Ukraine to participate in tenders
• wide and accessible training of potential Ukrainian contractors on the specifics of tender procedures, compliance and due diligence requirements
• providing Ukrainian companies that are not representative offices of foreign companies with preferential loans for reconstruction projects if they win the tender

6. It is important to ensure effective interaction and cooperation between Ukrainian businesses and foreign companies. Investment funds from developed jurisdictions, in particular private equity funds, can play an important role in this regard. Another important tool for recovery could be the granting of privileges and preferences, the latter relating only to investment and not the sale of goods on the market, to large foreign companies from their parent countries when they invest in Ukraine.

Proposals for Ukraine's qualitative recovery will be discussed in detail by economists, business and government representatives at the Key Anti-Corruption and Institutional Changes for Ukraine's Recovery forum on 7 June, organised by the largest business coalitions, the Ukrainian Business Council (UBC) and the National Business Coalition (NBC), with the support of the Centre for International Private Enterprise (CIPE).

Ukraine and its foreign partners have mostly passed the test of war with flying colours. We hope for a complete and, as far as possible, quick victory in the war.

But after that, reconstruction and development will be an equally important test, and we need to prepare for this test today.