The West is ready to give money to rebuild Ukraine. How to avoid delaying this process?

Why are only half of the large infrastructure projects implemented locally with donor funds successful and how can this be fixed?

Foreign donors are ready to help Ukraine rebuild, but local authorities need to learn how to work with them to receive and spend funds. Otherwise, the country’s recovery will take several decades.

Without capable experts on the spot, Ukraine will face a frustration similar to Afghanistan, where the local government failed to “digest” tens of billions of dollars and soon collapsed like a house of cards. And Haiti, despite assistance from around the world, is still in ruins due to weak government institutions.

Experts of the Centre for Economic Strategy talked to representatives of Ukrainian cities and key organisations operating in Ukraine (EBRD, World Bank, EIB, USAID, KfW, International Finance Corporation) and collected the main problems they face in the implementation of projects.

Ukrainian cities had partially succeeded in cooperating with foreign organisations by 24 February 2022. Out of the 15 projects we analysed, six were successful, seven were delayed, and two failed. This delay was mostly caused by the outbreak of a full scale war and a change in priorities.

However, there are projects where other factors got in the way even before the full scale war.

One of the most unsuccessful was the Water Supply, Sewerage, and Waste Management project, which was financed by the IBRD and initiated by Lvivvodokanal. The project lasted from 2003 to 2007, but before its completion, the Accounting Chamber stated that the investment was incomplete and inefficiently used.

The deadline for implementation and the loan closing date were extended to 2008, but the targets for each of the indicators and parameters were not met. The project’s shortcomings indicated a lack of consistency in decision-making and a self-imposed exclusion from influencing the effective use of investment funds.

In addition, Lvivvodokanal became unprofitable during the project implementation and was unable to repay the debt under the contract in a timely manner, which brought the case to court.

Instead, the EBRD-funded Kyiv-Chop Road Repair project was a success. It brought the M-06 road closer to the European level. The number of accidents there has decreased by more than 90%, and fuel consumption by 10-20%.

However, only six of the fifteen projects analysed were implemented without delay. What prevents cities from implementing projects?

1. Lack of political will. The main challenge is the political will of the local authorities to cooperate. If there is no will, cooperation will not be successful. Lack of enthusiasm and proactive work of the local authorities often hinders the effective use of funds more than any technical problems.

2. Insufficiently trained staff. Even when political will exists, a lack of technical skills among staff often becomes an obstacle to cooperation. This is especially true for those cities that are just starting to work with donors.

The inexperience of local authorities can “cut off” their applications at the initial stages, before they reach the stage where the donor can provide technical assistance. During the interviews, government officials noted that the most difficult thing for them was budgeting and adapting to working with donors due to their lack of experience in cooperation.

This is especially true for smaller cities that have been severely affected by Russian aggression and are seeking funds for recovery. Donors have similar impressions.

3. Lack of strategic planning (creating a concept for a future project). There is a lack of skills at the local level to create strong projects based on the region’s development strategy. Donors are forced to reject such projects.

4. Poor financial management. Teams have a poor understanding of the financial process, international financial instruments (including loan programmes, grants, bank guarantees) and financial audits, and lack information about the limits of individual responsibility under current legislation. This applies to financial transactions during the implementation of foreign aid projects.

The skills of the staff can be “improved” through courses. At the same time, the working conditions for staff need to be such that they do not leave for the private sector or NGOs after they have been trained. This was the case in Romania, where significant efforts to train employees failed because government officials with new skills went to work in consulting.

A separate issue is the problem with the English language, which is not easy to master quickly. In this case, it makes sense to involve qualified people in local teams for project work.

5. Bureaucratisation of processes. According to representatives of foreign organisations, decentralisation was one of the key reforms that improved their cooperation with cities. When communities were given the opportunity to act independently, it became an impetus for developing cooperation with international partners.

This was especially true with regard to fiscal decentralisation: communities could manage their own funds as they saw fit. The War changed this. The government limited the ability of communities to spend their money. When a mandatory “intermediary” in the form of the government appears in the relationship between the donor and the recipient, the effectiveness of project implementation rapidly declines.

Ukraine needs to return to decentralisation and restore the best practices that were developed in recent years before the war.

6. Corruption. Donors are closely monitoring the corruption problems of cities and tend not to cooperate with authorities where such complications may arise. This means that authorities with a dubious reputation can be an obstacle to cooperation, even if the corruption risks in a particular project are minimal.

Ukraine also faces financial management risks, which can lead to personal problems for contractors. Ukraine has a complex problem of legal relations with law enforcement agencies and a high risk of qualifying the actions of officials as “causing damage to the state”.

7. Government restrictions. In terms of budget legislation, communities have no obstacles to attracting loans and grants. However, after the outbreak of the war, the Cabinet of Ministers adopted Resolution No. 590, which regulated the order of payments by the Treasury. This led to cases where communities, having both the needs and the funds, were unable to implement their initiatives. The Treasury did not pass these payments due to the clearly established priority of expenditures.

Almost all representatives of communities (especially those located far from the combat zone and with significant revenues) and donors noted that the provisions of the resolution prevented them from allocating funds for development projects. These requirements are objective, as they are caused by military aggression, but it is worth revising the list of expenditure priorities, which will partially unblock funds on the local level.

This material and research has been produced with the financial support of the UK Government (UK Aid), but the views expressed do not necessarily reflect the official position of the UK Government.