Ukraine – Attracting Investments in the Municipal and Environmental Infrastructure

Key sectors covered District Heating and Energy Efficiency – renewal of obsolete heating and distribution systems and significant efficiency gains District Heating and Energy Efficiency – renewal of obsolete heating and distribution systems and significant efficiency gains Water & Wastewater – improved quality of service and environmental compliance Water & Wastewater – improved quality of service and environmental compliance Solid Waste Management – improved efficiency and frequency of waste collection; adequate waste disposal; prevention of groundwater contamination Solid Waste Management – improved efficiency and frequency of waste collection; adequate waste disposal; prevention of groundwater contamination Urban Transport – improved public transport services and more efficient and safe network design Urban Transport – improved public transport services and more efficient and safe network design

Challenges in the municipal infrastructure sector in Ukraine Inefficient, obsolete infrastructure systems, creating vast energy and water losses and high operating costs Inefficient, obsolete infrastructure systems, creating vast energy and water losses and high operating costs Low service quality Low service quality Lack of regulatory and institutional reforms to Lack of regulatory and institutional reforms to promote energy and cost savings (consumption- based billings, cross-subsidy reforms, commercialisation of utility companies) promote energy and cost savings (consumption- based billings, cross-subsidy reforms, commercialisation of utility companies) include required investments into new tariffs include required investments into new tariffs Below cost-recovery tariffs Below cost-recovery tariffs Weak financial position of municipal utilities Weak financial position of municipal utilities

Challenges in the municipal infrastructure sector in Ukraine Delayed implementation of decentralisation policies limiting municipal budgets Delayed implementation of decentralisation policies limiting municipal budgets Lack of effective legislation governing municipal borrowing: the applicable laws on municipal borrowings and municipal guarantees deviate from best international practices Lack of effective legislation governing municipal borrowing: the applicable laws on municipal borrowings and municipal guarantees deviate from best international practices => This limits the ability of commercial banks to fund urgently needed investments at local level and in many cases will make it impossible.

Attracting investments in the municipal infrastructure sector in Ukraine – the way forward Develop effective legislation that will grant municipalities authority and autonomy to manage their budgets and attract investments for improvement of the municipal infrastructure Develop effective legislation that will grant municipalities authority and autonomy to manage their budgets and attract investments for improvement of the municipal infrastructure Introduce adequate caps for municipal borrowing and issuance of guarantees – debt limits to be linked to tax base municipal revenues which are steady and predictable Introduce adequate caps for municipal borrowing and issuance of guarantees – debt limits to be linked to tax base municipal revenues which are steady and predictable Eliminate the requirement for municipal utilities to issue counter-guarantees. They are owned and controlled by the municipalities anyway Eliminate the requirement for municipal utilities to issue counter-guarantees. They are owned and controlled by the municipalities anyway Develop efficient and clear procedures to control the level of municipal borrowing at the Central Government level but not blocking it. Develop efficient and clear procedures to control the level of municipal borrowing at the Central Government level but not blocking it.

What is at stake? Lack of investments in the municipal infrastructure leads to: (i) poor quality of service provided to citizens; (ii) energy inefficient operations; (iii) decline in environmental and health standards

Where does Ukraine fit in comparison to other neighbouring countries

UkrainePolandBulgariaRussia Are Municipal Guaranties subject to approval by the State Are Municipal Guaranties subject to approval by the State Municipal guarantees are subject to Ministry of Finance approval. Municipal guarantees are not subject to Ministry of Finance approval. Municipal guarantees are not subject to approval by the Federal or regional governments. Methods for State/Ministry of Finance oversight the off balance sheet liabilities of the Municipalities Methods for State/Ministry of Finance oversight the off balance sheet liabilities of the Municipalities The oversight is ensured through Ministry of Finance approval of the direct and contingent debt of municipalities and monitoring their indebtedness. The oversight of municipal budgets is carried out by the Regional Audit Chambers of the Ministry of Finance; these are located at regional level and have to review and sign off on the completed municipal budgets every year, in particular noting compliance with the debt limits. They have to be reported and registered at a register at Ministry of Finance. Also on quarterly basis municipalities submit extensive information on their financial standing including off-balance sheet assets/liabilities. The data is standardized and inputted in a database. They have to be reported and registered at a register at Ministry of Finance. Also on quarterly basis municipalities submit extensive information on their financial standing including off-balance sheet assets/liabilities. The data is standardized and inputted in a database. The municipal guarantees are consolidated in the debt book of the regions (through registering with the finance departments of regional governments) and the Federal Ministry of Finance

UkrainePolandBulgariaRussia Statutory debt limit for municipal indebtedness Statutory debt limit for municipal indebtedness The total amount of local debt and the debt guaranteed municipality as of the end of a budgetary period shall not exceed 100% (or 200% for the city of Kyiv) of average annual indicative forecasted revenues to the development budget for the next two years. Municipalities can incur direct debt plus guarantees to a limit up to 60% of the total revenues. Total Debt Service to Own Revenues plus General Equalising Subsidy of not more than 25 per cent; The limit of the total amount of the municipal guarantees for each municipality cannot exceed 5% of its own revenues plus General Equalising Subsidy in each year. Total Debt Service to Own Revenues plus General Equalising Subsidy of not more than 25 per cent; The limit of the total amount of the municipal guarantees for each municipality cannot exceed 5% of its own revenues plus General Equalising Subsidy in each year. Total indebtedness (direct debt plus guarantees) of the municipality cannot exceed 100% of the own revenues of the municipality (excluding any transfers from upper level budgets within the budgetary system of the Russian Federation). For those municipalities whose share of general purpose grants exceed 70 percent of municipality's total revenues, the level of total indebtedness is limited to 50 percent of the amount of own revenues (excluding any transfers from the upper level budgets within the budgetary system of the Russian Federation).

UkrainePolandBulgariaRussia Is there statutory obligation for the Borrower to issue counter guarantee to the Municipality (Guarantor) Is there statutory obligation for the Borrower to issue counter guarantee to the Municipality (Guarantor) There is a statutory obligation for the Borrower to issue counter guarantee to the municipality. In addition it is required to pledge fixed assets and provide bank guarantee. There is no statutory obligation for the Borrower to issue a counter guarantee in favour of the municipality There is no statutory obligation for the Borrower to issue a counter guarantee in favour of the municipality. There is no statutory obligation for the Borrower to issue a counter guarantee in favour of the municipality (Guarantor). Municipal guarantees can be issued with recourse and without recourse to the Borrower. The guarantee issued with recourse to the Borrower shall be secured on the Borrower's liquid assets or bank guarantees issued in favour of the Guarantor (similar to counter- guarantee).