The ineffectiveness of budget spending has historically been one of the main flaws in Ukraine’s budgetary system, especially due to the lack of clear rules about providing state aid to commercial entities. Different estimates put the cost of such assistance at between 4-5% of GDP. Ukraine also currently lacks an oversight over the provision of state aid. This is the crucial reason for ineffectiveness of spending on state aid to various branches of the economy and individual enterprises. Moreover, the impact of state aid on the country’s economy, in particular on competition, is not analyzed. The losses incurred from this nontransparent and inefficient state aid run to the billions of hryvnias, while the resulting distortion of competition has a very negative impact on the investment climate. The latest casualty of all this was the EU Budget Support program, which was terminated in February 2012.
Ukraine committed to approve rules for the state aid. It is one of the priorities of the Association Agenda with the EU in the sphere of competitiveness. Still, the framework law on state aid has not been approved, although several versions of a bill have already been drafted. Lack of political will and disagreement in the Government about the principles of regulation is the main reason for the delay.
To make the system more effective, a number of steps need to be taken to carry out the Concept for Reforming State Aid that has already been given a green light by the Cabinet: approving the framework law on state aid, inventorying such aid as is already being provided, and establishing which government bodies are authorized to oversee and monitor the provision of such assistance. Moreover, this framework legislation should be based on such principles of public administration as non-interference and the independence of institutions, transparency and delimited timeframes. If these conditions are met, state aid to commercial entities might actually begin to foster economic growth with a minimum of negative impact on competitiveness.
This policy paper has been prepared as a part of the “Economic aspects of Ukraine’s European integration in the light of Association Agenda priorities: Expert analysis, recommendations and public discussion” project being carried out by the Institute for Economic Research and Policy Consulting (IER) with the support of the European Program of the International Renaissance Foundation. This project is being undertaken jointly with the Public Expert Council under the Ukrainian Side of the Committee for Cooperation between Ukraine and the EU.
