Head of the European Investment Bank Representation to Ukraine: “Ukraine’s overall reconstruction needs amount to $411bln”

The European Investment Bank (EIB) is the world’s largest multilateral lender. Currently, the EIB’s shareholders are the 27 Member States of the European Union. Ukraine began its cooperation with the EIB in 2005, when a framework agreement was signed between the Bank and the country, outlining the basic principles of the Bank’s activities in Ukraine and allowing the EIB to invest in infrastructure, energy, transport and other projects. In 2007, the Bank signed its first financial agreement and even opened its representation in Ukraine, the first in an Eastern Partnership country.

Despite the full-scale russian aggression, the EIB did not cease its support for Ukraine, and the amounts allocated even increased slightly. Now, the Ukrainian government works on expanding cooperation, particularly in the context of financing the transport and energy sectors, urban infrastructure and overall economic recovery in Ukraine.

Mind met with Jean-Erik de Zagon, who has been heading the EIB Representation to Ukraine since 2018, and discussed the Bank’s future strategic plans for cooperation with Ukraine. This includes increasing investments in Ukraine, financing small and medium-sized enterprises (SMEs), projects in the agriculture sector, support for municipalities during the war and key obstacles to improving the national business climate.

On the EIB’s future plans regarding Ukraine

– Tell us about the EIB’s cooperation strategy with Ukraine for the next two to three years. Does it make sense to make plans in Ukraine for this period in general?

– Of course, planning not only makes sense but is crucial for stability and progress. The EIB’s cooperation with Ukraine will take into account the global context and the country’s current needs. Our projects and initiatives will be based on the data from the Ukraine Rapid Damage and Needs Assessment prepared by teams from the World Bank, the European Commission, the United Nations and the Ukrainian government. According to this assessment, Ukraine’s total needs for recovery and reconstruction amount to $411 billion. An updated assessment, expected by the end of the year, will allow us to adjust our plans and focus on the highest-priority areas.

I want to point out that, to continue providing concessional financing to Ukraine, we have introduced several programmes and mechanisms for such financing. Specifically, our support will be provided using guarantees and grants from the EIB’s EU for Ukraine Fund, to which EU Member States have already committed €400 million. In addition, the Ukraine Facility is a crucial programme of the European Commission aimed at macroeconomic support, recovery and development of the country, with a budget of €50 billion for 2024–2027. Since the EIB is the bank of the European Union, we will actively participate in the use of instruments from this facility.

I want to emphasise that we aim to ensure that all projects implemented with our support contribute to Ukraine’s integration into the European space. We not only provide financing but also offer advisory support. We understand the challenges of launching and implementing projects in Ukraine, so we place a strong emphasis on the importance of technical and advisory assistance, allocating €100 million for this purpose.

On the level of EIB support and its directions

– What is the current size of the EIB’s portfolio in Ukraine? And where does SME lending (in terms of the number of loans and volumes) rank in the overall lending structure?

– The EIB has been actively working in Ukraine since 2007. Our portfolio currently stands at €7.3 billion, of which a significant portion, namely €5.7 billion, has been allocated since the Revolution of Dignity [also known as the Maidan Revolution – Ed]. Overall, EIB funds are directed to the following sectors: transport, €2.8 billion; energy, €1 billion; and municipal infrastructure, €1.5 billion.

When it comes to projects in the transport sector, the EIB actively supports the development of municipal transport in Ukraine, investing over €850 million in improving its transport infrastructure. The main focus is on the modernisation of urban public transport, including the acquisition of new trolleybuses, trams, buses and metro cars for various cities in Ukraine. As for municipal infrastructure, two of our recovery programmes can serve as examples, for which the Bank has allocated a total of €540 million. These programmes focus on the restoration of key social infrastructure facilities such as schools, kindergartens, hospitals, social housing and more.

By the way, before the war, the EIB signed a €270 million loan agreement with the Ukrainian government for the modernisation of the Boryspil International Airport. However, given the current situation, the project implementation has been halted owing to the risk of infrastructure destruction..        

As for cooperation with SMEs, we provide credit lines to local banks, which in turn finance SMEs. We also offer guarantees for SMEs to banks, effectively improving the lending conditions for SMEs, enabling local banks to provide financing to businesses that would not have access to funding without our support. Specifically, €1.6 billion has been directed to credit lines for Ukrainian banks financing SMEs, and nearly 1 500 SMEs have benefited from these loans.

According to our estimates, these loans for SMEs have created 260,000 jobs. As for guaranteeing the portfolios of SMEs by local banks, from 2014 until the beginning of russia’s full-scale invasion of Ukraine, we allocated nearly €300 million. Thanks to these guarantees, an additional 400,000 jobs were created.

After the full-scale invasion, the EIB provided an additional €125 million in guarantees for SMEs in December 2022. We have also signed additional guarantees for Ukraine worth €30 million (and €10 million for Armenia, Azerbaijan, Georgia and Moldova). We intend to expand these guarantees to €100 million. It’s important to emphasise that the instrument of guaranteeing local banks’ SME portfolios is of great importance for economic recovery.

On interaction with Ukrainian banks

– The EIB allocates funds for SME projects through partner banks. Who are these partner banks in Ukraine, and what are the conditions set by the EIB for businesses to obtain a loan?

– The EIB collaborates with a number of Ukrainian partner banks, including Ukreximbank, ProCredit Bank, Oschadbank, UkrGasBank and others, with the aim of providing financing to SMEs in Ukraine.

To obtain a loan from the EIB through local banks, SMEs must meet certain criteria. First and foremost, the company must be classified as a small or medium-sized enterprise, typically defined as having fewer than 250 employees. Furthermore, the enterprise must present an investment project aimed at business development, which must include the creation of new jobs. The EIB emphasises that these projects will contribute to overall economic development, with job creation being a key factor.

These conditions help ensure the use of EIB funding for sustainable business development, which, in turn, promotes economic growth and strengthens the labour market in Ukraine.

– What are the lending limits of your bank, especially for SMEs?

– Typically, the EIB seeks to finance up to 50% of the project’s cost, although there are situations where this quota can be increased. This is especially relevant for special-purpose programmes, such as the Ukraine Recovery Programme, under which the EIB can provide financing up to 100% of the project’s cost.

On the EIB’s investments in new and pre-war projects

– At the beginning of our conversation, you mentioned the EIB’s plans for the coming years. How much is the Bank prepared to invest in Ukraine by the end of this year, and in which sectors?

– The EIB disbursed €1.7 billion of emergency assistance for critical infrastructure needs to ensure the country’s viability in 2022. We are currently working on the preparation of various projects with values ranging from €0.5 billion to €1 billion. The exact timing for the start of these initiatives is still being coordinated.

The sectors on which the EIB focuses its attention reflect the country’s key needs. Social infrastructure is the most critical, as the recovery and development of this sector are essential for bringing people back to Ukraine. Transport also has a high priority because it stimulates economic activity. Following it in importance are water supply and sanitation, as well as cybersecurity, which is becoming increasingly important in the modern world. These priorities align with the strategic goals of the Ukrainian government, ensuring their relevance and effectiveness.

I also want to emphasise that the EIB is making every effort to ensure that existing projects are properly implemented right now. For example, we continue to implement the Ukraine Urban Public Transport project, under which Lviv recently purchased new trams. Within the Ukraine Early Recovery Programme we have also opened a renovated hospital in Odesa and a school in Poltava, demonstrating our direct involvement and contribution to improving life in Ukraine.

– It is known that the EIB has an interest in financing projects in Ukraine’s agricultural sector. What are the plans for the current year, including projects within the Solidarity Lanes initiative – corridors for Ukrainian agricultural exports – and what are the prospects for the development of projects related to funding this sector of the economy? What is the total value of agricultural projects that have received funding in recent years, including 2022–2023?

– Regarding the Solidarity Lanes, the EIB is working on one such project with a value of €230 million.

As part of the EU programme Connecting Europe Facility (CEF), we are directing investments into strategic transport infrastructure, including the improvement of border infrastructure between the European Union and neighbouring countries, which involves enhancing border crossing points. This project is based on co-financing, with part of the funds provided as a grant from CEF, and the rest as a loan from the EIB.

Concerning the support for agricultural projects, in the past, we provided funding for the development of agribusiness, including large companies such as Epicenter K, Nibulon and Kernel. Currently, although large agricultural enterprises are not our primary priority for lending, we acknowledge the critical role of the agricultural sector for Ukraine, especially in times of war. Many enterprises have suffered losses due to the russian occupation, and we are seeking effective ways to work with existing loans in these circumstances.

The negative impact of the war is felt not only in agribusiness but also in the broader context, where companies face asset destruction and reduced profitability. The EIB and other financial institutions are aware of these challenges and strive to find constructive ways to support them in such circumstances.

–  Tell us, please, about the EIB’s priorities regarding energy and energy efficiency projects, as well as infrastructure projects (financial volumes).

–  Since the beginning of the full-scale invasion by russia, the EIB has allocated €50 million to Ukrenergo electricity transmission system operator and is considering the possibility of additional financing of €86 million for urgent needs, including winter preparations.

We are also working with Ukrhydroenergo hydropower generating company and hope to allocate €133 million for this company in the near future. We are discussing the possibility of providing funds for the restoration of the Kakhovka Dam (even though the territory is still occupied by russia, we are already discussing prospects for cooperation in this direction). As for the cost of the Kakhovka Dam restoration project, it is still in the process of calculation, but it is expected to reach hundreds of millions of euros. However, it is better to address these questions to Ukrhydroenergo because there may be specific phases for its resolution.

Concerning energy efficiency, the EIB is implementing an ambitious programme for the energy-efficient modernisation of public buildings, worth €300 million. This project allows small and medium-sized cities, as well as other communities across Ukraine, to obtain funding for thermal modernisation, repairs and infrastructure adaptation, including buildings damaged due to the war, and to meet the needs of internally displaced persons. Under this programme, which is being implemented by the Ministry for Restoration of Ukraine, a project selection process has been announced, with municipalities invited to participate. The call for proposals is open until 10 December 2023.

In the context of recovery, our Bank is implementing two key recovery programmes with a total volume of €540 million, of which €200 million has been allocated to the Ukraine Early Recovery Programme. Already, more than 100 items have been successfully repaired, including 52 educational institutions, 37 medical facilities and nine social buildings. Examples include the renovation of the School No. 16 in Kamyanske and the School of Arts in Myrgorod, as well as the major renovation of the Hospital No. 8 in Odesa. These projects, though not large, play an important role for local communities.

Another priority is the greening of urban transport. We focus on green transport by investing in environmentally friendly buses, trams and trolleybuses to reduce car traffic and enhance public transport standards. We initiated these projects even before the war. Following the onset of the war, we have already allocated €22 million for the purchase of new environmentally friendly trolleybuses and trams for Kyiv, Lviv and Odesa, manufactured by Ukrainian companies. In total, we plan to allocate another €100 million to many cities in Ukraine.

On cooperation with Ukrainian municipalities

– Continuing the discussion on the implementation of projects with Ukrainian municipalities, specifically in Kharkiv, what are the EIB projects (infrastructure, transport, etc.)?

– We actively cooperate with Kharkiv, financing significant infrastructure projects.

We allocated €160 million for the expansion of the Kharkiv metro, although the implementation has faced delays. Within the Ukraine Urban Public Transport project, we allocated €10 million for low-floor trolleybuses and €45 million for new metro cars. The EIB has also allocated €15 million for 30 electric buses to enhance eco-friendly transport in the city. Our support for social infrastructure includes the renovation of schools and medical facilities. In addition, there is an investment project planned to upgrade the tram fleet and restore war-damaged tram infrastructure with preparatory funding of €400,000 from the Eastern Partnership Technical Assistance Trust Fund, managed by the EIB.

– Are the funds that EIB provides for projects in Ukrainian municipalities in the form of grants or loans? If loans, what are the interest rates?

– EIB primarily provides long-term loans, although there are also grants, usually co-financed by the European Commission. We offer attractive interest rates and flexible repayment terms, depending on the specifics of the project.

Our Bank has many advantages. Thanks to our high credit rating, EIB secures financing at low rates, allowing us to offer favourable loans. As the largest multilateral bank, we have the resources to wait for project realisation and repayment for quite a long time. We can align this with the project’s cycle, its profitability or the results obtained. So the loan terms for Ukrainian projects are exceptionally long, sometimes extending up to 30 years, providing unparalleled investment support in the country.

On the financing of the public sector

– You have already mentioned financing projects in the public sector, including Ukrenergo and Ukrhydroenergo. Can you tell us about your cooperation with Naftogaz and Ukrzaliznytsia (EIB’s strategy regarding the integration of railway networks between Ukraine, Moldova and the European Union)?

– We haven’t provided loans to Naftogaz. According to EIB’s policy, as we are often referred to as the EU climate bank, we do not finance entities operating in fossil fuels. Our focus lies on renewable energy sources. However, I recently had a meeting with representatives from Naftogaz to discuss potential financing for their decarbonisation efforts, particularly transitioning from oil and coal to renewable energy sources. For cooperation to be possible, Naftogaz must align with the requirements of the Paris Agreement.

Now, regarding Ukrzaliznytsia. I mentioned earlier in our conversation about border crossing points and financing through the CEF (referring to a grant and 50% loan from EIB). As for the financial aspect of this project, we are still in discussions with Ukrzaliznytsia. Speaking about the strategy for the integration of railway networks between Ukraine, Moldova and the European Union, one of its components involves the assessment by our technical advisory service, JASPERS [Joint Assistance to Support Projects in European Regions], regarding the development of European gauge on railway tracks to Lviv and Chişinău as part of the significant CEF programme. Considering Ukraine’s strategic ambitions with the European Union, there is a significant emphasis on aligning railway standards with European ones. Specifically, during a recent meeting with Ukrzaliznytsia management, we discussed the modernisation of their rolling stock.

And on the Ukrainian business climate

– For years, we’ve heard numerous complaints about the Ukrainian business climate. I remember when Sevki Acuner led the EBRD (before the war), in an interview, he admitted that there were “no lines of companies ready to invest in Ukraine”. According to EIB, what are the reasons for the low attractiveness of our business climate (besides the military actions)?

– If we’re not talking about the war, the number one reason acting as a barrier to investment in Ukraine is the issue with the rule of law. Many foreign investors also admit they don’t trust the local judicial system. Ukraine has a long way to go to build trust in its judiciary.

The second reason is ensuring proper governance in major state-owned enterprises, I am talking about to the introduction of supervisory boards. International financial institutions like the International Finance Corporation, the World Bank and our Bank emphasise this necessity.

The third reason is corruption, which stems from the two previous ones. When the rule of law doesn’t function, and there’s no trust in the judicial system, corruption flourishes.

However, Ukraine has significant positive assets: I’m referring to its human potential. I also want to highlight the IT sector, which is highly developed here, even compared with Western Europe.