Harmful Aid

| Civil Expert Council

The ineffectiveness of state aid in Ukraine leads to considerable public cost and the lack of oversight allows it to distort competition. This, in turn, creates a poor investment climate.

The rules for providing state aid are neither clear nor transparent in Ukraine right now. Nor is there any legislation that might establish the conditions for approving such assistance and the agencies that would be responsible for inventorying and overseeing the provision of such aid. Today, state aid is completely discretionary in Ukraine. Apart from budgetary reporting, there is no accountability for providing state aid, which is in contradiction to the principle of open public finances.

Today, the Government has plans for reforming the state aid system. In particular, the Concept for Reforming State Aid envisages such steps as approval of the Law on State aid, inventory of state aid being provided, clear definition of responsibilities of authorities to conduct an oversight and monitoring. All these steps should help make the system more effective. And this means that state aid to commercial entities could eventually stimulate economic growth with a minimum of negative impact on competition.
Why state aid is not helping? 
The ineffectiveness of public spending has historically been one of the main flaws in Ukraine’s budgetary system. 
 The reasons of the public spending ineffectiveness:
  • Corruption that fosters the misappropriation of public spending
  • The lack of medium-term planning
  • The constantly large number of budget programs with funding not tied to clearly-established performance criteria
Ukraine still lacks a clear, transparent procedure for providing state aid to commercial entities. Nor has it established  an entity responsible for controlling this process. The main state authority that makes decisions on state aid is the Ministry of Finance. It decides the volume of state aid, which is included into the draft State Budget, and it analyzes the budgetary impact of all the bills proposed by the Cabinet and most of the ones submitted by other state bodies. The Anti-Monopoly Committee (AMC) is responsible to ensure equal opportunities for all companies and protect 
competition on the market. Practice shows that cooperation between these two agencies is quite ineffective, given the differences in their functions.
International standards guard the competition 
In its international agreements, Ukraine has committed to reform its competition policy. In the Ukraine-EU Association Agenda, the two sides agreed that the country would work towards more effective state aid system with controls and monitoring systems in order to improve competition on the domestic market.
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. 
The EU presumes that any form of state aid distorts competition and, thus, is prohibited under the Treaty on the Functioning of the European Union. 
Nevertheless, EU legislation contains several exceptions to this general principle. EU rules for state aid impose control over various forms of aid granted to commercial entities  by their governments. The purpose of this oversight is to prevent any harmful impact on competition in the common market, to restrict creation of “economic rents,” and to prevent the ineffective use of public money in a “subsidies race.”
Such a law should  follow international principles for providing state aid that are reflected in the legislation of the European Union:
Minimizing interventions: Any form of state interventions affects the market mechanism limiting competition. Thus, if state support is inevitable its negative impact on competition has to be minimized.
Independent institutions: Regulation and oversight of state aid need to be handled by an independent agency following clear and transparent procedures. 
Evaluation: Evaluations of the actual need for state aid, its likely effectiveness, and its impact on the public good and competition is critically important.
Transparency: Public access to information about state aid and its application should be guaranteed. 
Limitations on time and cope:   The scope of state aid, its duration and coverage should be limited. The principle of gradual diminishment of aid should always apply.
Sector-based aid: Vulnerable sectors and special forms of assistance should be clearly defined to prevent the further emergence of state aid schemes with a special treatment.
The direction of the reform
The principles on which state aid is based should be reformed along with changes to the legislative base for all types of public spending. Among others, it would be useful to institute principles in Ukraine’s legislation that allow for public money to be spent only for the purpose of reaching public objectives. For such provisions to work, there needs to be a clear system of objectives and clear procedures for expenditures. The performance criteria for each type of spending also need to be clearly spelled out.
Essential points in state aid reform
• The framework law on state aid should be adopted.
• This law should follow generally-accepted principles of public administration, including non-interference, independence of institutions, accountability, transparency, and limitations as to timeframes and spheres of influence.
• This law should include elements of prior control so that propositions regarding new forms of state aid and changes to existing mechanisms of state aid are first checked by a competent body.
This brief is elaborated by Victoria Gumeniuk (Centre UA)on the basis of Policy paper  «Reforming State Aid in Ukraine», the authors of which are Oleksandra Betliy and Vitaliy Kravchuk (The Institute for Economic Research and Policy Consulting)

Policy Paper "Reforming State Aid in Ukraine"


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