Background to Nefco’s operations in Ukraine
In 2009, Nefco and Ukraine signed a framework agreement that provides a legal framework for Nefco’s operations in Ukraine. The framework agreement, which came into effect in 2010, grants Nefco certain privileges and immunities in Ukraine and enables Nefco to provide financing to municipalities and carry out projects in an efficient way. This supports the country in its transition to a green economy, strengthen its alignment with EU regulations and benefits the communities and ordinary people in Ukraine.
Why grant funding is needed to rebuild Ukraine
Since February 2022, the Russian invasion of Ukraine has caused significant damage to and already destroyed some 40% of the country’s energy infrastructure. As a result of the war, 7.8 million Ukrainians have fled to Europe, and there are 6.5 million internally displaced persons (IDPs). Approximately 16 million Ukrainians need help with water, sanitation and hygiene.
When the war began, Ukraine was deprived of access to new credits. Nefco, alongside other IFIs, had to halt disbursement of credit funds to municipal projects. As a result, several projects under development stalled. Some of the projects resumed later with repurposed grant funding. At the end of 2022, active physical work was ongoing to varying degrees in 23 Nefco-financed projects in Ukraine.
In the short term, it is unlikely that any municipal projects will be implemented based on credit funds while the fundamental needs of a liveable society, including the supply of basic municipal services, are increasing. The availability of grant funds to implement projects in the coming year(s) is therefore important.
Multi-donor programme to support a green recovery
The Nefco Green Recovery Programme for Ukraine is a multi-donor programme comprising individual initiatives and funds, which have been entrusted to Nefco by various contributors.
Nefco has considerable expertise and experience working on environmental projects with a hands-on approach in high-risk operating environments and in collaboration with more than a hundred Ukrainian municipalities. Nefco complies with strict fiduciary standards and has passed the EU Pillar Assessment, which enables it to manage EU funds and act as an implementing agency for EU-funded actions and projects.
Funds originate from several donors. Currently, contributors include the European Union (EU), Denmark, Finland, Norway and Sweden. In addition, Nefco may collaborate with other organisations and multilateral donors such as the Eastern Europe Energy Efficiency and Environment Partnership (E5P), a multi-donor fund managed by the European Bank for Reconstruction and Development (EBRD)
Transparency – the cornerstone of Nefco’s procurement practices
Nefco has tight restrictions and rules on how funds are to be used and monitored. In order to mitigate misconduct, Nefco has set guidelines for both its internal processes and its cooperation partners and beneficiaries to follow.
As a result of its IFI status, Nefco can choose to apply its own procurement policy and procedures to municipal projects to which it is facilitating funds. Nefco’s procurement policy and procedures will then supersede and replace national procurement laws.
Nefco’s Procurement Policy and Procedures are applied to all projects, and Nefco’s policies on integrity, ethics and compliance allow for checks and monitoring of Nefco’s counterparties, such as representatives of the municipalities and contractors throughout the project cycle. Transparency and competitiveness are cornerstones of these principles, which are also designed to mitigate corruption risks. Furthermore, Nefco always engages with an independent consultancy firm that is appointed to monitor and control that the procurement procedures are followed.
Nefco’s procurement and integrity principles are closely aligned with other IFIs in Ukraine – such as EBRD, EIB and CEB – and best procurement and integrity practices are co-developed and implemented by this group of development banks.
Role of the parties involved in Nefco-financed projects
- In most cases, projects are based on a Grant Agreement between Nefco and the local municipality. For some projects within the EU activity ‘Housing for internally displaced persons and rehabilitation of liberated cities in Ukraine’, the grant agreements are made between the EU and the municipalities; however, Nefco’s Procurement Policy and Procedures are still applied to the projects.
- The project proposal is presented by the beneficiary (usually a municipality).
- Nefco facilitates a feasibility study through a grant. The study is conducted by a third-party consultant procured and assigned by Nefco. The feasibility study evaluates the project proposal, needs and impact, taking into account programme and donor requirements.
The beneficiary is responsible for the project implementation, including procurement and contracting of suppliers. For project management, a local Project Implementation Unit (PIU), including technical supervision, is established by the beneficiary.
- Nefco contracts a third-party consultancy firm (PIU support consultant) to support and advise the PIU and provide technical supervision. The consultancy firm monitors and controls that the procurement procedures are followed.
- The beneficiary assigns a Tender Evaluation Committee comprising officials from the municipality. Third-party consultants are involved as advisers but not as decision-makers.
- Depending on the nature and schedule of the project, the tendering process follows certain procedures: open tendering, selective tendering or direct contracting. The Tender Committee decides on the need for a pre-tender meeting for interested potential bidders.
- To ensure that the procurement process and the project overall are carried out correctly and in accordance with applicable laws and regulations, Nefco provides procurement guidance and Standard Tender Documentation to the beneficiary and Tendering Committee, as well as consultancy support.
- An integrity due diligence (IDD) check is performed on the winning tenderer and, from time to time, also on other listed suppliers. Due to the framework agreement, Nefco has the right to apply its own effective Procurement Policy and Procedures concerning tenders or other competitive procedures.
- The municipality is responsible for contracting suppliers and contractors.
See also Nefco Procurement Policy and Procedures: Nefco’s procurement: Applying good practices | Nefco
- Disbursements of funds are carried out at different stages of the project, typically with the last instalment after completion of the project.
- Disbursements are made directly to contractors that have been chosen through the competitive procurement process and performed the actual work, when Nefco has received satisfactory documentation, including evidence that the specific milestones have been met. Payments do not go through the municipality or any other party.
- Some funds may have special conditions, e.g. with regard to exemption from taxation and/or instalment schedules.
Strict control measures
Nefco requires transparency and integrity in procurement and employs strict control measures to mitigate the risk of prohibited practices in its projects. Nefco carefully investigates allegations of prohibited practices in accordance with the Policy on Anticorruption and Compliance
Nefco also provides a channel for reporting possible misconduct; see: Report corruption and misconduct.
Environment and sustainability in focus
The Environmental and Sustainability Policy and Guidelines set out the key principles applied by Nefco to assess project proposals and ensure that the financed projects live up to Nefco’s high environmental and sustainability standards.
Based on defined Nefco impact indicators appropriate for the project, beneficiaries monitor and report actual achieved results on an annual basis. Annual and final monitoring allows Nefco to track the operational performance of projects as well as to gather lessons learned. Read more under our impact section.