In the first article, we considered the institutional reforms foreseen by several strategic documents which the Ukrainian government promised to implement over the next few years: EU-2023 Review, Ukraine Facility Plan, IMF program for Ukraine, and the government Revenue Strategy.
In this article, we look at sectoral reforms that should create prerequisites for sustainable economic development and EU integration. We also discuss planned changes in the taxation system that should increase budget revenues. Overall the proposed measures (if implemented properly) will result in more efficient spending of public funds and will improve the investment attractiveness of Ukraine.
Human capital: improvements in education and care for the vulnerable
The current IMF program focuses on macroeconomic stability and sustainability of public finance and therefore it only briefly mentions human capital (previous programs usually also included only general references to healthcare or education reforms). Specifically, the IMF program states that the Ukrainian government will refrain from introducing new “special” (privileged) pensions or lowering pension age since the Ukrainian pension system is already strained. EU documents do not mention healthcare reform either, perhaps implying that healthcare reform launched in 2017 should continue (at the same time EU-2023 Review notes that the absence of a national health insurance card does not allow implementation of the European Health Insurance Card in Ukraine). The Ukraine Facility Plan includes investment in healthcare (see Table 2) but no institutional reforms. It pays a lot of attention to education and social security: these spheres are essential to preserve and develop Ukraine’s human capital.
The government will continue consolidating social payments (recently it adopted a decree on the Single System for Social Sphere that will keep the data of all the recipients of social support). The creation of this single database has been ongoing for over 15 years, and now it is supported by another World Bank loan. The need to change the model of social support has been discussed for years, but recently the government made a few practical steps to replace “the zoo” of social payments with tailored support for households. The aim of this new system is to address specific needs of a household (restore lost documents, find a job, enroll children into a school etc.) so that it becomes sustainable. Social services will be provided not only by state and communal entities but also by private organizations or NGOs.
A comprehensive law on the integration of veterans into civilian life (to be adopted) will address healthcare needs, retraining, employment, and support for veteran businesses. Ukraine plans to develop an electronic system with information on all the people with disabilities that will use the International Classification of Functioning Disability and Health. The system will automatically offer support to these people.
Both EU-2023 Review and Ukraine Facility foresee de-institutionalization of elderly, people with disabilities, and children. The former two groups will get tailored social services and the latter one – foster families.
The major reforms of the housing policy foresee the adoption of legislation to enable leases with an opportunity to buy communal housing, to improve the transparency of the distribution of social housing and opportunities for civil society organizations (CSOs) to monitor social housing projects. The standards for social housing such as accessibility, energy efficiency etc. will be adopted (in fact, they will be introduced for all the housing – see Table 3).
EU-2023 Review notes that Ukraine still has to do some work on eliminating discrimination: to implement the equal rights strategy and gender pay gap strategy, to ratify the ILO convention 190 on reducing violence and harassment. Ukraine also needs to start collecting relevant data, e.g. statistics on court cases on discrimination, to be able to measure progress in this sphere.
Ukraine’s EU integration includes integration of the labour markets. Thus Ukraine will need to provide for EU citizens and their children the same rights to access employment and education as Ukrainian citizens have. Recently, the legislation for employment of foreigners was simplified (the wage floor was abandoned) but they still need an employment permit. Ukraine recognizes foreign qualifications since 2021 but it still needs to implement the EU law on professional recognition in full and to join the EURES network which supports the EU single labour market. Simplification of employment for foreigners will be beneficial for Ukraine because it currently faces labour shortages in some industries.
Another EU requirement is better protection of the rights of workers: strengthening social dialogue and powers of the respective Council, aligning workplace safety norms with the EU and providing more powers to labour inspections (implementation of ILO Conventions 81 and 129 which Ukraine ratified a long time ago).
Ukraine Facility Plan foresees adoption of the new laws on vocational and pre-school education. Two draft laws on vocational education (4207, 4207-1) that were submitted to the parliament in 2020 were rejected by the parliamentary committee on education in August 2023. In April 2024 the Ministry of Education presented another draft law on this topic (currently under discussion). The ministry plans to intensify cooperation between vocational schools and potential employers and to provide new equipment to vocational schools. The draft law on preschool education was adopted in the first reading more than a year ago. This new legislation on vocational and preschool education should establish fair market rules and a “guaranteed” access to preschool education for all the children of relevant age.
Speaking of other education levels, the EU-2023 review mentions implementation of the Strategy on higher education adopted at the end of 2022. The strategy foresees mergers of higher education institutions to exploit economies of scale and development of the “money follows a student” principle: provision of educational grants to students instead of “budget-funded places” for the majority of specialties.
Although Ukraine has very little money to invest into science and research, it cooperates with the Horizon Europe program; it also adopted the National Open Science Plan and Strategy for Innovation Sector development. Today this sphere is probably the least reformed. The Ministry of Education and Science plans to introduce performance-based research funding, the first steps to which were made in 2018 when the National Research Fund was created.
Table 1. Documents and other indicators of reforms in the sphere of human capital
| origin of recommendation | documents to be adopted or amended and other indicators | deadline |
| EU-2023, Ukraine Facility | Adopt the Demographic Development Strategy for the period up to 2040 (done) | Q3 2024 |
| EU-2023, Ukraine Facility | Adopt a strategy to deinstitutionalize elderly and people with disabilities | Q4 2024 |
| EU-2023, Ukraine Facility | Adopt a strategy to deinstitutionalize children | Q4 2024 |
| EU-2023 | Develop and implement a strategy to attract and reintegrate displaced persons in the Ukrainian labour market | 2024 |
| EU-2023 | Establish national office and contact points for the Horizon Europe program | 2024 |
| EU-2023 | Adopt the strategy for scientific and technological development | 2024 |
| EU-2023 | Develop regional smart specialization strategies | 2024 |
| EU-2023 | Develop a plan for a relevant statistical data collection, analysis and sharing mechanism for education and training | 2024 |
| EU-2023 | Implement a plan to optimize the network of education institutions | 2024 |
| Ukraine Facility | Adopt the strategy for developing culture (enhancing cultural institutions and support for creative industries) | Q1 2025 |
| EU-2023, Ukraine Facility | Implement the law on preschool education | Q1 2025 |
| EU-2023, Ukraine Facility | Implement the law on vocational education | Q2 2025 |
| EU-2023, Ukraine Facility | Adopt Cabmin resolution on the procurement of social services | Q2 2025 |
| EU-2023, Ukraine Facility | Adopt legislation on the transition system from military service to civilian life | Q4 2025 |
| EU-2023, Ukraine Facility | Adopt a law on key priorities of housing policy | Q4 2025 |
| EU-2023, Ukraine Facility | Adopt Population Employment Strategy | Q2 2026 |
| EU-2023, Ukraine Facility | Adopt a new version of the law on social housing fund | Q4 2026 |
| Ukraine Facility | Adopt a law introducing electronic system for people with disabilities and offering relevant support to them | Q4 2026 |
Table 2. Investment in human capital foreseen by Ukraine Facility program (at least 20% to be allocated by local governments)
| investment purpose | amount, EUR million | |
| 2024-2025 | 2026-2027 | |
| School shelters, school buses, modern teaching methods + equipment for them; materials and equipment, nutrition, VET centres at schools | 300 | 350 |
| Healthcare: lab equipment, shelters, medical equipment, healthcare infrastructure, IT solutions | 200 | 200 |
| Reconstruction of damaged and construction of new social infrastructure | – | 350 |
| Compensation to people whose houses were destroyed | – | 600 |
| Provision of housing to persons with disabilities of I-II groups; to IDPs who fought for Ukraine and their family members; to family members of deceased defenders | 200 | 250 |
Energy market and green transition: more market elements, less government regulation
Measures in this sector (among them market pricing of energy and enhancing competition) aim to raise energy efficiency and thus lower consumption and greenhouse gas (GHG) emissions. They include alignment of Ukrainian legislation with EU directives on electricity and gas markets and on atomic energy; introduction of market-based carbon pricing mechanisms and a different carbon tax model; development of more efficient (decentralized) district heating (table 3). Ukraine should adopt an Energy and Climate plan that would set a more ambitious goal than the current 27% of energy supplied by renewable sources by 2030 (in 2021 this share was about 6%).
These changes will be accompanied by investment in energy infrastructure and energy efficiency (table 4).
Unfortunately, the introduction of market energy tariffs is delayed until martial law is lifted. This will impede capital investment in the sector and will likely worsen the financial situation of Naftogas. Recent Russian attacks on energy generation mean that Ukraine has to urgently rebuild power generation capacities. Since the end of the war is not insight, it is better to aim at distributed power generation – small power stations that use gas, oil products or bio materials that are easy to protect. Construction of large generation capacities, such as nuclear reactors, should be postponed.
Table 3. Documents and other indicators of reforms in the sphere of energy and green transition
| origin of recommendation | documents to be adopted or amended or other indicators | deadline |
| IMF | Calculate the stock of arrears of District Heating companies to Naftogas (distribute by pre- and after full-scale war)Structural benchmark | Q2 2024 (end-June) |
| EU-2023, Ukraine Facility | Adopt energy and climate plan (draft) | Q2 2024 |
| EU-2023, Ukraine Facility | Adopt the Strategy for thermal modernization of buildings (done) | Q2 2024 |
| Ukraine Facility | NEURC adopts secondary legislation for REMIT law to ensure integrity and transparency of wholesale energy market | Q3 2024 |
| IMF | Compensations to Naftogas for its PSO duties shall not exceed UAH 60 bn (end-Aug – compensation sum calculated) | Q3 2024 |
| IMF | Adopt draft law 6133 to accommodate for the end of gas transit | 2024 |
| EU-2023, Ukraine Facility | Amend the Cabmin decree to encourage investment into green energy (implement the EU Directive 2018/2001). The guarantees of renewable energy sources were introduced in 2023. | Q4 2024 |
| EU-2023, Ukraine Facility | Adopt the draft law providing more independence to NEURC in line with EU (exempt the decisions of the National Energy and Utilities Regulatory Commission from the state registration procedure) | Q4 2024 |
| EU-2023, Ukraine Facility | Adopt the draft law providing more independence to NEURC in line with EU legislation (special status of NEURC) | Q4 2025 |
| EU-2023, Ukraine Facility | Approve action plan (measures and time frame) for establishment of GHG emissions trading system | Q1 2025 |
| EU-2023, Ukraine Facility | Adopt the draft law on climate policy setting climate goals and mechanisms for their achievement | Q1 2025 |
| Revenue strategy | Develop GHG emissions taxation model that would tax oil, gas, coal extraction or imports rather than GHG emissions | 2024-2025 |
| EU-2023, Ukraine Facility | Adopt a Roadmap to separate the Renewable Energy Surcharge from the Transmission Tariff | Q2 2025 |
| EU-2023, Ukraine Facility | Resume mandatory monitoring, reporting and verification (MRV) system for emitting facilities according to existing legislation (i.e. only newly built facilities) | Q2 2025 |
| EU-2023, Ukraine Facility | Adopt the new law on district heating (setting clear rules for connection and disconnection; procedures for installment of individual heat substations) | Q3 2025 |
| EU-2023, Ukraine Facility | Adopt the Second Nationally Determined Contribution (NDC) to the Paris Agreement (current commitment is reduction of emissions by 2030 to 65% of 1990 level – practically achieved) | Q3 2025 |
| EU-2023, Ukraine Facility | Cancel the moratorium on raising heat and hot water tariffs | Q4 2025 |
| EU-2023, Ukraine Facility | Adopt a new law on electricity market introducing 16 EU directives | Q4 2025 |
| EU-2023, Ukraine Facility | Appoint a nominated electricity market operator designated by National Energy and Utilities Regulatory Commission (NEURC). | Q4 2025 |
| EU-2023, Ukraine Facility | Adopt the State targeted economic program for energy modernisation of heat generating enterprises until 2030 | Q4 2025 |
| EU-2023, Ukraine Facility | Create an independent Scientific and Expert Council on Climate Change and Preservation of the Ozone Layer | Q4 2025 |
| Ukraine Facility | Implement EU Directive 2022/03/MC–EnС to align with the EU taxation and customs regimes for cross-border electricity trade | Q2 2026 |
| EU-2023, Ukraine Facility, IMF | Adopt a Roadmap for gradual liberalization of gas and electricity markets to be implemented after the expiration of the martial law (liberalization of prices, reform of PSO, introduction of targeted subsidies) | Q2 2026 |
| Ukraine Facility | Adopt a law streamlining permit issuance for green investment in line with EU rules | Q3 2026 |
| Ukraine Facility | Adopt minimum requirements for energy efficiency and classes of energy efficiency of buildings | Q3 2026 |
| Ukraine Facility | Adopt requirements to energy labeling and eco-design as mandatory minimum criteria during public procurement. Strengthen the capacity of the state market surveillance body to enforce these requirements. | Q1 2027 |
Table 4. Investment into energy sector foreseen by Ukraine Facility program
| investment purpose | amount, EUR million |
| 2026-2027 | |
| Raising energy efficiency of district heating companies | 550 |
| Contribution to the Energy Efficiency Fund | |
| Thermal modernisation of public buildings | |
| Physical protection of Ukraine’s energy infrastructure | |
| Support for the development of renewable energy sources |
Environmental protection: improving quality of land and water, protecting biodiversity and forests
In this sphere, like in all the others, Ukraine should work on aligning its legislation with the EU acquis, specifically, introduce the EU air and water quality standards and relevant measurement system; adopt and implement the draft law on emerald network (a number of nature preservation sites). Automated pollution control systems should be installed at all the facilities, not only the new plants, because the largest pollutants are the old Soviet legacy plants. Ukraine will need to amend its legislation to align with the UNECE Convention on the Transboundary Effects of Industrial Accidents which Ukraine ratified in 2022. Specifically, Ukraine will need to establish closer cooperation between the State Emergency Service and State Ecological Inspection to develop prevention measures to mitigate environmental risks resulting from industrial accidents.
Table 5. Documents and other indicators of reforms in the sphere of environmental protection
| origin of recommendation | documents to be adopted or amended and other indicators | deadline |
| Ukraine Facility | Adopt the draft law on ensuring the rights to a safe environment (introducing EU Directive 2010/75/EU). Adopt necessary by-laws by Q3 2025 including provisions on applications of the best available technologies. | Q3 2024 |
| EU-2023, Ukraine Facility | Develop a concept note defining the scope of deviations from the Environmental Impact Assessment (EIA) and Strategic Environmental Assessment (SEA) rules | Q3 2024 |
| EU-2023, Ukraine Facility | Adopt the Strategy for implementing the principles of the circular economy and its Action Plan in 5-10 priority sectors (e.g. waste, textiles, electronics, agriculture) | Q1 2026 |
| EU-2023, Ukraine Facility | Approve national waste management plan until 2033 (current plan until 2030 is not implemented yet) | Q1 2026 |
| EU-2023, Ukraine Facility | Adopt the law on reducing deforestation and forest degradation: expand electronic timber accounting, introduce certification of origin of timber and wood products | Q2 2026 |
Agricultural sector: more transparency of state support and demining
The main expected changes in the agricultural sector are (1) introduction of land monitoring systems and (2) supporting only farmers who are registered in the State Agrarian Registry. Ukraine Facility foresees provision to Ukrainian farmers of EUR 75 million in 2024-2025 and the same amount in 2026-2027 for demining.
Table 6. Documents and other indicators of reforms in the agrifood sector
| origin of recommendation | documents to be adopted or amended and other indicators | deadline |
| EU-2023, Ukraine Facility | Adopt demining strategy until 2033 (draft approved in Feb 2024) | Q2 2024 |
| EU-2023, Ukraine Facility | Adopt national strategy on agriculture and rural development for 2023-2030 (concept) | Q4 2024 |
| EU-2023, Ukraine Facility | Adopt the draft law on state agrarian registry (SAR)(at the end of Q1 2026 at least 80% of public support to agricultural producers should be provided via SAR) | Q4 2024 |
| EU-2023, Ukraine Facility | Adopt a long-term plan for the development of irrigation systems | Q1 2025 |
| EU-2023, Ukraine Facility | Deploy the automated system for monitoring of land relations and the geoinformation system for land assessment within State Land Cadaster in line with the decree on public land monitoring | Q1 2025 |
| EU-2023, Ukraine Facility | Adopt the new version of the law on state support to agro producers | Q3 2025 |
| Ukraine Facility | Deploy the EU-aligned Farm Sustainability Data Network (FSDN) system | Q1 2027 |
Transport: reforms of the border crossing points, railroads, and water transport
In this sector, a lot of changes are planned for all the modes of transport. On the railways, the European model will be introduced (the discussion of different models of railroad restructuring can be found at VoxUkraine: article 1, article 2). Western border crossing points will be developed, and regulation of maritime and river transport will be considerably changed in line with the EU rules. Ukraine Facility foresees investment of EUR 350 million in 2026-2027 into reconstruction of transport infrastructure.
Table 7. Documents and other indicators of reforms in the transport sector
| origin of recommendation | documents to be adopted or amended and other indicators | deadline |
| EU-2023, Ukraine Facility | Adopt the revised transport strategy until 2030 | Q4 2024 |
| EU-2023, Ukraine Facility | Adopt the Strategy for developing and expanding the border infrastructure with EU and Moldova until 2030 | Q4 2024 |
| EU-2023, Ukraine Facility | Adopt the law on aligning Ukraine railways with EU acquis | Q4 2025 |
| Ukraine Facility | Adopt the draft law on better regulation of maritime and river shipping and simplification of administrative procedures | Q2 2026 |
| EU-2023, Ukraine Facility | Adopt the EU regulation on port services | Q1 2027 |
Critical materials
Ukraine has many materials that will be useful for years to come, e.g. lithium, rare earth metals, and non-metal materials. The Ukrainian government plans to attract investors into extraction of these materials via product sharing agreements or PPPs.
Table 8. Documents and other indicators of reforms in the sector of critical materials
| origin of recommendation | documents to be adopted or amended and other indicators | deadline |
| Ukraine Facility | Adopt the draft law on mineral base development | Q4 2024 |
| Ukraine Facility | Upgrade the e-cabinet of subsoil users | Q1 2025 |
| Ukraine Facility | Launch the Product Sharing Agreement (PSA) tenders with participation of international players; publish the results | Q2 2025 |
| Ukraine Facility | Publish the pipeline of investment projects for extraction of critical raw materials | Q2 2025 |
| Ukraine Facility | Publish report on the verification of Critical Raw Materials reserves of Ukraine | Q3 2025 |
| Ukraine Facility | Publish a study assessing the current legislation on Environmental, Social and Governance (ESG) reporting in the mining and extractive sector with recommendations on what legislative gaps need to be closed | Q4 2025 |
Tax system: closing loopholes and raising tax revenues
In this last section we consider the planned changes to the taxation system that would enable the government to collect more taxes to finance defense and other needs. These changes are described by the government’s Revenue Strategy, to which both Ukraine Facility Plan and the IMF program refer.
The IMF program is mainly focused on reduction of tax evasion and leveling the playing field. Within this program the government promised to refrain from tax amnesties or introduction of new tax exemptions during the program duration (some tax exemptions on critical imports are possible but should be limited in time and tightly overseen, and by 2026 the system of privileges on customs payments should be harmonized with the EU rules). Both the IMF program and the EU-2023 Review mention the need to implement the EU Anti-Tax Avoidance Directive. Ukraine will develop a unified approach to provision of tax privileges and introduce constant monitoring of the sum of these privileges and their effectiveness.
One of the most important loopholes in the taxation system is the simplified tax regime that allows large companies to “optimize” tax payments by hiring their staff as private entrepreneurs. This way an employee pays only 5% of income tax plus social contribution equal to 22% of minimum salary, which is much lower than 18% of income tax + 1.5% of military surcharge + social contribution equal to 22% of the actual salary. The Revenue Strategy assumes that when deductibles are similar, people will demand official employment because in this case they will not need to administer their taxes. Those who stay on the simplified system will have to use cash registers and will have to pay VAT after they reach a certain revenue threshold. The Revenue Strategy does not specify planned tax rates for entrepreneurs working on the simplified system. It only states that these rates will be differentiated by types of activities and by the sum of revenues.
Progressive scale will be introduced (again) for a “regular” personal income tax. Historically, Ukraine had both flat and progressive scales and it is hard to tell which one was more efficient. The minimum non-taxable income will be replaced by subsidies to the poorest.
All these changes will happen a year after the tax inspection introduces a proper personal data protection system and gains access to bank accounts of people, i.e. the earliest in 2027. The government may need to collect more taxes already in 2024-2025 because of insufficient external economic support. The government may raise the VAT rate or speed up aligning of excise rates with the EU.
Legal entities that use simplified taxation systems will pay the rate equal to the regular profit tax rate – 18% compared to current 6% of turnover + VAT or 10% without VAT. Profit tax privileges and exemptions will be limited so that effective tax rate does not fall below 15%. However, to encourage investment, the government plans to implement instant amortization (i.e. spending on some productive assets will be deductible from the profit tax base in the same year when it is made).
Until 2027 the government will implement the rules that discourage companies from searching for low-tax jurisdictions (BEPS and OECD two-pillar solution). By 2025 it plans to align the Ukrainian taxation system with international rules and by 2030 – to review all the agreements on avoiding dual taxation and if needed adjust Ukrainian legislation to international norms.
As we noted in the first article, local governments will receive more powers and opportunities to collect property tax. This tax should become the major revenue source for local budgets, in line with the experience of other countries.
By the end of 2025, Ukraine will introduce taxation of virtual assets and a new carbon tax model (see table 3).
Table 9. Documents and other indicators of tax reforms
| origin of recommendation | documents to be adopted or amended and other indicators | deadline |
| IMF | Assess the effectiveness of tax privileges, their effect on the budget | Q2 2024 |
| EU-2023, IMF | Develop the draft law in line with EU Anti-Tax Avoidance directive to prevent tax evasion | 2024 |
| IMF, Revenue Strategy | Analyze and reform rent payments: all payments for radio frequencies will be the same, there will be a legislative limit on the time during which a well can be considered new (those wells pay lower rent) | 2024 |
| EU-2023 | Ensure the implementation of the automatic exchange of tax information with EU Member States in line with the OECD Global Standards and Ukrainian law. Establish central communication office for information exchange with EU Member States and connections to EU IT systems | 2024 |
| Revenue Strategy | Adopt the draft law introducing OECD principles of transfer pricing | 2024 |
| Revenue Strategy | Publish a study on pros and cons of windfall taxes modeling impact of such taxes on Ukraine’s investment attractiveness | 2024 |
| Revenue Strategy | PIT: exemptions/privileges cut but instant amortization introduced | 2024-2025 |
| Revenue Strategy | Implementation of e-Excise system: sub-laws and IT solution | 2024-2025 |
| Revenue Strategy | Harmonize Ukrainian law with the EU system of custom duty privileges. The new Customs Code should align with the EU Customs Code and additional regulations 2015/2446, 2015/2447, 2022/2399, 1186/2009, 608/2013. | 2024-26 |
| EU-2023, Revenue strategy | Align VAT legislation with the EU directive | 2025-2027 |
| Revenue Strategy | Implement the EU directives on headquarters and branches; shares and royalties | 2026 |
| Revenue Strategy | Reform Personal Income Tax and simplified taxation system | 2027 |
| Revenue Strategy | Introduce the excise on sugar drinks | 2027 |
| Revenue Strategy | Set minimum excise rates on alcohol at the EU level | 2028 |
| Revenue Strategy | Gradually align tobacco taxes with the EU | 2029 |
| Revenue Strategy | Set minimum excise rates on fuel at the EU level | 2029 |
Conclusion
In some areas (energy sector, education and science, taxation or social support) Ukraine will need major institutional reforms. In some sectors (e.g. agriculture or transport) no major changes are planned but a lot of investment is needed (demining, reconstruction of transport infrastructure etc).
Implementation of the planned reforms will show Ukraine’s commitment to join the EU and will also benefit Ukrainian businesses and public finance. The Ukraine Facility Plan will provide some “seed” investment, e.g. into reconstruction of schools, hospitals or energy efficiency. If institutional reforms are properly implemented, this investment will attract some private players or international organizations. However, this will happen only if Ukraine receives enough military support to be able to defeat Russia.