Zubko’s mission: Energy efficiency, empower local governments

The deputy prime minister’s portfolio is regional development, construction and housing.

Zubko believes it is long past time for Ukraine to fully decentralize its government and to become more energy efficient – two key areas he is focusing on with his 387-strong ministry staff.

Amendments delayed

In an interview with the Kyiv Post, Zubko said that “decentralization is important because none of our European partners will invest in a non-transparent system of administration where it isn’t clear who makes what decisions, and who isn’t held responsible for managing funding.”

To implement decentralization, parliament needs to pass constitutional amendments that would allow municipalities to have more control over their resources. But it is a touchy subject.

The first vote for the amendments in August 2015 caused a mass protest of the right-wing activists where four National Guard officers were killed defending the parliament.

The second reading was scheduled for early June, but has been put on hold. Parliament Speaker Andriy Parubiy explained it with Russia’s failure to follow the Minsk peace agreements. The amendments were one of the conditions that Ukraine had to implement under the Minsk deal.

“Decentralization destroys the Soviet system of administration that Ukraine has lived with for the past 25 years,” Zubko said. “This is the system that basically didn’t give Ukraine the chance to break away from Russia.”

Centralized Ukraine

Today, Zubko says, 70 percent of tax revenues go straight to the top level of government, where they are manually redistributed through each ministry, and are only then sent back to the municipal administrations.

“But during that process we lose 70 percent of the money because of the corruption that comes out of the manual regime,” Zubko said.

He thinks that 65 percent of the money should stay at the bottom level, and that cities should decide directly how to spend it. The remaining 35 percent should be spent on defense, universities, social security and medical services.

“Honestly, there’s no interest from the local governments in collecting money for land rent, because part of it goes to someone’s pocket, and part goes further up,” Zubko said. “But with decentralization, every mayor, every local head knows that these are their resources.”

This way city heads and regional administrators will be held more responsible, and top officials will have less chance to steal money from taxpayers, Zubko said.

“But most importantly, this motivation gives people the chance to plan,” he said.

In anticipation of real decentralization, the government is providing Hr 1 billion for Ukrainians to organize into local communities hromada which then officially decide what to use the financing for. So far there are 159 such communities.

With a few adjustments in the budget and tax laws during the past two years, Ukraine’s municipal administrations gained some additional authority over collected taxes. As a result, during the January-May period, local budgets were up by a total of Hr 18 billion, or 49 percent, compared to the same period last year.

Regional competition

It is necessary to create competition between the oblasts where regions will want to be more efficient, and develop more, the minister said. Right now every of Ukraine’s 24 oblasts is defining what are the top 10 key sectors they are good at – whether it is tourism, IT, wood processing or manufacturing. Then each of them will filter it to the three highest priorities that bring the most revenue. And investors then clearly understand where they can invest.

In February 2015 Ukraine already took some of its first steps to regional decentralization, when its oblasts received a total of Hr 2.5 billion to finance regional development projects via the State Fund for Regional Development.

Developing regions

Ukraine’s most investment-friendly regions so far are in its western oblasts. Partially this is due to the logistics of being closer to Europe. Such is the case for Japanese company Fujikura, which has an electronic car parts plant in Lviv Oblast, Sumitomo Electric Parts manufacturing in Ternopil Oblast, and the Kromberg & Schubert factory in Zhytomyr Oblast. Recently 17 U.S. motorcycle parts companies have shown interest in operating in Ukraine as well, Zubko said.

Interest in investment is also shifting eastward to cities such as Kharkiv, and Kramatorsk in Donetsk Oblast.

But Ukraine’s most eastern Donbas region, directly affected by war, is not likely to recover soon. Even though it very difficult to say, Zubko roughly estimates the cost of repairing damage to infrastructure, companies and residential houses to be up to $15 billion.

Last year, together with the United Nations, his ministry estimated the value of infrastructure damage in the region to be around $1.5 billion.

“(Today) I think this figure is much bigger, probably five to 10 times,” Zubko said.

$40-billion investment

Zubko believes that Ukraine needs $40 billion in investments to cut its residential sector gas consumption by a third, or down to 11.5 billion cubic meters from its present 18 billion cubic meters. This 8- to 10-year-long process would bring Ukraine closer to European levels of energy use.

That would reduce the need for energy subsidies, which in 2015 amounted to Hr 43 billion ($1.72 billion), and cut Ukraine’s dependence on natural gas, as well as the general financial pressure on Ukrainians.

‘Warm credits’

In cooperation with Ukraine’s state banks Oschadbank, Ukrgazbank and Ukreximbank, the regional development ministry came up with the idea of issuing “warm credits” where a person receives a loan from a bank to improve their apartment energy efficiency. Depending on the upgrade, up to 40 percent of the cost of the credit could be subsidized by the government. This could result in 45 percent energy savings, Zubko said.

As the borrower would deal directly with the bank, this would take government officials out of the loop, leaving little place for corruption.

International help

Zubko also thinks there should be an Energy Efficiency Fund, similar to the ones in Lithuania, Poland and the Czech Republic, through which the government compensates the banks.

The minister also wants to engage European Bank for Reconstruction and Development and the European Investment Bank in the loan giving, and to establish a supervisory board with representatives from Germany, the European Union, and the U.S. Agency for International Development.

Zubko said that the EU is ready to finance an office for such a fund for three years. -At the same time, he emphasizes that Ukraine should receive more non-material support, such as experience from other countries, educational support and diplomatic pressure against corruption.

“Not just investing money into some sort of big corruption bonfire, in which millions of dollars are burnt,” Zubko says.

Facing resistance

But when asked to name those who bolster corruption in the country and who block his ministry’s reforms, Zubko said that he had no specific names.

When it comes down to parliament, Zubko says that there are certain groups of parliamentarians that lobby for vested interests and block the reformative bills by proposing less efficient alternatives.

Such techniques, he said, have been delaying his ministry’s efforts to transfer land distribution powers from central government to local city administrations.

At the same time, Zubko said there was no direct oligarch pressure on his ministry. His former government team member, Economy Minister Aivaras Abromavicius, resigned on Feb. 3 citing pressure from presidential lawmaker Ihor Kononenko to appoint specific CEO heads of state-owned enterprises. Kononenko denied wrongdoing.

Zubko said that he didn’t have such problems, as his ministry doesn’t have any state-owned companies under its authority, but that “there was always lobbying for the interests of oligarchs, who brought their own people into parliament.”