Are Swiss enterprises freeloading off development cooperation?

Speaking at the Ukraine Recovery Conference (URC) in Berlin on 11 June last, Federal Councillor Ignazio Cassis laid out Switzerland's commitments: "First, the private sector plays a key role in the reconstruction process. Switzerland is promoting sustainable framework conditions and ensuring that small and medium-size enterprises (SMEs) can function and remain competitive". In cooperation with the European Bank for Reconstruction and Development (EBRD), Switzerland announced its support for a new mechanism to protect private investments against war risks, and its intention to join an alliance to support SMEs. One therefore had reason to believe that the Swiss Foreign Minister's intention was to give priority support to Ukrainian companies and the Ukrainian economy.

Two weeks later, however, on 26 June, the Federal Council announced that "Switzerland's private sector should play a key role in Ukraine's recovery efforts". The Federal Council plans to allocate CHF 500 million for that purpose over the next four years, that amount coming from the budget of CHF 1.5 billion earmarked for Ukraine in the International Cooperation Strategy 2025-2028. Almost the entire sum will be transferred from bilateral development cooperation funds at the Swiss Agency for Development and Cooperation (SDC) to the State Secretariat for the Economy (SECO). The "Ukraine country programme" as a whole will be managed by Jacques Gerber, currently Councillor of State for the PLR in the Canton of Jura, who will be attached to the General Secretariat of the FDFA as Delegate for Ukraine, and will report directly to Federal Councillors Cassis and Parmelin.

SECO plans

As far as we are aware, the SECO plans comprise two phases. First, support is to be given to Swiss companies already operating in Ukraine to enable them to create or maintain jobs. To this end, the federal government must cover the risks faced by those companies, for example, through financial assistance or insurance solutions. The justification given for using international cooperation funds is that the projects of companies being supported must include a "development component", for example vocational training programmes. So far nothing is clear, but some potential beneficiaries are being mentioned, including the glass manufacturer Glas Trösch. Moreover, some measures are meant to incentivise Swiss companies not yet active in Ukraine to invest there. That could crowd-out Ukrainian SMEs and companies.

The second phase, in which SECO envisages giving preference to the Swiss private sector in general, is even more problematic. Ukraine would receive money from Switzerland which it could then only use for procurement from Swiss companies. This tied aid is at odds with best practices of international cooperation, WTO provisions, and with Swiss law on public procurement. There is no legal basis for that practice, and it would therefore have to be created in the coming months. For the Federal Council, an international agreement with Ukraine would suffice, while the Foreign Affairs Committee of the Council of States has called for a specific law. During its winter session, the Parliament will take the final decision on the package as a whole in the context of the International Cooperation Strategy. The decision by the Federal Council to grant preferential treatment to Switzerland's private sector is obviously not consistent with the promises made in Berlin, however. The fact that Ukraine is free to decide for itself what it needs from Swiss companies is not a convincing argument. In an emergency, you will accept a supermarket voucher even if it is disadvantageous to your own village shop, which you should be supporting.

Strengthening the local economy

What Ukraine needs is support from the international community – which should include Switzerland – for its economy and its companies, the backbone of which comprises small and medium-size enterprises (SMEs) – some 90% – which are showing exceptional resilience despite the uncertainties of the war. A recent study by the London School of Economics¹ has found the Ukrainian economy to be remarkably resilient, but that growth prospects will remain weak for as long as the war continues. Ukrainian producers are losing domestic market share to international competitors that are not operating in wartime conditions. This represents a loss to Ukraine that gives cause for concern and illustrates that the country’s relatively open economy (especially vis-a-vis the EU, through the Association Agreement) is ill-suited to wartime conditions. In the circumstances, increased State purchases of goods and services (through public procurement) from Ukrainian private enterprises is a crucial tool for boosting the resilience of Ukraine's wartime economy by supporting production capacity and employment while laying the groundwork for future recovery and reconstruction.

Supporting "Made in Ukraine"

Partners, including Switzerland, must therefore support a "localisation offensive" to guarantee and build national capacities. They should support the Ukrainian Government's "Made in Ukraine" subsidy programme, which is designed to boost national production. They should set the example by making local content stipulations a condition for providing financial aid to Ukraine, so that aid going to Ukraine is spent in Ukraine. Efforts should also be made to favour technology transfer to the Ukrainian economy. Not only would this boost fiscal receipts, but thanks to increased exports, also foreign exchange receipts, both of which will be needed to repay the reconstruction loans granted by the international community (mainly the EU).
Moreover, Western countries should encourage cooperation between their enterprises and Ukrainian ones for goods production (through joint ventures or consortiums, for instance), using mechanisms that insure against war risks, and providing favourable funding. In the short term, that could boost the resilience of Ukraine’s wartime economy and, over the medium-to-long term, facilitate its integration into global value chains. The measures in the first phase of Switzerland's plans would therefore be meaningful, if the appropriate framework conditions were met.

Reconstruction planning should take account of the green transition, which would both make Ukraine's economy sustainable and facilitate alignment with the EU's Green Deal. Investing in clean energy would be indispensable, as would be efforts to decentralise energy production (Ukraine has a large number of small electric power plants), which renders the industry less vulnerable to Russian strikes. Foreign partners and investors should help Ukrainian enterprises that are lacking in capabilities and human capital to deploy cutting-edge technology, including zero-emission technologies. SECO's plans could also contribute to this.

Funding for enterprises

There is nonetheless an appreciable shortage of funding for modernising Ukraine's industries and for reconstruction, including in the construction materials and metalworking industries, and for decarbonising their structures, some of which date back to the Soviet era. Creating a Ukrainian development bank could provide the long-term capital needed for such re-industrialisation projects. Western partners, including Switzerland, should support Kiev in its quest for funds and provide the requisite guarantees for the large-scale funding of Ukrainian companies.

Ukraine's burgeoning raw materials sector demonstrates the need for both increased funding and a targeted industrial policy. In Berlin, EU representatives hailed Ukraine's huge reserves of ‘critical raw materials’, which the European Commission considers to be crucial to the European economy. Ukraine is said to have 22 of the 34 minerals identified as essential for ensuring the EU's ‘strategic autonomy’, or even ‘European sovereignty’. A Ukrainian development bank could help national companies to become players in this emerging sector and maximise value creation in Ukraine.

Urgently putting things right

It is clear to Alliance Sud that some measures in the first phase of SECO's plans could be wise, if they create jobs, facilitate technology transfer – especially "green" technology – and entail partnerships with local companies, and if it is ensured that promoting Swiss companies does not mean crowding out Ukrainian ones. There is an urgent need for transparent reporting on specific plans so that their utility or their undesirable effects can be assessed. Switzerland's aid should nevertheless focus on support for the local private sector and the Ukrainian economy. That would require funding first and foremost; Switzerland would do better to use existing multilateral channels instead of going it alone.

The second phase, which is designed solely to secure a "piece of the reconstruction cake" for the Swiss export sector, would clearly run counter to the interests of the Ukrainian economy. Yet, a Ukrainian economy with long-term stability is more beneficial to Switzerland than full order books for some companies in the short term. These plans should therefore be stopped. Clearly, these activities are only marginally in line with Switzerland's international cooperation priorities and should therefore not be funded from the international cooperation budget.

¹ A state-led war economy in an open market. Investigating state-market relations in Ukraine 2021-2023. LSE Conflict and Civicness Research Group, 4 June 2024.