PROJECT INFORMATION DOCUMENT (PID)



PROJECT INFORMATION DOCUMENT (PID)

APPRAISAL STAGE

Report No.: AB3283

|Project Name |Public Finance Modernization Project |

|Region |EUROPE AND CENTRAL ASIA |

|Sector |General public administration sector (100%) |

|Project ID |P090389 |

|Borrower(s) |Ukraine |

|Implementing Agency |Government of Ukraine |

| |Ministry of Finance |

| |12/2 Hrushevsky Street |

| |01008, Kiev, Ukraine |

| |Tel: (380-44) 206-5888 Fax: (380-44) 253-8243 |

|Environment Category |[ ] A [ ] B [X] C [ ] FI [ ] TBD (to be determined) |

|Date PID Prepared |August 24, 2007 |

|Date of Appraisal Authorization |August 24, 2007 |

|Date of Board Approval |November 27, 2007 |

A. Country and Sector Background

1. Enhancing the transparency, efficiency and effectiveness of the public financial management is an important element of the institutional modernization plan of the Government of Ukraine (GoU) and has been in the agenda of successive governments since the beginning of the decade. Important progress has been made, including the establishment of a Treasury system, the abolishment of central bank direct financing of the Government, the adoption of a new Budget Code and budget classification system, the creation of internal audit function and the improvement of the availability of fiscal information. Despite impressive growth performance (12.1 % in 2004; Ukraine's growth was the highest in Europe) and prudent fiscal policy, there are still significant institutional challenges to address for improving public service delivery.

2. The current government, in office since August 2006 has continued this commitment to PFM reform and is well aware of its importance not only for achieving improved levels of service delivery, but also as part of an agenda to improve governance and pave the way for EU accession. In line with these objectives, the GoU approved a White Paper on Internal Financial Control (2005) and the Concept of Local Budget Reform (2007). The Ministry of Finance (MoF) is in the process of finalizing and approving the Concept for Modernizing and Raising Efficiency in Public Financial Management, as well as drafting the Tax Code and amendments to the Budget Code. The GoU is committed to implement budget reforms aiming at better transparency, accountability and efficiency as stated in the draft PFM Concept and has already started to introduce performance-based budgeting (PBB), public financial control and accounting reforms.

3. Implementing a modern integrated Public Financial Management System (PFMS) that serves as a backbone to all public expenditure management processes and interlaces with the revenue collection systems is a key part of the agenda. This system would not only bring together the full budgeting cycle under a single platform of information and control, but should also facilitate the implementation of a number of improvements in fiscal planning, budgeting, treasury, debt management, accounting and auditing, being supported by the Bank and many other donors.

4. Ukraine will undertake the PFMS implementation process having successfully implemented a Treasury system in 2004 with the support of a World Bank-financed project[1]. The PFMS will capitalize on the core treasury system already implemented and provide an integrated platform for approximately 8,500 internal users in the MoF, STU, KRU offices, central line ministries and other government agencies, as well as around 50,000 external system users. Table 1 shows the expected functionality of the new PFMS compared to the existing Treasury system.

|Table 1: Moving from a Treasury System to integrated PFMS |

|Treasury System (current) |PFMS (foreseen) |

|Management of Payments |Treasury System, plus: |

|Management of Receipts |Macroeconomic Forecasting |

|Resource/Cash Management |Budget Formulation |

|General Ledger |Commitment/Purchasing |

|Financial Reports |Management of Real Assets/Stocks |

| |State Debt Management |

| |Accounting Module for Budget Inst. |

| |Int’l Financial Assistance Management |

| |State Procurement Management |

| |Personnel Management |

| |Support for Internal Audit |

5. In addition to the implementation of PFMS, there are significant capacity-building needs in both the MoF and other entities that are part of the public expenditure cycle. A recent World Bank report[2] that assessed public financial management capacity in Ukraine based on the PEFA[3] indicator set found that, despite high marks for budget credibility and certain dimensions of comprehensiveness and reporting, there are still capacity gaps in areas such as debt management and internal financial control, among many others. Fiscal management at the central government level in Ukraine remains fragmented. The implementation of Performance-Based Budgeting, currently supported by USAID and the U.S. Treasury, will also hinge upon an enhanced capacity in the MoF and the development of a reliable monitoring system[4].

6. The Government of Ukraine (GoU) plans to tackle this capacity-building challenge through several fronts. First of all, the GoU is benefiting from substantial technical assistance from a World-Bank-provided grant[5], EU-TACIS, the French Government, GTZ, SIDA, the Dutch Government, USAID and U.S. Treasury in areas including macroeconomic programming, budgeting, treasury decentralization and internal audit. Second, the functional review of key PFM organizations and the reorganization of the MoF were completed, including business process reengineering and the development of interim ICT tools. Finally, additional advisory services will be obtained to ensure the implementation of new budget methodologies and to improve key elements of MoF business such as debt management and medium-term budgeting in the context of the restructured MoF.

7. Carrying forward this substantial reform program will require both leadership from the MoF as well as close coordination among various donors and related government bodies. An Interagency Working Group (IWG) was established in January 2007 to better coordinate the efforts of all stakeholders in PFM during the implementation of the reform process. Finally, an Administration and Procurement Support Team (APST) was established in June 2007, to develop institutional capacity within the MoF for project management based on country systems.

8. The MoF is the beneficiary of the project. However, project activities are designed to assist the State Treasury of Ukraine (STU) and State Control-Revision Service (KRU) substantially to strengthen treasury and internal audit operations and support reform needs in addition to urgent MoF requirements while developing an integrated information system.

B. Objectives

9. The development objective of the proposed project is to strengthen public financial management by improving operational efficiency and transparency. This would be promoted through an integrated public financial management system (PFMS) and supporting for the MoF’s urgent reform program.

C. Rationale for Bank Involvement

10. In 2004, the government requested the support of the Bank to design and finance the second phase of the treasury modernization project, then dubbed Treasury II, mostly due to the excellent results of the first project and the quality of the policy dialogue with the Bank. The PHRD grant mentioned above became effective in early 2005 and has been a key source to provide technical assistance and policy advice to the MoF. This, in addition to the body of analytical work produced by the Bank including the recent PEFA Report, has set the stage for a prominent role of the Bank in the upcoming stages of the PFM modernization agenda.

11. The Bank is also well-placed to mobilize international experience for the benefit of the Ukrainian reform process. PFM modernization efforts, including the implementation of PFMS, have been supported by the Bank in all its regions since the 1980’s; this has helped build a substantial knowledge base that works for the benefit of every new client. This role in knowledge exchange is further enhanced by initiatives such as PEM-PAL (a regional program co-sponsored with other donors) that promotes cross-country knowledge sharing in PFM topics.

D. Description

12. The proposed project is designed to strengthen public financial management through an integrated public financial management system (PFMS) and supporting for the MoF’s urgent reform program. The project includes financial and technical support for the MoF’s reorganization; developing new PFM methodologies and procedures; establishing integrated information and communication technology (ICT) solutions and other technological infrastructure; and training to achieve these objectives.

13. During the preparation phase (which started in January 2006), the MoF, STU and KRU were involved in a number of important activities (mostly funded by donors) to develop the PFM Reform Strategy (named as the “Concept for Modernizing and Raising Efficiency in Public Financial Management”) and define key reform objectives. As a baseline study, the Public Expenditure and Financial Accountability (PEFA) assessment was completed with Bank support in March 2007, and provided valuable feedback on the current status of public financial management capacity in Ukraine. In parallel to these, the PFMP provided the opportunity to benefit from a Japanese PHRD Grant for the development of “Concept Document” which outlined key PFM reform actions based on the MoF functional review and needs analysis. Finally, PFMS “System Design” and “Technical Specifications” were developed.

14. The CoM approval of the PFM Reform Strategy (or Concept for Modernizing and Raising Efficiency in Public Financial Management) is an important segment of project preparation. This will allow having well defined objectives and funding to support the development and avoid the negative effects of possible fluctuations in Government in the light of forthcoming parliamentary elections. Additionally, the Treasury (STU) development strategy includes the transition to accrual based accounting, to be designed and implemented mostly under EU-TACIS project.

15. A significant amount of multilateral and bilateral assistance in PFM is underway in Ukraine:

• The World Bank provided immediate advisory support on MoF reorganization; debt management and debt market development; and prepared a White Paper on public internal financial control for KRU (2005).

• EU-TACIS is providing TA and training to the Treasury for “effective state budget management” (2004-06), as a part of the EU-Ukraine Action Plan. EU project covers some of the TA needed for the implementation of PFMS, particularly the design of a phased approach to move to accrual based accounting, and a close coordination is necessary to avoid overlapping activities.

• French Government (French Treasury and ADETEF) is providing TA and training for the Treasury decentralization and internal audit.

• USAID will be providing technical assistance (TA) and training for the MoF Budget Dept. on design and implementation of Performance Program Budgeting (PPB) as well as macroeconomics (2005-08).

• US Treasury will be assisting the MoF Budget Dept. on PPB and budget execution.

• GTZ (Germany) and SIDA (Sweden) will be providing advisory support and training for institutional reform of the MoF.

• The Government of the Netherlands will support Ukraine’s competitiveness through improved capital budgeting, public finance management and trade and transit facilitation through the World Bank or recipient executed trust funds (2007-08).

16. In February 2007, the MoE led donor coordination efforts and several key donor coordination groups were established to focus on key reform areas in Ukraine. It was decided that the MoF will lead the “PFM donor coordination group”, meeting on a quarterly basis, to avoid over-lapping assistance and to assure maximum value to the GoU of the limited resources available. Moreover, a Donor Coordination Team will be established as a part of PFMP implementation arrangements to coordinate the PFMP activities with other donor funded projects within the MoF and communicate with this group.

17. The PFMP implementation will complement these efforts with additional advisory support to the MoF, KRU and STU for some of the key PFM reforms, followed by core competency training, business process re-engineering, integration of work flows around core MoF tasks, and eventually, with implementation of ICT solutions to develop an integrated PFM system.

18. Larger reforms requiring separate projects were excluded from the present project (e.g. Customs, Sub-national Public Finance Reform, and Tax Modernization, which already has a Bank-supported project). Also, the project does not include direct support to ongoing reforms being supported by other donors (e.g. Program and Performance Budgeting, supported by USAID and possibly by the US Treasury). However, ongoing reform activities will be closely monitored and related project activities will be streamlined with these to avoid duplicate efforts and to ensure smooth integration of outputs.

19. The Public Finance Modernization Project (PFMP) will support the Government over a period of five years (2008-2012) and will include the following components:

Component 1: Strengthening Institutional Capacity and Operational Effectiveness

US$5.9 million

The purpose of this component is to assist the MoF in selected institutional capacity building activities for PFM reforms, functional review of the MoF, business process re-engineering, and design of ICT solutions, as a part of broader PFM reform agenda (2007-2011) which is being implemented by the GoU and supported by a number of donors. Further enhancement and optimization of the functions and operational efficiency of the MoF and Treasury are other important objectives. Training needs that stem from the new functionalities of the system are also included in various subcomponents. Assistance in strengthening the institutional capacity will be limited due to existence of adequate donor funding (grants) available for the GoU to implement PFM reforms. Component 1 activities will be coordinated with other capacity building efforts of the MoF to achieve targeted PFM reform objectives coherently.

Since the MoF requested urgent advisory support for their reorganization and reform needs, the PHRD funded preparation activities started with the development of a PFM Concept Document (CD). The CD includes the functional review of all MoF units and other PFM organizations, the recommendations for improving institutional capacity, and the PFMS functional requirements, together with necessary procedural and organizational changes. The CD was approved by the MoF in April 2007 and MoF reorganization was completed in August 2007, accordingly.

Based on the PFM reform needs identified by the MoF, some of the advisory support requirements were already covered through a PHRD grant during the preparation phase, as well as other ongoing donor funded activities. Further work on public procurement and human resources management components of the reform will be carried out by the Government itself in parallel to PFMP implementation. Hence, complementary advisory support activities included in component 1 will focus on the following areas of PFM reforms, based on the requirements identified during preparation activities:

1.1. Improvement of coordination in the process of macroeconomic forecasting

1.2. Improvement of budget planning and mid-term budgeting; development of performance based budgeting capability.

1.3. Support to local budget reform

1.4. Development of a monitoring system for performance based budgeting

1.5. Support for the implementation of accounting reform

1.6. Creation of the single registry of spending units

1.7. Development of the unified chart of accounts

1.8. Improvement of the debt management system

1.9. Improvement of international financial assistance management

1.10. Improvement of coordination for internal financial control

Component Manager will be the Ministry of Finance (MoF).

Component 2: Development of an integrated Public Financial Management System

US$57.45 million

With the completion of the Bank’s first Treasury project in December 2004, a well functioning Treasury System (TS) is in place. However, integration of key PFM modules to create a single, integrated centralized information system that will serve as a backbone to all public expenditure management processes and interlace with the revenue collection systems is a key element of the reform agenda. Therefore, based on the functional and technical requirements identified during preparation phase, component 2 activities will focus on the development of an integrated Public Financial Management System (PFMS). Additionally, change management, training and related technical assistance (TA) activities are included to ensure sustainability of implemented solutions.

Following activities are included in the second component:

1. IT support for interaction with IT systems of Spending Units related with PFMS

2. IT support for analysis and modernization of business processes

3. Support for change management - workshops, study tours, training

4. PFMS implementation advisor(s) (long term)

5. Development of integrated PFMS software and installation of central servers

6. Installation of PFMS field hardware and network equipment

TA for the development of specific tools for the interaction of SUs with the PFMS, and support for the modernization of daily operational tasks (office automation) will be provided at early stages of implementation. Change management activities are included to streamline operational and decision-making procedures, to train financial managers and operational staff in new procedures, control features, and information systems, and to conduct dissemination events (seminars, study tours) to foster system acceptance during implementation. An implementation advisor will assist the MoF throughout PFMS implementation to ensure compliance of ICT solutions with technical requirements.

Integrated PFMS solutions will be implemented through two major ICT contracts:

• Development of PFMS application software (ASW) and installation of related central servers and data storage systems (Activity 2.5).

• Installation of standard field hardware and network equipment (Activity 2.6).

PFMS ASW will be developed as a combination of commercial off-the-shelf (COTS) software and custom developed software (CDSW) modules to provide full functionality of the designed system, based on the functional requirements and technical specifications developed during PHRD activities. PFMS ASW modules will be implemented in two groups to ensure successful and timely completion of planned activities according to existing capacity and resources of the MoF, STU and KRU IT Departments.

Expected number of concurrent (internal) system users (MoF, STU, KRU offices, central line ministries and other government agencies) with online access right to various PFMS modules is around 8,500. Total number of external system users (spending units, local finance directorates, local public authorities, municipalities, etc.) is expected to be around 50,000. Building necessary institutional capacity within the MoF, KRU and STU requires substantial change management activity for effective use and sustainability of integrated PFMS. Therefore, a large number of workshops and user training seminars will be organized for MoF, STU and KRU staff during implementation.

|PFMS functional modules |To be implemented by |

|PFMS modules to be implemented by MoF and KRU: |MoF IAS Dept. |

|1. Macroeconomic forecasting & strategic budget planning |MoF + MoE |

|2. Formulation and approval of the budget |MoF Budget Dept. |

|3. State debt management |MoF State Debt Dept. |

|4. International financial assistance management |MoF |

|5. State procurement management |MoF |

|6. Personnel management |MoF |

|7. Support for internal financial control and audit |KRU |

|8. Interfaces for data exchange with external systems |MoF IAS Dept. |

|PFMS modules to be implemented by STU: |STU IT Dept. |

|1. Management of payments |STU |

|2. Management of revenue / receipts |STU |

|3. Commitment management / purchasing goods & services |STU |

|4. Resource / cash management |STU |

|5. Management of tangible assets and stocks |STU |

|6. Accounting ledger (general ledger) |STU |

|7. Accounting for budget institutions |STU |

|8. Financial reports |STU |

|9. Creation of a single register of budget institutions |STU |

The Main System Center (MSC) hosting the integrated PFMS will be located at the STU. A Business Continuity Center (BCC) will be established in the MoF as a replica of the MSC and to host the FMIS for planning and decision support.

All MoF, STU and KRU offices located at 27 regions and 681 districts will be connected to MSC and BCC in Kiev. Existing countrywide telecommunication infrastructure of the STU will be expanded to cover additional connectivity needs of the MoF and KRU. Connections from 32 line ministries and central agencies to the MoF central office (BCC) and STU (MSC) will also be established via State Special Telecommunications Network.

MoF will be the coordinator and component manager.

Component 3: Project Management

US$1.15 million

In addition to above main components, a project management component is included to ensure timely and efficient allocation of resources, to carry out project procurement, financial management, and audit activities, to monitor and evaluate the implementation and to interact with all local and international entities involved in project execution. Treasury established a project implementation unit (PIU) while implementing the PHRD grant for project preparation. To ensure proper and timely implementation of the PFMP, a similar MoF unit (Administration and Procurement Support Team) was established in June 2007. MoF will be the component manager.

E. Financing

|Source: |($m.) |

|Borrower |15 |

|International Bank for Reconstruction and Development |50 |

| Total |65 |

F. Implementation

20. The Ministry of Finance (MoF) will implement the project, and coordinate the implementation of project activities at central and local budget organizations. An Interagency Working Group (IWG), chaired by the Minister of Finance, is responsible from the preparation and implementation of the project. The Deputy Finance Minister shall be appointed as the Deputy IWG Chairperson. The composition and the terms of reference for the IWG were approved by the relevant Government Resolutions in 2007. One of the important roles of the IWG is to ensure that relevant government agencies are fully informed about project activities and trained properly, so as to facilitate timely implementation of activities requiring participation of the budget spending units. IWG consists of all Component Managers, who will lead the component activities and on a regular base monitor the progress, including procurement and disbursements. Other project stakeholders (representatives of all the ministries and agencies in PFM domain) are also present within the IWG. Project Annual Work Plan (AWP) will be prepared by the IWG, based on inputs from Component Managers. The IWG is supported by IT Coordinators (the Heads of the MoF, STU and KRU IT Departments) and an Administration and Procurement Support Team (APST).

21. The First Deputy Finance Minister shall be appointed as the Project Manager (PM). PM shall be responsible for the overall Project management. PM shall get functional and technical support from Component Managers (CM), IT Coordination Team (IT CT), Administration and Procurement Support Team (APST) and Donor Coordination Team (DCT). PM shall report to IWG on Project implementation progress, funds disbursements, procurement, financial management and other issues as well as appoint Monitoring Project Partners Missions. PM shall submit AWP based on proposals from CM, IT CT, APST and DCT for IWG consideration in compliance with Project Operations Manual.

G. Sustainability

22. The project supports key PFM reforms as integral parts of the Government policies. Improvements in governance are one of the key mandates of the Government. Existence of multiple donor funded projects in PFM domain further enhances the longer term nature of this support. These are considered as the key factors that contribute to the sustainability of PFMP.

23. The expected duration of the project is five years. However, some of the reform initiatives it supports have a longer term perspective. The design of project components builds on the Government’s existing strategies for reforms in budgeting, accounting, human resource management, procurement and public internal financial control and audit, which are combined in the Concept for Modernizing and Raising Efficiency in PFM. Subsequently, implementation of the project components is fully institutionalized in the agencies that represent key players within the PFM system. Such arrangements will provide for strengthening and maintaining adequate organizational capacity necessary to sustain immediate project outputs and to proceed with further developments in the public sector as per the national policies to evolve.

H. Lessons Learned from Past Operations in the Country/Sector

24. The following lessons learned from the implementation of previous projects in Ukraine and other countries have been taken into account during the definition of the project objectives:

a) the need for a clear vision of the MoF’s future state, supported by the Government, including well articulated development strategies for the Ministry as a whole, for the Treasury (STU) and KRU, and comprehensive plans agreed to realize this vision;

b) the need for all elements of the reform to be addressed in an integrated way, including participation of and relationship to external stakeholders;

c) clear evidence of sustained political commitment and support for the reform; and

d) focusing on building strong institutional capacity (business processes, staff non-IT skills, etc.), rather than information technology (IT) systems alone.

I. Safeguard Policies (including public consultation)

|Safeguard Policies Triggered by the Project |Yes |No |

|Environmental Assessment (OP/BP 4.01) |[ ] |[X] |

|Natural Habitats (OP/BP 4.04) |[ ] |[X] |

|Pest Management (OP 4.09) |[ ] |[X] |

|Physical Cultural Resources (OP/BP 4.11) |[ ] |[X] |

|Involuntary Resettlement (OP/BP 4.12) |[ ] |[X] |

|Indigenous Peoples (OP/BP 4.10) |[ ] |[X] |

|Forests (OP/BP 4.36) |[ ] |[X] |

|Safety of Dams (OP/BP 4.37) |[ ] |[X] |

|Projects in Disputed Areas (OP/BP 7.60)* |[ ] |[X] |

|Projects on International Waterways (OP/BP 7.50) |[ ] |[X] |

J. List of Factual Technical Documents

|Document Name | Date |Document Type |

|PHRD Part-II Final Reports (Technical Requirements) |07/13/2007 |Report |

|Country Procurement Assessment Report 2006 |07/02/2007 |Report |

|PHRD Part-I Final Reports (System Design) |05/21/2007 |Report |

|Report No.39015-UA: Ukraine PEFA Report 2006 |03/15/2007 |Economic Report |

K. Contact point

Contact : Cem Dener

Title : Senior Public Sector Management Specialist

Tel. : (202) 473-7342

Fax : (202) 614-1322

Email : cdener@

L. For more information contact:

The InfoShop

The World Bank

1818 H Street, NW

Washington, D.C. 20433

Telephone: (202) 458-4500

Fax: (202) 522-1500

Email: pic@

Web:

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[1] “Treasury Systems Project” (P049174), $16.4 million.

[2] “Ukraine: Public Financial Management Report 2006”, March 2007

[3] “Public Expenditure and Financial Accountability”; a partnership between the WB and several other donors.

[4] Certain elements of PBB have already been implemented at the central level, and follow-up work with the Ministries of Finance, Education, Healthcare, Economy and Agrarian Policy as pilots is expected for 2007.

[5] PHRD Grant TF054609 for supporting the preparation of the Treasury II project.

* By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties' claims on the disputed areas

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