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INTERNATIONAL MONETARY FUND

IMF Country Report No. 19/356

UKRAINE

TECHNICAL ASSISTANCE REPORT—PUBLIC INVESTMENT MANAGEMENT ASSESSMENT

December 2019

This Technical Assistance report on Ukraine was prepared by a staff team of the International Monetary Fund. It is based on the information available at the time it was completed in April 2016.

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FISCAL AFFAIRS DEPARTMENT

Ukraine

Public Investment Management Assessment

Brian Olden, Miguel Alves, Yugo Koshima, Ulrike Rwida, and Eivind Tandberg

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Technical Report

June 2016

Contents

• GLOSSARY

• PREFACE

• EXECUTIVE SUMMARY

  • I. TRENDS IN PUBLIC INVESTMENT

    • A. Trends in Total Public Investment and Capital Stock

    • B. Composition of Public Investment

  • II. EFFICIENCY AND IMPACT OF PUBLIC INVESTMENT

    • A. Efficiency of Public Investment

  • III. PUBLIC INVESTMENT MANAGEMENT INSTITUTIONS

    • A. Overall Assessment

    • B. Investment Planning

    • C. Investment Allocation

    • D. Investment Implementation

  • IV. RECOMMENDATIONS

  • BOX

  • A.1. Institutions for Control over SOEs’ Financial and Investment Plans

  • FIGURES

  • 1.A. Public Investment and Capital Stock

  • 1.B. Public Capital Stock per Capita, Comparison with Peers, 2013

  • 1.C. Public Investment, Comparison with Peers

  • 1.D. General Government

  • 1.E. Current and Capital Spending, Comparison with Peers, 2014

  • 1.F. Execution of Public Investment

  • 1.G. Comparison of Investment Volatility

  • 1.H. Execution of Public Investment Spending

  • 1.I Public Investment by Function

  • 1.J. Volatility in Functional Allocation of Non-Defense Public Investment

  • 1.K.: Public Investment by Subsector

  • 1.L. General Government Investment Spending by Level of Government, 2013

  • 2.A. Efficiency Frontier, Quality of Infrastructure Indicators (2008-14)

  • 2.B. Efficiency Gap, Quality of Infrastructure Indicators (2008-14)

  • 2.C. Perceived Infrastructure Quality (2006-13)

  • 2.D. Measures of Infrastructure Access (2014)

  • 2.E. Comparison of Corruption Perception (2014)

  • 3.A. Public Investment Management Institutions

  • 3.B. Budgetary Central Government Debt

  • 3.C Budgetary Central Government Deficit

  • 3.D Budget Performance (Acquisition of Fixed Asset

  • 3.E Budget Performance (Capital Transfer

  • A3.1 Sectoral Share in SOEs’ Total Assets

  • A3.2 Sectoral Share in Number of SOEs

  • A3.3. Number of Lease Contrasts of State and Municipal Property

  • TABLES

  • 0.A. Summary Assessment

  • 3.A. Structure of Project Document According to Cabinet Resolution No. 571

  • 4.A. Detailed Recommendations and Action Plan

  • ANNEXES

  • I. Fiscal Support for Decentralization

  • II. Selected Issues in Legislation on Regulation of Infrastructure Companies

  • III. Selection of Public Investment Projects

  • IV. Projects Accepted According to Cabinet Resolution 571

  • V. Gatekeeping Role for the MoF in PPP Design and Implementation

Glossary

Preface

A technical assistance mission from the IMF’s Fiscal Affairs Department (FAD) visited Kiev, Ukraine during the period April 7-21, 2016 to conduct a Public Investment Management Assessment and advise the government on improving public investment management (PIM) practices. The mission was led by Brian Olden and comprised Miguel Alves, Yugo Koshima (all FAD), Ulrike Rwida, and Eivind Tandberg (both FAD experts). The mission was funded by the Global Affairs Canada.

The mission met with Mr. Danylyuk, Minister of Finance; Mr. Omelyan, Minister of Infrastructure; Mr. Synyutka, Governor of the Lviv Region; Mr. Sadovyy, Mayor of Lviv; Mr. Chuprynenko, Deputy Minister of the Ministry for Regional Development, Construction and Municipal Economy; Mr. Kachur, Deputy Minister of Finance; Mr. Nefyodov, Deputy Minister for Economic Development and Trade; Mr. Lozytsky, Budget Director; Mr. Panteleyev, Deputy Head of the Kyiv City State Administration and their senior staff.

The mission also met with the Budget Committee of the Verkhovna Rada, separately with Mr. Serhiy Kiral, Deputy Committee Head of the Verkhovna Rada Industrial Policy and SME Committee, the State Audit Service of Ukraine, the Accounting Chamber of Ukraine and the State Road Agency of Ukraine. Discussions with the European Commission, World Bank, and the US Treasury Advisor Mr. Whitman also took place.

The mission would like to thank the authorities for their cooperation during the mission and express its gratitude for the courtesy extended from all these officials and institutions throughout the stay. It is especially grateful to Mr. Ihor Shpak from the IMF resident representative office for his excellent organization and contribution to the mission, as always. The mission would also like to express its appreciation to Ms. Valentina Kukhtik, Ms. Zenida Shulga, and Ms. Oksana Burakovska for their excellent interpretations services.

Executive Summary

Ukraine’s public capital stock has been on a declining path over the last 20 years. Having started the period at a relatively high level (99 percent of GDP in 1996), it now ranks amongst the lowest of its comparator countries (56 percent in 2013). Evidence as to the reasons for the deterioration point to significant and persistent weaknesses in the institutional framework surrounding public investment management, inefficient allocation of resources to productive public investment and high levels of perceived corruption. Ukraine currently has an efficiency gap of around 32 percent, which ranks it below average amongst emerging market countries and other comparators. Persistent under-investment, the currently high stock of debt, and ongoing institutional weaknesses, coupled with effects of the conflict in the East could see this gap continuing to grow, absent concerted efforts to reverse recent trends.

Since 2008, public investment spending has been extremely low, averaging only 1.5 percent of GDP. This can be explained, to some extent, by the absence of fiscal space, but the main reason lies in the practice of explicitly protecting current expenditures through legislation, at the expense of investment expenditures. Consequently, investment is regarded as a residual item, especially in times of economic stress.

Government policy on fiscal decentralization, articulated in the government’s 2014 coalition agreement, has the potential to significantly impact on the allocation of public investment. Since 2005, the share of investment allocated to local government has increased from 46 percent to 70 percent with the majority of this shift occurring in 2015. This move to increased decentralization will require a re-assessment of how public investment is managed at both central and local level, with the center reluctant to cede control over investment allocation decisions, and the local level struggling to develop its investment management capacity. SOEs both at central and local level also have a large share of investment, and their monitoring frameworks remain underdeveloped including the area of fiscal risk management.

The institutional framework is weak in all areas. Seven out of 15 institutions are ranked low in terms of their strength, while a further eight are ranked as medium. No institution is ranked as strong. However, it is in terms of effectiveness of the institutions that the Ukrainian PIM system really falls short. Twelve institutions are ranked as ineffective while a further two are moderately effective, with only one institution scoring a high rank in this category.

While the picture looks bleak, some recent initiatives may bring about significant improvements. For example, recent proposals to better coordinate inter-governmental fiscal relations; improve the legislative and oversight frameworks for PPPs; introduce a multi-annual budget process and introduce comprehensive project appraisal and selection processes should result in marked improvements, provided the reforms are fully implemented.

The many institutional gaps will require prioritization of efforts to introduce reforms.

Specific areas in need of urgent action include:

• At the planning stage: (i) national and sectoral planning strategies, which do not prioritize or cost investment proposals nor take account of fiscal constraints; (ii) fragmentation of systems of resource allocation for local government investments where, in some cases, decisions are largely ad hoc; and (iii) the confusion caused by the myriad of legislation surrounding PPPs, including concession contracts, added to the lack of capacity to manage fiscal risks.

• At the allocation stage: (i) the inefficiency and lack of certainty caused by the absence of a multi-annual budget framework and in particular the lack of a stable medium-term funding framework for public investments; (ii) the absence of a precise definition of capital spending with many recurrent costs being included in development budget spending; and (iii) the weaknesses in project appraisal and selection processes, which while improving, are only being applied to a small subset of projects.

• At the implementation stage: (i) the uncertainty surrounding availability of funding for capital spending, due to protection of current spending and weak cash management arrangements; (ii) the weaknesses of monitoring systems, including ex post external audit with audit largely focused on financial compliance; and (iii) inadequate project management frameworks for domestically financed projects, which are not focused on achievement of project objectives.

To address these weaknesses, the recommendations in the report prioritize improvement in three key areas:

1. Improving planning and prioritization

• Establish a common, concise set of fully costed and prioritized capital investment plans to be included in national and sectoral strategies.

• Consolidate and make more transparent the allocation methodology and process for approval of capital transfers to local governments and merge the Regional Development and Socio-economic Development funds, while delegating the selection of projects to be financed from these funds to the local level.

• Consolidate and strengthen the legal and institutional framework for PPPs, focusing on the management of fiscal risks arising from those arrangements.

2. Improving resource allocation for public investments

• Establish a medium-term investment project pipeline process and combine this within a comprehensive medium-term budget framework that facilitates and takes account of multi-annual commitments.

• Provide a clearly defined capital budget in budget documents using international classification standards and have this formally approved by parliament, as part of the budget approval process.

• Strengthen the newly established project appraisal and selection approach and extend this to all major state investments, including projects with external financing.

3. Developing comprehensive and efficient project implementation systems

• Ensure effective oversight of public investments through centralized monitoring and systematic ex post financial and performance audits.

• Prohibit reallocation from capital to other expenditure and specify carryover rules common to the general and special fund appropriations within quantitative limits and with MoF approval.

• Implement previous FAD recommendations to strengthen cash management arrangements.

Reversing the cumulative decline in the public capital stock will require urgent action.

Some of the recommendations in this report are already being considered as part of an overall public financial management reform plan. The action plan in this assessment seeks to leverage these reforms and prioritize implementation of the recommendations, focusing on the most urgent actions within realistic timeframes, while taking account of capacity constraints.

Table 0.A summarizes the assessment. The assessment of institutional strength is based on the questionnaire presented in the IMF Board Paper “Making Public Investment More Efficient.” Each institution was assessed across two dimensions: institutional strength (i.e., whether the institution was nominally in place) and effectiveness. The following color code was used:

	High	Medium	Low
Institutional strength
	High	Medium	Low
Effectiveness

View Table

	High	Medium	Low
Institutional strength
	High	Medium	Low
Effectiveness

Table 0.A.

Ukraine: Summary Assessment

Table 0.A.

Ukraine: Summary Assessment

Phase / Institution			Institutional Strength	Effectiveness	Rec.
A. Planning	1	Fiscal rules	A debt ceiling is included in the budget code but the ceiling has been breached and there are no escape clauses.	The debt ceiling was breached in 2015, although the ongoing voluntary debt restructuring is likely to bring the debt stock back under the ceiling.
	2	National and sectoral planning	National plans do not prioritize or cost capital investments or specify their output targets, while some but not all sector plans do so.	Sector plans do not take into account financial constraints imposed by the annual budget and only a fraction of proposed projects are actually funded.	1
	3	Central-local coordination	A strong legal framework for local borrowing exists, including limits on how much local government can spend on servicing the debt.	There is no strategic discussion between national and LGs on capital programs, and limited transparency on transfers to LGs.	2
	4	Public-private partnerships	The scrutiny and selection of PPP projects in not transparent and value-for-money analysis is not always required.	The government is ill-equipped to manage fiscal risks arising from PPP arrangements.	2, 3
	5	Regulation of infra. Companies	Domestic competition exists in some but not all infrastructure markets, the regulator is not fully independent.	The institutions controlling SOEs’ investments are overlapping and unclear, and the oversight functions are limited.
B. Allocation	6	Multi-year budgeting	A comprehensive multi-year budget framework currently does not exist	Plans to introduce multi-year budgeting for the 2018 budget remain vague.	1, 4
	7	Budget comprehensiveness	Most government capital spending is undertaken through the budget and externally financed projects are disclosed. PPPs are not disclosed.	PPPs are currently limited. Failure to disclose does not pose a challenge for budget comprehensiveness.	3, 5
	8	Budget unity	A single budget is prepared but no disclosure of operating costs for investments. The budget classification specifies consumption and development costs, not capital spending.	Failure to specify capital spending and the absence of information on operational cost implications are serious obstacles to effective oversight.	5
	9	Project appraisal	Few investment projects have been subject to systematic appraisal, but new appraisal procedures were introduced for the 2016	New project appraisal methodology has been applied to a limited set of projects, and its effectiveness remains unproven.	6
	10	Project selection	Few investment projects are systematically reviewed, but new selection procedures were introduced in the 2016 budget. There is no systematized project pipeline.	New project selection methodology is incomplete and has been applied to few projects. Its effectiveness will depend on introduction of medium-term budgeting.	6
C. Implementation	11	Protection of investment	Outlays appropriated on an annual basis, the MOF can reallocate from capital to other expenditure, and carryover applies only to special fund appropriations.	Total variation from the original budget for capital expenditure to actual outturn is small, but allocation to each project in the original budget is not credible.	5
	12	Availability of funding	Cash forecasts are not amended as the year progresses, making it difficult to ensure that sufficient funds are available as projects are adjusted.	Current expenditures are protected, and as a result, disbursments for capital programs are rationed.	8, 9
	13	Transparency of execution	New procurement law provides potential for improvements. There is no centralized project monitoring mechanism and no systematic ex post audit.	Efficacy of the new procurement law remains unproven. Plans for strengthened centralized project monitoring and ex post audit are vague.	7
	14	Project management	There is no standard for project management. Externally financed projects are managed as required by the funder.	Management and monitoring relates to budget adherence, with very little consideration to meet project objectives.	7
	15	Assets accounting	Financial statements exclude the stock positions and depreciation of nonfinancial assets.	Asset surveys are conducted regularly only for a minor subset of the general government nonfinancial assets.

View Table

Table 0.A.

Ukraine: Summary Assessment

Phase / Institution			Institutional Strength	Effectiveness	Rec.
A. Planning	1	Fiscal rules	A debt ceiling is included in the budget code but the ceiling has been breached and there are no escape clauses.	The debt ceiling was breached in 2015, although the ongoing voluntary debt restructuring is likely to bring the debt stock back under the ceiling.
	2	National and sectoral planning	National plans do not prioritize or cost capital investments or specify their output targets, while some but not all sector plans do so.	Sector plans do not take into account financial constraints imposed by the annual budget and only a fraction of proposed projects are actually funded.	1
	3	Central-local coordination	A strong legal framework for local borrowing exists, including limits on how much local government can spend on servicing the debt.	There is no strategic discussion between national and LGs on capital programs, and limited transparency on transfers to LGs.	2
	4	Public-private partnerships	The scrutiny and selection of PPP projects in not transparent and value-for-money analysis is not always required.	The government is ill-equipped to manage fiscal risks arising from PPP arrangements.	2, 3
	5	Regulation of infra. Companies	Domestic competition exists in some but not all infrastructure markets, the regulator is not fully independent.	The institutions controlling SOEs’ investments are overlapping and unclear, and the oversight functions are limited.
B. Allocation	6	Multi-year budgeting	A comprehensive multi-year budget framework currently does not exist	Plans to introduce multi-year budgeting for the 2018 budget remain vague.	1, 4
	7	Budget comprehensiveness	Most government capital spending is undertaken through the budget and externally financed projects are disclosed. PPPs are not disclosed.	PPPs are currently limited. Failure to disclose does not pose a challenge for budget comprehensiveness.	3, 5
	8	Budget unity	A single budget is prepared but no disclosure of operating costs for investments. The budget classification specifies consumption and development costs, not capital spending.	Failure to specify capital spending and the absence of information on operational cost implications are serious obstacles to effective oversight.	5
	9	Project appraisal	Few investment projects have been subject to systematic appraisal, but new appraisal procedures were introduced for the 2016	New project appraisal methodology has been applied to a limited set of projects, and its effectiveness remains unproven.	6
	10	Project selection	Few investment projects are systematically reviewed, but new selection procedures were introduced in the 2016 budget. There is no systematized project pipeline.	New project selection methodology is incomplete and has been applied to few projects. Its effectiveness will depend on introduction of medium-term budgeting.	6
C. Implementation	11	Protection of investment	Outlays appropriated on an annual basis, the MOF can reallocate from capital to other expenditure, and carryover applies only to special fund appropriations.	Total variation from the original budget for capital expenditure to actual outturn is small, but allocation to each project in the original budget is not credible.	5
	12	Availability of funding	Cash forecasts are not amended as the year progresses, making it difficult to ensure that sufficient funds are available as projects are adjusted.	Current expenditures are protected, and as a result, disbursments for capital programs are rationed.	8, 9
	13	Transparency of execution	New procurement law provides potential for improvements. There is no centralized project monitoring mechanism and no systematic ex post audit.	Efficacy of the new procurement law remains unproven. Plans for strengthened centralized project monitoring and ex post audit are vague.	7
	14	Project management	There is no standard for project management. Externally financed projects are managed as required by the funder.	Management and monitoring relates to budget adherence, with very little consideration to meet project objectives.	7
	15	Assets accounting	Financial statements exclude the stock positions and depreciation of nonfinancial assets.	Asset surveys are conducted regularly only for a minor subset of the general government nonfinancial assets.