EAP Task Force

Performance Review of the State Environmental Protection Fund of

Ukraine

Main Conclusions and Recommendations

Nelly Petkova

Environmental Finance Programme

Tenth Meeting of the EAP Task Force EECCA Environmental Finance Network22 – 23 February 2007

Paris, France

EAP Task Force

Structure of the Presentation

• Performance Review Methodology

• Objectives of the Performance Review

• Performance Assessment of the State Fund of Ukraine: 2006

• Major Findings and Conclusions– Fiscal Prudence– Management Efficiency– Environmental Effectiveness

• Major Recommendations

• Lessons Learnt

EAP Task Force

Performance Review Methodology

• Based on the criteria identified in the Good Practices for Public Environmental Expenditure Management (PEEM)

– environmental effectiveness

– fiscal prudence

– management efficiency

• Inputs from FitchRatings on fiscal prudence and financial performance

• The review was implemented in close co-operation with the Ministry of Environmental Protection, with representatives from other key ministries

• The project - financially supported by the governments of Switzerland and the Netherlands

EAP Task Force

Objectives of the Performance Review

• To conduct an independent and objective assessment of all aspects of the administration and management of the Fund against internationally-recognised criteria, such as those contained in the Good Practices for PEEM

• To identify and analyse the strengths and weaknesses of the Fund’s performance and propose a Reform Plan for further improvements

• To support the Ministry of Environment in its efforts to improve the management of the public environmental finance system in Ukraine

• To help improve data collection and disclosure of information

EAP Task Force

Performance Assessment of the State Fund of Ukraine: 2006

EnvironmentalEffectiveness

Fiscal PrudenceManagement Efficiency

Best Possible Performance

Frontier

Actual Performance

Scope for Improvement

Checklist

Checklist

Checklist

EAP Task Force

Major Findings and Conclusions – Fiscal Discipline

• Generally, the National Fund’s performance has benefited from wider reforms in the public finance system

- In 1998 – transformed from an extra-budgetary to a budgetary “special” Fund – improved Parliamentary control

- State Treasury created and a Treasury Single Account opened – all Fund’s revenue and expenditure channelled through this account – improved financial control over spending

- Accounting Chamber created – improved control over the expenditure of budgetary entities

- State Tax Inspection made responsible for pollution charges – significant increase of revenue

- Passport of budgetary programmes created - attempt to introduce performance-based budgeting and improve programming

- Due to the strict rules of the Budget Code and annual budget laws – prudent fiscal policy- Barter and other non-monetary transactions have been largely eliminated and all

revenue now collected in cash

• The Fund largely complies with the main criteria of fiscal discipline

EAP Task Force

Fund’s Revenue

Progression of the revenue collected

0

20

40

60

80

100

120

2000 2001 2002 2003 2004

Source : State Environmental Fund

UA

Hm

0

20

40

60

80

100

%Revenues (LHS) Collection rate (RHS)

EAP Task Force

Major Findings and Conclusions – Management Efficiency

• The project cycle management is inadequate with regard to the type of expenditure financed

- The management structure – most elements present but only vaguely correspond to the best international practices

- No dedicated professional staff and a separate administrative structure to manage the Fund’s resources

- Responsibilities for appraisal and selection split between too many people and levels- Decision-making is slow and unproductive – disbursement hampered and resources spent in an

ad hoc manner- Project appraisal – formal process – checking proposals for compliance with legal and budgetary

requirements but no clear appraisal and selection criteria and rules - no skills to conduct sound appraisal

- Cost-effectiveness - not a prominent selection criterion – data on O&M costs not collected- Main disbursement mechanisms – grants – which resemble direct purchase of goods and

services on behalf of the government - public procurement should not be a core responsibility of a public finance institution

- Fund legislation does not ensure operational independence and protection of staff against ad hoc political interference

• Need for an urgent reorganisation of the governance structure of the Fund in line with good international practices

• Need for introducing proper project cycle management tools to ensure the selection of the most cost-effective projects

EAP Task Force

Major Findings and Conclusions –Environmental Effectiveness

• Environmental effectiveness - difficult to assess

- Fund supports many programmes across environmental media - Programming is still weak – no clear priorities and targets- In 2006 – 8 MEP programmes supported by the Fund + 15 programmes of 5 other

Ministries financed from Fund’s resources – failure to create a critical mass of resources

- Poor communication with potential clients – the Fund does not try to identify good projects

- The one year-budget perspective of Fund’s expenditure is incompatible with the multi-year implementation schedules of investment projects – completion of projects jeopardised

- The Fund does not monitor the implementation of projects and the environmental results achieved

- Information on actual spending incomplete and unreliable and not available at a national level

• Need to reformulate priorities, narrow them down and translate them into realistic and measurable targets

• Need to arrive at a political consensus on the strategic areas which will be supported by the Fund

EAP Task Force

Major Recommendations

• Reduce the number of Funds and concentrate revenue to obtain a critical mass of resources

• Introduce specific, narrow and investment-oriented priorities

• Design a proper organisation and management structure – create a separate unit with a degree of management autonomy

• Develop strong capacity in project cycle management – conduct appraisal and selection in accordance with best international practices

• Introduce a medium-term budget framework to facilitate the smooth implementation of multi-year projects

• Introduce and maintain regular monitoring and control of individual investment projects implemented with support by the Fund

• Collect data at a national level and develop a database on projects financed by the Fund, containing key financial, technical and environmental information

EAP Task Force

Major Lessons Learnt• Funds remain a second best option• Public finance reform creates opportunities to improve the quality

of Funds– Consolidating extra-budgetary funds into the regular budget

improves control and transparency– Transferring responsibilities for collection of revenue from

pollution charges to tax authorities brings better results• Programming and clear priority-setting is crucial for implementing

national environmental objectives in a coherent, transparent and accountable manner

• Multi-year budgeting – a prerequisite for the smooth implementation of investment programmes

• Need for a clear management structure and a clear division of responsibilities for programming (political level) and project appraisal (technically competent staff)

• Need for modern management tools - including simple but robust eligibility, appraisal and selection criteria and clear decision-making rules and procedures

• Where public money is involved the process is very political with lots of vested interests – hence, reforms require strong political support, consensus and leadership

• Donors – what role to play?