Ukraine Iziaslavskyi Rayon 2019

1. The main purpose of the 2019 PEFA assessment is to provide the Government of Ukraine with an objective, up-to-date diagnostic of public financial management performance at the rayon level of subnational government based on the latest internationally recognized PEFA methodology. This 2019 PEFA report is an assessment of the quality of the Ukrainian PFM system at the subnational level. More specifically, the PEFA assessment measures which processes and institutions contribute to the achievement of desirable budget outcomes, aggregate fiscal discipline, strategic allocation of resources, and efficient service delivery. A central government PEFA assessment and a subnational assessment at the oblast level were conducted in 2019. The Ministry of Finance has expressed its interest to update the 2017-2020 PFM Reform Strategy based on the 2019 PEFA assessment’s findings and subsequent recommendations.

2. This assessment covers the Iziaslavskyi rayon administration which is composed of 16 budgetary institutions. Where relevant it covers national bodies that are responsible for certain activities in the rayon: State Treasury; Authorized Body for Procurement Service (Ministry for Development of Economy, Trade and Agriculture), State Audit Service, Accounting Chamber, and State Fiscal Service (revenue administration). It also covers the Budget Committee of the rayon council (RC).

3. The PEFA assessment was undertaken by the World Bank under the Parallel EC-World Bankpartnership Program for ECA Programmatic Single-Donor Trust Fund/EU Program for the Reform of Public Administration and Finances (EURoPAF). The assessment oversight and management team include the Ministry of Finance, the World Bank, the Delegation of the European Union to Ukraine and representatives from the rayon local administration. The assessment covered fiscal years 2016 to 2018 and was performed in September/early October 2019. The cut-off date was September 30, 2019. Assessment management and quality assurance arrangements are presented in Box 1.1 below.

4. The challenges in producing accurate total revenue projections have not been met in recent years.

Actual revenues were significantly greater than estimates and grants from the central government were also greater, except in 2018 when it was on track. Actual total revenues from all sources were much higher than estimated in the planned budget. As a result, the aggregate expenditure side of the budget has not performed well. Budget execution required the use of virement and monthly supplementary budgets, both following the Budget Code, to allocate the additional revenues.

5. The Chart of Accounts, which underpins budget preparation, execution and reporting, is comprehensive and consistent with GFS standards, but transparency and predictability of funds are weak.

Despite the advanced Chart of Accounts, the rayon does not report by administration classification. Neither does the information that is included in the budget support a fully transparent budget process. The transfers to subnational government under the rayon are determined by Rayon Council (RC) rules but reports of lower level of government are not published. The volumes of intergovernmental transfers approved by the rayon administration after the deadline for preparing and publishing draft local budgets. This applies to own transfers from the rayon budget and transfers originating from the state budget, received directly or transferred through the oblast budget which the rayon authorities distribute to lower level branches. Information on performance plans and achievements in service delivery outputs and outcomes in the rayon is very good and reflects the program budgeting structure, with performance plans, performance achieved and performance evaluation reflecting the “program budget passport” system and the work of the Balance Commission. While information on spending on individual service delivery units is available, it is only reported in aggregate. Public access to fiscal information is good. Four of all applicable required elements are made available. A citizen’s (summary) budget is not available at the rayon level.

6. A comprehensive and inclusive process is lacking in managing public investment. Economic analysis is not carried out, and project costing and project monitoring do not meet the basic requirements. Selection of investments is rated higher reflecting the priorities set by sectoral policies for choosing projects. Rayon allocated capital inter-governmental transfers to local budgets after the approval of budgets during the fiscal year and without transparent formula-based approach. Sometimes transfers happen in the last months of the year, which may lead to ineffective use of budgeted funds. Those capital transfers exceeded in 1.3 times rayon investment projectsв in 2018. Information on disposal of assets is reported by each spending unit within annual financial reports. The rayon has no debt at the time of the assessment as it is not allowed to borrow.

7. Some limited progress has been made towards a comprehensive medium-term expenditure framework. There is good information on the specification and evaluation of key performance indicators. A medium-term approach is taken to Key Spending Unit’s (KSU) budget proposals but not to the formulation of annual budgets. The adopted overall fiscal strategy focuses on the budget year and does not examines changes from previous forecasts, but there is reporting against fiscal outcomes in the budget execution report. There are no hard ceilings for budget preparation and the budget program proposals are used for annual budget estimates only. There is a budget calendar which provides spending units less than four weeks to prepare their budgets. The legislature receives less than one month to carry out its scrutiny but it approves the budget on time. It considers fiscal policies and aggregates for the upcoming budget year and the medium term. Procedures and timetables for budget scrutiny are respected.

8. The State Fiscal Service is responsible for revenue collection at the time of the assessment on behalf of the rayon. Revenue collected is well-managed in terms of the flow of funds to the Treasury and recording of transactions that are collected on behalf of the rayon. All revenues are paid into the rayon account with the Treasury. All accounts are reconciled on a timely basis. The State Fiscal Service can monitor revenues in real time. Payments to the Treasury Single Account are reconciled monthly on schedule. A revenue report is prepared monthly for management purposes.

9. The consolidation of cash balances in the Treasury Single Account (TSA) at the National Bank is made daily. The Finance Department forecasts the annual cash flow broken down by month, but only updates it periodically. Spending units know their annual budget within one month of approval of the rayon budget and can commit funds up to the value of their annual budget allocations and make payments up to the value of their monthly apportionment limits. Management of budget releases using strong commitment control processes has been successful in managing arrears.

10. Each department is responsible for maintaining its own payroll accounting system. Economic Information on employees, which is accounted for by the Human Resource unit, and remuneration processed by the accounting department, are reconciled. Changes to staff and payroll information are made on approval. Budgetary institutions have clear and detailed rules and procedures for making changes to staff and payroll information. These rules and procedures include a requirement for signatures of authorized persons and provide a clear audit trail.

11. The public procurement system is strong. This reflects the national ProZorro electronic procurement platform which is used at all levels of government in Ukraine. It has been recognized internationally and has received several awards. All procurements above a threshold at the time of the assessment were carried out by competitive methods and there were no waivers.

12. Internal controls on non-salary expenditure are positive. There are effective commitment controls and compliance with payment rules and procedures. Improved segregation of duties with clear responsibilities is ensured by the management information system (“E-Treasury”) that supports the TSA. However, there is no internal audit unit in the rayon. The Western Directorate of the State Audit Service may carry out internal audit activities based on its risk assessment but has not done so to date.

13. Accounts reconciliation and financial data integrity are areas of strength. The bank reconciliation for the TSA takes place daily. There are no suspense or advance accounts. Data integrity is good as access and changes to records are restricted and recorded, which produces a sufficient audit trail. A senior member of the rayon’s management team provides oversight of all transactions.

UKR-IZR-1

14. With respect to in-year budget reports, coverage and classification of revenue and expenditure in reports allow direct but not full comparison to the original budget. Reporting on expenditure is based on economic and functional classifications, but not on administrative classification. This does not allow for comprehensive direct comparison with the original budget. Information includes all budget estimates for the spending units. There are quarterly budget execution reports that are issued within 35 days from the end of the quarter to the rayon state administration (RSA). Basic information is provided monthly to the RSA and detailed information quarterly. There are no material concerns regarding data accuracy. Information on expenditure is provided at the payment stage (only unpaid commitments are shown).

15. The annual financial statements include information on assets, liabilities, revenue, expenditure, and a reconciled cash statement. Reporting on expenditure is based on economic and functional classifications, but not on administrative classification, which does not allow for direct comparison with the original budget, as is the case for the in-year budget reports. The financial statements are produced within three months after the end of the reporting year but have never been submitted for external audit. The national public sector accounting regulations (standarts) that apply to all financial statements are largely consistent with international standards. Notes to the financial statements clearly disclose the accounting framework and standards used in preparing annual financial reports. However, the differences between applicable national provisions and International Public Sector Accounting Standards (IPSAS) are not presented.

16. External audit at the rayon level is not routinely carried out. As a result, legislative scrutiny of audit reports does not take place. The financial statements are reviewed at the RC.

17. The internal control environment is generally sound, but is weakened by the absence of periodic internal audits. The controls associated with the day-to-day transaction of the rayon budget are functioning and result in good data integrity regarding the activities of these entities. The laws and regulations provide the legal framework, and allow for specific roles and responsibilities, segregation of duties, and operating processes. The system embeds access controls and audit trails that support the internal control framework. The budget execution reporting system that provides information on performance relating to service delivery enhances the overall control environment. The rayon’s Balance Commission reviews expenditure performance in relation to service delivery and provides independent evaluation and makes recommendations on service delivery performance, however the results of these reviews have never been published.

Aggregate Fiscal Discipline

18. Aggregate fiscal discipline is achieved due to control over budget execution, but is weakened due to a low level of realism in the revenue forecasts. While revenue administration ensures that revenues are efficiently collected, the relative weaknesses in forecasting own revenue and the transfers from the central government have undermined overall discipline. In particular, the system of transfers from the state budget allows the central government to allocate some transfers during a budget year as well as reallocate transfers between local budgets during the budget year. Moreover, the rayon allocates some transfers to lower level budgets during the budget year as well. Nevertheless, implementing the planned budget, on an aggregate basis, to accommodate unplanned revenues is assisted using virement and supplementary budgets following the procedures laid out in the Budget Code. Treasury operations and cash management enables expenditures to be managed within the available resources as forecast by the rayon’s Finance Department. Control of contractual commitments is effective and has ensured that expenditure arrears are insignificant and manageable. The absence of a full external audit function may inhibit fiscal discipline while the operations of the State Audit Services is minimal and there is no internal audit function in the rayon. The operations of the Balance Commission fill the gap. The rayon’s use of competitive tenders in its procurement also improves fiscal discipline.

Strategic allocation of resources

19. The Chart of Accounts and budget classification cater to a multi-dimensional analysis of expenditure but the full classification is not fully used at the reporting stage. The budget information available to citizens makes them aware of what is being spent and encourages them to demand resources directed at their needs. Although the rayon budgets are adopted annually and the program proposals are used for annual budget estimates only, there is an emerging medium-term perspective in expenditure budgeting at the level of key spending units. Performance indicators are specified, and there is assessment and independent evaluation of performance achievement. The work of the Balance Commission provides a critical review of performance, but its results are not published. There is an emphasis on overall fiscal forecasting but this does not extend to a multi-year fiscal strategy to assist in resource allocation.

Efficient use of resources for service delivery

20. The strength in the procurement process is good and affects the efficiency of service delivery.Relative weakness in the payroll system particularly in the integration of payroll and personnel systems may mean that staff are not used effectively. The strengths in accountability mechanisms provide counter checks on inefficient use of resources although regular external audits of full annual financial statements are absent. The quarterly budget execution reports (supported by internal monthly reporting) do not ensure that there is well-timed assessment of resource usage relating to the planned budget, considering the lack of expenditure reports by administrative classification. Publishing of performance targets and outcomes supports the efficient use of resources in service delivery units. The reviews of expenditure performance by the Balance Commission are a positive feature of the rayon’s PFM system.

UK-IZR-2

21. The adoption of a comprehensive decentralization program has been at the center of the reform process. Addressing governance ineffectiveness of small local communities was the primary objective of the reform process. The awareness of the necessity to undertake deep structural reforms in order to make the economy more efficient to ensure sustainable growth became a mainstream political agenda. It is against this backdrop that the very bold and elaborate decentralization agenda was adopted to become a top reform priority. The program was officially formulated in the Concept for Reform of the Local Government and Territorial Organization adopted by the Cabinet in April 2014. Consequently, the program was also reflected in a range of systemic legislative pieces among which are the Budget Code of Ukraine (BCU) and Tax Code of Ukraine.

22. At the end of 2014, amendments to the Budget Code were introduced to implement the reform of intergovernmental fiscal relations in light of new models of financial provision. The responsibilities of local governments – primarily relating to education, healthcare and social welfare were changed to reflect amalgamation process at the lowest level. A supplementary range of fiscal reforms was also introduced to enlarge the own revenue base of local governments. In addition, the changes to the Budget Code enabled broadening of the ability of type of local governments to borrow and incur debt. Most importantly, the local government transfer system was changed to accommodate the new functional mix and the tax code modifications. Amalgamation of over 10,000 small settlements (called hromadas) into larger town-like communities was prescribed by the 2015 Law on Voluntary Amalgamation of Territorial Communities. As of the end of 2018, 806 new entities (ATC) were established covering nearly 40 percent of Ukraine’s rural population(i.e., over 8 million people).

23. This PEFA assessment creates a baseline for the rayon. There has been no previous assessmentat this level1.