Ukraine Zhytomyr City 2022
Rationale and purpose
Ukraine’s macroeconomic growth remained on track since 2016, following the 2014-2015 economic crisis; this was partly due to the first IMF’s Stand-By Arrangement (SBA) approved in December 2018 and the second 18-month COVID-19 related SBA request of USD5 billion approved in June 2020, coupled with sound fiscal and monetary policies, which culminated into the reduction of public debt. The country was not spared by the global COVID-19 pandemic; the humanitarian and economic crisis have derailed efforts towards a stronger and all-inclusive growth.
Several years ago, Ukraine adopted a very bold and elaborate decentralization agenda which became the top reform priority of the Government. The reform included the shift of fiscal responsibilities to local governments, which was adequately being followed by the decentralization of the delivery of key public services such as education, health, and social welfare. As decentralization gains momentum, sub-national government levels are taking up an increasing share of the overall public expenditure.
In accordance with the Budget Code of Ukraine, the main sources of revenue of the Oblast Capitals include: 60% of the personal income tax, excise tax, rent and fees for use of natural resources, corporate income tax from communal enterprises, and local taxes (first of all, flat tax, property tax and land tax). Meanwhile, the expenditure responsibilities of the Oblast Capitals include: education (pre-school education, secondary education, high-school communal institutions, extra curriculum education, professional education), healthcare, local fire department, housing and communal services, transport and road infrastructure, mass media, social services, physical education, culture development, libraries, museums, and communal zoos.
The bold decentralization drive of the Government led to the first sub-national PEFA assessment of Starosynyavska Amalgamated Territorial Community in 2019, followed by other SNG PEFA assessments for Khmelnitsky Oblast, Khmelnitsky Oblast Capital, and Iziaslavskyi Rayon between 2019 and 2020. At the national level, three PEFA assessments have been conducted: in 2012, 2016 and 2019.
This PEFA assessment in selected cities (including Zhytomyr city) is part of a preparatory phase of the “Effective Local Public Financial Management in Ukraine” Project (ELocFin), which is planned to be implemented between 2022-2025 with the financial support of the Swiss State Secretariat for Economic Affairs (SECO).
The overall objectives of this sub‐national PEFA assessment are to:
(i) Contribute to an up‐to‐date picture of the quality of sub‐national PFM system at Oblast Capital level in Ukraine;
(ii) Enable the relevant central and local governments to identify reform priorities based on the findings of the PEFA assessment;
(iii) Provide the basis for PFM capacity development initiatives in local governments of Ukraine;
(iv) Inform possible adjustments to relevant ongoing reforms in the country.
Based on this information, the local governments would be in a stronger position to prepare a list of PFM improvement proposals for submission to the Ministry of Finance (the proposals may include amendments to the budgetary legislation or additional reform initiatives/measures to the PFM Strategy and/or its Action Plan). The assessment results will be used for identification of the PFM strengths and weaknesses in the respective city and consequently for determination of the underlying causes of the PFM performance. On the other hand, as the Ministry of Finance is directly involved in this PEFA assessment both as member of the Oversight committee and as peer reviewer, the results can be directly used by the ministry for further adjustments (if needed) in PFM or in decentralization reform.
The specific objective of this PEFA assessment is to improve public service delivery through supporting PFM reforms at the sub-national level (oblast capital level) in line with Swiss SECO’s ELocFin project. Following an evidence-based approach, this preparatory stage assesses the strengths and weaknesses of PFM in the pre-selected Oblast Capitals using the PEFA 2016 methodology, including gender and service delivery modules. On the one hand, the ensuing assessment reports will provide the basis for the final selection of participating Oblast Capitals as well as for the development of individual reform action plans (including baselines) during the inception stage of the first project phase. On the other hand, they will contribute to an increasingly granular understanding of PFM in Ukraine, which is the basis for the dialogue on PFM reform strategies and priorities both among local stakeholders and with international development partners.
The primary beneficiaries of this PEFA assessment are Ministry of Finance of Ukraine and the Zhytomyr City Council. Key officials involved in the assessment were trained on the use of the PEFA methodology, gender-responsive PFM, and the service delivery module as part of internal capacity building to facilitate the assessment and communication of results.
Main strengths and weaknesses of the PFM systems
PFM laws, regulations, and guidelines established by the central government are strong; they form the basis of a strong PFM system. Not only the laws are strong, but also the compliance levels are high.
The good performance of budget classification and documentation included in the budget proposal enhances transparency. Transparency and publication of fiscal data (budget, execution reports, procurement information, performance information for service delivery, etc.) encourage financial accountability. There is also citizens engagement during the budget formulation and preparation process through public consultations, which further improves transparency.
The debt management system is well-regulated and supported by the Government in terms of ensuring local debt approval and monitoring by the Ministry of Finance on the regular basis. This is an efficient instrument for managing risks and increasing efficiency of local investments.
The public procurement system is solid. The Prozzoro online portal provides a lot of information on procurement, including procurement plans, bids, contract awards, procurement complaints resolution, and procurement statistics. This information is made available to the public promptly. Transparent procurement systems contribute to reducing service delivery costs, leading to efficiency and effectiveness.
There is a strong cash management framework coupled with a good revenue reporting mechanism which ensures a timely release of funds to key spending units for payment of expenditure, thereby eliminating expenditure arrears. The cash management system is effective thanks to TSA, which allows the City Government to properly track its cash/bank balances.
The huge expenditure reallocations for both economic and functional classifications, resulting from higher level government transfers originally not budgeted for, have a negative impact on the execution of planned sub-national government policies and programmes. The good news, however, is that these activities are predetermined by the central government and therefore cannot be altered.
Though annual financial statements are comprehensive, they are not directly comparable with the approved budget (in part of administrative classification). This makes it difficult to properly track City Government budget.
External oversight carried out by the Accounting Chamber of Ukraine is partial; it fails to provide a comprehensive independent overview of the operations of the City Government. This is because of the limitations of the legal framework that governs the activities of ACU – meaning that the independence of ACU is severely undermined. The City Council also cannot scrutinise external audit reports because these reports are not prepared and submitted to the council for scrutiny.
Impact of PFM performance on budgetary and fiscal outcomes
Aggregate fiscal discipline
Aggregate fiscal discipline is strengthened by the existence of strong PFM laws promulgated by the state government for all levels of the government. There is also a high compliance with payment rules and procedures, which strengthens the fiscal discipline. Fiscal discipline is also strengthened by the reliability of aggregate revenues. Nonetheless, it is weakened by the variances in revenue composition. The expenditure budget is reliable at the aggregate level but unreliable at both economic and functional classification levels because of unpredictable and unbudgeted higher level government transfers; this has a negative impact on fiscal discipline.
At this stage, revenues and expenditures outside the City Government budget and reports are not a threat to fiscal discipline since they represent less than 2% of the City Government operations. They could, however, affect fiscal discipline in the future if they are allowed to expand and if the city is not establishing a proper internal audit function that can monitor the development. In fact, good practice suggests a threshold of not more than 1% of the revenue and/or expenditure budget. However, operations outside the City Government are monitored and reported timely.
The city public corporations are fairly monitored, with the majority of them being audited annually; this reduces the risk of providing additional funding to unprofitable corporations. That said, public enterprises with poor performance could be a pointer in terms of strengthening the oversight responsibilities of public corporations. Payroll controls are satisfactory to the extent that they provide reasonable assurance for strengthening fiscal discipline.
The ineffectiveness of the external oversight roles by the ACU and the City Council - mainly due to legal limitations of the former – as well as the consequential lack of auditing and submitting external audit reports of the local government for legislative review have the potential to weaken the internal control framework with a consequential negative impact on fiscal discipline.
Strategic allocation of resources
The City Government’s budget classification meets international standards. This good practice coupled with comprehensive budget documentation information enhances the strategic allocation of resources. Resources allocated can be easily traced.
The underlying assumptions for forecasting the budget set the tone for resource allocation in a strategic manner. The insufficient time allocation for key spending units to meaningfully prepare their budget proposals reduces KSUs’ ability to effectively prioritise their programmes and expenditure requirements. That said, the approval of the annual budget promptly allows key spending units to commence their annual programmes and activities in time to ensure the full utilisation of allocated resources for improved service delivery.
The adequacy of resources available to the City Government for the execution of its policies and programmes through transfers from higher level government, though unpredictable, supports the provision of service delivery. The concern, however, is about the frequency and significance of budget reallocations within the year; this defeats the purpose of strategic resources allocation. Nevertheless, this negative effect is minimised by pre-determined activities to be funded, meaning that funds can only be used for these activities. Strategic resource allocation is strengthened by a good revenue accounting framework and an efficient cash management system, together with ensuring the availability of resources promptly for improved service delivery.
Efficient use of resources for service delivery
The efficiency in the use of resources for service delivery has been positively impacted by a good budget classification which allows strategic allocation of resources. That said, in-year budget virements are significant and frequent. This has a negative impact on strategic resource allocation, leading to inefficient service delivery. However, the negative impact is reduced by the availability of cash for payment of expenditures/services.
Procurement management systems are good with most procurement activities going through open tender, leading to cost reduction and, consequently, improved service delivery. There is good public access to service delivery information, both planned and achieved. This has led to citizen engagement for more accountability, resulting in the efficiency of the use of resources for service delivery. Approach to public consultation should be revised and strengthened, yet there is some experience in conducting consultation in design of the SD program over the period under assessment; more public engagement in the design of public service means improvement in the efficient use of resources for service delivery. The existence of proper accountability for resources received in cash and kind has led to an improvement in the delivery of primary services.
The efficiency in the use of resources for service delivery is negatively affected by the low internal and external audit coverage. Improved audit coverage ensures that the performance of service delivery is assessed to evaluate its efficiency and effectiveness. The timely preparation and publication of fiscal data (in-year budget execution reports) has led to improvement in public accountability, thereby leading to an efficient use of resources for service delivery. Fixed assets that are needed for the delivery of service are well kept, accounted for and monitored; this has a positive impact on the efficiency of service delivery since resources are not wasted.
Impact of PFM performance on service delivery
Service delivery process is a ground for formulating one of the key principles of the budgetary system that is the principle of subsidiarity. It implies the distribution of different groups of expenditure between the state budget and local budgets, as well as different levels of local budgets, based on the need to bring public services closer to citizens.
Improvement of the quality of public services and consequent increase in citizens’ welfare were among the main tasks of the Government’s budget and decentralization reform which has started in 2014. These also constituted a basis for gradual transferring of powers and responsibility of public service delivery from the central level to local governments.
As a result of the recent implementation of the decentralization reform, a lot of administrative services are currently being implemented at the local level, such as: residence registration, ID issuance, state registration of entities, entrepreneurs, associations of citizens, registration of civil status, property rights, and land issues regulation. This contributes to the improvement of citizens’ accessibility to the public services, as well as shortening the time required for services delivery.
Performance changes since the previous assessment
Since this is the first PEFA assessment, there is no tracking of performance changes. This assessment therefore forms the baseline for future assessments.
Table 1 below provides a summary of PFM performance of each dimension and indicator. Chapter 2 provides a detailed analysis and assessment of PFM performance of each dimension and indicator. Chart 1 shows a graphical presentation of PFM performance at the indicator level.