1. 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 Network 22 – 23 February 2007 Paris, France

2. 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

3. 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

4. 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

5. EAP Task Force Performance Assessment of the State Fund of Ukraine: 2006 Checklist  Checklist  Checklist 

6. 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

7. EAP Task Force Fund’s Revenue

8. 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

9. 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

10. 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

11. 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?