Nelly Petkova Environmental Finance Programme

1. Tenth Meeting of the EAP Task Force EECCA Environmental Finance Network22 – 23 February 2007 Paris, France Performance Review of the State Environmental Protection Fund of UkraineMain Conclusions and Recommendations Nelly Petkova Environmental Finance Programme

2. 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. 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. 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. Performance Assessment of the State Fund of Ukraine: 2006 Checklist  Checklist  Checklist 

6. 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. Fund’s Revenue

8. 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. 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. 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. 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?