## 1ukrea2019008 ## Source details **Canonical URL:** [1ukrea2019008](https://www.imf.org/-/media/files/publications/cr/2019/1ukrea2019008.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2019/1ukrea2019008.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2019/1ukrea2019008.pdf.json) --- ### Executive summary — key diagnostics and trends - Public capital stock: - 99 percent of GDP in 1996. - 56 percent of GDP in 2013. - Public capital stock per capita among the lowest of comparator countries. - Efficiency and investment gap: - Efficiency gap of around 32 percent (Ukraine) versus about 22 percent (emerging market countries) and 28 percent (CIS countries). - Recent public investment spending: - Since 2008, public investment spending averaged 1.5 percent of GDP. - Investment fell to under 1.5 percent of GDP after the crisis (post-2007). - Reduction in investment spending (2005 PPP adjusted): 2008: 3.3 percent of GDP; 2013: 0.9 percent of GDP. - Decentralization and allocation shifts: - Share of investment allocated to local government increased from 46 percent to 70 percent since 2005, with the majority of the shift in 2015. - Local government investment share: 56.3 percent in 2005 rising to 69.6 percent in 2015. - State-owned enterprises (SOEs) and PPPs: - SOEs at central and local levels hold a large share of investment; monitoring frameworks and fiscal risk management for SOEs underdeveloped. - PPP institutional strength—Low; Effectiveness—Low. - Institutional assessment summary (overall): - Institutional strength: 7 out of 15 institutions ranked low, 8 ranked medium, 0 ranked strong. - Effectiveness: 12 institutions ranked ineffective, 2 moderately effective, 1 scored high. - Main drivers of under-investment: - Protection of current expenditures through legislation treating investment as a residual item (Budget Code Article 55). - Persistent institutional weaknesses, high perceived corruption, limited fiscal space, high stock of debt, and conflict in the East. ### Major institutional weaknesses by PIM phase (planning, allocation, implementation) - Planning stage: - National and sectoral plans do not prioritize or cost investment proposals nor take account of fiscal constraints. - Fragmented allocation systems for local government investments; some decisions largely ad hoc. - Confusing and fragmented PPP-related legislation and weak capacity to manage PPP fiscal risks. - Allocation stage: - Absence of a comprehensive multi-annual budget framework and stable medium-term funding for public investments. - No precise definition of capital spending; recurrent costs often included in development budget spending. - Project appraisal and selection processes weak and applied to a small subset of projects. - Implementation stage: - Uncertainty of funding for capital spending due to protection of current spending and weak cash management. - Weak monitoring systems and ex post audit focused on financial compliance rather than performance. - Inadequate project management frameworks for domestically financed projects. ### Budget rigidities, composition, and execution - Legal protection of current expenditures: - Budget Code of Ukraine (Article 55) protects wages, social benefit and other current expenditures, making capital spending a residual. - Execution and volatility: - Public investment execution rates for general government investment in fixed assets ranged between 53 and 87 percent of the revised budget over the last decade. - Ukraine's public investment has been the most volatile among peer countries. - External financing and sources: - Around half of general government investment currently financed through external sources. - External financing previously averaged 25 percent of total public investment financing, primarily IFIs. - With exception of local government borrowing, external financing for investment is concessional. - Sectoral and functional allocation (average 2009–13 and 2014–15 shifts): - Capital spending in social sectors: 34 percent in Ukraine versus 40 percent in EU countries (average 2009–13). - Functional shifts 2009–13 to 2014–15: public order and safety 5.1 to 10.6; social services 33.9 to 41.3; infrastructure 49.1 to 36.4. - Roads and infrastructure access: - Roads per capita: Ukraine 3.7 kilometers per capita; Poland/Turkey/Hungary 12 kilometers per capita; Emerging and Developing Europe 8; emerging markets 6.2. ### Corruption, procurement, and private participation - Perceived corruption indicators: - 99 percent of firms expect to pay bribes to win government contracts. - 73 percent report "gifts" required to secure construction permits. - 73 percent report "gifts" required to get things done. - Procurement and e-procurement: - Annual procurement about 300 billion UAH; up to 40 percent of funds might have been misused. - New procurement law effective April 1, 2016; e-procurement system (Prozorro) rollout mandatory thresholds: - Mandatory for central government entities’ procurements above 200 thousand UAH for goods and 1.5 million UAH for services from April 1, 2016. - Mandatory for all government entities including local governments from August 1, 2016. - Impact on PPPs and private investors: - High perceived corruption reduces private partner and foreign investor participation and may increase costs. ### Public-Private Partnerships (legal and institutional diagnosis) - Legislative fragmentation: - Multiple overlapping laws: “General Concession Law” (1999); “Law on Concessions in Construction and Operation of Motorways” (1999); “Law on Leasing and Concession of Municipal Assets in Heating, Water Supply and Sanitation (2010)”; “Law on Public-Private Partnerships (2010)”. - “Concept for PPP Development 2013-18” exists but not considered in current investment decisions. - Deficiencies of the 2010 PPP law: - Limited role of the MoF in PPP gateway process. - Lack of protection for private partner (no access to arbitration, restricted access to government guarantees, impossibility of multi-year commitments by public partner). - No step-in rights; no systematic approach to unsolicited proposals. - Practice and disclosure: - Most private participation via concession contracts that require no explicit government funding and are procured under concession laws with less onerous requirements. - Since 2010 PPP Law, only two very small projects procured under its provisions. - MoE and State Property Fund registries do not record projects’ explicit or contingent liabilities; financial information limited. - Fiscal risk management: - MoF approval required only for explicit government funding, limiting ability to identify medium- and long-term fiscal impacts. - No government plans to introduce a limit on accumulation of associated PPP liabilities. ### SOE regulation, oversight, and fiscal risks - Institutional overlap and burdens: - Large number of entities: in 2013 around 3,632 entities (around 1,338 estimated viable); 623 entities in energy and infrastructure accounted for 77.1 percent of aggregate assets. - Overlapping roles: Cabinet, shareholding line ministries/local governments, MoE, MoF, sector regulators, State Property Fund. - MoE concentrates monitoring on largest 100 SOEs but lacks methodologies and legislative clarity. - MoF role and gaps: - MoF tasked to identify and mitigate fiscal risks from SOEs but legislation does not specify required information flows, contents of fiscal risk statements, publication requirements, or methodologies. - Fiscal risks unit in MoF established in 2015. - State Support Procedure (SSP) limitations: - Redundant and incomplete coverage: of 45 projects listed in State Register (aggregate project costs 61 billion UAH), 30 are local projects accounting for 0.2 percent of aggregate project costs. - SSP targets revenue-generating projects proposed after 2012; only six SOE projects included and none added since 2015. ### Project appraisal, selection, pipeline, and monitoring - New mechanism (2015 MoE) for project appraisal and selection: - Committee comprising nine ministers and nine parliamentarians; Cabinet resolution No. 571 of 22.07.2015 provides procedures. - For 2016 budget: 36 projects prepared; 10 selected for implementation within a 1 billion UAH envelope (one project split into three sub-projects, total 12 funded); 27 positively reviewed for other sources; 18 returned for further development. - Project document structure includes: Objective and brief description; Main purposes and results; Responsible entity; Project rationale and zero-option; Alternative analysis; Total project cost; Funding sources; Economic efficiency; Social impact; Environmental impact; Annual project revenues; Annual operational costs; Domestic and foreign currency costs; Permits required for the project (verbatim fields from Table 3.A). - Coverage and pipeline issues: - The 1 billion UAH set-aside compared to expected total general government capital spending of 30–40 billion UAH in 2016. - Mechanism covers a large share of new central government investment projects but a small fraction of overall government capital projects; many development expenditures allocated to military/security without individual project identification. - No pipeline for subsequent budget years; selection for one year does not guarantee future funding; projects must be resubmitted each year. - Projects selected for 1 billion UAH in 2016 estimated to require an additional 7 billion UAH to be completed. - Project appraisal and selection shortcomings: - Criteria in Article 12 of Cabinet resolution No. 571 are high-level and process-oriented, useful for documentation quality but less for final prioritization. - Primary selection criterion in 2016: prioritization of completion of ongoing projects. - Monitoring, ex post audit, and asset accounting: - No centralized mechanism for monitoring major capital projects; MoE developing a monitoring process to begin implementation mid-2016. - No systematic ex post internal or external audit of capital projects; State Financial Inspection and Accounting Chamber limited to compliance-focused audits. - Asset accounting: government financial statements exclude stock positions and depreciation of nonfinancial assets; national public accounting standards adopt some accrual IPSAS but general government units continue cash basis; consolidated balance sheet includes only financial assets and liabilities. ### Multi-year budgeting, budget classification, and cash management - Multi-year budgeting: - No comprehensive multi-annual budget framework in practice despite Article 21 of Budget Code. - Multi-annual budget forecast approved in 2012 but abandoned; MoF circulates indicative ceilings for two subsequent years but actual budgets differ substantially. - Starting 2016, an annex includes a list of major public investments with remaining lifetime costs but: - Relates only to projects defined as public investments under Budget Code. - Excludes other capital projects which constitute more than 90 percent of capital expenditure. - Costs not broken down by year. - All appropriations lapse at year-end; multi-annual commitments strictly prohibited except for externally financed projects where loans carry over. - Budget classification and comprehensiveness: - Budget classification distinguishes consumption and development costs, not current and capital spending; not consistent with GFSM 2001/2014. - Final state budget for 2015 included 44.472 million UAH for “development” spending. - End-2015 totals: total allocation for capital spending during the year approximately 43 billion UAH, of which approximately 35 billion UAH were executed. - International borrowing for projects expected to amount to 15 billion UAH for 2016 (recorded as revenue to the special fund). - SOE investment 2015 estimates and financing: - Government guarantees for direct loans to SOEs amounted to 12.8 billion UAH in 2015. - Capital grants from the budget (to SOEs and private entities) amounted to 11.0 billion UAH. - Most SOE investment in 2015, estimated at approximately 20 billion UAH, was covered by state guarantees or financed by capital grants. - Cash management: - Monthly financial plans produced at beginning of year but not updated; State Treasury Service produces weekly forecast of cash balances for following month. - Investment spending treated as residual; protected items (Article 55) prioritized and are almost entirely current spending and transfers. - IFI-financed project FX accounts held in commercial banks outside TSA weakening consolidated liquidity management. - Local governments permitted to open commercial bank accounts from 2015 increasing exposure to banking system. ### Institutional assessment (Section III excerpts) - Project Selection: Institutional strength—Medium; Effectiveness—Low - Protection of Investment: Strength—Medium; Effectiveness—Medium - Availability of Funding: Institutional strength—Low; Effectiveness—Low - Transparency of Execution: Institutional strength—Low; Effectiveness—Low - Project Management: Institutional strength—Low; Effectiveness—Low - Assets Accounting: Institutional strength—Low; Effectiveness—Low ### Prioritized recommendations (three key areas and nine targeted issues) 1. Improving planning and prioritization - Establish a common, concise set of fully costed and prioritized capital investment plans to be included in national and sectoral strategies. - Consolidate and make more transparent the allocation methodology and approval process for capital transfers to local governments; merge the Regional Development and Socio-economic Development funds; delegate project selection financed from these funds to local level. - Consolidate and strengthen legal and institutional framework for PPPs, focusing on fiscal risk management; develop and adopt a single comprehensive PPP law; assign MoF explicit gatekeeping role; incorporate PPPs/concessions in budget process and MTBF; include lifetime costs in budget documentation. 2. Improving resource allocation for public investments - Establish a medium-term investment project pipeline process and combine it within a comprehensive medium-term budget framework that accounts for multi-annual commitments. - Provide a clearly defined capital budget in budget documents using international classification standards and have this formally approved by parliament. - Strengthen the newly established project appraisal and selection approach and extend it to all major state investments, including externally financed projects. 3. Developing comprehensive and efficient project implementation systems - Ensure effective oversight through centralized monitoring and systematic ex post financial and performance audits. - Prohibit reallocation from capital to other expenditure and specify carryover rules common to general and special fund appropriations within quantitative limits and with MoF approval. - Implement FAD recommendations to strengthen cash management capacity, eliminate foreign currency accounts of spending units, and integrate debt and cash management strategies. - Additional numbered recommendations (Issues 1–9 with specific measures) reproduced exactly in intent and sequencing in the action plan highlights below. ### Action plan highlights — targeted reforms, timelines, and responsible institutions (selected items) - I. Limited Planning and Prioritization - 1.1 Develop and adopt a new Planning Law and associated regulations: - Draft by Nov. 2016; Regulations approved by Jun 2017. Responsible: MOE. - 1.2 Require sectoral strategies to include fully costed and prioritized capital investment plans using a harmonized template: - Stock-take by Sep. 2016; New template by Jun 2017; New sectoral strategies approved by June 2018. Responsible: MOE, MOF. - 2.1 Merge Regional Development Fund and Socio-Economic Development Fund: - Allocations combined in 2017 budget. Responsible: MOF, MORD. - 2.2 Develop a transparent formula-based system for capital transfers to local authorities: - New allocation formula approved by end-2016; Funds allocated according to the new formula in 2018 budget. Responsible: MOF, MOE, MORD. - 3.1 Develop and adopt a single comprehensive PPP law: - Draft by Oct. 2016. Responsible: MOE, MOF. - II. Inadequate Budget Practices - 4.1 Establish medium-term investment project pipeline with annual projections of full project costs: - Procedures defined and guidelines updated by Jun-2016; Multi-year commitment authorized in Budget Code; Include multi-annual commitments in 2017 budget law. Responsible: MOE, MOF. - 5.1 Include a table on expenditure by economic classification, broken between current and capital budgets in budget documents to be approved by VR: - 2017 budget preparation. Responsible: MOF. - 6.1 Extend project appraisal and selection procedures to all major projects and require MOF scrutiny of budget affordability: - Procedures extended to all major domestically financed projects in 2017; extended to projects with external financing in 2018. Responsible: MOE, MOF. - III. Weak Implementation Processes - 7.1 Establish systematic reporting with project development, implementation, and risk assessment information: - MOE monitoring framework in place from July 2016. Responsible: MOE, MOF. - 7.2 Mandatory ex post financial and performance audit of all projects involving significant fixed capital formation: - Specific ex post audits included in audit program for 2017; Ex post audits published as separate reports, starting Jan 2017. Responsible: Accounting Chamber. - 8.1 Amend the Budget Code to prohibit reallocation from capital to other expenditure and allow carryover of unused capital appropriations: - Budget Code amended and regulations adapted by Sep 2016; New rules enforced in 2017 budget execution. Responsible: MOF. - 9.1 Integrate all foreign currency accounts of spending units into the TSA: - Integration into TSA by end-2016. Responsible: MOF. - 9.2 Integrate debt and cash management strategies and forecasting techniques: - MOF responsible for central government cash planning by Oct. 2016; MOF responsible for managing central government cash position by Jun 2017. Responsible: MOF, State Treasury Service. ### Capital transfers to local government — structure, figures, and transparency - Major capital transfer programs (2016 figures): - Ministry of Regional Development manages: - Regional Development Fund: UAH 3 billion in 2016, 0.15 percent of GDP. - Subvention for Amalgamated Territories: UAH 1 billion, 0.05 percent of GDP. - Ministry of Finance manages: - Subvention for Socio-Economic Development: UAH 1.94 billion, 0.1 percent of GDP. - Ministry of Economic Development manages: - Program to support national and regional development projects: UAH 485 million. - Combined total of these four transfers: UAH 6.43 billion in 2016, constituting 1 percent of the main budget or 0.35 percent of GDP. - Funding certainty and accountability: - Local capital spending financed from own revenue described as insignificant. - Funding certainty at local level limited; Subvention for Socio-Economic Development allocations are project based with no transparent criteria and final decisions not made by local authorities. ### Annex highlights — SOE legislation, leases, selection frameworks, and MoF gatekeeping - SOE financial performance monitoring (key legislative issues and recommendations): - Overlapping institutions and gaps in SOE performance monitoring; MoE oversight responsibilities duplicative and resource constrained. - Recommend amending LMSP to replace MoE’s direct approval role with focused monitoring of largest 100 SOEs and specify methodologies. - Recommend amending MoF Order to specify information flows, fiscal risk statement contents, publication requirements, and methodologies for SOE fiscal risk assessment. - Lease of state property: - Registered leased properties: 19,260 in the Register of Operating Lease (SPF). - Around 4,000 properties leased at 1 UAH per month. - Lease revenue limited to 0.2 percent (1.2 billion UAH) of total State Budget revenue in 2015. - Legal constraints identified on pricing, term adjustment, eviction, and lack of model lease contract. - Selection of public investment projects: - Recommend weighted scoring across criteria (national strategy 10 points; sector strategy 20 points; Benefit/cost ratio 40 points with B/C 2,0 = 40; implementation risks 20 points; concessional financing 10 points). - Example illustrative scoring: a project scoring 5 (national) + 15 (sector) + 40 (B/C >=2,0) + 5 (risks) + 0 (concessional) = total score 65. - MoF gatekeeping role for PPPs (Annex V structure): - Gateways across phases: Planning (Gateway 1), Feasibility (Gateway 2), Design/Tender (Gateway 3), Bidding/Signing (Gateways 4–5), Construction/Operation (Gateway 6). - MOF-IU and MOF Finance Division assess VfM, budgetary affordability, macroeconomic consistency; Finance Minister approval required at gateways. ### Key numeric observations and exact figures (selected) - Public capital stock: 99 percent of GDP in 1996; 56 percent of GDP in 2013. - Investment trajectory: 2008: 3.3 percent of GDP (2005 PPP adjusted); 2013: 0.9 percent of GDP (2005 PPP adjusted). - Post-2008 public investment average: 1.5 percent of GDP. - Efficiency gap: about 32 percent (Ukraine). - Execution rates for general government investment in fixed assets: ranged between 53 and 87 percent of the revised budget. - External financing previously: averaged 25 percent of total public investment financing. - Sectoral capital in social sectors: 34 percent (Ukraine) vs 40 percent (EU) average (2009–13). - Functional shifts (2009–13 to 2014–15): public order and safety 5.1 to 10.6; social services 33.9 to 41.3; infrastructure 49.1 to 36.4. - Roads per capita: Ukraine 3.7 km per capita; Poland/Turkey/Hungary 12 km per capita; Emerging and Developing Europe 8; emerging markets 6.2. - Perceived corruption: 99 percent expect to pay bribes; 73 percent report gifts required for construction permits; 73 percent report gifts to get things done. - Debt ceiling on budgetary central government: 60 percent of GDP (Budget Code). - Local government borrowing limits: 200 percent of forecasted local development revenues for following two years; City of Kiev 400 percent. - Limit on local government debt servicing: 10 percent of the local general fund. - Local government debt: 1 percent of total general government debt. - Local government investment share: 56.3 percent in 2005 to 69.6 percent in 2015. - Number of State Target Programs (STPs) existing: 30, with a further 27 likely to be submitted by end-2016. - Fraction of proposed projects funded in public roads program: around 5 to 10 percent. - 2016 capital transfer program amounts: Regional Development Fund UAH 3 billion (0.15 percent of GDP); Subvention for Amalgamated Territories UAH 1 billion (0.05 percent of GDP); Subvention for Socio-Economic Development UAH 1.94 billion (0.1 percent of GDP); Program to support national/regional development projects UAH 485 million; Combined UAH 6.43 billion (1 percent of main budget or 0.35 percent of GDP). - 2015 budget “development” spending line: 44.472 million UAH. - End-2015 capital spending allocation/execution: approximately 43 billion UAH allocated; approximately 35 billion UAH executed. - IFI-financed projects expected international borrowing for 2016: 15 billion UAH. - SOE-related 2015 figures: government guarantees for direct loans to SOEs 12.8 billion UAH; capital grants from budget 11.0 billion UAH; most SOE investment in 2015 estimated at approximately 20 billion UAH. - Project mechanism 2016: 36 projects prepared; 10 selected within 1 billion UAH envelope; selected projects estimated to require additional 7 billion UAH to complete. - Procurement thresholds for Prozorro mandatory use: 200 thousand UAH (goods) and 1.5 million UAH (services) for central government from April 1, 2016; mandatory for all government entities from August 1, 2016. - Registered leased properties in SPF register: 19,260. - Number of lease contracts leased at 1 UAH per month: around 4,000. - Lease revenue share of State Budget 2015: 0.2 percent (1.2 billion UAH). *Source: IMF Fiscal Affairs Department mission PIMA report (1ukrea2019008 — Preface, Section II, Section III, Annexes II–V, and Table 4.A Action Plan excerpts).* ### PREFACE _________________________________________________________________________________________ 5 ### 1ukrea2019008 - PREFACE ### Mission and scope - IMF Fiscal Affairs Department technical assistance mission to Kiev, Ukraine: April 7–21, 2016. - Mission purpose: conduct a Public Investment Management Assessment (PIMA) and advise on improving public investment management (PIM) practices. - Mission led by Brian Olden (FAD); team: Miguel Alves, Yugo Koshima (all FAD), Ulrike Rwida, and Eivind Tandberg (both FAD experts). - Funded by Global Affairs Canada. - Principal Ukrainian and partner interlocutors included: Minister of Finance Mr. Danylyuk; Minister of Infrastructure Mr. Omelyan; Governor of the Lviv Region Mr. Synyutka; Mayor of Lviv Mr. Sadovyy; senior officials from the Ministry for Regional Development, Construction and Municipal Economy; Ministry of Finance; Ministry for Economic Development and Trade; Kyiv City State Administration; Budget Committee of the Verkhovna Rada; State Audit Service of Ukraine; Accounting Chamber of Ukraine; State Road Agency of Ukraine; and discussions with European Commission, World Bank, and US Treasury Advisor Mr. Whitman. - Mission acknowledges organization support from Mr. Ihor Shpak (IMF resident representative office) and interpretation services by Ms. Valentina Kukhtik, Ms. Zenida Shulga, and Ms. Oksana Burakovska. ### Executive summary — key diagnostic findings - Public capital stock trend: - 99 percent of GDP in 1996. - 56 percent of GDP in 2013. - Ukraine’s public capital stock per capita is among the lowest of comparator countries. - Efficiency and investment gap: - Ukraine has an efficiency gap of around 32 percent, ranking below average among emerging market countries and comparators. - Recent public investment spending: - Since 2008, public investment spending has averaged only 1.5 percent of GDP. - Decentralization and allocation shifts: - Since 2005, the share of investment allocated to local government increased from 46 percent to 70 percent, with the majority of the shift occurring in 2015. - State-owned enterprises (SOEs): - SOEs at central and local levels hold a large share of investment; monitoring frameworks and fiscal risk management for SOEs remain underdeveloped. - Institutional assessment summary: - Institutional strength: 7 out of 15 institutions ranked low, 8 ranked medium, 0 ranked strong. - Effectiveness: 12 institutions ranked ineffective, 2 moderately effective, 1 scored high. - Key drivers of under-investment and deterioration: - Protection of current expenditures through legislation that treats investment as a residual item. - Persistent institutional weaknesses, high perceived corruption, limited fiscal space, high stock of debt, and the conflict in the East. ### Main institutional weaknesses (by PIM phase) - Planning stage: - National and sectoral plans do not prioritize or cost investment proposals nor take account of fiscal constraints. - Fragmented allocation systems for local government investments; some decisions are largely ad hoc. - Confusing and fragmented PPP-related legislation and weak capacity to manage PPP fiscal risks. - Allocation stage: - Absence of a comprehensive multi-annual budget framework and stable medium-term funding for public investments. - No precise definition of capital spending; recurrent costs are often included in development budget spending. - Project appraisal and selection processes weak and applied to a small subset of projects. - Implementation stage: - Uncertainty of funding availability for capital spending due to protection of current spending and weak cash management. - Weak monitoring systems and ex post audit focused largely on financial compliance rather than performance. - Inadequate project management frameworks for domestically financed projects. ### Summary assessment highlights (excerpts from Table 0.A) - Fiscal rules: - A debt ceiling is included in the budget code but the ceiling has been breached and there are no escape clauses. - The debt ceiling was breached in 2015, although voluntary debt restructuring is likely to bring the debt stock back under the ceiling. - National and sectoral planning: - National plans do not prioritize or cost capital investments or specify output targets; sector plans partially do so. - Sector plans do not take into account annual budget financial constraints; only a fraction of proposed projects are funded. - Central-local coordination: - Strong legal framework for local borrowing exists, including limits on local government debt servicing. - No strategic discussion between national government and local governments on capital programs; limited transparency on transfers to local governments. - Public-private partnerships: - Scrutiny and selection of PPP projects not transparent; value-for-money analysis not always required. - Government ill-equipped to manage fiscal risks from PPPs. - Multi-year budgeting: - Comprehensive multi-year budget framework does not exist; plans to introduce multi-year budgeting for the 2018 budget remain vague. - Budget comprehensiveness and unity: - Most government capital spending undertaken through the budget; externally financed projects disclosed; PPPs not disclosed. - Budget classification specifies consumption and development costs, not capital spending; absence of capital spending specification and lack of operating cost disclosure obstruct effective oversight. - Project appraisal and selection: - Few projects subject to systematic appraisal; new appraisal and selection procedures introduced for the 2016 budget but applied to a limited set of projects and unproven in effectiveness. - Protection of investment and cash management: - MOF can reallocate from capital to other expenditure; carryover applies only to special fund appropriations. - Cash forecasts are not amended as the year progresses; current expenditures are protected; capital disbursements are rationed. - Transparency and project management: - New procurement law has potential but efficacy unproven. - No centralized project monitoring mechanism and no systematic ex post audit. - No standard for project management; externally financed projects follow funder rules; domestic project management focuses on budget adherence over project objectives. - Assets accounting: - Financial statements exclude stock positions and depreciation of nonfinancial assets; asset surveys conducted regularly only for a minor subset of general government nonfinancial assets. ### Prioritized recommendations (three key areas) 1. Improving planning and prioritization - Establish a common, concise set of fully costed and prioritized capital investment plans to be included in national and sectoral strategies. - Consolidate and make more transparent the allocation methodology and process for approval of capital transfers to local governments and merge the Regional Development and Socio-economic Development funds, while delegating project selection financed from these funds to the local level. - Consolidate and strengthen the legal and institutional framework for PPPs, focusing on management of fiscal risks arising from those arrangements. 2. Improving resource allocation for public investments - Establish a medium-term investment project pipeline process and combine it within a comprehensive medium-term budget framework that facilitates and takes account of multi-annual commitments. - Provide a clearly defined capital budget in budget documents using international classification standards and have this formally approved by parliament as part of the budget approval process. - Strengthen the newly established project appraisal and selection approach and extend it to all major state investments, including projects with external financing. 3. Developing comprehensive and efficient project implementation systems - Ensure effective oversight of public investments through centralized monitoring and systematic ex post financial and performance audits. - Prohibit reallocation from capital to other expenditure and specify carryover rules common to the general and special fund appropriations within quantitative limits and with MoF approval. - Implement previous FAD recommendations to strengthen cash management arrangements. ### Outlook and implementation notes - Reversing the cumulative decline in the public capital stock requires urgent action and prioritization of institutional reforms. - Some recommendations are already being considered as part of an overall public financial management reform plan; the assessment includes an action plan focused on the most urgent actions within realistic timeframes and capacity constraints. *Source: IMF Fiscal Affairs Department mission PIMA report (Preface and Executive Summary).* ### 2. Existing budget rigidities are a constraint on efforts to increase investment levels. ### 2. Existing budget rigidities are a constraint on efforts to increase investment levels. ### Levels and volatility of public investment - Public investment in Ukraine has been significantly lower than those of emerging market economies since before independence. - After higher investment between 2002 and 2007, limited fiscal space from the financial crisis and high levels of current spending brought investment levels back to under 1.5 percent of GDP. - The Budget Code of Ukraine (Article 55) explicitly "protects" wages, social benefit and other current expenditures, making it extremely difficult to protect investment spending in downturns; investment typically adjusts when there are revenue shortfalls. - Public investment execution rates for general government investment in fixed assets ranged between 53 and 87 percent of the revised budget over the last decade. - Ukraine's public investment has been the most volatile among peer countries. ### Composition and sources of public investment - Around half of general government investment is currently financed through external sources, substantially larger than in the past. - Before the recent trend, external financing represented on average 25 percent of total financing and was primarily provided by IFIs (World Bank, EBRD, EIB), largely for road and energy sectors. - With the exception of local government borrowing (relatively small), all external financing for investment is provided on concessional terms. - Sectoral allocation (average 2009–13): capital investment in economic infrastructure was substantially higher than in EU countries; capital spending in social sectors (notably education) was lower than in EU countries (34 compared to 40 percent). - Functional shifts (2009–13 to 2014–15): public order and safety increased from an average of 5.1 to 10.6; social services from 33.9 to 41.3; infrastructure decreased from 49.1 to 36.4. Share of investment in defense has been gradually increasing following escalation of conflict in the East. - Subsectoral allocation changed: until 2013 central and local levels contributed roughly equally to public sector investment in fixed assets; in 2014–15 the share of local level investment rose to around 70 percent, driven by reallocation from central government investment to defense and decentralization legislation passed in late 2014. ### Efficiency and impacts - Ukraine's public investment efficiency is below average compared to emerging markets, CIS countries and the world. - The efficiency gap in Ukraine, based on a quality indicator, is about 32 percent; average efficiency gap for emerging market countries is about 22 percent and 28 percent for CIS countries. - Perceived quality of infrastructure has been trending downwards; reduction in investment from 2008: 3.3 percent of GDP to 2013: 0.9 percent of GDP (2005 PPP adjusted terms) contributes to deterioration. - Ukraine performs better than average on some physical infrastructure access indicators (public education, electricity production, public health infrastructure); access to treated water is similar to comparator countries. - Roads per capita: 3.7 kilometers per capita in Ukraine versus Poland, Turkey and Hungary at 12 kilometers per capita; Emerging and Developing Europe at 8; emerging markets in general at 6.2. - Corruption perceptions are extremely high and contribute to lower investment rates: - 99 percent of firms expect to pay bribes to win government contracts. - 73 percent report "gifts" required to secure construction permits. - 73 percent report "gifts" required to get things done. - High perceived corruption reduces private partner and foreign investor participation (e.g., PPPs) and may increase costs by discouraging more efficient firms. ### Public investment management institutions and planning - Institutions for managing public investments are weak at all stages (planning 1–5, allocation 6–10, implementation 11–15), with particular weaknesses in management of PPPs, multi-year budgeting and project management; company regulation and budget comprehensiveness are exceptions where scores are better. - Recent initiatives include: better coordination of inter-governmental fiscal relations; improved legislative and oversight frameworks for PPPs; introduction of a multi-annual budget process; introduction of comprehensive project appraisal and selection processes for some investments — but these have not progressed sufficiently to materially affect assessed scores. - Fiscal rules: - Budget Code includes a debt ceiling on budgetary central government set at 60 percent of GDP covering domestic and external debt and loan guarantees. - Amendments in 2014 require a corrective plan to the Verkhovna Rada if the limit is breached, but provide no automatic correction mechanism; the VR may authorize a temporary deviation; there are no escape clauses. - Externally financed capital expenditure is included within the debt ceiling and there is no floor on the level of capital expenditure. - The debt ceiling was breached in 2014. - State Budget forecasting: - The forecasted deficit in the State Budget Law frequently exceeds the annual deficit target specified in the Budget Policy Guidelines; no justification for the increase is provided and there is no attempt to identify compliance with the debt rule. - National and sectoral planning: - "Sustainable Development Strategy of Ukraine 2020" (Ukraine 2020), adopted by Presidential Decree in 2015, is the sole national strategic document but provides only broad policy direction and does not include plans for capital investments or policy measures. - Some sectoral strategies include prioritized capital investments with costing information (e.g., State Target Program for Public Roads); other sectoral documents do not regulate priority or costing (e.g., Action Plan on Natural Gas Market). - The strategic planning process is largely dysfunctional: 30 STPs exist and a further 27 likely to be submitted to the Cabinet by end-2016; many sectoral strategies resemble wish lists with only a fraction of proposed projects funded (e.g., around 5 to 10 percent in the public roads program). - Central-local coordination and local borrowing: - Local government borrowing limits in the Budget Code are set at 200 percent of the forecasted local development revenues for the following two years, except the City of Kiev where the debt limit is 400 percent. - Article 74 of the Budget Code limits local debt servicing in any year to 10 percent of the local general fund and requires MoF approval for local borrowing and issuing guarantees; the state is not liable for local government debt. - Local government debt is 1 percent of total general government debt. - Local government investment increased from 56.3 percent of general government investment in 2005 to 69.6 percent in 2015. - Capital spending plans of local governments are submitted to national government on a project-by-project basis for projects funded through external sources and by the state (Article 24–1 of the Budget Code); intergovernmental committee chaired by the Minister of Regional Development approves Subvention for Amalgamated Territories projects after consultation with the relevant Oblast State Administration. - The 2016 State Budget Law gives the COM authority, in consultation with the VR, to allocate funds for projects in the Subvention for Socio-Economic Development in some regions, but there are no clear criteria to select regions or projects. - National approval requirements and project-level discussions dilute strategic medium-term capital planning, attributed to the lack of a multi-year budget planning framework. ### Key numeric observations and exact figures - Investment fell to under 1.5 percent of GDP after the crisis (post-2007). - Execution rate for general government investment in fixed assets ranged between 53 and 87 percent of the revised budget. - External financing previously averaged 25 percent of total public investment financing. - Capital spending in social sectors: 34 percent in Ukraine versus 40 percent in EU countries (average 2009–13). - Functional spending shifts: public order and safety from 5.1 to 10.6; social services from 33.9 to 41.3; infrastructure from 49.1 to 36.4 (comparison 2009–13 to 2014–15). - Roads per capita: Ukraine 3.7 km per capita; Poland/Turkey/Hungary 12 km per capita; Emerging and Developing Europe 8; emerging markets 6.2. - Perceived corruption indicators: 99 percent expect to pay bribes to win government contracts; 73 percent face "gifts" for construction permits; 73 percent face "gifts" to get things done. - Debt ceiling on budgetary central government: 60 percent of GDP. - Local government borrowing limits: 200 percent of forecasted local development revenues for following two years; City of Kiev 400 percent. - Limit on local government debt servicing: 10 percent of the local general fund. - Local government debt share: 1 percent of total general government debt. - Local government investment share: 56.3 percent in 2005 rising to 69.6 percent in 2015. - Reduction in investment spending (2005 PPP adjusted): 2008: 3.3 percent of GDP; 2013: 0.9 percent of GDP. - Number of State Target Programs (STPs) existing: 30, with a further 27 likely to be submitted by end-2016. - Fraction of proposed projects funded in the public roads program: around 5 to 10 percent. *Source: 1ukrea2019008 - 2. Existing budget rigidities are a constraint on efforts to increase investment levels.* ### 19. Capital transfers to local government are managed by individual line ministries ### 19. Capital transfers to local government are managed by individual line ministries ### Capital transfers to local government — structure and funding certainty - The Ministry of Regional Development manages: - Regional Development Fund: UAH 3 billion in 2016, 0.15 percent of GDP - Subvention for Amalgamated Territories: UAH 1 billion, 0.05 percent of GDP - The Ministry of Finance (MoF) manages: - Subvention for Socio-Economic Development: UAH 1.94 billion, 0.1 percent of GDP - The Ministry of Economic Development manages: - Program to support national and regional development projects: UAH 485 million - Combined total of these four transfers: UAH 6.43 billion in 2016, constituting 1 percent of the main budget or 0.35 percent of GDP. - Local capital spending financed from own revenue is described as insignificant due to low own revenue raising capacity and existing budget rigidities. - Funding certainty at the local level is limited. *Public-Private Partnerships (Institutional strength—Low; Effectiveness—Low)* ### Public-Private Partnerships — institutional framework and practice - There is no PPP strategy or set of criteria for entering into PPP arrangements currently in place. - A “Concept for PPP Development 2013-18” exists but is not considered in current government investment decisions. - Multiple overlapping legal frameworks: - Four laws may be applied to public investment projects including private sector actors: “General Concession Law” (1999), “Law on Concessions in Construction and Operation of Motorways” (1999), “Law on Leasing and Concession of Municipal Assets in Heating, Water Supply and Sanitation (2010)”, and the “Law on Public-Private Partnerships (2010)”. - The 2010 PPP law contains elements aligned with international practice (mandatory value for money analysis, appraisal procedures, competitive tendering, risk assessment/allocation, funding mechanisms) but has notable deficiencies: - Limited role of the MoF in the PPP gateway process. - Lack of protection of the private partner (no access to arbitration, access to government guarantees only after agreement finalization, impossibility of multi-year commitments by public partner). - Lack of step-in rights in event of contract breach by PPP contractor. - No systematic approach to unsolicited proposals. - In practice: - Most private-sector participation takes the form of concession contracts requiring no explicit government funding and procured under concession laws with less onerous requirements (e.g., no requirement for value-for-money analysis or oversight by the PPP unit in the Ministry of Economy). - Since the 2010 PPP Law was passed, only two very small projects have been procured under its provisions. - Registries: - MoE and State Property Fund (SPF) maintain central registries of PPP/Concession arrangements but neither records projects’ explicit or contingent liabilities. - Registries record date and duration of contract, parties, object and purpose, and state property used. Financial information is limited to total cost and funding (MoE) and concession fees paid (SPF). - Fiscal risk management: - The MoF’s approval is required only for explicit government funding (direct payments or loan guarantees), limiting its role in PPP/Concession approval procedures. - Absence of multi-year budgeting, commitment controls, full lifetime costing and analysis limits MoE’s and MoF’s ability to identify medium- and long-term fiscal impacts of PPPs. - The government has no plans to introduce a limit on accumulation of associated liabilities. ### Regulation of Infrastructure (Strength—Medium; Effectiveness—Low) - Market structure and SOE dominance: - Energy sector: Naftgaz has 30 percent share in wholesale gas provision; monopoly on gas import, transportation, storage, and retail (legal protection of import monopoly eliminated in 2012). - Electricity: 2014 Law on Principles of Operation of Electricity Market liberalizes wholesale electricity market but progress stalled due to recent energy crisis. - Railways: Ukraine Railways (UZ) monopoly on passenger services and infrastructure management and a 70 percent share of freight services. - Telecom: more advanced liberalization; domestic competition in mobile market; Ukrtelecom privatization completed in 2011. - Liberalization efforts: - Draft New Energy Strategies (NES) envisages opening gas and electricity markets to new distributors and providers by 2018, aligned with third EU Legislative Energy Package. - Law on Natural Gas Market adopted in 2015; draft Law on Electricity Market in the VR to unbundle generation, transportation, wholesale and distribution. - UZ converted into a joint stock company with new governance structure in 2015; new management being appointed. - Regulatory independence and conflicts: - NKREKP sets electricity, gas, and heat prices and also licenses and supervises energy companies — combining regulatory and price-setting functions creates significant conflicts of interest undermining independence. - Similar conflicts in railway sector; Ministry of Infrastructure and local governments authorize railway fare increases. - Article 9 of the Law on Railway Transportation (1996) allows fares of regional commuter services to be set below cost recovery, with losses compensated by other fares and budget subsidies. - Oversight of SOE financial and investment plans: - Tight control exercised but overlapping and opaque institutional responsibilities weaken effectiveness. - Publication of financial or investment plans by SOEs is not mandatory; some ministries publish them and others do not. - No published consolidated report on investment plans; MoE published a consolidated report on financial indicators of the largest 100 SOEs. - Approval processes involve five separate institutions (Cabinet, MoF, MoE, sector regulators, shareholding line ministries/local governments/SPF) creating redundancy and confusion. - Oversight largely vested in shareholding line ministries and local governments focusing on sectoral policy targets, limiting management of economic efficiency or SOE investment activities. - A fiscal risks unit in the MoF was established in 2015 with initial responsibility to identify and analyze fiscal risks from the SOE sector. - State Support Procedure (SSP) (introduced in 2011) — limitations: - Amendments to Law on Investment Activity (LIA) in 2011 subject state support for investment projects to MoE economic efficiency assessment. Article 12 (1) of the LIA includes four funding sources: financing and co-financing from State or local budgets, State or local guarantees on financing, and subsidy to financing costs. - Capital transfers to or guarantees on projects of SOEs, local governments, and private-sector companies must be listed in the State Register of Investment Projects after passing economic efficiency assessment. - Effectiveness limited because: - Process is redundant and adds little value — of 45 projects listed in the State Register (aggregate project costs; 61 billion UAH), 30 projects are those of local governments or community owned companies accounting for 0.2 percent of aggregate project costs; MoE duplicates assessments of small local projects. - Lack of comprehensiveness — SSP targets new “revenue-generating” projects proposed after 2012, unclear under LIA which projects are subject to SSP; SOE projects for capital repairs, restructuring, or regulatory compliance are not captured. Only six SOE projects are included in the State Register and no project has been added since 2015. ### Investment Allocation #### Multi-year Budgeting (Institutional strength—Low; Effectiveness—Low) - No comprehensive multi-annual budget framework in practice despite Article 21 of the Ukraine Budget Code providing for public investments to be incorporated within such a framework. - A multi-annual budget forecast was approved in 2012 but abandoned after a year; approved estimates bore little relation to the eventual approved annual budget. - MoF circulates expenditure ceilings for the current year and indicative ceilings for two subsequent years (May) prior to preparation of budget proposals, but actual approved budgets differ substantially from the ceilings. - Absence of a definition of public investments complicates proposals to impose aggregate limits on capital investment. - Starting with the 2016 budget, a list of major public investments is included as an annex to the Budget and includes an estimate of remaining lifetime costs, but: - Relates only to projects defined as public investments under the Budget code. - Does not include other capital projects which constitute more than 90 percent of capital expenditure. - Costs are not broken down by year. - All appropriations lapse at end of each budget year; spending units cannot enter into multi-annual contractual commitments, increasing risk of funding shortfalls for projects in subsequent years. - Government agreed under PFM action plan to introduce a medium-term budget framework in time for preparation of the 2018 budget; work has yet to start in earnest. #### Budget Comprehensiveness (Institutional strength—Medium; Effectiveness—High) - General government capital spending is overwhelmingly undertaken through the budget and reported in general government financial statements. - Final state budget for 2015 included 44.472 million UAH for “development” spending. - Budget documents do not provide an economic classification breakdown; no formally approved capital budget. - MoF develops quarterly budget implementation schedules (ROSPIS) based on economic classification. - End-2015 totals: total allocation for capital spending during the year was approximately 43 billion UAH, of which approximately 35 billion UAH were executed. - Development budget includes central government capital spending and capital grants to subnational governments but does not capture local government capital expenditure financed by other sources. - Budget execution reports and the consolidated financial statement comprise both central and local government capital spending. - International borrowing for projects expected to amount to 15 billion UAH for 2016; recorded as revenue to the special fund, with investment spending included under relevant budget heads. - SOE investment estimates and financing in 2015: - Government guarantees for direct loans to SOEs amounted to 12.8 billion UAH in 2015. - Capital grants from the budget (to SOEs and private entities) amounted to 11.0 billion UAH. - Most SOE investment in 2015, estimated at approximately 20 billion UAH, was covered by state guarantees or financed by capital grants. - PPP arrangements are not disclosed in budget documents; concession fee income is transparently disclosed. - Shortcomings in budget comprehensiveness are not judged critical for public investment management given comprehensive information about foreign-funded projects and limited PPPs; absence of specified capital budget is a greater concern. #### Budget Unity (Institutional strength—Medium; Effectiveness—Low) - Capital and current budget prepared by MoF and presented in a single budget document, based on a program classification. - MoE plays a key role in selection of public investment projects but does not take part in consolidated budget preparation. - Budget classification is largely program-based but some programs are organizational units. - Budget document does not provide appropriations for or information about recurrent costs associated with investment projects. - The mechanism for preparation and selection of state investment projects requires project proposals to include recurrent cost information, but this information is not yet used for budget preparation. - Budget classification distinguishes between consumption costs and development expenditures rather than current and capital spending, and is not consistent with GFSM 2001/2014. - MoF order No.11 of 14.01.2011 defines development spending composition; MoF ROSPIS are based on economic classification, but mapping details from budget classification to ROSPIS are not publicly available. - Absence of a clearly defined capital budget is a significant weakness for budget transparency. *Source: 1ukrea2019008 - 19. Capital transfers to local government are managed by individual line ministries* ### 41. Most capital projects currently in the budget have not been subject to standardized ### 41. Most capital projects currently in the budget have not been subject to standardized cost/benefit analysis, but the recently established public investment project mechanism provides a framework for conducting such analysis in the future. ### Public investment project mechanism and appraisal framework - In 2015, the Ministry of Economy established a mechanism for identification, preparation, appraisal and selection of public investment projects for the 2016 budget. - Projects are reviewed by a committee comprising nine ministers and nine parliamentarians. - For the 2016 budget: - 36 projects were prepared and submitted for assessment. - 10 projects were selected for implementation within a 1 billion UAH envelope set aside for 2016. - One of the 10 projects is divided into three sub-projects in the budget appendix, giving a total of 12 projects to be financed. - 27 projects were positively reviewed but considered suitable for financing from other sources. - 18 projects were returned for further development and elaboration. - Cabinet resolution No. 571 of 22.07.2015 establishes an inter-agency committee and detailed procedures for preparation, appraisal and assessment. - The mechanism provides detailed guidelines (specification of objectives and targets, quantification of costs and benefits, analysis of financial and economic viability, preparation of risk assessment and project implementation plans) and provides for independent examination by the Ministry of Economy according to pre-determined criteria. - Table 3.A. Structure of Project Document According to Cabinet Resolution No. 571 includes (verbatim fields): - Objective and brief description - Main purposes and results - Responsible entity - Purpose of new facilities - Project rationale and zero-option - Strategic framework - Alternative analysis - Total project cost - Project implementation plan - Funding sources - Power sources - Economic efficiency - Economic impact - Social impact - Environmental impact - Annual project revenues - Annual operational costs - Domestic and foreign currency costs - Project consistent with legal framework - Permits required for the project ### Coverage, prioritization and pipeline issues - Coverage and scale: - The 1 billion UAH allocation for projects covered by the mechanism in 2016 must be compared to expected total general government capital spending during the year of 30–40 billion UAH. - The mechanism covers a large share of new central government investment projects but only a small fraction of overall government capital projects. - A significant part of development spending is allocated to military and security purposes without identification of individual projects. - Selection criteria and process: - Article 12 of Cabinet resolution No. 571 provides criteria: compliance with state requirements, expected impact (environmental, social and economic), impact on state budget figures, reasonableness of costs and implementation plan and availability of adequate resources. - These criteria are described as high-level and process-oriented; they are more helpful for ensuring quality of documentation than for final prioritization. - The primary criterion that influenced selection for 2016 was prioritization of completion of ongoing projects. - The MoE examination focuses on compliance with formal criteria; actual selection is based on ad hoc prioritization in the inter-agency committee. - Project pipeline: - There is currently no pipeline of projects for subsequent inclusion into the budget; the 10 projects approved were immediately included in the budget. - The new mechanism could enable development of a project pipeline if integrated with the budget process and introduction of medium-term budget planning (MTBF). - In the absence of a well-functioning MTBF, an investment project pipeline will add limited value. - Funding continuity: - Selection of a project for one budget year does not guarantee funding in future budgets; projects must be resubmitted each year. - The projects selected for the 1 billion UAH set aside in the 2016 budget are estimated to require an additional 7 billion UAH to be completed. - The MoE received 46 project proposals for the 2017 budget, of which six are continuations of projects funded in 2016; 34 proposals were returned for further elaboration before the final deadline of April 15, 2016. ### Investment implementation, budget appropriations and reallocation - Appropriations and multi-annual commitments: - Capital investments are appropriated on an annual basis. - Article 38(4–1) of the 2015 amendments to the Budget Code: the 2016 budget documents present non-binding information on total project costs and expenditure for the budget year of 10 “public investments”, but do not show medium-term expenditure on a year-by-year basis. - The State Budget Law authorizes total amount of loans for externally financed projects on a project-by-project basis and these are automatically carried over. - Co-financing and grant-financed projects are authorized through annual appropriations, as are domestically financed projects. - Multi-annual commitments are strictly prohibited for all projects except those financed through external loans and even then budget co-financing is appropriated annually. - Reallocation powers: - Under Article 23 of the Budget Code, reallocation of any appropriations requires the MoF’s approval on the request of a key spending unit. - Amendments to the State Budget Law are necessary for reallocation between general and special fund appropriations or to change authorization of loans from donors. - There is no prohibition of specific types of reallocation and no quantitative limit on the amount. - Reallocation of externally financed expenditures is restricted; there is no restriction on reallocation of capital expenditure by the MoF of domestically financed projects to other expenditure. - Budget execution and credibility: - Variations between originally voted budgets and actual outturns is small for expenditures on acquisition of fixed assets and capital transfers, except for 2014. - There is a persistent tendency for revised budgets to increase capital expenditure appropriations through reallocation and supplementary budgets and for these revisions to be subsequently under-executed (likely because increases are approved too late in the year). ### Cash management, funding availability and treasury arrangements - Monthly financial plans required under Article 23 are produced at the beginning of the year but are not updated during the year. - Cash forecasting is focused on short-term needs; the State Treasury Service produces a weekly forecast of cash balances for the following month. - Investment spending is treated as a residual in the budget in terms of release of funds; protected items (Article 55 of the Ukraine Budget Code) get priority payments and are almost entirely current spending and transfers to households and local governments. - Local governments: - Until 2015, local governments were required to deposit revenues in the Treasury Single Account; they are now permitted to open accounts in commercial banks. - This increases local government flexibility but increases exposure to the banking system; discussions revealed that some local governments may have suffered losses depositing funds in banks that subsequently failed. - IFI-financed project accounts: - Spending units hold foreign exchange accounts for IFI-financed projects in commercial bank accounts, outside the Treasury Single Account; this weakens Treasury consolidated liquidity management. - Any change to these procedures would require significant upgrades in cash planning and management capacity. ### Transparency, procurement and monitoring during execution - Procurement: - Annual procurement is stated as about 300 billion UAH, and as much as 40 percent of the funds might have been misused. - A new procurement law became effective April 1, 2016: it simplifies procedures, reduces exceptions, improves public access and transparency, and aligns legislation closer to European practices. - A new E-procurement system (Prozorro) rollout: - Mandatory for central government entities’ procurements above 200 thousand UAH for goods and 1.5 million UAH for services from April 1, 2016. - Mandatory for all government entities including local governments from August 1, 2016. - Effective monitoring of compliance and consistent action against breaches and irregularities are key to realize improvements. - Centralized monitoring and ex post audit: - There is no centralized mechanism for monitoring major capital projects during implementation; no centralized repository for project implementation information. - The MoE is developing a monitoring process and plans to begin implementation from mid-2016. - No systematic ex post internal or external audit of capital projects: - State Financial Inspection has performed ex post internal audit of at least one capital project (in 2011) and plans three new assessments of completed investment projects in 2016. - The Accounting Chamber has carried out ex post audits focused on compliance with annual budget provisions; these are not documented in separate reports and do not contain information about specific audit findings. - Project management is fragmented: - IFI-financed projects are monitored per each institution’s requirements. - State funded projects are managed ad hoc; monitoring largely based on budget compliance by agencies including State Financial Inspection and Accounting Chamber. ### Project adjustments, ex post evaluation and asset accounting - Project adjustments: - No guidelines for project adjustments are applied consistently across government. - Article 33 of the 2016 State Budget Law requires spending units to report project adjustments to the VR on a quarterly basis when adjustments are made for a specific category of capital expenditure. - Project monitoring is largely budget-compliance oriented; absence of multi-annual commitments contributes to failure of project managers to assess need for adjustments to meet objectives. - Ex post review and evaluation: - Ex post review and evaluation are limited to IFI-financed projects. - State Financial Inspection intends to audit three projects in 2016 (Hydro-electrical Power Generation, Power Transmission and High Speed inter-city trains (Ukrainian Railways) completed in preparation for the 2012 European Football Championships). - Ministry of Economic Development is developing a monitoring framework expected to include requirement to complete ex post reviews and evaluations once construction is completed. - Assets accounting: - Key spending units conduct annual surveys of nonfinancial assets, forming the basis for revaluation disclosed in the balance sheet submitted to the State Treasury Service. - Government nonfinancial assets managed by the State Property Fund are not updated regularly despite keeping a registry. - No information on the stock of assets or depreciation is included in the final consolidated financial statements of the government. - National public accounting standards approved in 2010 adopt a number of accrual IPSAS, but accounting of general government units continues to be on a cash basis. - The Annual Financial Report of the State Treasury Service presents two transaction statements (Statement of Government Operations and Cash Flow Statement) that are presentational variants of the same cash data, with no disclosure of depreciation; the consolidated balance sheet includes only financial assets and liabilities. ### Institutional assessments (as stated in the text) - Project Selection: Institutional strength—Medium; Effectiveness—Low - Protection of Investment: Strength—Medium; Effectiveness—Medium - Availability of Funding: Institutional strength—Low; Effectiveness—Low - Transparency of Execution: Institutional strength—Low; Effectiveness—Low - Project Management: Institutional strength—Low; effectiveness—Low - Assets Accounting: Institutional strength—Low; Effectiveness—Low *Source: IMF staff estimates.* ### 65. Based on the assessment provided in Section III, the following recommendations are ### 1ukrea2019008 - 65. Based on the assessment provided in Section III, the following recommendations are ### Issues and recommended measures (summary) - Issue 1: Most of the national and sectoral strategic plans do not prioritize capital investments, and investment plans specified in some sectoral plans do not take into account the budget constraints. - Recommendation 1: Establish a common format of fully costed and prioritized capital investment plans to be included in national and sectoral strategies and require the MoF to provide opinions on their affordability by amending the laws and regulations on the economic and social development programs. - Issue 2: Capital transfers to local government are fragmented, even though the objectives are the same. - Recommendation 2: Consolidate the allocation methodology and process for approval of capital transfers to local government and merge the Regional Development and Socio-Economic Development funds. Allocations to local government should be formula based. Local governments should report to national government on outputs and outcomes, against the formula based allocations. - Issue 3: The legal and institutional framework surrounding PPPs is fragmented, over complicated, and ill-equipped to ensure that fiscal risks emanating from PPPs and concessions are adequately identified, disclosed and mitigated. - Recommendation 3: Consolidate and strengthen the legal and institutional framework for PPPs, focusing on fiscal risk management. Specifically: - Develop and adopt a single PPP law that is comprehensive in scope (and applicable to concessions) and coverage to provide sound principles for fiscal risk management and a stable and attractive environment for private investors. - Assign the MoF an explicit role as gatekeeper of public finances in all stages of PPP/concession projects (see Annex V). - Incorporate PPPs and concessions in the overall budget process and medium-term planning exercise and include information on the lifetime costs of outstanding PPPs in the budget documentation. - Issue 4: There is currently no pipeline of approved projects that can be considered for funding as it is made available. - Recommendation 4: Establish a medium-term investment project pipeline process and combine this within a comprehensive medium-term budget framework that facilitates and takes account multi-annual commitments for investment projects. Strengthened project appraisal and selection should form the basis for systematic monitoring of a portfolio of investment projects from initiation through approval and implementation. The Budget Code should be amended to permit approval of multi-annul commitments for capital projects. - Issue 5: Capital spending is not clearly defined and presented separately in budget documentation. - Recommendation 5: Provide a clearly defined capital budget in budget documents and have this formally approved by parliament. Replace the current development budget concept as the basis for parliamentary budget approval; the development budget breakdown could still be included as an information item. - Issue 6: Project appraisal and selection processes remain relatively weak and recent improvements have only covered a small sub-set of capital projects. - Recommendation 6: Strengthen the newly established project appraisal and selection approach and extend this to all major state investments, including projects with external financing. Use Cabinet resolution 571 as a basis, further develop the selection framework, include externally funded projects, coordinate with development partners, centralize large and strategic projects, leave smaller projects to responsible ministries/local governments, and define a threshold for central review in regulation. - Issue 7: Existing external and internal audit oversight is weak and focused on compliance with financial limits. Audit findings are also not published as a matter of course. - Recommendation 7: Ensure effective oversight of public investments through centralized monitoring and systematic ex post audit. Adopt a portfolio approach to allow active risk management and project/portfolio adjustments. State Financial Inspection Service should support internal audit activities. Require stringent external ex post audit of all major investment projects and publish audit findings. - Issue 8: There are no limitations to budget reallocation from capital to other expenditure and no carryover is allowed for projects funded by the general fund appropriations, while there is no limitation to carryover of the special fund appropriations. - Recommendation 8: Amend the Budget Code to prohibit reallocation from capital to other expenditure and specify carryover rules common to the general and special fund appropriations within quantitative limits and with MoF approval. - Issue 9: Cash forecasts are short term and cash requirements are not integrated in debt management strategies leading to significant uncertainty surrounding availability of funding for investments. - Recommendation 9: Implement previous FAD recommendations to: - Strengthen cash management capacity, - Eliminate foreign currency accounts of spending units, - Review the practice of maintaining large balances in foreign currency accounts in the National Bank of Ukraine to finance future debt redemptions; and - Integrate debt management strategies with cash management strategies. ### Action plan highlights (Table 4.A) — targeted reforms, timelines, and responsible institutions - I. Limited Planning and Prioritization - 1.1 Develop and adopt a new Planning Law and associated regulations. - Draft by Nov. 2016; Regulations approved by Jun 2017. Responsible: MOE. - 1.2 Require sectoral strategies to include fully costed and prioritized capital investment plans using a harmonized template. - Stock-take by Sep. 2016; New template by Jun 2017; New sectoral strategies approved by June 2018. Responsible: MOE, MOF. - 2.1 Merge Regional Development Fund and Socio-Economic Development Fund. - Allocations combined in 2017 budget. Responsible: MOF, MORD. - 2.2 Develop a transparent formula-based system for capital transfers to local authorities. - New allocation formula approved by end-2016; Funds allocated according to the new formula in 2018 budget. Responsible: MOF, MOE, MORD. - 2.3 Develop reporting system linking outputs/outcomes to formula-based allocations. - Framework developed by Oct. 2017; Implemented in 2018 budget execution. Responsible: MOE, MOF, MORD. - 3.1 Develop and adopt a single comprehensive PPP law. - Draft by Oct. 2016. Responsible: MOE, MOF. - 3.2 Implement MoF gatekeeping procedures for PPP/Concession projects. - Implement gatekeeping procedures and assign responsibilities. Responsible: MOE, MOF. - 3.3 Incorporate PPPs and concessions in overall budget cycle and disclose related information. - 2018 budget preparation. Responsible: MOF. - II. Inadequate Budget Practices - 4.1 Establish medium-term investment project pipeline with annual projections of full project costs. - Procedures defined and guidelines updated by Jun-2016; Multi-year commitment authorized in Budget Code; Include multi-annual commitments in 2017 budget law. Responsible: MOE, MOF. - 4.2 Integrate multi-year investment budgeting into MTBF. - 2018 budget preparation. Responsible: MOF. - 5.1 Include a table on expenditure by economic classification, broken between current and capital budgets in budget documents to be approved by VR. - 2017 budget preparation. Responsible: MOF. - 6.1 Extend project appraisal and selection procedures to all major projects and require MOF scrutiny of budget affordability. - Procedures extended to all major domestically financed projects in 2017; extended to projects with external financing in 2018. Responsible: MOE, MOF. - 6.2 Clarify project selection criteria and develop a centralized selection platform with transparent disclosure. - Transparent scoring developed by end-2016; Platform used in 2018 selection process. Responsible: MOE, MOF, MORD. - 6.3 Set project cost threshold for central review. - Threshold defined in updated guidelines by end-2016. Responsible: MOE, MOF, MORD. - III. Weak Implementation Processes - 7.1 Establish systematic reporting with project development, implementation, and risk assessment information. - MOE monitoring framework in place from July 2016. Responsible: MOE, MOF. - 7.2 Mandatory ex post financial and performance audit of all projects involving significant fixed capital formation. - Specific ex post audits included in audit program for 2017; Ex post audits published as separate reports, starting Jan 2017. Responsible: Accounting Chamber. - 8.1 Amend the Budget Code to prohibit reallocation from capital to other expenditure and allow carryover of unused capital appropriations. - Budget Code amended and regulations adapted by Sep 2016; New rules enforced in 2017 budget execution. Responsible: MOF. - 9.1 Integrate all foreign currency accounts of spending units into the TSA. - Integration into TSA by end-2016. Responsible: MOF. - 9.2 Integrate debt and cash management strategies and forecasting techniques. - MOF responsible for central government cash planning by Oct. 2016; MOF responsible for managing central government cash position by Jun 2017. Responsible: MOF, State Treasury Service. ### Fiscal decentralization and local government funding (key points and figures) - Decentralization premise: decentralized governments are more responsive and strengthen accountability when they have discretion to raise revenue. - 2014 Tax Code amendments allow local governments to collect multiple taxes including land and property taxes, tourism taxes, fees for certain business activities, parking fees, and a tourism tax. - Local government borrowing limits in the Budget Code: - 200 percent of the forecasted local development revenues for the following two years for general local government. - 400 percent for the City of Kiev. - Article 74 limits debt servicing to 10 percent of the local general fund in any year. - Revenue sharing under Article 64 of the Budget Code: - Local government receives 60 percent of the personal income tax, 5 percent of the excise tax on the sale of excisable goods, 100 percent of the single tax, 100 percent of the property tax, 100 percent of the land payment, 100 percent of the corporate income tax for municipal property enterprises, 100 percent of the fee for the provision of administrative services and 25 percent of the environmental tax. - The City of Kiev receives 40 percent of the personal income tax and 10 percent of the corporate income tax. - 2016 allocations and funds: - Regional Development Fund: not less than 1 percent of revenues in the state general fund; allocated 3 billion UAH in 2016 despite projected 559.7 billion UAH general fund revenue. - Allocation rule: 80 percent based on population size and 20 percent based on GDP per capita if region is less than 75 percent of average national GDP per capita. Projects require 10 percent co-funding by the local authority. - Article 24 timetable: Oblast Councils submit proposals by May 1 each year; Ministry completes evaluation by August 1 for Cabinet approval. Ministry had not finalized projects to be funded in 2016. - Subvention for Amalgamated Territorial Communities: 1 billion UAH in 2016 allocated through a formula including size of rural area and rural population. New communities created: 159. - Local authorities must report monthly within 5 days after the end of the month to the Ministry of Regional Development. - Subvention for Socio-Economic Development: 1.94 billion UAH allocated in 2016; managed by the MoF. Allocations are project based with no transparent criteria; final decisions are not made by local authorities, weakening accountability. *Source: content unit 1ukrea2019008, Section III assessment and Table 4.A action plan as provided in the source text.* ### Annex II. Selected Issues in Legislation on Regulation of ### Annex II. Selected Issues in Legislation on Regulation of Infrastructure Companies ### Overview - Regulations surrounding SOE provision of infrastructure services are inadequate. - Annex gives overview of current legal framework, analysis of its issues, and recommendations to improve the legislation. ### SOEs’ Financial Performance Monitoring Key Legislation cited: - Law on Management of State Property (LMSP, 2006); - Cabinet Resolution on Control over Functions of State Property Management (832–2007); - Presidential Decree on Ministry of Economic Development and Trade (634–2011); - MoE Order on Guidelines for Efficiency Criteria on Management of State Property (253–2013); - MOE Order on Performance of State Enterprises (1307–2012); - MoE Order on Guidelines for Transparency of Entities in the Public Sector (116–2015); - Cabinet Resolution on List of State Property of Strategic Importance (83-2015); - Cabinet Resolution on List of Entities in the Public Sector to Be Restructured (1227–2015); - Cabinet Resolution on the Ministry of Finance (375–2014); - Presidential Decree on National Commission for State Regulation on Energy and Utilities (2014–715); - Law on State Property Fund (SPF Law, 2012). Main issues and findings: - Legislation creates overlapping institutions and gaps in SOEs’ performance monitoring. - Specific concerns: - The requirement for the MoE to approve SOEs’ financial plans that require the COM approval (Presidential Decree 634–2011) duplicates oversight by shareholding ministries and local governments. - The MoE’s oversight burden (Cabinet Resolution 832–2007) is overwhelming given its lack of resources. In 2013 there were around 3,632 entities (of which around 1,338 were estimated to be viable). Of these 623 entities in energy and infrastructure sectors counted for 77.1 percent of the total aggregate assets. - MoE concentration: - MoE is concentrating on monitoring the performance of the largest 100 SOEs (MoE Order 116–2015), but methodologies have not been issued and no legislative amendments have been made. - MoE tasked with drafting lists of SOEs to be restructured (Cabinet Resolution 1227–2015) and those of strategic importance (Cabinet Resolution 83-2015); selection criteria are not defined in legislation. - Ministry of Finance (MoF) role: - MoF tasked to identify, analyze, and propose mitigation measures for fiscal risks arising from SOEs (Cabinet Resolution 375–2014). - Legislation does not (i) specify and require necessary information flow to the MoF from SOEs and relevant line ministries, (ii) require publication of fiscal risk statements with defined contents, and (iii) set out methodologies for fiscal risks monitoring and management. Institutions for control over SOEs’ financial and investment plans (Box A.1): - Cabinet – Article 5(20) of the LMSP: approve financial plans of SOEs that are monopolies or have estimated net profit of more than 50 million UAH. - Shareholding line ministries and local governments – Articles 6(6) and (7) of the LMSP: approve SOEs’ financial and investment plans for three to five years and monitor financial performance; Article 6(14-1) requires appointment of representatives who vote at SOEs’ general meetings where important financial and investment decisions may be approved. - Ministry of Economy – Cabinet Resolution 832-2007 (under LMSP): evaluate line ministries and local governments on “the effectiveness of the management of state property.” - Ministry of Finance – Cabinet Resolution 375-2014: “control fiscal risks associated with activities of entities in the public sector” and coordinate domestic long-term and external borrowing of SOEs. - Sector regulators – some sector laws require regulators to oversee performance of regulated companies including SOEs; e.g., Presidential Decree 715-2014 requires the NKREKP to exercise control over “targeted use of funds” and “performance of natural monopolies” in the energy sector through review of financial and investment plans. - State Property Fund – Article 5(3) of the Law on SPF: analyze and monitor “financial and economic indicators of economic companies under its jurisdiction,” mostly SOEs going through privatization or insolvency processes or regarded as dormant. Recommendations (explicitly required legislative changes): - Amend the LMSP and its regulations to: - Replace the MoE’s responsibilities for direct approval of financial plans and for “the oversight of the oversight” with monitoring responsibilities focused on the largest 100 SOEs and specify the new methodologies. - Amend the existing MoF Order to: - Specify information flow to the MoF, - Define contents of fiscal risk statements, - Require publication of fiscal risk statements, - Set out methodologies for assessment and management of fiscal risks arising from SOEs. ### Oversight of SOEs’ Capital Investments Key Legislation cited: - Law on Investment Activities (LIA, 1991); - Cabinet Resolution on Evaluation Criteria on Economic Efficiency of Project Proposals (684-2012); - MOE Order on Methodological Recommendations on Development of Investment Projects with State Support (1279-2012); - Cabinet Resolution on State Examination of Investment Projects (701-2011); - Cabinet Resolution on Methodology for State Examination of Investment Projects (243-2013); - Cabinet Resolution on Selection of Project Proposals with State Support (835-2013). Main issues and findings: - Lack of a clear definition of “investment” creates redundancy in, and limits coverage of, the State Support Procedure (SSP), weakening its effectiveness. - Specific legal framework issues: iv. “Investment activity” encompasses investments by local governments (Article 2(2) of the LIA), requiring capital transfer to and guarantees on local governments to follow the SSP and duplicating local government project appraisal. ii. “Investment” required to “result in creating profit (income) or achieve social effect” (Article 1 of the LIA) forces SSP to target revenue-generating projects, raises disputes about meaning, and narrows SSP coverage. iii. “Public investment” includes state support and projects of spending units (Article 2(2) of the LIA), creating overlap with public investment process under Article 32(4) of the Budget Code. iv. Two sets of project evaluation criteria exist (Cabinet Resolution 684-2012 and 701-2011) — one focuses on profitability and the other includes broader criteria — causing unclear procedural guidance and risk of arbitrary application. v. LIA requires monitoring of project implementation selected through the SSP (Article 12-1(6)), but no monitoring methodology or process is specified. Recommendations: - Amend the LIA to: - Establish a clear definition of “investment” required to follow the SSP based on unambiguous criteria, such as an amount of project costs; - Avoid duplication of project appraisal of spending units’ and local governments’ projects. - Amend and issue new regulations under the LIA to: - Unify the bifurcated evaluation criteria; - Specify the methodology and process for monitoring of project evaluation. ### Lease of State Property Key Legislation cited: - Law on Lease of State and Municipal Property (Lease Law, 1992); - Cabinet Resolution on Methodology for Evaluation of Lease (629-1995). Main issues and findings: - Lease terms and pricing criteria prevent the government from setting appropriate prices for use of infrastructure. - Registered leased properties: 19,260 in the Register of Operating Lease maintained by the SPF. - Composition: - Most leased properties relate to buildings and lands; - Several infrastructures (energy and manufacturing plants, port and mining facilities) are leased as “integral property complexes.” - Around 4,000 properties, mostly non-residential buildings, are leased at 1 UAH per month. - Lessor: SPF; Lessees: SOEs, local governments, private sector companies, and individuals. - Lease revenue: limited to 0.2 percent (1.2 billion UAH) of the total revenue of the State Budget in 2015. Identified legal framework problems: i. Article 33 of the Lease Law appears to allow lessee to reduce fees and rents to account for depreciation of assets — difficult to justify economically since lessee does not own asset and imposes budget costs. ii. Article 17(1) of the Lease Law sets the term of lease at five years or more unless the tenant agrees to a shorter term; Article 21 permits adjustment to lease prices only when both parties agree or in exceptional circumstances — effectively prevents government from changing lease prices over the long term irrespective of economic conditions. iii. Article 26 of the Lease Law allows lease termination without consent of the party only by court decision or on other limited grounds — makes eviction of tenants violating lease terms difficult. iv. Article 10(1) of the Lease Law requires lease price based on an “index” and Cabinet Resolution (629–1995) requires independent evaluation when making or renewing a lease, but no clear principle or criteria for setting lease price exist. v. No model lease contract is available under the Lease Law. Statistic/figure references: - Figure A3.3: Number of Lease Contracts of State and Municipal Property (X-Axis – Amount of Monthly Lease, UAH) — Source: IMF staff estimates. ### Annex III. Selection of Public Investment Projects Context and main points: - Potential for productive public investment usually exceeds available resources; mechanisms are needed to ensure projects reaching selection stage are well-designed, documented, and have positive benefit/cost ratios. - Without stringent selection criteria, risk of too many approved projects leads to under-funding and extended implementation (noted as the case in Ukraine). Recommended approach: - Use weights and scores for different selection criteria and base project selection on total weighted scores to improve consistency and transparency. - Scoring provides concrete feedback to project developers on goals and required documentation. Example assessment framework (Table A.1. Criteria for Assessing Public Investment Projects): - National development strategy: 10 points — How well does the project contribute to national goals? - Sector development strategy: 20 points — How well does the project contribute to sector goals? - Benefit/cost ratio: 40 points — B/C 2,0: 40; B/C 1,5: 20; B/C 1,0: 0 (proportional scoring) - Implementation risks: 20 points — Insignificant risk gets score 20, others relative - Concessional financing: 10 points — Scores for reduced cost consistent with benefit/cost ratio Illustrative scoring example: - A project with National development strategy impact = 5, Sector development strategy impact = 15, Benefit/cost ratio at least 2,0 = 40, Implementation risks = 5, Concessional financing = 0 would get total score = 65. ### Annex IV. Projects Accepted According to Cabinet Resolution 571 (selected data) - Tabulated projects include start/end dates, total project costs, financed before 2015, funding 2015, project completion end 2015, investment 2016, projected investment 2017–2018. - Examples (as provided in table rows): - Reconstruction of X-ray radiology department Institute Otolaryngology: 2012-2016; total project costs 167 167,80; financed before 2015 137 193,50; project completion end 2015 82,10 %; investment 2016 29 974,30. - Rehabilitation and adaptation Institute of Neurosurgery: 2011-2017; total project costs 150 144,90; financed before 2015 70 831,30; project completion end 2015 47,20 %; investment 2016 45 000,00; projected investment 2017 34 313,60. - Medical-diagnostic complex of National Children's Hospital "Okhmatdyt": 2011-2018; total project costs 3 347 057,80; financed before 2015 390 477,60; funding 2015 500 000,00; project completion end 2015 26,60 %; investment 2016 395 000,00; projected investment 2017 380 000,40; projected investment 2018 490 000,39. - Total (final table row): 9 501 338 905 682 600 000 1 000 000,00 1 000 000,00 1 000 000,00. ### Annex V. Gatekeeping Role for the MoF in PPP Design and Implementation Project preparation and implementation gatekeeping structure — phases, MoF roles, and ministerial decision gateways: Phase 1 — PLANNING - Line Ministry / Contracting agency: Prepare initial pre-feasibility study and undertake VfM and public sector comparator analysis. - MOED: ensure alignment with National Strategic Plans and advise contracting agencies in preparation. - MOF-IU: assess pre-feasibility study and public sector comparator analysis, assess VfM. - MOF Finance Division: evaluates budgetary affordability and consistency with fiscal goals; reviews impact on macroeconomic scenario and global sustainability. - MOF-IU reports to the Finance Minister; may advise to turn down project if insufficient VfM or unaffordable. - GATEWAY 1: Finance Minister to approve/reject initial project. Phase 2 — FEASIBILITY - Prepare feasibility study and update VfM. - MOED: advise contracting agencies in feasibility study preparation. - MOF-IU: assess feasibility study and public sector comparator analysis, assess VfM. - GATEWAY 2: Finance Minister to approve/reject “go ahead” project. Phase 3 — DESIGN AND PREPARATION OF TENDER - Prepare tender documents. - MOED: advise contracting agencies in tender preparation. - MOF-IU: review tender documents for consistency with agreed financial project specifications; report to the Finance Minister. - GATEWAY 3: Finance Minister to approve/reject issuance of tender documents. Phase 4 — BIDDING AND CONTRACT SIGNING - Receive tender bids and select bidder(s). - MOED: review bids and advise contracting agency in selection. - MOF-IU: ascertain VfM of pre-selected bid; report to the Finance Minister; may advise rejection if insufficient VfM or unaffordable. - GATEWAY 4: Finance Minister to approve/reject selected bid. - Present final version of PPP contract. - MOED: advise contracting agency in contract negotiations. - MOF-IU: review consistency with bidding conditions; report to the Finance Minister; may advise rejection of final version if insufficient VfM or unaffordable. - GATEWAY 5: Finance Minister to award/reject contract. - PPP contract signed. Phase 5 — CONSTRUCTION AND OPERATION - Supervise and monitor contract on regular basis. - MOED: monitor construction and service delivery. - MOF-IU: monitor financial soundness of PPP. - If needed, propose renegotiation of contract terms. - MOED: advise contracting agency in renegotiations. - MOF-IU: review VfM of renegotiated draft contract and report to the Finance Minister; may advise rejection if insufficient VfM or unaffordable. - GATEWAY 6: Finance Minister to approve/reject renegotiated contract. *Source: Annex II–V, "Selected Issues in Legislation on Regulation of Infrastructure Companies" (as provided).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2019/1ukrea2019008.pdf_