Ukraine’s Public Finance Management Systems Needs Further Improvements, Say World Bank and European Union

July 9, 2012

Kyiv, July 9, 2012 – The World Bank and the European Union released today the Public Expenditure and Financial Accountability (PEFA) Assessment 2011 for Ukraine. The assessment was carried out by a joint team of experts from the European Union and the World Bank. The report is an update of a previous PEFA Assessment carried out in 2006 and it includes a description of the changes that have taken place over the intervening five years.

According to the report, Ukraine scores 2.67 (on a 1-4 PEFA scale where 4 is the highest, without the donor practices).  This indicates that the country has established fundamental PFM systems but there is plenty of scope for improvement.  Among 114 assessed countries, Ukraine rates above the worldwide average of 2.53.

Ukraine performs well on execution control, transparency and predictability of the budget, as well as, on accounting and reporting. But, given its aspirations and potential, Ukraine is lagging behind on credibility of the budget and policy based budgeting. It scores as an average performer on the rest of the dimensions. For example, external scrutiny and audit is among the weakest one, undermined by the limited mandate of supreme audit body, the Accounting Chamber of Ukraine, and limited parliamentary scrutiny.

"Ukraine has made important progress in Public Finance Management reform in the last few years, including in the areas of transparency, predictability and execution control of the budget and public procurement.  However more needs to be done, particularly in the areas of capital budgeting practices, policy based budgeting, budget credibility, internal and external audits," said Qimiao Fan, World Bank Country Director for Ukraine, Belarus, and Moldova.

"Improvement in Ukraine's system of Public Finance Management will ensure that public moneys are efficiently collected and effectively used for the benefit of all Ukrainians; this assessment should in particular be used as a tool to strengthen internal control and external audit of the budget. Such an improvement would also facilitate Ukraine’s access to EU budget support and macro-financial assistance," said Jose Pinto Teixeira, Head of the European Union Delegation in Ukraine.

The report finds that weaknesses in certain PFM practices have also contributed to negative perceptions of Ukraine as place to do business. The most recent World Bank Business Environment and Enterprise Performance Survey and the Global Integrity Index indicate that poor practices in tax collection and procurement are seen as particular problems.


1. What is PEFA and what does it show?

Under the Public Expenditure and Financial Accountability (PEFA) Program, the public financial management (PFM), Performance Measurement Framework (PMF) (or PEFA Framework) has been developed as a contribution to the collective efforts of many stakeholders to assess whether a country has the tools to deliver three main budgetary outcomes: aggregate fiscal discipline, strategic resource allocation, efficient use of resources for service delivery.
The PEFA assessment framework consists of 28 high-level performance indicators measuring major elements of a country's public financial management system, with 3 supplemental indicators on donor practices that impact a country's public financial management system.

2.  What exactly the 2010 Ukraine assessment measures?

The 2011 PEFA Assessment measures performance of Ukraine public financial system along major dimension of budget credibility, transparency, execution, reporting, and external scrutiny based on 2010 data. It measures the performance based on both established rules and practices using the data and information available as well as interviews with the Government and external experts.

3. How PEFA could be useful for Ukraine?

PEFA could be useful to: (1)track reform progress over time; (2) inform the reform process going forward; (3) identify the weakest links in the PFM cycle to focus efforts on monitoring and improving their performance; (4) provide information on PFM performance to external actors in a standardized manner

4. How does Ukraine compare internationally?

In most dimensions of performance Ukraine’s PFM systems lags behind that of upper middle income countries in the Europe and Central Asia (ECA) region, although it is above the average of all countries in the region and, as a group ECA countries perform better than the global average. Thus, while Ukraine is not doing bad, it needs to improve considerably to achieve its aspirations of becoming a middle income European country

5. What changed between 2005 and 2010 assessment?

Major changes between 2005 and 2010 include:
(1) Improvements in procurement system with abolition of the flawed procurement system involving privatization of some government functions in 2005 and establishment of legal framework broadly aligned with good international practices;
(2) Deterioration in budget credibility in 2009-2010 mainly due to political uncertainties and economic crisis affecting execution of the budget as  compared to planned figures
(3) Further improvements in treasury servicing of the budget
(4) Consolidation of tax legislation under a single Tax Code

6. What are the strongest parts of the PFM system?

Ukraine performs well on transparency, predictability and budget execution control, as well as, on accounting and reporting.  The particular strength of the system is existence of a functional treasury system with Single Treasury Account and commitment control in place. Ukraine also scores well on transparency as most of the information on budget planning and execution is publicly available through both internet and in paper form.

7. What are the weakest parts of the PFM system?

The particular weak points of the PFM system in Ukraine according to the 2011 PEFA Assessment are those related to the oversight of the State Owned Enterprises and scrutiny and audit, mainly due to a the limited mandate of supreme audit body, the Accounting Chamber of Ukraine, and limited parliamentary scrutiny. The policy-based budgeting remains weak, although the 2011 Budget Code once implemented and used should improve the performance by introduction of the medium term budgeting

8. Does PEFA assessment capture corruption related issues?

PEFA is not designed to capture corruption issues per se as it only measures performance of the PFM systems. However many of the PEFA dimensions such as procurement, internal audit and control, external audit have direct impact on likelihood of corruption occurrence

9. How come PEFA shows improvements in revenue administration while Doing Business does not?

This mismatch can occur due to differences in methodologies. The PEFA is measuring the efficiency of tools available for the Government and taxpayers while the Doing Business and similar studies attempt to measure the final outcome of their application. Even good tools can be not efficient if not properly applied and also improvement in revenue administration practices lead to improved business environment with considerable lag.

10. Is deterioration in score necessarily means worsened situation?

The deterioration in scores does not necessarily mean worsened situation. As any complex and comprehensive assessment, PEFA can contain some inaccuracies or be based on insufficient information. Some of the worsened scores (e.g., Internal Audit indicator in the 2011 PEFA) are not reflecting worsened situation but are reassessment of the previous score based on newly available or clarified information.

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The Public Expenditure and Financial Accountability (PEFA) Program was founded in 2001 as a multi-donor partnership between seven donor agencies and international financial institutions to assess the condition of country public expenditure, procurement and financial accountability systems and develop a practical sequence for reform and capacity-building actions. PEFA is a multi-donor effort composed of the European Commission, the UK's Department for International Development, the Swiss State Secretariat for Economic Affairs, the French Ministry of Foreign Affairs, the Royal Norwegian Ministry of Foreign Affairs, the World Bank, the International Monetary Fund and the Strategic Partnership with Africa.

The PEFA assessment framework consists of 28 high-level performance indicators of a country's public financial management system, with 3 supplemental indicators on donor practices that impact a country's public financial management system. The PEFA indicator set is being used by international donors to assess fiduciary risks in supporting partner countries. The Framework is available in Arabic, English, French, Serbian, Spanish, Portuguese, Russian and Ukrainian.

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