Ukraine - Treasury Systems Project

Report No. PIC4952 Project Name Ukraine-Treasury Systems Project Region Europe and Central Asia Sector Public Sector Management Project ID UAPE49174 Borrower Government of Ukraine Implementing Agency Treasury Department, 9, Bastionnaya Street, Kyiv - 14 252008, Ukraine Telephone: + (380-44) 294 4900 Fax: + (380-44) 295 94 61 Date this PID Prepared January 1996 Projected Appraisal June 1997 Projected Board Date October 1997 1. Country and Sector Background Over the last two years, the Government has carried out important reforms that have stopped hyperinflation, provided a stable currency, and led to a recovery in hard currency exports. However, unless there is a more fundamental reform of the public sector, the success of the reform program in sustaining macroeconomic stability and in reversing the decline in output may be jeopardized. One of the main factors which indicates the fragility of the achieved success is the unsustainable fiscal situation. For the last few years, the Government has been running up arrears and postponing expenditures, caused by the unrealistic budget and by poor expenditure management and control. To achieve sustainability, the Government budget has to correspond to a realistic assessment of available resources; its drafting and execution needs central coordination first to ensure that the resources are allocated to priorities and second to guarantee that expenditure commitments do not deviate from available revenues. This requires strengthening the Ministry of Finance and creating a well functioning treasury system. It also means setting clear rules for expenditure selection, allocating expenditure responsibility and ensuring oversight. All these measures will contribute to a stable and efficient system. At present, the Government has developed a reform program to address the issue of fiscal sustainability and to improve the management of public resources as well as to address many of the existing government-imposed obstacles to business. Reforming the public expenditure system and creating a well functioning treasury system is an important element of this program -- the Government realizes its crucial importance for the success of the whole reform program. Therefore, it has set up its own targets for making the Treasury operational -- start performing basic functions (the interim system) in 1997 and consequently become fully operational  in 1999. Moreover, the Government has agreed with the IMF on a set of reform actions aimed at improving public expenditure management to be supported by the EFF program. The Bank is already active in restructuring the public sector in Ukraine. The Institution Building Loan (IBL) already in place helps to develop a number of key institutions and their associated systems. Three pieces of economic and sector work, namely a Study of Debt Management, a Public Expenditure Review and a Public Investment Review provide the analytical underpinnings for reforms in public sector aimed at rationalizing taxes and improving tax administration, restructuring the budget expenditure management, improving administrative efficiency, and making government more responsive to private sector needs. The IMF has also been extensively involved in advising the Government in the areas addressed by the project. In particular, assistance is being provided to the Treasury in the development of a new budget classification structure, a chart of accounts and the functional specifications for a fully functioning treasury system through a resident expert in Ukraine. The Government has expressed a strong desire to ensure IMF involvement in the implementation phases of its reform program. The IMF would continue to be responsible for advising the Ministry of Finance and Treasury on the substantive aspects of the budget execution, cash management and treasury operations and to assist the Treasury in designing and installing the full treasury system This project proposes to assist the Government in its efforts to establish a Treasury Department and a computerized treasury management system, encompassing the full range of functions needed to manage the execution of the fiscal program of the government. The creation of the Treasury Department that will manage budget execution - including oversight of extra budgetary and local budget operations - and implementation of associated systems and procedure, is an essential step to meet the needs of financial administration in a market economy. 2. Project Objectives The project would assist the Government to: (i) Establish a Treasury Department and implement associated legal and institutional framework, including systems and procedures. (ii) Assist the Government to design and implement a fully functional, automated treasury system, that would serve as an effective instrument for budget execution and cash management. 3. Project Description the project would provide technical assistance, computer hardware and software and training to enable the government to complete the design of the treasury system, which will support the policy framework for the public expenditure management developed by the - 2 -  Government with the help of IMF, World Bank and other donors. Technical assistance (advisory services) would be provided by the project to supplement the assistance provided by the IMF to establish a full treasury system. In particular, to develop: a) a regulatory framework and detailed procedures at all levels of treasury operations, b) improved methods and guidelines for forecasting of expenditure requirements, c) improved procedures for cash management, and d) information systems for a fully automated treasury system. Equipment and software would be procured to be installed at the Treasury headquarters, oblast and selected rayon Treasury offices. Each office would receive an appropriately sized UNIX server, a LAN network, a RDBMS and application development tools, laser and line printers and windows based work stations and modem connections over all Treasury network. Details of equipment to be procured would be determined by the Treasury and project consultants. The project proposes to investigate off-the-shelf application software packages that could meet the Treasury requirements after customization. Software would be selected from packages available in the market and would be acquired for a few pilot sites. After the pilot system has been tested, it would be replicated across the remaining sites if the system fits Treasury requirements. Custom development of the systems would be undertaken only if no off-the-shelf application software packages are available that could possibly be used for the Treasury after customization. Training would be provided to build skills on functional and technical matters. Training is recognized to be a crucial element for project implementation and its further systainability. The project would provide financing to develop an overall training strategy for the system's users, as well as to design in-house training facilities. The project would also finance training courses, seminars and study tours for government employees in budget execution and treasury operations areas, as well as in computer systems. 4. Project Financing The proposed Bank loan of US$15.750 million equivalent will finance 61 percent of the total project costs, which comprise 66.5 percent in foreign exchange costs ( US$13.750 million equivalent) and 37 percent in local costs, (US$2.0 million equivalent). The Government will finance the balance of project investment costs (about US$9.5 million equivalent), including duties and taxes which are estimated at US$3.125 million equivalent. Recurrent incremental costs, which comprise equipment operations and maintenance and facilities service costs (US$0.7 million equivalent), will be financed entirely by the Government. US$0.5 million would be provided form PHRD grant funds to prepare the project. It is expected that the IMF would designate and finance specialist advisors for varying periods of time up to a total of 24 person months to assist in the design and implementation of the system. - 3-  5. Project Implementation Project Institutional and Implementation Arrangements are as described below: (a) Implementation Period: Four Years; FY1997-FY2000 (b) Executing Agencies: The Treasury would administer funds under the project (c) Project Coordination: A working group will be set up by the Treasury with representatives from the Ministry of Finance (MOF) , National Bank of Ukraine (NBU), and other related agencies to deal with day to day operational issues. (d) Project Oversight: A steering committee chaired by the Head of the Treasury, would be set up, by a resolution of the Cabinet of Ministers, to oversee overall implementation of the project and advise on policy issues. This committee will include representatives of the MOF, the NBU, the National Agency for Reconstruction and Development, the Ministry of Economy and the Treasury, 6. Sustainability The sustainability of the project would largely depend upon the commitment by the authorities to the project objectives. The Government has indicated its commitment to the treasury system reform and has set an explicit timetable for the implementation of a full treasury system. Work under this project builds upon efforts already underway. These efforts also give a strong indication of Government commitment. Another critical condition for project sustainability is that the Treasury be able to assimilate and retain the transfer of technical skills. The project would supplement technical skills as required. To institutionalize the technological changes smoothly, the project would recruit foreign and local specialists and structure training programs for staff. By developing long term training strategies the project would ensure sustained institutional support. Participation of the local private sector in systems development and implementation activities proposed in the project would also ensure sustainability. 7. Lessons learned The Bank's experience with similar projects demonstrates the need for: (i) a high level of commitment to project objectives on the part of the borrower; (ii) well defined objectives consistent with the country's absorptive capacity; (iii) thorough preparation and accurate assessment of needs; (iv) close monitoring of project preparation actions to be undertaken by the borrower and provision of necessary technical assistance; and (v) rigorous supervision to handle the design, procurement and implementation challenges that these projects typically present. The Bank's experience with the Treasury component under the IBL -4 -  shows that borrower's commitment and his extensive involvement in deciding the project (participatory approach) as well as extensive involvement of the resident mission in the process of preparation and supervision are essential for the success of the project. The project incorporates these lessons by: (i) focusing on areas to which the Government is currently committed ( see para. 11 below); (ii) building on existing Government efforts in these areas; (iii) providing technical assistance to help the borrower to implement the actions required for the project preparation and providing financing for skills required for project implementation, (iv) proposing a PIU to meet implementation challenges; (v) anticipating intensive supervision requirements and involving extensively the resident mission in Kiev in this process. 8. Poverty Category This project does not directly attempt to resolve poverty issues. Therefore it is classified as " Not in the Program of Targeted Interventions". 9. Environmental Aspects In accordance with the Bank's Operational Directive on Environmental Assessment ( OD 4.01, Annex E), the proposed project has been placed in Category "C" and does not require an environmental assessment. 10. Program Objective Category Economic Management Contact Point Public Information Center The World Bank 1818 H Street N.W. Washington, D.C. 20433 Telephone No.: (202) 458-5454 Fax No.: (202) 522-1500 Note: This is information on an evolving project. Certain components may not necessarily be included in the final project. Processed by the Public Information Center week ending April 11, 1997. - 5 -