Ukraine - Treasury Systems Project

Document of The World Bank Report No. T-7184-UA TECHNICAL ANNEX TO THE MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT UKRAINE TREASURY SYSTEMS PROJECT JANUARY 27, 1998 Poverty Reduction and Economic Management Unit Europe and Central Asia Region  CURRENCY EOUIVALENTS (as on June 1997) Currency Unit = HR 1.95 HR =US $1.0 US$1= 0.51HR 1993 1994 1995 June 1997 US l.00= - - - 1.95 PRINCIPAL ABBREVIATIONS AND ACRONYMS CAS Country Assistance Strategy DC Direct Contracting FAD Fiscal Affairs department GFMIS Government Financial Management Information System GFS Government Finance Statistics H/W Hardware IBL Institutional Building Loan IBRD International Bank for Reconstruction and Development ICB International Competitive Bidding IMF International Monetary Fund IS International Shopping IT Information Technology MOF Ministry of Finance NS National Shopping NBU National Bank of Ukraine PC Personal Computer PFM Public Finance Management PHRD Policy and Human Resources Development Fund PIU Project Implementation Unit QCBS Quality and Cost Based Method of Selection RDBMS Relational Data Base Management System RTU Regional Treasury Units S/W Software SOE Statement of Expenses SU Spending Unit SL Short List TLS Treasury Ledger System TSA Treasury Single Account Fiscal Year January I - December 31 Vice President: Johannes F. Linn, ECAVP Country Director: Paul J. Siegelbaum, ECC 11 Sector Director: Pradeep K. Mitra, ECSPE Sector Leader: Sanjay Pradhan, ECSPE Team Leader : Lilia Burunciuc, ECC 11 Co-Team-Leader: Ali Hashim, ECSPE  TABLE OF CONTENTS 1. COUNTRY AND SECTOR BACKGROUND 2 2. SECTOR ISSUES TO BE ADDRESSED BY THE PROJECT 3 Progress to date 4 3. LESSONS OF EXPERIENCE AND BANK STRATEGY 5 Lessons Learned 5 Rationale for Bank Involvement 5 4, THE PROJECT 6 Objectives 6 Project Description 6 A. Policy Framework and Institutional Reforms 6 B. Key Cbaracteristics of the Treasury Ledger System Design 7 Items to be Financed 9 A. Technical Assistance (base cost US $ 2.62 million) 10 B. Computer Hardware and Software (base cost US $ 21.4 million) 12 C. Training (base cost US $ 0.6 million) 13 5. IMPLEMENTATION ARRANGEMENTS, PLANS AND SCHEDULES, MONITORING AND EVALUATION 14 Project Implementation Arrangements 14 Implementation Strategy & Schedule 14 Project Sustainability 15 Project Launch, Monitoring and Evaluation 15 6. PROJECT FINANCING AND COSTS; PROCUREMENT AND DISBURSEMENT ARRANGEMENTS 17 Financing and Costs 17 Procurement Arrangements and Schedules 19 Methods other than ICB 20 Technical Assistance 21 Disbursement and Financing Schedules 23 Financial Management System 24 Special Account 24 Project Audits 25 8. BENEFITS AND RISKS 26 Benefits 26 Critical Assumptions and Risks 26 9. AGREEMENTS REACHED 28  LIST OF ANNEXES: Annex 1: Detailed Functionality of the Treasury Ledger System and the Technology Architecture Required for Implementation. Annex II: Treasury Systems Project Implementation Schedule. Annex III: Project Performance Monitoring Indicators. Annex IV: Detailed Cost Tables. Annex V: Detailed List of Technical Assistance Requirements.  GOVERNMENT OF UKRAINE Treasury Systems Project Loan and Project Summary Borrower: Ukraine Implementing Agency: The Ministry of Finance Beneficiaries: The Ministry of Finance, the Treasury Department Poverty: Not applicable Amount: US$ 16.4 million Terms: The loan would be made in US Dollar at the Bank's standard interest rate for LIBOR based single currency loans, with a maturity of 20 years including five years of grace. Commitment Fee: 0.75 percent on undisbursed credit balances, beginning 60 days after signing, less any waiver. Financing Plan: See para. 6.1 Staff Appraisal Report: Technical Annex (Report No. T-7184-UA) in Lieu of Appraisal Report to supplement Memorandum of the President (Report No. P- 71 84-UA). Project ID Number: 49174   1. COUNTRY AND SECTOR BACKGROUND 1.1 Over the last two years, the Government of Ukraine has carried out important reforms that have stopped hyper-inflation, 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. 1.2 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 expen diture management and control. To achieve sustainability, the Government budget has to correspond to a realistic assessment of available resources. The preparation of the budget and its 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 (MOF) 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. 1.3 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 through a proposed Public Resource Management Loan. 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. 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 stand-by program. 1.4 The Bank is already active in restructuring the public sector in Ukraine. The 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. 1.5 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 and the IMF would continue to be responsible for advising the MOF 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.  -2- 2. SECTOR ISSUES TO BE ADDRESSED BY THE PROJECT 2.1 Previous analyses by the Ukrainian authorities and by the IMF and the World Bank staff highlighted significant weaknesses in the budget system and the financial management of governnent operations. These have been reported on in previous IMF reports (e.g. Ukraine- A Prograrn to set up a Treasury System, IMF/FAD, April 1993). The features of the previous system that hindered effective financial management in the central and local governments are summarized below. 2.2 In the process of transformation from a centrally planned to a market economy, the public expenditure management system will need to be re-structured and take on new tasks in order to be an efficient instrument of economic management. Specifically, past preoccupation with compliance with centrally issued directives to fulfill the planned targets is no longer relevant. Other major weaknesses in the former public expenditure management system are: 1) Diffusion of responsibilities for fiscal matters among a number of different entities within the Government in addition to the MOF; 2) Inappropriate budget classifications, which do not allow meaningful budget monitoring; 3) Inappropriate legal framework for budget preparation, approval, implementation and monitoring; 4) Lack of reliable, comprehensive and timely accounting information; 5) Underdeveloped debt and cash management operations that are not linked to overall budget management; 6) Dispersion of budget money in many spending units accounts, instead of concentrating money in a single treasury account, which makes cash management difficult; 7) Lack of macro economic framework needed for formulation of the budget and making of revenue and expenditure projections; 8) Lack of administrative capacity to adjust the budget in response to changing circumstances; 2.3 The proposed project will address the points 1-6 mentioned above: assist the Government to define the functional responsibilities of the Treasury, the Budget and Taxation Departments of the MOF, design new budget classification structures to allow meaningful resource allocation and monitoring, design a new legal framework to underpin budget execution, design and implement a treasury system to centralize payment processing and optimize cash management, and provide timely information on the deployment and use of fiscal resources.  -3 - Progress to date 2.4 The Treasury Department has been established as an organization and has begun taking over the budget execution functions formerly carried out by the financing departments of the MOF. However, fiscal management accounting still depends on records maintained by the National Bank of Ukraine (NBU). Payments are, for a large part, still made directly from the spending units' accounts held in banks. Nevertheless, the Government is extremely committed to establishing well functioning Treasury to meet the needs of financial administration in a market economy. Moreover, difficult fiscal situation is forcing the Government to take actions to improvement of expenditure management and control. It is committed to addressing remaining systemic problems, such as fiscal reporting which is dependent on records maintained by the NBU and payments which are made directly from spending unit accounts held in banks. It has set up its own targets for making the Treasury operational -- start performing basic functions (the interim system) in 1997 and become fully operational in 2000. 2.5 Originally, the work on the treasury system had started under the Institution Building Loan (IBL) Treasury component, which was canceled in April 1996, due to the lack of progress at that stage. However, some operational procedures, operating manuals and directives for the new system have been developed under the IBL Treasury component. 2.6 Over the last twelve months, the Treasury Department has embarked on a project to set up an interim computer based system with the assistance of the NBU. This system will cater to basic requirements for treasury operations related to financing Government programs and processing payments from Government agencies. The Government has started to centralize payment processing on a pilot basis from June 1, 1997 for the Kiev University, Ministry of Health, and the Chernobyl and the Employment funds, for three Oblasts. Subsequently, the scope was increased to include all central Government institutions based in Kiev. The pilot is being extended now to cover all Oblasts by end 1997. In addition, a draft of the new Budget Management Law has been prepared. Finally, the new Minister of Finance has taken an active interest in the project and has set up a formal working group and the Treasury has developed a detailed action plan required for project implementation. 2.7 A separate computer department has also been set up and is currently staffed with about 20 analysts and programmers at the Treasury headquarters. In addition 2-3 analysts and programmers are located at each Oblast Treasury office. To set up the interim system, the Treasury has acquired computer hardware and software worth about $6.4 million, financed from its own resources. 2.8 The Government has approached the Bank to finance the development and implementation of new systems, processes, procedures and methodologies required for the establishment of the fully functional Treasury. The Bank loan would supplement Government's own outlays and enable the full implementation of the treasury system. The project will build on work already done by the borrower in establishing a Treasury Department and associated systems.  -4- 3. LESSONS OF EXPERIENCE AND BANK STRATEGY Lessons Learned 3.1 The Bank's experience with the Treasury component under the IBL shows that the borrower's commitment and extensive local involvement in designing the project (participatory approach) as well as extensive involvement by the Bank's resident mission in the process of preparation and supervision, are essential for the success of the project. The Bank's experience with similar projects indicates that other important aspects that need to be kept in mind are: (i) well defined objectives consistent with the country's absorptive capacity; (ii) thorough preparation and accurate assessment of needs; (iii) close monitoring of project preparation actions to be undertaken by the borrower and provision of necessary technical assistance; and (iv) rigorous supervision to handle the design, procurement and implementation challenges that these projects typically present. 3.2 The project incorporates the above mentioned lessons by: (i) focusing on areas to which the Government is currently committed; (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; and (v) anticipating intensive supervision requirements and involving the resident mission in Kiev in this process. 3.3 The Government is very committed to the project. An indication of the Government's commitment and ownership is that the project scope and design are based on an action plan and cost estimates developed jointly with Treasury officials. Government commitment is also confirmed by the intention to make its own contribution to the project of about 37 percent of the project cost which includes US$ 6.4 million for hardware and software for the interim budget and US$ 3.6 million for duties and taxes. Rationale for Bank Involvement 3.4 The Country Assistance Strategy (CAS) emphasizes the need for restructuring the public sector and recasting it in a supportive role essential to the efficient operation of a market economy. The indicators established in the CAS for monitoring progress towards this development objective include strengthening economic management institutions. The creation of a Treasury Departmern to manage budget execution - including oversight of extra budgetary and local budget operations - and implementation of associated systems and procedures, is an essential step to meet the needs of financial administration in a market economy. The project will help build institutional capacity in Ukraine to deal with public expenditure management issues and assist the Government to set up the Treasury in close collaboration with the IMF. The Bank and Fund are currently involved in several similar projects in the countries in transition, and over the years, have developed valuable expertise in this area that give them a comparative advantage. Bank support would thus significantly help the Government to develop an efficient system of public finance. This would be in line with the objectives of the CAS (Report No. 15674-UA, June 3, 1996).  -5- 4. THE PROJECT Objectives 4.1 The overall objective of the Project is to support ongoing Government efforts to 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. Project Description 4.2 The Government is in the process of implementing several key policy actions to enable the Treasury to be set up and function in accordance with international best practices. To support this activity, this project will assist the Government in designing and implementing a fully functional automated treasury system capable of serving as an effective instrument for budget execution and cash management. The proposed project would provide technical assistance, computer equipment and software and training to enable the authorities to design, develop, test and implement processes, procedures and systems, related regulations and training programs for budget execution and treasury operations and payroll management. The project would first assist in the design of the systems. The system will then be implemented at a number of pilot sites and, after the pilot exercise, replicated across the country. 4.3 Following is a brief description of the institutional and policy reforms underway, and of the information systems and associated technology to be set up for the Treasury under the project. A. Policy Framework and Institutional Reforms 4.4 The IMF and World Bank have been extensively involved in advising the Government in developing policy and institutional reforms to enable the treasury to be set up and function in accordance with international best practices. A comprehensive package of public sector reforms is being undertaken by the Government and supported by the Bank as part of preparation of the proposed Public Resource Management Loan. The proposed Treasury project will complement the reforms proposed under the Public Sector Resource Management Loan and will support Government efforts to reform the system of public expenditures. In addition, these reforms are being supported by the IMF's program. Some of the key actions and policy reforms being undertaken are detailed below: (i) Development of a comprehensive Budget Management Law which will provide a framework for the proper management of public moneys and property, with specific emphasis on: (a) the receipt and custody of public moneys (including banking arrangements); (b) public expenditure management (including control processes and linkages with appropriations); (c) the accounting system; (d) the role and responsibilities of the Treasury and other MOF departments; (e) asset management and control; (f) borrowing and investment (specifically the management of the public debt); and (g) reporting and audit. The first draft of the law has already been prepared by the MOF, and reviewed by the Bank and the IMF, and is currently being discussed in several Parliamentary committees.  -6- (ii) Adoption of a budget classification system consistent with the IMF's Government Finance Statistics (GFS) methodology, and final design of a treasury chart of accounts embodying this classification system for implementation. The Ministry of Finance already issued the new budget classification system on December 3, 1997. (iii) Implementation of a transaction based treasury ledger system embodying the new chart of accounts. (iv) Centralization of all Government payments through the Treasury and consolidation of bank accounts to a single account at the NBU. The Government started a pilot on June 1, 1997, to implement central payment processing for the Kiev University, Ministry of Health, and the Chernobyl and the Employment funds, for three Oblasts. The pilot will be extended to cover all Oblasts by end 1997. Centralized payment processing will be progressively extended across the Government during 1998, with 70% of transactions by value expected to be processed centrally by June 1998. (v) Reducing reliance on physical movements of cash in the budget revenue collection process and implementation of a payroll system that makes direct deposits to employee bank accounts, replacing cash payments. It is expected that the government will pilot an automated payroll system within the MOF in 1999. This system would then be progressively implemented across the Government. (vi) Conducting a functional review of the Treasury Department to first review the allocation of functions between the Treasury and Budget Departments of the MOF, and Tax Administration by November 1997. Consequently, a comprehensive operational and effectiveness review of the Treasury will be completed by end- 1998. B. Key Characteristics of the Treasury Ledger System Design 4.5. At a policy level, recommendations related to the scope and functions of the Treasury and associated systems and procedures have been developed by the IMF and are based on international best practice as adapted for economies in transition. The Treasury Ledger System (TLS) proposes a centralized approach to payment processing through the Treasury, rather than a decentralized approach, in which the accounting departments of ministries would be directly responsible for processing payments for expenditures incurred by their respective agencies. The IMF has weighed the advantages and disadvantages of a centralized versus a decentralized system in the early 1990s, while designing this system, and believes that the centralized approach is more appropriate for Ukraine for the following reasons: (a) Under the current system the Ministry of Finance (MOF) periodically distributes funds to spending agency bank accounts, and the spending units directly process payment transactions against these accounts. This results in a situation where, on the one hand, sizable idle balances can build up in spending unit bank accounts, while the MOF is in deficit in overall terms. This, in turn, necessitates additional government borrowing and/ or causes arrears in payments.  -7- (b) The MOF cannot exercise any control to ensure that public expenditures incurred by spending units were in accordance with budget appropriations. (c) The MOF does not receive timely information on public expenditures or receipts from line agencies. In view of this, the IMF has recommended implementation of a centralized model in which all Government funds would be placed in a TSA at the NBU (Central Bank), spending agency bank accounts would be closed, and all payments for spending agencies would be processed by the Treasury Department, which would control the TSA at the Central Bank. 4.6 The proposed system would not, however, undermine spending unit authority and responsibility for budget preparation or administrative and financial control of expenditures during the budget execution phase. These responsibilities would continue to lie with the spending agencies. Thus, the finance departments of spending agencies would continue to be responsible for budget preparation and ex- ante financial control (including commitment control) of transactions. The accounting departments of these agencies would verify receipts of goods and ensure that proposed expenditures are in accordance with budgeted appropriations, prior to forwarding payment orders to Treasury for payment. Though a good treasury system cannot rectify problems of bad budgeting, the new system would, nevertheless, enable the Treasury to ensure that proposed expenditures are in fact in accordance with the budget appropriations, as they should be under any well performing fiscal management system. It would also provide the MOF a means to exercise control on which payments need to be given priority in a situation in which there is a shortage of funds. Since all payments would be processed through Treasury, the system would also enable the Treasury to, simultaneously, compile overall information for the MOF on public expenditures and receipts. Therefore, in view of the current need for central control over expenditures and idle balances in agency accounts, and for up to date information on public expenditures and receipts, a centralized system holds clear advantages over a decentralized approach. 4.7 The core functional processes and information flows associated with the system are shown schematically in Figure 1. The project envisages implementing systems at the Treasury head offices and at each of the Oblast and Rayon branches of the Treasury to process and control central government payments in their respective areas. Local government payments are not envisaged to be part of the system at this stage. Nevertheless, the implementation of the treasury system would not preclude the installation of a similar system for local governments at a later date. 4.8 The TLS would be the core Government Financial Management Information System (GFMIS) and would be used by: (i) the Treasury and its regional offices to perform the basic accounting functions and to undertake budget implementation; (ii) the Budget Department of the MOF to obtain the status of actual expenditures and perform the processes associated with budget preparation and monitoring; (iii) the Cash Management Department of Treasury to provide the information it requires for cash management and implementation of cash limits;  Figure 1: Ukraine- Core Government Fiscal Management Processes, Information Systems and Information Flows Treasury will be Responsible for Making Payments. Central Bank Directly responsible for Retail Bankin-g Operations. Core Functional Processes Spending Ministry of Finance GFM Information National Bank of Ukraine Commercial Ministries & SUa Treasury Syatems TSA Banks Central Processes Deve"lo Maka-cro Economic Framework (with Sectoral Ministry Input) J Legend .--* Information Flows Bnudge1jt GuidellneS Bu--- Sdget GuidelinesJ J Agency Involvement in the Process Ric-eiv-e B-u dg-et P r-o p osals W (Mnits-tirie-s sen d con- solI 'date-d -propo- s-als Budget Proposals (including SUs) to MOF) ]Budget Preparation system Consolidate Bud-get Propo~sals i-nalize Bud-ge-t ]T -BudijetAppm-p4i I-o-tig-nal-a-ri r- -r-rBudget- BudgetI Ministries Appropriitios Appropriations Consolidated Fiscal reports Mo-nitor- Overall Budget_Execution -- rom System Central Treasury Ledger& Casth Management -- Expenditure ManagementlControliProcesss ___ Treasury, Line Ministry Heatd Offices and SUs at the Center)- Receive'Cash- Req-uire-m ent Forecas-ts firom Ministries Cash Forecasts/Requirennents! Obtain Expenditure_Figures and Cash Balances from TLS Determine Ortly Limits on Commitments ( Enter_In_System and inform Ministries) .4Ortlcorrmndment-LnilTits- Determine Funds Allocationg to Ministries (Enter in System, Inform Ministries) Financial releases - _____ - - Budget ~~~~~~~~~~~~~~~~~appro Ministries Determine Btudget Appropriations and Commitment Limits for Stis o m ~ J -4 Finaniaiil Release toSAccounts (Enter into System and inform SLIs) FssilRlae oSt) 7 K;equ-est-foe-E-xoenifdiidFiJ?, -AdmTni-tstaiti~/I-A~p-pvaT-W Bu-dg-IUary Zo-ntrtof--a Ministries) L Co6m-mitm-e-nt-s an-d Verif-ic-ati-o-ns (ofdo-ods Receipt) Transactions -commitmentsANefitcations~ National Bank Commerciat Payment Orders_to make Expenditure-.Payment orders ot Ukraine Banks Budgetary~ Cnrol at Treasury 1] TSA) Payment transcti1fons agais TS yTesr -Paymeni Transactions against T ~ Cre dit to -Commercial Banks of Amounts authorized for credit to Govt. Creditors Credit to Suppliers Acc,o.ts] Daily Filei of paym ents -r-o-m- T-SA and_Reconcililation by Treasu ry F~DiyF n ot Payments from TSA Summary of Receipts (Tax and Non Tax) to the TSA -_ _ ] S mmary of Receipts --Summary of Receipts Detie Accounso instries fro-m ystem Det-ailed-Accounts-at Mi tne Deaaled Sl, Accoun-ts f r onm -Syste jDetailedSUA Aount in-fo-rmati-on flows_tfolfrom Subo-rdinate 'Unitt s - Uss Regional and District Spending Unit Processes -RTUs Regional Regional Branches of Req~uest for Ex-pe-n-diture_Admini~strative Appr-ov-al & Lo-cal_1Bu-dg-etary Cont-rol- Systems Branches of Commercial Com6mitmenrt-s and Verifications (of_Goods Receipt) Transactions U CommitmentsNerifications' Modules NBUt Banks Pa-ymenti O-rders to_ m- a ke_Expenditure -Payment orders -- Budigetary Control at Treasury_(RTU) _------ Pay-me-n-tt-ra-nsacet-ions against TSA by Treasury - -- -- Payment Transactions against TSA, J Creditto Commercial B-anks of Amounts authorized for credit to Go-vt. Creditors Crecht to Suppliers AccountsJ Weaily- Fil 1-9 of' -paym ents f-rom T-S-A- -- 1Daily File of Payments from TSA Summnary of Receipts (Tax and Non Tax) to the TSA ISummary of Receipts JSummary of ReceiptsJ Detailed Accounts of SUs from System b etailed Su Acco.nsot  -9- (iv) line agencies, to cater to their accounting and financial information needs; and (v) the Government auditing organization to access financial transaction data for auditing purposes. 4.9 In a fully automated accounting system, as it exists in most developed countries and several middle income countries, the basic accounting processes are automated and data captured only once as an accounting transaction progresses through the system. Such a system, introduced along with a modem budget classification system and an appropriate chart of accounts, enables expenditures and revenues to be recorded at a very detailed level and related to specific programs and projects. Data recorded at this level can be directly used for program and project management. This data is also easily amenable to cross classification in other ways as required for financial analyses. In the absence of an automated accounting system, data recording is not at as detailed a level. More important, cross classification of data to other schema is very cumbersome and therefore is seldom carried out. The introduction of an automated accounting system would ensure completeness of data capture (that is no transaction would be processed outside the system) and rigorous application of appropriate financial controls to all transactions processed by the system. 4.10 The information contained in the system data bases would provide the MOF and other core financial agencies with comprehensive management information related to the country's financial resources. In addition, the system would provide useful financial information to the ministries and other spending units (in their respective areas) to enable them to better manage their work programs. 4.11 The system will encompass the functional requirements for the budget implementation and accounting processes and would cover the appropriation, commitment, funds allocation, and payment processes for both the investment and current budgets. The details of the functionality of the TLS and of the technology architecture to be used are given in Annex I. Items to be Financed 4.12 A description of the technical assistance, computer hardware and software, and training to be financed under the project are given in the following paragraphs.  -10- A. Technical Assistance (base cost US $ 2.62 million) 4.13 The IMF has been providing technical assistance 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 an expert resident in Ukraine and would continue to be responsible for advising the MOF/ Treasury on the substantive aspects of the Budget Execution, Cash Management and Treasury Operations. For this purpose, the IMF proposes to designate and finance experts/ advisors to continue to advise the Government on the functional aspects of Treasury operations and to assist the Treasury in the design and installation of the full treasury system. 4.14 The project would supplement this with technical assistance in the functional and technical areas as well as for project implementation as described below: Functional Aspects: 4.15 Technical assistance in functional aspects would include: (i) Review of existing budget classifications and coding structures and develop and design a revised structure and chart of accounts conforming with the IMF's GFS classification methodology and suitable for both budget preparation and implementation. (ii) Developing the legal regulatory and operational framework and develop detailed guidelines, procedures, regulations, forms and operating manuals for budget execution processes required at all levels of Treasury operations to implement the treasury system and for payroll management. (iii) Developing methods to improve forecasting of expenditure requirements and cash management. (iv) Developing the fiscal reporting system of Treasury and improve linkages between the Treasury fiscal reports and MOF analysis. (v) Developing detailed functional specifications for the treasury ledger system and payroll system, including requirements for incorporating necessary expenditure control procedures. (vi) Assessing training requirements for institutional development, including, assessment of the skill levels of Treasury/ MOF staff to operate and manage a modem fiscal management system as well as necessary technical skills required for the implementation and operation of the new treasury system, and develop and implement a training, skills upgrading and recruitment program as may be necessary.  -11- Technical Aspects: 4.16 In the information systems area, technical assistance would be provided to develop the technical design of the TLS and payroll system and implement the systems first at a designated set of PILOT sites - the center, one oblast and a few (4-5) rayons and after testing the system in this environment, replicate the new system country wide. This would include: (i) Developing the technology architecture for implementing the budget execution treasury and payroll systems and specifying the hardware, software and communications design, systems software and application software environment (UNIX, RDBMS & Application development tools) (ii) Researching and identifying application software for the Treasury and payroll systems and determine customization requirements. (iii) Specifying the hardware and software requirements and prepare bidding documents in accordance with World Bank Procurement Guidelines. (iv) Supervising implementation of the budget execution and treasury operations and payroll systems, including: v Technical project coordination and systems integration; * Procurement of hardware and software; v Installation and testing of H/W and S/W; * Customization or development (as may be required) of application software for budget execution and treasury operations and payroll. * Acquisition, installation and testing of S/W for the treasury system A Developing operational guidelines, security and disaster recovery procedures * Developing procedures and check list for replicating systems at subsequent sites. (v) Develop a plan for upgrading the informatics capability of the Treasury to enable it to carry out the design, implementation, operation and maintenance of the above systems; including: * Specifying an organization structure and training/ skills requirements for this facility * Developing a training strategy and plans for the implementation of the systems country wide * Developing end user manuals and training materials and documentation * Training end users at Pilot sites * Designing and specifying systems training facilities for the Treasury/MOF  -12- Project Implementation 4.17 Technical assistance would also be provided to assist the Treasury to administer and manage the project and assist with Bank procedures (project monitoring, accounting, disbursement). A Project Implementation Unit (PIU) will be established at the Treasury for project monitoring, implementation, administration, procurement, and disbursement. The project will provide financing for salaries and operating costs of the PIU. B. Computer Hardware and Software (base cost US $ 21.4 million) 4.18 Details of computer hardware, software, related equipment to be provided under the project are summarized below: Hardwvare, Systems Software and Application Development Tools, DBMS's. Equipment (UNIX servers, work stations, networks, printers, uninterrupted power supply [UPS], site preparation), systems software and application development tools for central facilities at the Treasury Headquarters, Oblast and selected Rayon treasury offices. Each office would receive an appropriately sized UNIX server, a Local Area Network (LAN), a RDBMS and application development tools, laser and line printers and windows based work stations and modem connections connecting with the overall treasury network. Details of equipment to be procured would be determined by the Treasury and Project consultants. The project would also provide some computer hardware to supplement the hardware procured from Government's own resources, that is required for the ful implementation of the interim system. Application Software Application software will be necessary for treasury systems at center, regional units, and spending units and customization, as may be necessary, and application software to manage and operate a payroll system for Government employees. This includes cost of package software purchase and customization as identified by project consultants. In case package software is not available the application software would need to be custom developed. Miscellaneous These include office equipment and training facilities for Treasury, as may be necessary.  -13- C Training (base cost US $ 0.5 million) 4.19 Training is recognized to be a crucial element for project implementation. Training requirements for the project can be divided into several areas: (i) Training in principles, concepts and methodologies of the subject areas covered by the project, namely, budget execution, cash management and treasury operations. (ii) Senior level management training / orientation in the use of computer based financial management information systems. (iii) End user training in the use of the computerized information systems to be set up under the project. This would include training for line agency finance staff and for Government auditors. (iv) Technical training in the use of the specific tools to be employed for developing and implementing the information systems under the project. e.g. the chosen RDBMS, the operating system-UNIX, application development and computer assisted software engineering (CASE) tools, etc. (v) More general training related to the design and development of information systems. (vi) Training in electronic data processing (EDP) project management and the provision of end user support to staff who will use the systems. 4.20 The project would provide financing for: (i) Technical assistance for a training needs analysis and development of an overall training strategy and a schedule for training users in the light of the results of the training needs analysis; the design and specification of in-house training facilities and/ or identification of suitable training courses within the country and abroad; the development and acquisition of training materials, technical documentation and end user manuals. (ii) Training courses to be arranged at site, or in local or foreign institutes to cover the above mentioned areas. Staff to be trained under the project would include the MOF, Line Agency, Government Auditors, and Treasury. (iii) The project would also finance study assignments for government officials in the budget execution and treasury operations areas to enable them to benefit from the experiences of other countries in these areas. This would include financing of courses and study tours on specific topics.  -14- 5. IMPLEMENTATION ARRANGEMENTS, PLANS AND SCHEDULES, MONITORING AND EVALUATION Project Implementation Arrangements 5.1 Project Implementation Arrangements are summarized below: (a) Implementation Period: Four Years; FY1998-FY2001 (b) Executing Agencies: The Treasury would admninister funds under the project (c) Project Oversight: An Inter-Agency Coordinating Committee chaired by the Head of the Treasury has been set up by a resolution of the Cabinet of Ministers on April 3, 1997 to oversee overall implementation of the project and advise on policy issues. The committee includes representatives of the MOF, the NBU, the National Agency for Reconstruction and Development, the Ministry of Economy and the Treasury. (d) Project Coordination: The working group that was part of project preparation will now form part of project steering committee during project implementation. (e) Project Accounting, Reporting, Monitoring, and Evaluation and Auditing: (i) A Project Implementation Unit (PrU) in the Treasury would be responsible or activities related to project monitoring, administration, accounting, disbursement, procurement and periodic reporting to the Bank; (ii) Project Accounts and the Special Account will be audited in accordance with the Guidelines for Financial Reporting and Auditing of Projects Financed by the World Bank (March 1982); (iii) World Bank supervision missions. Implementation Strategy & Schedule 5.2 The various steps involved in the implementation of this new system are detailed in the accompanying project implementation schedule attached as Annex II. The schedule describes the main tasks involved in the implementation of the full treasury system and gives the estimated start and completion dates for these tasks. 5.3 The implementation strategy adopted for the project was arrived at after an analysis of possible alternatives in order to achieve a cost effective solution to the Government's needs for a set of efficient and effective tools for public expenditure management. The following aspects are particularly important: (a) Technology Platform: The choice of an OPEN and scaleable systems technological platform that is proposed for the project was arrived at after an analysis of other technological options, since it strikes a balance between large main-frame systems, which would be cumbersome and expensive and other PC based options ( e.g. stand- alone PCs) that could be under-powered and not scaleable to sites with a large number of transactions;  -15- (b) Applications Software Package Selection and Systems Pilot: The Project Implementation Schedule shows that the project would first look at feasible alternatives for an appropriate technological platform and an off the shelf software package that could possibly meet the Treasury requirements, after customization. This would be followed by acquiring the application software for a few pilot sites. This software would be tested on the computers acquired for the interim system. After the pilot system has been implemented and the Treasury has confirmed the fit between the new system and treasury requirements, it would be replicated across the remaining sites. The application software would be acquired in a single contract through a process of International Competitive Bidding (ICB). The delivery schedule for the contract would specify, first, a delivery of a few licenses for the pilot phase only. After a successful pilot implementation, additional copies would be acquired under the same contract for the replication phase. Custom development of application software would be undertaken only if no off the shelf application software package is found that could possibly be used for the Treasury system after suitable customization. Additional hardware required for the final replication would be procured after the Pilot exercise has been successfully completed. Project Sustainability 5.4 The sustainability of the project would largely depend upon the commitment by the authorities to the project objectives. Work under this project builds upon local efforts already underway, which 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 build on existing efforts and 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 capacity. Participation of the local private sector in systems development and implementation activities proposed in the project would also contribute to sustainability counter balancing attrition tendencies. Project Launch, Monitoring and Evaluation 5.5 A set of project monitoring and performance indicators have been developed (Annex III) to measure the inputs, key process milestones, track outputs and assess the impact of the project inputs on the project's major development objectives. These will be used as a basis for monitoring and evaluating the project. A project launch workshop would be held in Spring 1998. The project launch workshop would include a session on procurement. A mid-term review to assess performance achieved and to review the appropriateness and continuing relevance of the project design. In addition, more concise progress reports would be provided to the Bank on a quarterly basis by the Treasury describing the status of implementation and procurement activities. 5.6 Reporting and Annual Reviews. The Treasury will prepare semi-annual descriptive and financial reports on each project component, objective and activity (beginning from the date of Loan Effectiveness). The reports will describe: (i) current status; (ii) deviations, if any, from the implementation plan; and (iii) the reasons for deviations and corrective actions being taken. Reporting and Bank supervision will focus on reviews of. (i) the emerging policy framework;  -16- (ii) the effectiveness of component and sub-component activities and their consistency with agreements reached at negotiations; (iii) performance of the implementing groups and institutions; (iv) emerging needs for adjustments to project parameters; and (v) possible follow-up operations which could be supported by the Bank. Bank supervision will be based on the quarterly and semi- annual progress reports and the annual evaluation of project activities by the Treasury. This will be supplemented by a review of project expenditures and availability of financial resources, in addition to substantive discussions with technical assistance groups implementing or assisting in the implementation of various components, and discussions with responsible authorities. A mid- term review of the project is planned for Spring 2000. 5.7 In view of the significant complexity and difficulty of technical assistance projects of this sort, Bank staff and consultant supervision inputs are expected to be high and atypical, as compared to the average, but comparable to other similar projects. It is estimated that the requirements wili be in the range of 16-20 staff weeks per year. Supervision would include: (a) general portfolio management - review of procurement and consultant contracting documents, progress reports and correspondence; (b) formal reviews- participation in the midterm and other reviews; and (c) supervision missions. At least two supervision missions would be necessary annually each for a period of two weeks on average. Table I shows the supervision plan. Table 1: Supervision Plan Timing Staff Weeks Staffing FY98 12 weeks Team Leader (4 weeks) Information Systems Specialist (4 weeks) PFM Specialist (4 weeks) FY99 20 weeks Team Leader (8 weeks) Information Systems Specialist (6 weeks) PFM Specialist (6 weeks) FY2000 16 weeks Team Leader (6 weeks) Information Systems Specialist (6 weeks) PFM Specialist (4 weeks) FY 2001 10 weeks Team Leader (4 weeks) Information Systems Specialist (4 weeks) PFM Specialist (2 weeks)  -17- 6. PROJECT FINANCING, COSTS & PROCUREMENT AND DISBURSEMENT ARRANGEMENTS Financing and Costs 6.1 The proposed Bank loan of US$ 16.4 million equivalent will finance 70 percent of the total project investment costs and 70.2 percent of the foreign exchange costs. The Government will finance 37 percent of project investment costs. This includes US$ 6.39 million equivalent for hardware and software for the interim system, and duties and taxes which are estimated at US$ 3.41 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. 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. 6.2 Project costs and financing plan is shown in Table II. This table also shows total project costs, by project component and by expenditure category. Project costs include a physical contingency for unforeseen variations (US$ 0.906 million) equivalent to about 5% percent of the base cost of all project items. The foreign exchange component is estimated at about US$ 23.285 million including contingencies, or 86.6 percent of total project costs. Taxes and duties on goods and service contracts are calculated at 25 percent. Therefore, project costs include an estimated US$ 3.41 million equivalent in direct and indirect taxes and duties on goods and services, to be financed by the Government. About US$0.7 million equivalent is required to cover incremental operating costs directly attributable to the Project during the period July 1997 to December 2001. These consist of incremental operation and maintenance expenditure for equipment and facilities related charges. Detailed Cost Tables are attached at Annex IV.  -18- Table II: Financing Plan by Financier and Component (Total amounts including duties and taxes) Cost Component IBRD % Govt. % Total For. % Local % Duties Exch. (exclud and ing Taxes Taxes) Equipment & Software Standard H/W and S/W 10,379 54 8,995 46 19,374 16,779 87 - 2,595 Application S/W 2,714 80 679 20 3,393 2,714 80 - 679 Sub Total 13,093 56 9,673 44 22,767 19,494 86 - 3,273 Technical Assistance Information Systems 1,906 100 - - 1,906 1,906 100 - 100 Experts I_I Treasury Systems 545 80 136 20 682 545 80 - - 136 Experts Project Implementation 271 100 - - 271 271 100 - 100 Support _ Sub Total 2,722 95 136 5 2,859 2,723 95 - 136 Training IlI Training courses, 585 100 - - 544 544 100 - - - fellowships, study tours & attachments) Total Investment 16,400 63 9,810 37 26,170 22,760 87 - 8 3,410 Costs Recurrent Costs HIW, S/W, Maint.J - - 696 100 696 525 71 171 29 - License Fees, Telecommunications costs, and incremental operational expenses during project implementation period Total - - 696 - 696 500 - 171 - 3,410 Total Project Costs 16,400 61 10,506 39 26,866 23,285 79 171 8 3,410  -19- Procurement Arrangements and Schedules 6.3 Procurement arrangements under the Project are summarized in Table III. Table m: Procurement Arrangements Total Cost, including contingencies, taxes and duties (US$ million) a Expenditure Type ICB Other NBF d Total Equipment Standard Hardware and 8.88 1.5 8.99 19.37 Software (8.88) b (1.5)c (10.38) Application Software 2.71 0.68 3.39 (2.71) (2.71) Consulting Services 2.72 0.14 2.86 (2.72) (2.72) Training 0.54 0.54 (0.54)e (0.54) Total 11.59 4.76 9.81 26.16 (11.59) (4.76) (6.36) Recurrent Costs Equipment Operations and 0.70 0.70 Maintenance, includin2 H/W. Software Maintenance, License Fees, etc. Total 0.70 0.70 Total Project Costs 11.59 4.76 10.50 26.86 (11.59) (4.76) (16.36) Notes: a: Numbers may not add up due to rounding. b: Figures in parenthesis are respective amounts financed by IBRD. c: Includes International shopping (IS) for small amounts of goods not exceeding $300,000 per contract, up to an aggregate amount of US$ 1.000 million; prudent National Shopping may be used for sundry items not exceeding US $ 25,000 per contract up to an aggregate amount of $0.350 million. Direct contracting for proprietazy, time critical or special compatible equipment may be used up to an aggregate amount of US 0. 15 million equivalent subject to Bank's prior review. d: NBF: Not Bank Financed includes, US$6.4 million of equipment and software acquired by the Government from its own resources and US$3.27 million in taxes and US$ 0.7 million in recurrent costs to be paid by the Government. e: Includes Bank financed consulting services and training to be procured in accordance with the Bank's guidelines for use of consultants. 6.4. Procurement of Goods. Equipment contracts which are estimated to cost more than US$300,000 equivalent per contract will be procured following international competitive bidding (ICB) procedures in accordance with the Bank's "Guidelines for Procurement Under MBRD Loans and IDA Credits" January 1995, revised January and August 1996. Equipment procurement has been packaged according to related specialized fields (para. 6.8). Equipment procured through ICB will account for about 90 percent of the total equipment value financed by the Bank (US$ 9.38 million out of a total equipment cost of US$10.38 million (excluding duties and taxes). For contracts or goods to be awarded on the basis of ICB, the Borrower may, as set forth in the Loan  -20- Agreement, grant a margin of preference in the evaluation of bids up to 15% or the amount of applicable custom duties, which ever is lower, to qualified domestic manufacturers of goods in accordance with the World Bank Procurement Guidelines (January 1995, revised January and August 1996). The General Procurement Notice for the project will appear in the January 98 edition of United Nations Development Business. Methods other than ICB 6.5 International Shopping. Procedures for International Shopping will be used for small amounts of equipment where the cost of ICB would clearly outweigh possible price advantages. Contracts for equipment costing less than $300,000 equivalent, not to exceed an aggregate amount of US$1.0 million equivalent, will be awarded under international shopping procedures, based on comparing price quotations obtained from at least three suppliers from two eligible countries. 6.6 National Shopping (NS). Minor sundry items, such as small lots of information technologies and office equipment, not exceeding US$25,000 per contract, up to an aggregate amount of US$0.350 million equivalent, could be purchased on the basis of prudent national shopping by comparing price quotations obtained from at least three local suppliers. 6.7. Direct Contracting (DC). Goods and technical licenses which: (i) are of proprietary nature; or (ii) need to be compatible with other installed equipment, may be procured through direct negotiations with property and/or copyright owners, on terms and conditions acceptable to the Bank. Such items include contracts for intellectual property such as books, technical journals, training materials, audio-visual materials, computer applications software, including annual upgrading and licensing arrangements, copyrights, translation and reprinting rights for training materials, are estimated to cost under US$150,000 equivalent in the aggregate. 6.8 Table IV shows the major procurement packages for goods. The major procurement of the hardware and software has been separated in to three ICB packages for the following reasons: (a) Package-I consists of the hardware requirements for the interim system (comprising only standard hardware and software- mainly PCs and servers and some LAN equipment). This has to be procured about a year or more earlier than the equipment for the full system. (b) Package-2 is for the application software for the full system. The application software is sold by specialized firms and is best procured separately from these firms. This procurement will take place about 9-12 months after the interim system has been put in place. (c) Package-3 will be the hardware for the full system and will be procured one year after the purchase of the first package. Since the project envisages the employment of a UNIX / OPEN systems environment, the separate purchases of hardware as envisaged under packages 1 and 3 and application software under package 2 would not pose any compatibility problems or restrict competition for bidding.  -21- Table IV: Summary of Major Procurement Packages for Goods (Costs excluding taxes and duties) Component/ Estimated Procurement Start Doc. Invitation Award Contract Package Cost Method Preparatio Contract Completion US$ million n Standard Hardware and 3.1 ICB 2/98 4/98 10/98 12/98 Software for Interim System Standard Hardware and 5.78 ICB 10/98 12/98 2/99 12/2000 Software for Full System Application Software 2.71 ICB 2/98 4/98 10/98 12/2000 Technical Assistance 6.9 As discussed in chapter 4, the major technical assistance required in the functional area would be provided by experts deputed and financed by the IMF. The project would supplement this technical assistance in specific areas. Technical assistance assignments are estimated at US $2.72 million equivalent. Consulting services will be contracted in accordance with the "Guidelines for the Use of Consultants by World Bank Borrowers, January 1995 (The Consultant Guidelines). Firms and individuals will be selected for consultant assignments in accordance with the Bank's consultant guidelines. The Terms of Reference of all assignments would be subject to Bank's prior review. The following methods of procurement, summarized in Table V, will be followed.: (a) Quality and Cost Based Selection: A set of consultancies valued at US$1.25 million equivalent, comprising Information Systems Specialists with wide international experience in the implementation of accounting systems would be contracted internationally utilizing the procedures prescribed for the Quality and Cost Based Method of Selection (QCBS) from short listed firms. This group would typically include Applications Systems analysts, Systems Software Specialists, Database Specialists and Networking Specialists. (b) Individual Consultant Procedures will be used for small consultant contracts up to US$100,000 each. Many of the services provided under the project involve contracting of specialized experts, both national and international as individuals where knowledge of the various disciplines to be treated under the project is the paramount requirement. The following categories of experts would be contracted under these procedures: (i) Treasury Experts: These assignments require specific skills normally available from ex-Treasury/MOF officials from other countries with relevant experience. The total estimate for these services is US$ 0.54 million equivalent. (ii) Technical Experts for Project Implementation (Computer Programmers, End User Support Staff Training and Documentation Specialists): This category of experts are mainly intended to supplement the shortage of technical skills in the  -22- Treasury and required for project implementation. This category of experts would be procured at a total cost of US$0.65 million equivalent. (iii) Procurement, Disbursement and Accounting Specialists: These personnel are required to staff the PIU, and this set of consultancies is valued at US$ 0.24 million equivalent. Procurement specialists hired under this category would enable the Treasury to manage the procurement arrangements relating to consultants and equipment required for the project. 6.10 Table V shows the major procurement packages for technical assistance. Table V: Summary of Procurement Packages for Technical Assistance a Est. Cost Procurement Start Invitation Award Contract Package US $ million Method Tender Contract Completion Preparation Infornation Systems 1.25 S/L (QCBS) 11/97 12/97 2/98 6/2000 Specialists Treasury Experts 0.54 Individuals 11/97 12/97 2/98 6/2000 (based on qualifications) Technical experts for 0.65 Individuals 10/98 12/98 2/99 6/2000 project implementation (based on qualifications) Procurement/ 0.24 Individuals 11/97 12/97 2/98 6/2000 Disbursement/ (based on Accounting Specialists qualifications) a = Detailed list of experts is given at Annex V 6.11 The Treasury is the main implementing agency of the project. It is felt that the Treasury would require assistance in activities related to implementing the project and therefore as mentioned in paragraph 4.17 a PIU would be set up to, inter-alia, assist in procurement activities. The project would finance procurement specialists to ensure that procurement activities are carried out in a cost effective manner and in accordance with Bank procedures. A Country Procurement Assessment Review (CPAR) has not been prepared for the Ukraine. For this project the Government would follow agreed Bank procurement procedures as described above and as set forth in the Loan agreement. 6.12 Bank Review. For goods, the Bank shall review the Borrower's procurement plans, decisions and procedures in accordance with Appendix 1 of the Guidelines for Procurement under IMRD Loans and IDA Credits (January 1995). In particular: (i) each contract estimated to cost US$300,000 or more, which will cover all ICB contracts; and (ii) all DC shall be subject to prior review, in accordance with paragraph 2 of Appendix 1 of the above Guidelines Other contracts for goods for amounts less than US$300,000, shall be subject to post review. Terms of reference for all consulting contracts would require prior review by the Bank. Consultants contracts above $100,000 for firns and above $50,000 for individuals would require prior review by the Bank. However, for technical assistance contracts under US$100,000 for firms and under US$50,000 for individuals, the Bank will require prior review of only the terms of reference and short-lists of candidates.  -23- Disbursement and Financing Schedules 6.13 Disbursements. Disbursements against contracts for goods less than US$300,000 equivalent would be made on the basis of statement of expenses (SOE). SOE will also be used for all consulting firm contracts less than $100,000 and individual consultants contracts less than US$50,000 and for all expenses on training, fellowships and studies. All related SOE documentation would be retained by the Treasury, the implementing agency, and made available for subsequent examination by independent auditors and Bank supervision missions. The proposed Project is expected to be disbursed over a period of five years. The closing date will be June 30, 2002. 6.14 Disbursements of World Bank Funds will be made as shown in Table VI. A summary of the disbursement plan is shown in Table VII. Table VI: Proposed Disbursement Categories Category Amount of Loan Percent of Expenditures to (US$ million) be Financed Equipment & Software 12.0 100 percent of foreign expenditures and 100 percent of local expenditures (ex- factory cost) and 80 percent of other local expenditures Consulting Services 2.22 100 percent of expenditures Training 0.5 100 percent of expenditures Project Implementation Unit 0.28 100 percent of expenditures Un-allocated 1.4 Total 16.4  -24- Table VII Disbursement by Semesters Total Project Costs (US$ 000) Semester IBRD Financing Costs to be Cash Flow Cumulative Financed Cash Flow 1 4,738.5 -4,738.5 -4,738.5 2 1,273.2 4,738.5 -3,465.3 -8,203.7 3 1,273.2 1,729.2 -456.0 -8,659.7 4 1,416.2 1,729.2 -313.0 -8,972.7 5 1,416.2 3,615.3 -2,199.1 -11,171.8 6 2,857.0 3,615.3 -758.3 -11,930.2 7 2,857.0 3,350.1 -493.1 -12,423.3 8 2,633.6 3,350.1 -716.5 -13,139.8 9 2,664.4 _ 2,664.4 -10,475.3 Total 16.4 26,866.3 -10.506.1 -10.506.1 Financial Management System 6.15 The Treasury is responsible for the accounting function for the Government as a whole. Staff in Treasury are therefore familiar with accounting and auditing practices, standards, and internal controls required to ensure adherence to proper accounting and auditing standards. The project will nevertheless provide assistance to the PIU to finance accounting and disbursement specialists, acceptable to the Bank, to ensure that a proper financial management system is in place. An appropriate accounting system, acceptable to the Bank, will be set up, and project related accounting/auditing and disbursement activities are to be carried out satisfactorily and in accordance with Bank procedures. Periodic project reports would, inter-alia, include: (a) financial statements that give an assessment of the projects financial status, including reports of costs actually incurred by expenditure category (specified in Table II) and variances compared to the plan for the period; (b) project progress reports, that give a summary of the status of the project and explanation and variances in key project indicators listed at Annex III; and (c) procurement management reports giving status and details of contracts above the prior review threshold. Special Account 6.16 The Borrower will establish and maintain a Special Account (as specified in the Loan Agreement) with an authorized allocation of US$1,600,000. This will be exclusively for making payments from the proceeds of the Bank Loan. The initial deposit of the authorized allocation will be limited to US$800,000 and the remaining portion of the authorized allocation would be released when disbursements reach a level of US$3,000,000: In addition: (i) All applications for direct payment or special commitments must be for an amount not less than 20 percent of the initial deposit of the authorized allocation to the special account or not less than 20 percent of the full authorized allocation once available; and  -25- (ii) Applications for replenishment of the Special Account would be submitted on a monthly basis or when one third of the amount deposited has been withdrawn, which ever occurred earlier. Submission of replenishment applications takes precedence over the minimum size application as stated in (i) above. Project Audits 6.17 Project Accounts and the Special Account will be audited in accordance with the Guidelines for Financial Reporting and Auditing of Projects Financed by the World Bank (March 1982). A Bank approved auditor will be identified prior to effectiveness. The Borrower will provide the Bank (within six months of the end of each fiscal year), an audit report of such scope and detail as the Bank may reasonably request, including a separate opinion by an independent auditor acceptable to the Bank, on disbursements against certified SOE. The separate opinion should mention whether the SOEs subniitted during the fiscal year, together with the procedures and internal controls involved in their preparation, can be relied upon to support the related withdrawal applications.  -26- 8. BENEFITS AND RISKS Benerits 8.1 Current budget processes in Ukraine suffer from the following basic weaknesses: (a) the budget classification system is not useful for allocating resources to specific areas and functions; (b) the budget execution processes cannot ensure that actual public expenditures are according to budgeted categories; (c) the system of transferring funds to spending unit bank accounts, leads to a situation where significant idle balances are built up in these accounts while the MOF is in deficit in overall terms, thereby creating arrears or necessitating further borrowing; and (d) the MOF does have access to timely and accurate information on public expenditures and receipts to enable it to perform its functions. The project would help remove each of these weaknesses by: (a) implementing a GFS based classification system that would give the Government a tool to improve resource allocation and enable functional and economic analyses of the budget to be carried out; (b) improving budget execution processes which will enable implementation of improved expenditure controls in Government and assist in ensuring that these expenditures follow approved budget appropriations; (c) implementing a Treasury Single Account at the NBU and centralizing payment processing through Treasury which would eliminate the need of separate agency bank accounts and the danger of idle balance build up; and (d) implementing a TLS that would provide the MOF a means to obtain timely, consistent and accurate financial information. 8.2 These actions, taken together, will enable Government to improve resource planning, cash management, budgeting and public expenditure management and control. The improvements in the quality and timeliness of financial information and improvement in the capacity to carry out functional and economic analyses of the budget would promote the capacity to properly formulate and execute fiscal policies. The consistency in the classification of expenditure items and an effective system to control and monitor cash flows would enhance transparency and accountability in the fiscal process. 8.3 The total cost of the project is a very small fraction of the projected annual public expenditures in 1997. The benefits of even minor improvements to the efficiency, effectiveness or management of public expenditure, which would arise from improved financial information and control would significantly exceed project costs. The net development impact of the project is therefore expected to be positive. The fiscal impact of the project cost would be negligible. Critical Assumptions and Risks 8.4 Continued Government commitment to reform of the public sector and to strengthening the basic economic management institutions is a pre- requisite for successful project implementation. Specifically, by improving the quality of fiscal management systems the project would introduce transparency in the fiscal and resource allocation and expenditure processes. This would affect those who benefit from the current weaknesses. These interests may act to delay the project actions and divert it from its objectives. The Government has indicated its  -27- commitment to treasury system reform and has set an explicit timetable for the implementation of a full treasury system. Moreover, work under this project builds upon efforts already underway. These factors mitigate against some of the risks involved. 8.5 Introduction of the new institutional structure of budget execution would require a reorganization and re- alignment of the roles and responsibilities of related government agencies, such as the MOF, the NBU, the Treasury, as well as the relationships with the line ministries. Another key element is the requirement that the TSA be established at the NBU and spending unit accounts at commercial banks be closed and payment processing centralized through Treasury. Implementation of these aspects would need government support at the highest levels, who recognize the need for change, to ensure that the change process is completed smoothly. A phased and gradual introduction of new policies and procedures and a broad training program in the use of the new systems and methodologies would allow a wider appreciation of benefits and would enhance ownership. 8.6 The project would need to cope with: (a) the organizational capacities of the Treasury to manage project implementation; (b) lack of adequate technical skills within the Government; (c) the ability of Government to retain staff who have been trained. To ameliorate this risk the project would provide financing for hiring project implementation specialists and other technical skills from the private sector as required. However, it is likely that an ongoing policy of training would need to be adopted with significant attrition rates expected.  -28- 9. AGREEMENTS REACHED 9.1 During appraisal agreements were reached with the Government that the following actions would be completed before loan negotiations: (a) a GFS consistent budget classification system and a treasury chart of accounts embodying this classification would be adopted; and (b) central payment processing would be introduced for payments related to the Kiev University, the Ministry of Health, the Chernobyl and Employment Funds. Both conditions have been met. 9.2 During negotiations agreements were reached with the Government that as a condition for Board presentation, the Treasury will have to submit to the Bank evidence that the PIU has been established. This condition has been met.  Annex I Page 1 of 2 Detailed Functionality of the Treasury Ledger System and the Technology Architecture Required for Implementation A. Functionality The Treasury Ledger System would have a capability to: (i) Record initial budgets and distribute the budget appropriations as approved by the legislature, to spending ministries and keep a record of initial budgets, revised budgets, and budget transfers, for a typical government spending unit. (ii) Distribute appropriation and commitment authorizations to spending units and to record commitments incurred by a spending unit against the approved limits and the appropriation during the course of a year. (iii) Distribute funds allocations to spending units and keep a record of the amounts of funds allocations against the appropriations and any changes thereto. (iv) Record expenditure against commitments and funds allocations (e.g.. due to purchase orders, or other payments). The system will have facilities to check availability of appropriation, commitment and funds allocation prior to approving a payment. (v) Print consolidated payment instructions for action by the banking system. (vi) Record revenue and other receipts against appropriate account heads. (vii) If required, print checks against payment instructions and or make arrangements for the electronic transfer of payment information to an external paying entity.( e.g. a bank). (viii) Consolidate data from all ministries and regional offices, as necessary. The system will have good report writing facilitates and enable easy retrieval and reporting on data in the system data bases, in a variety of formats. The system would be able to produce the commonly required accounting and management reports. (ix) The system would have facilities to restrict access only to duly authorized staff. B. Technology Architecture Requiredfor the Information Systems Hardware Configuration: Implementation of the treasury system would require a distributed architecture with computer processing power located at the various nodes of the network (the center, the regional treasury units at the Oblasts and the Rayons and the line agencies). These  Annex I Page 2 of 2 nodes would be connected via the public switched data network that is available in Ukraine. The transaction processing and database management required at each node would be carried out by the computers installed at these nodes. Summary or detailed data. as required, would be transmitted via telecommunications facilities to the central computers located at the Treasury office in Kiev. Such an architecture distributes computing power, commensurate with needs, to different nodes of the network, thereby optimizing usage and making it more reliable and less vulnerable to malfunctions at a single central site. In addition, end users at the regional treasury units and spending agencies would have better control over their technological and data resources and this fosters a sense of ownership for the systems they use. The size and distribution of computing power across the various nodes of the network will be determined by the volumes of data and transactions that are generated and stored at the various nodes and the volumes and frequencies of data that are transmitted between the nodes. Information gathered from discussions with the Treasury has been used to estimate the size and location of computers. This information is being progressively refined by the consultants during the preparation phase of the project, by undertaking actual surveys to gather data for each site. Software Characteristics: The nature of the application systems requires that the same core functionality be available at all nodes of the network. Thus, for example, the core functionality requirements will be similar at all Regional Treasury Units. Therefore the same application software package would need to be replicated at multiple sites. This characteristic requires that the application software be scaleable and be able to run on small or large computers without major changes. Scalability can be achieved either by choosing a line of computers of varying capacities which are fully compatible from the software perspective. However, such a choice would restrict further additions to the network to this vendor and to this line of computers. Alternatively, to avoid these restrictions, the application systems should be developed using application development tools and Relational Data Base Management System (RDBMS) software that can operate on machines of different sizes offered by several vendors. This feature is called software portability. Several application development and RDBMS packages are available in the market which are both vertically and horizontally portable. Ideally the way to ensure vertical and horizontal portability and scalability at the various nodes of the network is to choose hardware and software that subscribes to the OPEN systems concepts. In practice, the environment that comes closest to this concept in current technology is the UNIX environment. Applications developed under this environment would be able to run, with minimum changes, on any computer that has a UNIX based operating system. Most hardware vendors now offer a version of UNIX as an operating systems alternative. Another operating systems option that is gaining popularity in view of its relative simplicity is Windows NT. The project therefore proposes to use UNIX or Windows NT as the operating systems environmnents across the nodes of the network. In addition the application development environment chosen will use Fourth Generation Languages (4GLs) and Relational Database Management Systems and associated development tools, Graphical User Interfaces (GUIs), to increase application development productivity and offer a user friendly environment for data access and usage. This approach strikes a balance between large main frame systems which would be cumbersome and expensive and other options which could be under powered and not scaleable to sites with a large number of transactions.  Annex II: Ukraine- Treasury Systems Project - Implementation Schedule _9I s7 I g8 1 -' 99 00 01 ID Task Name Duration 1 6 |123456789 123456789 123456789 123456789 I Bank Project Processing 437d 2 World Bank Identification Mission 2w 3 PHRD Grant Funds available ld 4 Pre - Appraisal mission 10d 5 Appraisal Mission 2w 6 Project Negotiations at World Bank 1w 7 Board Approval 1 d 8 Loan Effectiveness Id 9 Appoint IMF Advisor/Experts 1 _20w . . . , : _. 10 Select and Appoint Information Systems and Treasury 24w Experts (Consultants -PHRD financed) __:___. 11 Select and Appoint Information Systems and Treasury 24w Experts (Consultants -Project Financed) _____ ___.__:_ 12 Develop and Implement Interim System 1261d 13 Document Functional Requirements for Financing 52w _ . .... . _ and Payment Processes and App. SNW Specs. ._._._._. 14 Develop/ Customize Application Software for 52w : :-_77 : Interim System 15 Procure and Install Hardware for Interim System 52w . . _ . (Government Financed) ._.___: 16 Procure Hardware for Interim System ( Bank 26w Financed) _____ __ _.-. 1 7 Install Interim System Country Wide 2 18 Interim System Installed Od 19 Operate Interim system 135w 20 Finalize and Document Treasury System 120d Functional Requirements _ ____ _.___ 21 Bud Exec Processes and Guidelines, Chart of 24w Accounts, Trans. Docs. Inform Flows, ReportsD D 22 Develop Operating Manuals and detailed 260d Instructions _________________________ ; ________ ____________________________ _______ag Page 1 w  Annex II: Ukraine- Treasury Systems Project - Implementation Schedule 0 97 98 99 0001 1X ID Task Name Duration 1 )2i3L4L5L6J7J8|9J F | 1231415167 89| | 12345 19 123456789 1 3456789 H 23 Finalize Legal Framework and Regulations, 52w _H Develop Detailed Operating Manuals/Directives _ |_._._I 24 Develop Technical Systems Design For Full 120d _____ Treasury Ledger System _m ___ _ ___:. 25 Develop High Level Design and Technical 24w Architecture 26 Develop Detailed Software 24w Requirements/specifications __.___ 27 Develop HNv Specifications 24w_:_-.__________________ 28 Procure & Customize Application Software 120d _pplication Software __ 29 App. SN Search, Procurement, Testing, 24w Evaluation, Contract Award 30 Install Systems 120d 31 Install, Customize and Test Application SNv ( TLS 24w and Payroll systems) (Pilot Sites) _ ___ 32 Customize /Develop training material t2w 33 Train Users (Pilot Sites) 12w . _ _ _ __ _ 34 Complete Pilot System Installation Od 35 Replicate at Remaining Sites 180C 36 Procure and Install Any Additional HNv Required 36w. 37 Replicate systems at all remaining sites260d 38 Receive and Install HNV and Systems SAN 24w 39 Install and Test Application SAN (TLS/Payroll) 24w 40 Train Users (TLS/Payroll) 24w 41 Cut over to Full System (TLS/Payroll) 24w 42 TLS/Payroll fully operational Od 43 Systems Replication Completed O 44 Assessinst'itut'ional development requirements 945d Page 2  -Annex II: Ukraine- Treasury Systems Project - Implementation Schedule 97 1 98 99 00 01 ID Task Name Duration I I |1 12131415161718191 | | 112131415161718191 | |11121314151617189 1| 1213141516171819 123456789 45 Training needs analysis 8w 46 Implement Training/ skills Upgrading/Recruitment 100w Program 47 Project Complete Od (CD Page 3 o e~~~~~~~~~~~~~~~~~~~.  (D~ '--i Annex III - Project Performance Monitoring Indicators Objectives Ensure smooth and timely execution of the budget, while minimizing the cost of Government financing throughi the establishmilent of improved Treasury operations and cash management processes, procedures and systems. Input Indicators Process Indicators Output Indicators Impact In(dicators Consultancy Services The followinig activities will be completed in Full finctional design of systems, processes and T'he systems implemented under the project financed by the project in accordance with the project implementation schedule. procedures for ''reasury Operations completed and will give the government the ability to various aspects of implemented ; produce budget projections, functional and Treasury Operations and Engagement of Consultants; economic analysis, fiscal reports consistent Cash Malnagement, GFS consistent budget classification system approved with GIS classification. Information Systems Design and development of a fuill ftinctional treasury and effective for all Government expenditure, revenue Design and Development. system and a payroll system; and financing operations; The new 'FSA'based liniancial management procedtires, covering cash allocation, Development of methiodologies for ef'fective cash I)etailed regulations and operating maniuals covering commitment, payment processing, accounting flardware, Systems management; 'I'reasury Single Account (TSA) based budget and reporting, implemented under the project, Software and Application execution processes (cash allocationi, commitment and will enable commitment, payment and Software required for the Development of a plan for upgrading the informatics payment control, payment processing, accounting and internal audit control at the Center, and at all Treasury Operation System capability for the Treasury IMOI for the management reporting) completed and in use; Oblasts and Rayon branches of the Treasury. at Regional and District of the above systems; Treasury Units and Technical design of Treasury Ledger and Playroll A pilot for the payroll system will be Center. Development of a training strategy and plan for the Systems completed and implemented; introduiced whicih vill enable personnel implementation of the revised Treasury Operations control and direct salary deposits to staff System. Treasury training center established and operational bank accounits. and adequate numbers of staif trained in the use of the Acquisition, Delivery, installation and testing of I I/W new Treasury and Payroll Systems; The TSA based bud(get cxecution processes and S/W per implementation schedule; will result in improved Cash maniagemiient. At I I/W, S/W delivered, installe(d and tested; least 80% of the national governmi)elnt Application SIW tested for the following minimum payments, by amount, will he routedl throtigi Iunctionallity for the Treasury Ledger System: the Treasury. maintaining and processing cash allocation, colmlm)itmllelit, paymenit and( receipts transactions, Improved cash mianagcient systemii will accountinig lor government finianicial assets and reduce total government cash balances with liabilities and producing core Financial reports the banking system to at least half the present re(luired by the MOF/ Treasury, and the required amounit. functionality for the lPayroll System;  Cost Table I Ukraine Tresawy Systems Project Expenditur Accounts B.sualdown All Detailed Tables (USS '00) Physical Plus Bass Cost Physical Cotingeoncies Tce Contingencls _otaltontl. Coen. Base Costs Price Local LOCAl Localt Local * Price Cool, ont fE6cl. Duties & for. (E.ct. Duties & For. (Excl. Duties (Execl. Duties & Ceonl on Phylcal for. Exht. Teats) Taxes Total Exth. Tes) T_1xs Toalx Exch. Tates) Taxes Tetal For. Exth. 7sxes) Texes Total Base Costs Cont. 1. Invernflsot Costs A. Technical Assistance fl10llsrweSysltels LePot 1,7200 - 1. 7200 n0o - 860 t87 - ' B8.7 1,872.7 1,872.7 1,7B3B 89.2 Treasury Sysleoro Experts 5000 125.0 625.0 25.0 . 6 3 31.3 20-4 5.1 23.5 540.4 - 138.4 681.8 640.3 32.0 Subtotal TechnicalAsslstance 2.2200 125.0 2.3450 111.0 683 117.3 672 5.1 923 2,4182 - 1364 2.5545 2,432.Y t216 B Trainitg 500.0 - 50000 25 0 -25.0 368 . 1886 5438 5 43 6 557.7 25.9 C. Equilprnnlt StandardtHW&SW 9.5000 - 2,3750 11.8750 4750 - 1188 5936 404.3 t0t S00.3 10i379 3 2,594.8 12974t1 12.3563 6t7. Standard HNWand SIW Govt Frnanced 6.400 0 - . 6,400.0 - - - 6,400.0 - 68400.0 6,400.0 Alst,Katmnns N 2.500 0 . 1025.0 3,125.0 1325.0 - 31.3 108.3 804 A 22.4 111. 2.714 4 67086 3.393 0 3,231.4 161.6 SubtotalEqsipment 18,4000 . 3,000.0 21400.0 6000 1f00 7500 493 1234 617.1 1943.7 32734 22,707.1 21.9877 T77.4 D. PIU ConsuiarnlSalanestAtxwancs 2450 - - 245.0 12.3 - - 12.3 93 - 9.3 2666 - 2666 253.9 12.7 Operabonal expenses 35.0 - . 35.0 1.S - - L 14 - - 1.4 35.1 - - 38.1 36.3 18 SsblelalP3U 2800 ~~~~~~~~~~~~~---- . 280.0 14.0 . 4 17 * 07 304.7 .304 7 2902 14.5 Total tRwestmnenlCosts 21,4000 . 3.125O 24,520.0 700.0 1503 90.3 6102 128.5 738.7 22,7602 - 3,4098 26.19