Document of The World Bank Report No: 68408 v1 RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF PUBLIC FINANCE MODERNIZATION PROJECT TO UKRAINE LOAN NO. 4882-UA BOARD APPROVAL DATE: January 8, 2008 April 24, 2012 ABBREVIATIONS AND ACRONYMS APST Administration and Procurement Support Team ASW Application Software AWP Annual Work Plan ECA Europe and Central Asia FMIS Financial Management Information System GoU Government of Ukraine IBRD International Bank for Reconstruction and Development ICB International Competitive Bidding ICT Information and Communication Technologies KSZI Complex Information Security System / комплекÑ?них Ñ?иÑ?тем захиÑ?ту інформації (КСЗІ) MoF Ministry of Finance PFMP Public Finance Modernization Project PFMS Public Financial Management System POM Project Operations Manual SFIU State Financial Inspection of Ukraine STSU State Treasury Service of Ukraine Regional Vice President: Philippe H. Le Houérou Country Director: Qimiao Fan Sector Manager / Director: William Leslie Dorotinsky Task Team Leader: Cem Dener 2 UKRAINE: PUBLIC FINANCE MODERNIZATION PROJECT RESTRUCTURING PAPER A. SUMMARY 1. The proposed restructuring would alter the activities under the second component and extend the loan by two years. These changes would adjust the project in order to: ï‚· enhance PFMS functional and technical requirements in line with the latest regulations, reform actions, and advances in technology; ï‚· include new PFMS modules to support additional needs that emerged within the last two years; ï‚· replace two major ICBs with a single-stage combined ICB package to shorten the procurement period for remaining activities; and ï‚· strengthen the qualification requirements to ensure the participation of only experienced and well qualified suppliers during rebidding. The changes being proposed as part of this restructuring will not affect the Project description or any other provisions of the Loan Agreement. B. PROJECT STATUS 2. After an exemplary preparation period (during which the PFM reform priorities and the PFMS functional and technical requirements were identified in line with the MoF’s PFM modernization strategy, and the critical sections of two major international competitive bidding documents were drafted, together with detailed cost estimates and implementation schedule), there were several interruptions during project implementation mainly due to political instability and changes in the MoF management (delay in the ratification of the Loan agreement in 2008, and the Treasury’s parallel system development initiatives in 2009). 3. The most important project activity is the implementation of an integrated Public Financial Management System (PFMS). Two large International Competitive Bidding (ICB) packages were originally included in project design for the development of relevant information and communication technology (ICT) solutions (90% of the project budget). The PFMS functional and technical requirements were developed in late 2007, and according to the original work plan, related ICB packages would be announced in early 2009. However, due to delays experienced until late 2009, the PFMS requirements had to be revised in early 2010, and both packages were finally announced in mid 2010. There was another interruption during the evaluation of these ICB packages due to the reorganization of the MoF (Jan-Apr 2011) which resulted in changes in the project team (coordinator, tender committee members and component managers). 3 4. Despite these complications, the MoF management did their best to improve the project implementation performance starting from mid 2011. Actions mutually agreed in the context of the 2011 Country Portfolio Performance Review (CPPR) were completed as planned, except the two major ICB packages (for which related contracts were to be signed by the end of November 2011). The Bank team was unable to finalize the review of these two ICB packages, due to unforeseen circumstances and risks. New options were developed and agreed, and a level two restructuring undertaken to redefine the approach for procuring the new system, and revise some of the requirements to avoid the risk of implementing an obsolete solution. 5. Overall Implementation Progress rating of the project was kept as Moderately Unsatisfactory in the latest implementation review (filed in January 2012) due to delays in procurement activities and disbursements, despite substantially improved performance of the MoF team since June 2011. The new MoF project manager and team members are committed to timely completion of all remaining project activities and PFM reforms. An upgrade in performance rating will be considered in the next ISR based on the findings of the mid-term review (conducted during March 19-23, 2012). Progress towards the achievement of the project development objective (PDO) is rated Moderately Satisfactory. The project objectives continue to be achievable. C. PROPOSED CHANGES 6. The rationale for restructuring of the project is to avoid the risk of implementing an obsolete system due to longer than expected International Competitive Bidding (ICB) processes and considerable legal and institutional changes that took place over the last two years. The existing PFMS design will not fully support the substantial changes introduced in the legal and institutional framework since mid 2010 (including the new Public Procurement Law, new Budget Code, requirements for the Complex Information Security System (KSZI) in PFMS, etc.). A level two restructuring could provide an opportunity to introduce necessary changes in project activities and extend the project closing date, for supporting the MoF’s changing priorities and reform needs (without changing the project development objective). Most of the Part 1 activities were completed and the ongoing contracts are expected to be completed in 2012 (except training and change management). Hence, this restructuring is proposed to redefine Part 2 activities (PFMS implementation) by replacing two major ICBs with a single-stage combined ICB package (the rebidding process is expected to be completed by the end of 2012). 7. There will be no changes to the Loan Agreement aside from the Closing Date extension. The documents that will be affected by this change include the procurement and implementation plans, disbursement estimate and the descriptions of activity 2.3 and 2.4 in the Project Appraisal Document (PAD). The nature, rationale and implications relevant to the changes proposed are summarized below: 4 ï‚· Results/indicators The results indicators were revised as detailed in Annex 1 (for the period 2012- 2015), in line with the proposed changes in Part 2 activities, explained below. The current status of the previous defined results monitoring indicators (2009-2011) is also included in Annex 1. ï‚· Parts Original Part 2 activities included two major ICBs for the development of an integrated Public Financial Management System (PFMS). 2.3 Development of integrated PFMS software and installation of central servers; and 2.4 Installation of PFMS field hardware and network equipment. During the review of the MoF’s evaluation reports for these two ICB packages, it was realized that current design of the project might impose a risk of implementing an obsolete system, due to substantial changes in Ukrainian legislation since mid 2010 (including the new Public Procurement Law, etc.). The procurement module originally was not included in the project and there is a possibility to add other modules (e.g. debt management) and expand the system functionality to meet new requirements and comply with the latest legislation (including in the information security area). In addition, due to advances in server technology and new software releases, the MoF may benefit from a revised technical specification for the new web-based PFMS platform which is expected to ensure online data exchange between key PFM systems (Tax, Customs, and Financial Monitoring) as well. Moreover, requirements on information security can be strengthened to ensure that the system will provide a secure countrywide platform for all users. Taking into account these changes in the scope of Part 2, and in consultation with the Bank team during the visit of February 20-21, 2012, the MoF proposed the Project restructuring. The Bank has agreed with the MoF’s proposal. As part of this restructuring, the Bank and the MoF agreed to annul the two ICB processes and to prepare new bidding documents based on updated requirements. A new procurement process will be launched using a single stage combined ICB package with expanded and technically up-to-date specifications. The new bidding documents will contain strengthened qualification requirements including explicit requirement for successful FMIS implementation experience of supplier, subcontractors, and proposed key team members. With these considerations the revised description of component activity 2.3 includes all previously defined functionality under two major components, plus additional requirements of the MoF, as follows: 2.3 Development of integrated PFMS application software and installation of related central servers, field hardware and network equipment. Thus, there is no longer an activity numbered 2.4. 5 ï‚· Financing o Disbursement arrangements There is no change in disbursement arrangements. The disbursement estimate was revised according to the revised implementation/procurement plans. The current level of disbursement is around US$ 2.7 million (5.4 % of the Loan amount). The total amount of commitments is US$ 2.9 million (5.8 %). The disbursement rate is expected to rise later during the project, due to the relatively late disbursing nature of the large ICB contract for the development of PFMS, which accounts for the bulk of the uncommitted amount. Disbursement Estimates (US$m) Actual amount disbursed as of April 2012: 2.70 Fiscal Year Annual Cumulative 2012 0.10 2.80 2013 5.90 8.70 2014 11.70 20.40 2015 29.60 50.00 Total 50.00 ï‚· Procurement The procurement plan of the project was revised to include the new combined ICB package for the implementation of PFMS information and communication technology solutions (including the development of integrated PFMS application software, and supply and installation of related central servers, field hardware and network equipment), in place of the previously planned two ICB packages. ï‚· Closing date The closing date for Ukraine, Public Finance Modernization Project, Loan No. 4882-0 UA, P090389, will be extended from June 30, 2013, until June 30, 2015. This will be the first extension of the project. ï‚· Implementation schedule The project implementation schedule was revised to reflect the changes in Part 2 activities and the revised timetable for remaining Part 1 activities. 6 D. APPRAISAL SUMMARY The original cost estimate and project financing are still appropriate. The cost estimate of the PFMS ICT solutions was reviewed together with the MoF and it was agreed that there is no need to change the allocated budget. Most of the bids received during the initial ICB processes were within estimated budgets. Revisions in Part 2 activities are not expected to increase the overall budget. Therefore, the cost estimate remains valid in total. The safeguards category remains unchanged. ï‚· Technical There is no change in the technology architecture and core application software modules considered during the design of the integrated Public Financial Management System (PFMS). The MoF is expected to define additional functional requirements for the new modules and update existing technical requirements due to advances in server technology and new software releases. Moreover, requirements on information security will be strengthened to ensure that the system will provide a secure countrywide platform for all users in line with the latest legislation. ï‚· Financial Management The financial management capacity of MoF for implementation of the project has been confirmed to be satisfactory during the monitoring visit in March 2012. The latest project audit report has been combined and covered the years 2008 – 2010, due to low disbursements in 2008 and 2009. An unqualified audit report has been submitted on time and was acceptable. Auditors did not raise any internal control or accountability issues in their management letter. 7 ï‚· Risks The Project faces three important risks at this point. These risks are outlined below, together with the mitigation measures. Risk Rating Risks Risk Mitigation Measures with Mitigation Despite several changes in the government and project management team since 2008, consecutive governments have supported the PFMP objectives. The current Government has Loss of the Government demonstrated its commitment for the successful completion of commitment to public the Project since mid 2011, and the implementation of key PFM financial management reforms are in progress despite delays (e.g. accounting, budget, S reform due to political and internal audit reforms). While further changes in changes Governments are possible, the Bank will continue monitoring the Government commitment closely, and maintain the dialogue with the MoF management on key PFM issues to ensure the successful completion of remaining activities. The new combined international competitive bidding documents will contain revised functional specifications, and strengthened qualification requirements including explicit conditions for successful FMIS implementation experience of the main Complexity of the supplier (or joint venture partners), subcontractors, and procurement for the M proposed key team members. The MoF will clarify a number of PFMS ICT solutions key aspects (special conditions for software licenses, warranty and post-warranty, cut-off date, submission of unit prices for all items in the detailed cost tables, etc.) during the pre-bid meeting, to avoid ambiguities. Most of the Part 1 activities were completed and ongoing contracts are expected to be completed in 2012. Remaining Part 2 activities (implementation of new PFMS and training/change Slippages in the project management) can be completed within the extension period, if M implementation plan the procurement phase of the combined ICB package can be completed by the end of 2012. A mutually agreed timetable was prepared to monitor the rebidding process closely, and the Bank team is committed to provide procurement responses promptly. 8 Annex 1 Results Framework and Monitoring UKRAINE: PUBLIC FINANCE MODERNIZATION PROJECT Project Development Objective (PDO): The development objective of the Project is to strengthen public financial management by improving operational efficiency and transparency. Revised Project Development Objective: (same) D=Dropped Responsibility Cumulative Target Values** Core C=Continue Unit of Data Source/ PDO Level Results Indicators* N= New Baseline Frequency for Data Measure YR 1 (2012) YR 2 (2013) YR 3 (2014) YR4 (2015) Methodology R=Revised Collection Indicator #1: R N/A Existing 2013 State 2014 State 2015 State 2016 State Annual Project Ministry of Increased strategic alignment of the budget Budget and Budget and Budget and Budget and implementation Finance budget with the public policy formulation Forecast for Forecast for Forecast for Forecast for reports priorities. methodologie MTBF periods MTBF periods MTBF periods MTBF periods s are not conducive for (2014-2015 (2015-2016 (2016-2017 (2017-2018 the use of RR) are based RR) are based RR) are based RR) are budgets as a on economic on economic on economic prepared by policy and social and social and social using PFMS. instrument. development development development programs, and programs, and programs, and national target national target national target programs. programs. programs. Indicator #2: C % Decision- Establish the Progress in Progress in 20% reduction Twice Surveys and Ministry of Reduction of 20% in time required making baseline system system in average time during the their associated Finance to get necessary information for processes are through a implementatio implementatio for accessing term of reports: One managerial decisions through the delayed due specialized n is monitored. n is monitored. information by Project. establishing use of an integrated management to fragmented survey in MoF, key decision- baseline, and information platform. information. STSU, and makers as another SFIU. measured by establishing follow-up outcome. survey. Indicator #3: R N/A Public Sector National Development Accounting National Annual Project Ministry of Increased transparency and accounting is accounting of integrated module of accounting implementation Finance reliability of public sector financial not compliant standards for PFMS based PFMS partially standards are reports reporting through compliance with with ISA or public sector on new chart of (25 %) in use (via new international accounting standards EU accession requirements. are fully accounts prepared with PFMS). and alignment with EU accession developed and (CoA). new unified requirements. approved. CoA. INTERMEDIATE RESULTS Intermediate Result (Part One): Strengthening Institutional Capacity and Operational Effectiveness Revised Intermediate Result (Part One): (same) Intermediate result indicator #1: D Implementatio Annual Project Ministry of The MTBF and budget plans are n of MTBF implementation Finance prepared using a realistic macro- documents in reports fiscal framework. budget process in progress. Intermediate result indicator #1: N # of local Program The PTM is The PTM is Budget Budget Annual Project Ministry of The local budgets are based on budgets budgeting at introduced in introduced at preparation preparation implementation Finance program-target method (PTM) and and local budget some local local levels, for all 692 for all 692 reports all relevant budgetary program level is optional authorities including local budgets local budgets programs (pilot impl). (up to 346 local councils is based on is based on passports are managed with the new PFMS. local budgets; (up to 692 PTM (about PTM, about 10,000 local budgets; 20,000 budget supported by budget about 20,000 programs). PFMS (about programs) programs) 20,000 prog). Intermediate result indicator #2: R Frequency Summary State budget Detailed State Detailed State State budget Annual Project Ministry of Budget data and policy and proposed execution Budget Budget execution implementation Finance; assumptions published in greater regularity budget and performance execution execution performance reports STSU detail on the MoF web site. of web budget is published performance performance is published reports execution on the MoF is published is published in detail from published on web site (monthly). (monthly). PFMS Internet. (monthly). database (monthly). R N/A Accounting The Changes to Completion of PFMS is Annual Project Ministry of Intermediate result indicator #3: development legislation to amendments to operational and financial implementation Finance; Budget execution: reports not and approval implement legislation for based on new of all 19 nat’l PFMS for aligning national reports STSU Improving the system of PFM by unified in means of modernizing accounting public sector, accounting accounting and accounting & accounting and system and reporting standards in not aligned standards for reporting in reporting with reporting public sector. with the IAS. public sector. line with nat’l nat’l standards. standards. standards. Intermediate result indicator #4: D Current system Annual Project Ministry of is not aligned implementation Finance Internal financial control system is with int’l in line with international standards. reports standards. Intermediate result indicator #4: N # of MoF staff are ï‚· 4 workshops ï‚· 4 workshops ï‚· 4 workshops ï‚· 2 workshops Annual Project Ministry of staff not familiar for SUs (500 for SUs (500 for SUs (500 for SUs (200 implementation Finance; MoF, STSU and SFIU staff, and participants) participants) participants) participants) spending units (SUs) are trained on trained with new PFM reports STSU; SFIU legislation. ï‚· Training of ï‚· Training of ï‚· Training of ï‚· Training of new legislation & process changes. 400 staff 400 staff 400 staff 200 staff 10 Intermediate Result (Part Two): Development of an Integrated Public Financial Management System (PFMS) Revised Intermediate Result (Part Two): (same) Intermediate result indicator #1: R N/A Current PFM PFMS Complete PFMS rollout PFMS go-live Annual Project Ministry of Public Financial Management information rebidding PFMS and in Jan 2015. implementation Finance; System (PFMS) established and systems are completed application operational reports STSU; SFIU functioning. fragmented and ICB-3 software acceptance. contract development signed. and testing; install ICT equipment. Intermediate result indicator #2: R # of None currently Prepare ï‚· Workshops ï‚· Workshops PFMS Annual Project Ministry of staff trained. PFMS for 3,000 for 6,000 training and implementation Finance; MoF, STU and KRU staff trained training and PFMS users PFMS users change mgmt in PFMS functionality and reports STSU; SFIU change mgmt ï‚· Training of ï‚· Training of completion operations. program for 50 ICT 50 ICT report all users. specialist specialist prepared. Intermediate result indicator #3: D Some outline Internal business processes procedures improved. defined. Intermediate result indicator #3: R Currently Data Data Data Data Annual Project Ministry of Timely and comprehensive fiscal financial warehouse warehouse warehouse trial warehouse is implementation Finance; management reports produced from reports are reporting analysis and operations start fully reports STSU; SFIU PFMS data warehouse. fragmented. standards reporting tools with pilot test operational as defined as a developed and data. a part of part of ICB-3 tested. integrated documents. PFMS platform for online queries; and timely, comprehensive reporting. *Please indicate whether the indicator is a Core Sector Indicator (see further http://coreindicators) **Target values should be entered for the years data will be available, not necessarily annually 11 CURRENT STATUS OF THE RESULTS MONITORING INDICATORS (2009-2011) Outcome Target / Measured Values Data Collection and Reporting # /Results Baseline Frequency Data Collection Responsibility for Indicators 2009 2010 2011 and Reports Instruments Data Collection 1 Increased Existing The Law on the State Budget of New Budget Code and the The development of the State Annual Project Ministry of strategic budget Ukraine was developed for 2010. regulations that form the new budget for 2012, together with Reports implementation Finance alignment of formulation The forecast performance of the basis of the budget process were the forecast of State Budget of reports the budget methodologie consolidated budget of Ukraine adopted. The program budgeting Ukraine for 2013 and 2014, is with the s are not for major revenue and was used in preparing the local based on the Program of the public policy conducive for expenditure and financing for the budget in 37 local authorities. Cabinet of Ministers of Ukraine, priorities the use of years 2011 -2013 was approved. forecasting and program budgets as a The pilot testing of program documents of economic and policy budgeting at the local level was social development, national instrument. initiated. The program budgeting target programs. The program is used in 26 of 692 local budgeting was used in preparing budgets. Drafting regulations on the local budget in 118 of 692 the use the program budgeting at local authorities. The the local level was initiated. development of legal acts on the application of program budgeting at the local level was completed. 2 Reduction of Decision- A preparation to conduct a A preparation to conduct a A preparation to conduct a Twice Surveys and Ministry of 20% in time making special-purpose survey to define special-purpose survey to define special-purpose survey to define during the their associated Finance required to get processes are the time necessary to obtain the the time necessary to obtain the the time necessary to obtain the life of the reports: One necessary delayed required information to make required information to make required information to make project establishing information for because managerial decisions is in managerial decisions is in managerial decisions is in baseline, managerial information is progress. progress. progress. another decisions fragmented establishing through the use among several outcome. of an integrated systems and management cannot be and information accessed platform. efficiently. 3 Increased Public Sector Definition of detailed reporting Development / adoption of the Development / adoption of the Annual Project Ministry of transparency and accounting is requirements to be provided by national accounting standards in 75% of national accounting Progress Finance reliability of not compliant the PFMS. public sector was initiated. standards was completed and Reports public sector with ISA or About 50% of the Accounting approved by three MoF Orders. financial EU accession functionalities of PFMS were About 75% of the Accounting reporting requirements. implemented. 24 standards were functionalities of PFMS were through planned to be developed, and 12 implemented. The workshop for compliance with of them have been developed main spending units was int’l accounting and approved by the MoF organized and 83 officials were standards and Orders. trained on new national alignment with accounting standards. EU accession requirements. 12 Outcome Target / Measured Values Data Collection and Reporting # /Results Baseline Frequency Data Collection Responsibility for Indicators 2009 2010 2011 and Reports Instruments Data Collection Component 1: Strengthening Institutional Capacity and Operational Effectiveness 4 The MTBF Implementation The development and approval The Draft Resolution of the The development of the Forecast Annual Project Ministry of and budget of MTBF of the Forecast of the State Cabinet of Ministers of Ukraine of the State Budget of Ukraine Progress Finance plans are documents in Budget of Ukraine for 2011and “On the Forecast of the State for 2013-2014 is based on the Reports prepared using budget process 2013. The Forecast is an Budget of Ukraine for the Years Program of the Cabinet of a realistic in progress. information document. 2012-2013â€? was developed with Ministers of Ukraine, as well as macro-fiscal reference to the new the forecasting and program framework. requirements of the Budget Code documents of economic and of Ukraine. 11 budget revenue social development, national forecasting methods were target programs. developed and approved as a part of the Project activities. 5 Budget data A summary Information about the executed Information about the execution Publication of detailed reports on Annual Project Ministry of and policy of the budget is published on the of consolidated and state budgets performance using the revised Budget implementation Finance assumptions proposed official website of the Ministry of Ukraine by major types of budget according to Article 28 of publications reports published in budget and of Finance of Ukraine on a revenues, expenditures, and the Budget Code of Ukraine. greater detail budget monthly basis. financing is published on the execution official website of the Ministry published on of Finance of Ukraine on a Internet. monthly basis. 6 Budget Accounting The draft structure of the The new economic classification In order to perform transition to Semi- APST Ministry of execution: and financial Treasury Single Account for of budget expenditures was the new methodological Annual monitoring Finance Improving the reports are Public Sector Accounting was developed and approved by the principles of public sector Reports reports. in system of PFM not unified in developed and approved. MoF. financial reporting, public sector collaboration by means of public sector, accounting and reporting with STSU and and not standards were aligned with the Project modernizing implementation SFIU. accounting aligned with international standards. Changes the Int’l were made in the economic reports. system in public Accounting classification of budget administration Standards. expenditures and these were Survey of line sector. adopted by MoF Order. ministries, other PFM organizations. 13 Outcome Target / Measured Values Data Collection and Reporting # /Results Baseline Frequency Data Collection Responsibility for Indicators 2009 2010 2011 and Reports Instruments Data Collection 7 Internal Current Documents on Internal Financial The transition to the international The transition to the Annual Project MoF and SFIU financial system is not Control were developed by standards was initiated according international standards is in Reports implementation control system aligned with SFIU. Changes to the concept of to the SFIU documents which progress based on the SFIU reports is in line with the public internal financial control were approved by three SFIU documents approved by one the international were approved. The manual of Orders and a Government Government Decree and two international standards internal audit and technical Decree. MoF Orders. standards instruction on internal audit were prepared. Component 2: Development of an Integrated Public Financial Management System 8 Public Current PFM Functional design of systems and Two major ICB processes were ICB-1 and ICB-2 procurement Semi- APST MoF IT Financial information technical specifications initiated. The ICB-1 bidding processes were completed. The Annual monitoring Department, in Management systems are completed, bidding documents documents were purchased by 24 draft Evaluation Reports were Reports reports. collaboration System fragmented. prepared. firms, including 10 foreign prepared and sent to the World with STSU and (PFMS) companies. The bids were Bank for approval. SFIU IT established and submitted by 9 firms (including Project Departments. functioning. three foreign companies). implementation reports. The ICB-2 bidding documents were purchased by 11 firms, including 3 foreign companies. The bids were received from 3 firms. 9 MoF, STU and None None currently trained. None currently trained. None currently trained. Annual Project Ministry of KRU staff currently Reports implementation Finance trained in trained. reports. PFMS Annual surveys functionality under project and operations. management component. 10 Internal Some outline Improvements in standard The functional improvements in The functional improvements in Annual Project Ministry of business procedures operational procedures were the standard procedures, as the standard procedures, as Reports implementation Finance processes defined. identified. reflected in the ICB-1 reflected in the ICB-1 reports. improved. documents, were determined. documents, were determined. 11 Timely and Currently The reporting requirements were The reporting requirements were The reporting requirements were Annual Project Ministry of comprehensive financial defined in the PFMS detailed defined in the PFMS detailed defined in the PFMS detailed Reports implementation Finance fiscal reports are design. design. Some of the design. reports. management fragmented. requirements were revised due to reports changes in legislation. produced. 14