ENVIRONMENTAL FINANCE Performance Review of the State Environmental Protection Fund of Ukraine ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT The OECD is a unique forum where the governments of 30 democracies work together to address the economic, social and environmental challenges of globalisation. The OECD is also at the forefront of efforts to understand and to help governments respond to new developments and concerns, such as corporate governance, the information economy and the challenges of an ageing population. The Organisation provides a setting where governments can compare policy experiences, seek answers to common problems, identify good practice and work to co-ordinate domestic and international policies. The OECD member countries are: Australia, Austria, Belgium, Canada, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, the Slovak Republic, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States. The Commission of the European Communities takes part in the work of the OECD. OECD Publishing disseminates widely the results of the Organisation's statistics gathering and research on economic, social and environmental issues, as well as the conventions, guidelines and standards agreed by its members. EAP TASK FORCE The Task Force for the Implementation of the Environmental Action Programme for Central and Eastern Europe (EAP Task Force) was established in 1993 at the “Environment for Europe” Ministerial Conference in Lucerne, Switzerland. Its Secretariat was established at the OECD as part of the Centre for Co-operation with Non-Members. Since its creation, the EAP Task Force has proven to be a flexible and practical tool for providing support to political and institutional reforms in the countries of the region. After the Aarhus Ministerial Conference in 1999, its efforts were refocused on the countries of Eastern Europe, Caucasus and Central Asia (EECCA). More detailed information about Task Force activities can be found on its website at: www.oecd.org/env/eap This report is also available in Russian under the title: Обзор деятельности Государственного фонда охраны окружающей природной среды Украины © OECD 2006 No reproduction, copy, transmission or translation of this publication may be made without written permission. Applications should be sent to OECD Publishing: [email protected] or by fax (+33-1) 45 24 13 91. Requests for permission to photocopy a portion of this work should be addressed to the Centre Français d’exploitation du droit de copie, 20 rue des Grands- Augustins, 75006 Paris, France ([email protected]). 2 FOREWORD This report presents the results of a Performance Review of the State Environmental Protection Fund of Ukraine. It aims to support the Ukrainian government in its efforts to improve the management of the public environmental finance system in line with international good practices. The report provides an objective analysis of all important aspects of the administration of the Fund, identifies the strengths and weaknesses of the Fund’s operations and proposes a Reform Plan for strengthening its expenditure management capacity. The recommendations could be used as a basis for discussion and consensus- building among key stakeholders in Ukraine on the future strategic development of the Fund. The OECD Good Practices for Public Environmental Expenditure Management served as a benchmark to assess the performance of the State Fund in terms of environmental effectiveness, fiscal prudence and management efficiency. This report was prepared within the framework of the Task Force for the Implementation of the Environmental Action Programme for Central and Eastern Europe (EAP Task Force), whose secretariat is located in the OECD’s Environment Directorate. The project was managed by Nelly Petkova, with support provided by consultants Olivier Dumoulin and Andrei Piskunov from Fitch Ratings, Rafal Stanek (SST- Poland) and Oksana Volosko-Demkiv (Ukraine). The preparation of this report was financially supported by the Governments of Switzerland - the Swiss Agency for the Environment, Forests and Landscape - and by the Netherlands, through its Ministry of Housing, Spatial Planning and the Environment. The report is based on available documents and data, as well as on inputs from Ukrainian experts and officials and from representatives of international institutions (see Annex VI for officials interviewed). The cut-off date for most of the financial data used and analysed in the report is end of 2004; more recent data were used when available. We thank specifically Mikolay Pilipchuk and Oleg Kulik from the Ministry of Environmental Protection and Ludmila Lukash from the Ministry of Finance of Ukraine for their substantial contribution during the project implementation. The report has been reviewed by Xavier Leflaive and Brendan Gillespie from the OECD. Grzegorz Peszko (the World Bank) and Vladimir Morozov (Ukraine) provided useful comments on the report. Carla Bertuzzi helped with collecting and verifying statistical data. Dinara Aknazarova and Claire Cornfoot provided administrative support to the project. All these contributions are gratefully acknowledged. The views expressed in this report are those of the authors and do not necessarily reflect those of the OECD or its member countries. 3 TABLE OF CONTENTS EXECUTIVE SUMMARY .......................................................................................................................... 8 1. INTRODUCTION .................................................................................................................................. 11 1.1 Objectives of the Performance Review............................................................................................... 11 1.2 Performance Review Process and Methodology................................................................................. 12 2. LEGAL AND POLICY FRAMEWORK.............................................................................................. 14 2.1 Legal Framework ................................................................................................................................ 14 2.2 Strategic Role and Objectives of the Fund in Environmental Policy.................................................. 18 3. FUND ADMINISTRATION - INSTITUTIONAL AND MANAGEMENT SET-UP....................... 22 3.1 Institutional and Management Set-up.................................................................................................. 22 3.2 Personnel Management ....................................................................................................................... 28 3.3 Control (Internal/External) and Auditing............................................................................................ 28 3.4 Transparency, Public Disclosure and Access to Information.............................................................. 29 4. OPERATIONS OF THE FUND............................................................................................................ 31 4.1 Fund Revenue...................................................................................................................................... 31 4.2 Fund Expenditure ................................................................................................................................ 39 4.3 Fiscal Prudence ................................................................................................................................... 47 4.4 Project Cycle Management ................................................................................................................. 50 5. POTENTIAL ROLES IN LEVERAGING FOREIGN FINANCIAL RESOURCES AND RELATIONS WITH THE COMMERCIAL BANKING SECTOR...................................................... 66 5.1 Overview of Major IFI Sources of Finance in Ukraine....................................................................... 66 5.2 World Bank Requirements for Local Financial Institutions................................................................ 68 5.3 Relations with the Commercial Banking Sector ................................................................................. 70 6. CONCLUSIONS AND FURTHER ACTIONS.................................................................................... 71 7. REFERENCES........................................................................................................................................ 76 ANNEXES ................................................................................................................................................... 78 ANNEX I: UKRAINE – MAIN MACROECONOMIC INDICATORS..................................................... 78 ANNEX II: EXAMPLE OF ALLOCATION OF RESOURCES BY TYPES OF EXPENDITURE UNDER THE DNIEPRO RIVER BASIN STATE TARGETED PROGRAMME .................................................... 79 ANNEX III: APPLICATION FORM USED BY THE STATE FUND...................................................... 83 ANNEX IV: EXAMPLE OF A TWO-STAGE APPLICATION AND APPRAISAL PROCESS.............. 86 ANNEX V: CHECKLISTS FOR MEASURING COMPLIANCE WITH GOOD PRACTICES FOR PUBLIC ENVIRONMENTAL EXPENDITURE ...................................................................................... 119 ANNEX VI: LIST OF OFFICIALS/INSTITUTIONS