Checkpoint. How to Steer Budgetary Spending Effectively in a Crisis Year

What are the risks in steering funds to surmount the pandemic’s effects, and can they be minimized? Who should be supported and what mechanisms should be used to exercise control over budgetary resources? These and other issues were addresses by VoxUkraine during a thematic discussion.

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Against a backdrop of crisis, the government made large-scale changes to the budget: reduced revenue, increased expenditure and deficits. This year’s main task is to carry out the budget policy in such a way as to support the population and economy segments most affected by the crisis, avoiding to unbalance the state budget. What are the risks in steering funds to surmount the pandemic’s effects, and can they be minimized? Who should be supported and what mechanisms should be used to exercise control over budgetary resources? These and other issues were addresses by VoxUkraine during a thematic discussion.

The event was attended by Chairman of the Accounting Chamber of Ukraine Valeriy Patskan, First Deputy Minister of Finance of Ukraine Denys Uliutin, Director of the MFU Finance Department Volodymyr Lozytskyi, IMF Resident Representative in Ukraine Goesta Ljungman, First Deputy Chairman of the parliamentary Committee on Budget Ivan Krulko, Deputy Director of Center for Economic Strategy of Ukraine Mariia Repko. Moderation: Budget Watchdog project manager Halyna Kalachova.

Below are the main ideas expressed by the speakers in the course of the discussion.

The event is made possible with the support of the German government, as part of the project “Good Financial Governance in Public Finance III”, implemented by Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH.

– How much has counteracting the crisis already cost us? What are the first results of the crisis budget fund and how effective is it as a tool to combat negative crisis phenomena?

Denys Uliutin: – In April, the Parliament approved changes to the budget creating a  “coronavirus” stabilization fund of about UAH 65 billion. Of this amount, UAH 15.8 billion went to the “coronavirus” package, i.e. supplemental payments to doctors, the purchase of medication and personal protective equipment. The Pension Fund received UAH 10 billion in additional payments to retirees (UAH 1,000 each). Another UAH 12.7 billion was transferred to cover a possible decrease in Pension Fund’s revenues.

To make the allocation of these funds possible, we reviewed a number of programs that could not be implemented due to the coronavirus restrictions such as travel expenses, festivals, and other activities. At the same time, we had an understanding of the need to develop the country, so we retained funds for road infrastructure, construction, defense and security, etc.

Developing the procedure for using the “anti-virus” funds, we made a firm commitment to make the fund transparent, with cost-effective and targeted spending.

Funds allocation procedure has three stages. First, the Government makes the allocation decision. Second, the Government adopts a resolution regarding the usage of funding. Third, the Committee on Budget approves the resolution and procedure. The Committee on Budget is the final filter in this process.

What are the funds allocated for, in the first place? First of all, it is spending on healthcare, social spending such as supporting social insurance funds. In general, these funds are now received by about 110 thousand employees in a situation of partial unemployment, 440 thousand unemployed, and about 285 thousand families of individual entrepreneurs.

To avoid the misuse of funds following the allocation, we, together with the IMF, came to the conclusion that it is necessary to publish data in the ProZorro system on beneficial owners of the companies winning tenders.

Also, realizing that work needs to be done already at the procurement stage, the State Audit Service was tasked to constantly monitor the use of funds. The SASU will compare information on procurement costs received from the Treasury, the Ministry of Health, the Ministry of Social Policy, the Ministry of Economic Development, Trade and Agriculture, and the Ministry for Communities and Territories Development.

The Ministry of Finance, together with the relevant committee of the Verkhovna Rada, and the Accounting Chamber, is doing everything possible to ensure that the funds are used as efficiently as possible, and that every taxpayer penny is used for the benefit of taxpayers.

– How to secure budget costs (and creditors’ funds) from the corruption risks in a crisis? What is the best way to control the costs of the budget «antivirus» fund?

Goesta Ljungman: – The question is actually even bigger, meaning that it is not only money that is flowing from the IMF to Ukraine, but it’s also Ukrainian taxpayers’ own money that has to be safeguarded. It’s also not just a temptation for  outright corruption but a broader question of spending money effectively and efficiently. 

As Denys Uliutin pointed out, there is a large increase in spending this year and also a large re-channeling of funds that have been necessary to meet the health challenges of the COVID crisis. In order to do this effectively, there has been a need to make quick decisions on how to reallocate funds within the budget. This has to be balanced with the need for regular budget transparency and control. 

There are three broad issues that I’d like to highlight as important in safeguarding good control. The first one is to have a strong process and to make sure that when decisions are taken there is accountability for those decisions. I think there are good institutions in Ukraine and they have set good examples for how to make sure that there is a process for safeguarding money. Thus, for example, the public procurement system ProZorro that has proven itself to be a good way of conducting procurement. There are also other more narrow examples such as outsourcing of procurement of medical supplies. 

The second important issue is transparency – making sure that there is access to information about how the government spends its money. We highlight in the program ensuring that there is public access to information about how money is being spent from the COVID fund on meeting the challenges of this COVID 19 crisis. And as Denys Uliutin mentioned, we have agreed that it’s important that there is transparency too about the ultimate beneficial owners of the companies that received contracts from the government – so that there can be a scrutiny that these ultimate beneficial owners are not related to the people procuring materials for the government. 

One very important aspect of transparency is making sure that mass media have good access to information about the government. I think in pretty much all countries, the big revelations about misappropriation or about corruption come from journalists, they don’t typically come from the controlling bodies. It’s important that journalists can do this type of job by ensuring that they have access to information about government spending. 

The third point I want to make is on controlling audit. That is important for two reasons. The first and the obvious one is that people involved in fraudulent activities should be detected and should be held accountable. But a strong control environment and a strong audit are also important as a deterrent. If people have a strong suspicion that they would not get away with corruption or mismanagement, they will think twice before engaging in that.

Finally, I want to say that the IMF is generally in these programs, especially in emergency programs during the COVID crisis, setting very high threshold when it comes to the control of spending. So, for pretty much all countries we insist on measures to ensure a strong control environment, a strong audit, and Ukraine is not an exception.

In our program that was just adopted, we insist on transparency as I mentioned but also on post-audit of the spending from the COVID fund including an organization of this audit with the input of the third party. 

Mariia Repko: – Are there plans to prepare a three-year budget declaration this year?

Denys Uliutin: – The Verkhovna Rada suspended the Budget Code’s provisions concerning medium-term budget planning for this year. In the current situation, it is even difficult to plan one year ahead. A budget declaration is planned to be prepared next year and it will be done.

Yuliia Kasperovych, NISS: – Where do we stand with the expenditure review reports?

 – In 2018, we selected five areas to review budgetary expenditure. We are talking about spending on education, social policy, the agricultural sector and others. As of now, all these reports have been passed to the Cabinet of Ministers. In 2019, we selected nine areas for spending review, but in the middle of the year, the Government was changed and we were forced to revise the composition of all working groups. Last year, we submitted four reports to the Cabinet of Ministers, with the remaining reviews being postponed until 2020. In early 2020, before the quarantine, we asked everyone to complete the reports by June 1 and decide on the next nine areas, but the quarantine changed our plans. The Cabinet of Ministers issued an order changing the deadlines, and we are now waiting for the 2019 reports to be completed within three months following the end of quarantine.

What are the risks accompanying the allocation of expenditure to fight the pandemic? What is the role of the SASU and the Accounting Chamber in mitigating them?

Valeriy Patskan: – We have a 65 billion pandemic fund, of which the Government has allocated more than 28 billion. This is 44% of the funds. We monitor spending to combat the pandemic using a program we developed, and we see that there are many aspects to pay attention to.

For example, we allocated 1.7 billion hryvnias to the Ministry of Social Policy to provide assistance to children of individual entrepreneurs. Almost 400 payments were made and only 30 million hryvnias were used.

We have 100 million allocated to the Ministry of Health to purchase ventilators, but we do not see any tenders being announced, we do not see how and in what way these ventilators will be purchased. The Committee on Budget recently approved a new item of expenditure that can be financed from the fund – improvement of transport connection, construction, reconstruction and repair of public roads and principal roads. The relevant bill is yet to be passed in the Parliament.

I am all for building roads in our country, but we expressed our reservations and comments. They concern our being unaware of how the pandemic situation will develop in the future, whether there will be a second wave of disease outbreaks.

As of today, 7 oblasts and the city of Kyiv remain at risk.

Currently, 5% of the total state budget, or 65 billion hryvnias has been allocated to fight the pandemic. Centralization of resources decreases the efficient use of these funds. We have been drawing attention to this, and we will continue doing it. The biggest corruption risks lie in financing the measures unrelated to the emergency situation, but only marginally associated with it.

A second set of risks is organizational. The Government’s allocation-related decisions should be based on detailed calculations and include clear conditions on the use of these funds. Every government decision is approved by the Verkhovna Rada committee, and MPs must carefully analyze whether there is really a need to allocate these funds.

The Accounting Chamber will surely audit the “anti-virus” fund. Recently, we had an online meeting with 40 heads of the EU and US accounting chambers. We discussed the methodology and standards that should be used to check public spending after the pandemic. After quarantine, we will definitely conduct an audit.

The Cabinet of Ministers also decided to restore the State Audit Office. The SASU is an executive branch body that should already be monitoring spending. They will conduct audits without waiting for the quarantine to end.

– How can state policy toward supporting certain economy or population segments change by the end of the year?

Valeriy Patskan: – With onset of the pandemic, we realized the need to support small businesses, doctors, the unemployed, retirees. This was reflected in budget expenditures. It is now clear that the funds are not always allocated effectively. Specifically, state budget expenditures on reducing lending rates for small businesses under the “5-7-9” program have not reached the goal set. We see only a few hundred such loans in the whole of Ukraine. Support for the SME segment should be maximized, since only it will enable to bump up the level of revenues to the state budget to implement the plan.

– How do you see the Budget Committee’s role in the efficient allocation of expenditures in the pandemic year? How can state policy toward supporting certain economy or population segments change by the end of the year?

Ivan Krulko: –  In allocating the coronavirus funds, the Committee on Budget, indeed, has a controlling role, because the Committee on Budget approves allocations from the fund. As of now, the Committee has approved the allocation of 13 billion hryvnias, 51.6 billion remain unallocated. Following the end of the pandemic, the Accounting Chamber will audit the use of the funds, and the Committee on Budget will analyze the control measures carried out by the AC.

A separate coronavirus stabilization fund was not the only tool that could be used to combat the pandemic. MPs expressed different positions. My colleagues from the Batkivshchyna faction and I personally thought that the budget reserve fund tool could be used. Eventually, the Government and MPs decided to establish a separate fund by fully or partially reducing expenditures on a number of budget programs.

The Government informed us that as soon as the situation improved, all budget programs would be resumed. Let’s be realistic – they will not be restored. And it was also clear at the time of establishing the fund.

There is a list of positions to which the spending should be steered. Now, we see on what the funds were spent – providing financial assistance to the Compulsory State Social Insurance Fund in case of unemployment, assistance to children of individual entrepreneurs, purchasing ventilators, with almost 3 billion hryvnias allocated to the Ministry of Health to implement various measures, overcoming Covid-19, etc.

Bill No 3509 is currently being drafted for the second reading, providing for expanded possibilities of steering the fund’s money to two more areas.

The first area is purchasing equipment for healthcare facilities’ reception rooms in hospital districts and for such facilities’ repairs. This bill was amended to allow for purchasing equipment for rural outpatient clinics at the expense of the fund.

The second area is financing the principal roads repairs.

My position is that both areas are relevant. But we need to take into account how the epidemiological situation in Ukraine is unfolding and what other threats may arise to our healthcare system in connection with COVID-19 in the future.

– How and on what should budgetary resources be spent efficiently, with the minimum corruption risk?

Mariia Repko: – Sadly enough, the budget declaration and budget forecasting in Ukraine are perceived as an obstacle to process efficiency, rather than as something helpful in increasing efficiency.

When the pandemic broke out, we didn’t have a “what-to-do-when-the-crisis-is-here” scenario. The crisis is here, but there is no reserve fund, there are no ready decisions on how to respond to this crisis. There are no spending ceilings for different agencies, there is no understanding of what and to what extent depends on the macroeconomic situation, where to reduce and where, conversely, to increase.

A contingency fund planned in advance would make it possible to not make quick decisions on reducing culture and education spending – by the way, many of these decisions have been regretted – having time to decide on a more efficient and rational use of state budget funds.

So what do we see now?

Good decisions – such as partial unemployment benefits – are poorly implemented. Individual entrepreneurs write about the many problems they face as they seek to receive this assistance – starting with where they should go, what documents they should bring and ending with the very procedure being contrary to labor law.

Regardless of whether there is a crisis or not, there should be a connection between budget programs and the upper level goals that is now lost, either due to a change of government or the Ukrainian tradition.

I can give an example of funds allocation to the Institute of Molecular Biology and Genetics that developed coronavirus tests. The Institute was unable to get the funding due to a technical problem with approving their budget program. People took leaves without pay. Roughly the same thing happened to Oleksandr Dovzhenko National Center. It did not receive anticipated state funding under the budget program “Support for Cinematography”.

Could this have happened in a country with a well-established budgetary process and working program budgeting? Highly unlikely.

The process of allocating funds to fight coronavirus is well illustrated by the post on social networks by Hanna Novosad, former Minister of Education. She wrote that the Ukrainian government decided to allocate 2.7 billion hryvnias from the Covid-19 stabilization fund for supplemental payments to structures within the Ministry of Internal Affairs.  4.9 billion hryvnias were transferred from the education and science budget to this fund. That is, what happened? We took funds from the education and science budget and steered them to the Ministry of Internal Affairs. And the Ministry of Education did not receive funds to, for example, safely conduct EIT.

What is missing, in my opinion, in the approach toward funds allocation is a normal, transparent explanation of such decisions. No transparent explanation was provided as to why pensioners needed a supplemental payment of 1,000 hryvnias – but not single mothers who really suffered the most from quarantine. Retirees are not the category most affected by the coronavirus, but they received those funds.

The more clearly society and parliamentarians understand on what taxpayer money is spent, the better the quality of public policy will be.

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