The following issues will influence the successful execution of this project and generally the effective implementation of sector budget support in Ukraine:

• Two of the three basic eligibility conditions for providing sector budget support are arguably not satisfied at the present moment – the three criteria are that there exist (i) a well-defined sectoral policy and strategy, (ii) a stable and predictable macroeconomic framework, and (iii) a credible PFM system, including public procurement standards in line with EU laws. A sector strategy has been in place since 2006 which, notwithstanding its shortcomings, is strongly 'owned' by national stakeholders. However, regarding the other two eligibility conditions it was noted the following:

   

  • Ukraine has suffered a severe economic recession, experiencing the deepest drop in output and the sharpest decline in its exchange rate compared to any other country. Ukraine has, therefore, had to resort to assistance from the IMF to restore financial and economic stability under a two-year USD 16.4 billion "Stand-By Agreement." The economic programme adopted by Ukraine and supported by the IMF managed to stabilise an extremely difficult situation and, according to the World Bank, the real sector appears to have bottomed out in the first half of 2009. Even so, real gross domestic product is projected to fall by 15 per cent in 2009. Moreover, disagreements among the Ukrainian authorities particularly in the lead-up to presidential elections in 2010 are jeopardising the gains already made and can present significant implementation risks for the agreed economic programme.

   

  • The Public Financial Management (PFM) system in Ukraine is only partly in line with international norms, although the system is in the process of being harmonised with international and European standards with the support of a number of technical assistance projects, including an EU Twinning programme that was concluded in December 2009 and a World Bank Public Finance Modernisation project running to 2013. Public procurement standards are also not yet up to international standards, although attempts have been made to address the significant deficiencies of the relevant legislation in force since 2006.

 

• Broad project scope and complexity – this is a complex project that requires not only project management skills but a multi-disciplinary approach and a range of knowledge and skills across a wide spectrum: Ukraine and its energy sector, sector budget support, monitoring and evaluation, all energy sub-sectors and across the value chain for each, EU legal approximation, the Energy Community and Union for the Coordination of Transmission of Electricity (The European synchronous electricity grid) frameworks, structuring and financing of energy and infrastructure projects, the development and implementation of data and IT systems, the conduct of communication and public awareness activities in accordance with the EU visibility guidelines, website design and uploading, institutional and capacity building and training, and project management.
  
• The MoFE monitoring system will need to be consistent with broader performance monitoring initiatives developed under the PCA Project and to support the monitoring and implementation of the Energy Strategy in general, and not only the partial conditionalities that SBS focuses on. Indeed one of the key challenges of the project will be to streamline data collection, data storing and analysis, data reporting systems, that meet the needs of MoFE, JMG and the donor coordination entities, and avoid the development of parallel systems and duplication.
• Extensive improvements to the performance monitoring systems take a long time to achieve – the development of rigorous monitoring systems and, more importantly, their intensive utilisation in managing government activities amounts to a wholesale institutional and organisational change, which can realistically only be achieved over the longer term (the EU’s own guidelines for sector programmes, for example, refer to a 10-year time frame). This then points to the need for developing a menu of possible actions to strengthen monitoring and develop a clear action plan with a number of stages of development.
  
• Consensus building – the project staff will seek to establish agreement and consensus with stakeholders, particularly regarding the monitoring system, as this will help ensure that a self-sustainable system for implementing, monitoring and adjusting the energy strategy is created and thereby ensure sustainability of project results.
• Poor technical and financial performance of the energy companies - revenues in the sector are low due to a combination of factors, including prices that are below costs, and relatively high losses and low collection rates. Without measures that ensure the financial viability of the companies, it will be difficult to have them focus on broader reform, monitoring and reporting issues.
• Commitment by MoFE staff to successfully implement the project - the project  staff aims to provide a pragmatic and practical approach to the tasks to ensure that the key issues are addressed and solutions are proposed that will help achieve the project objectives. Commitment is required by MoFE staff to ensure that the proposals are implemented to achieve the maximum benefit from the project.
• Resource and personnel availability - adequate, skilled and dedicated staff from MoFE and other stakeholders will need to be available to develop, implement and maintain the systems and procedures developed by the project and to ensure effective knowledge and skills transfer to them so that they can carry out the breadth of MoFE’s challenging functions.