What can IT solutions give to the Ukrainian public financial management system? 5 benefits that European experts emphasize

The processes of modern public finance management are constantly evolving and changing. Sometimes this is due to changes in legislation, sometimes – with a general approach to the basic methodology and considering accepted best practices, which are constantly evolving.

For example, until recently, most governments based their public finances on cash-based accounting methodologies, while now the accrual method is used as the standard for public financial management, leading to a complete overhaul of best practices.

Jurgita Domeikienė
Team Leader

In general, in recent years, the word “reform” (whatever the sphere of government), is no longer perceived separately from the concept of “IT reform”. IT tools are evolving at a revolutionary pace, and not only provide new opportunities for improvement but sometimes dictate the vectors of reform. This is also the case for public finance management (PFM), an area of ​​revenue collection, expenditure planning, and control of actual expenditures.

EU has been a strong supporter of the PFM reforms for modernizing public financing in its member states as well as in the countries looking to join the EU in the future. This process was expedited since the active expansion of the EU started in 2004. Similar reforms, in various capacities, have already been conducted in most of the neighboring countries. Romania, Hungary, Slovakia have all benefited from the EU support in the reform processes. Now, Ukraine, learning from the experience of other countries, is looking to work jointly with the European Union to modify its public finances.

I want to share what vectors of PFM renewal, dictated by the IT revolution, we see together with the partner institutions, what results we have, and what we plan in the next two years.

About strategy, partner institutions and EU4PFM

To provide practical assistance to Ukraine in reforming the PFM, a special EU Program to Support Public Financial Management in Ukraine (EU4PFM) was created and launched in 2019. Our assistance (technical, expert) is aimed at improving the provision of public services and the business climate in Ukraine. It is provided to the Ministry of Finance and three other partner organizations under its management – the State Customs Service of Ukraine, the State Tax Service of Ukraine, the Accounting Chamber. The specific objectives of the Program are to support the development of a modern and efficient revenue collection system and to support the above-mentioned PFM institutions to increase their organizational capacity. The EU4PFM program is part of the PFM reform ecosystem.

Reform is impossible without the strategy. The Government is currently in the process of creating and adopting a new PFM Strategy for 2021-2024, which identifies both the results to be achieved in the coming years and the means, methodologies, and resources to achieve them.

PFM reform has a few components: it is necessary to reform legislation, improve methodologies, modernize business processes, and fulfill international obligations. Information technology provides tools for the effective implementation of reforms. Recognizing the importance of information technology, EU4PFM pays special attention to supporting Ukraine in the development and implementation of modern IT solutions – to help Ukraine achieve the results set out in the PFM strategy and international commitments.

Like PFM reform in general, its IT component also requires a clear strategic approach. To achieve maximum results, it is also necessary to understand the current situation and the goals to be achieved, as well as the timing, action plan, resources that will be used to achieve these goals. And to achieve the maximum return on financial and non-financial investments, the fastest and most optimal way to achieve the set goals, it is necessary to establish a common framework for all PFM institutions for further steps and coordinate activities.

The EU4PFM program actively assisted partner institutions in developing such IT strategies, both for the PFM ecosystem (the IT strategy of the Ministry of Finance is a framework here) and, according to it, individual strategies for each partner organization: State Customs Service of Ukraine, State Tax Service of Ukraine, Accounting Chamber.

Vectors, achievements, and plans

It is important to note that the specific goals and corresponding IT needs to vary from organization to organization, but certain trends in IT development are universal and common to the entire field of PFM.

1. Digital self-service instead of bureaucracy. Thanks to the ongoing digital revolution, IT can be used to reduce paperwork and red tape, speed up service delivery, and receive services anytime from anywhere — in short, reduce time to interact with the state. We help create and develop self-service tools for citizens and businesses.

The Project is currently undertaking several activities related to reducing the levels of bureaucracy and improving the quality of citizen services by digitalizing them. A new, modern contact center is being implemented for the State Tax Service of Ukraine, and the current website is being modernized by using new technologies. The new website will act as a portal for the taxpayer, allowing him/her to review the most updated information, as well as access the services needed. For the State Customs Service, the users can enter the NCTS declarations by using a new Trader Portal (https://commontransit.customs.gov.ua/trader)

2. “Digital” fight against corruption and the shadow economy. As in every country and economy, IT tools are increasingly providing the state with the means to combat potential internal and external corruption and other illegal activities. IT tools also help to minimize the human factor – direct interaction with employees and their involvement in the process, which reduces the risk of human error or attempted intentional corruption. Such tools help simplify the provision of services by citizens and businesses, as well as increase government revenues and reduce the share of the grey economy. o

IT platforms for risk management are being implemented to detect suspicious transactions and activities in the field of financial management. The State Customs Service of Ukraine is in the process of implementing a new, automated risk management platform developed with the help of EU4PFM; tools have also been developed to carry out the customs audit process. A platform covering the audit function will be developed for the State Tax Service and the Accounting Chamber of Ukraine. For the State Customs Service of Ukraine, the Post Audit platform developed will help the Partner to track the steps once the customs clearance has taken place, to ensure the declared goods are used for the purposes they are supposed to. The post-clearance activities involve examination of trader’s systems, accounting, and other business records and premises to test and measure compliance of information submitted for Customs declarations. The outcome of the post-clearance activities can be used as an input for automated risk management and subsequent actions, allowing the Customs Service to create more transparency and mitigate risks related to corruption.

3. Integration into the international ecosystem of PFM and fulfillment of international obligations. The PFM reform provides for the changes needed to become a full member of the PFM global ecosystem the fulfillment of international obligations. In some cases, the role of IT is supportive, but in many cases it is mandatory.

Among the most illustrative examples implemented by the State Customs Service and the Tax Service with the support of EU4PFM is the use of NCTS (New Computerized Transit System, the use of which is mandatory for Ukraine’s accession to the Convention on a common transit procedure facilitating pan-European transit of goods), CbC (Country by Country Reporting) and IT System for Transfer Pricing Audit to minimize tax evasion. For the State Customs Service, a platform covering the functionality needed for accessing NCTS Phase 5 will be developed allowing Ukraine to meet the taken commitment for joining the next phase of the convention.

4. Automation instead of manual labor. The most traditional benefit that is usually expected from any IT development is to increase process efficiency. In other words, IT solutions are expected to help reduce the length of the process and allow human resources to be used not for “paper transfer” but for higher value-added activities. Obviously, there is no single solution for process automation in all institutions, but there is a concept that horizontally covers all platforms implemented by EU4PFM and other partners. Thus, automation of PFM processes means saving time and financial resources, which leads to increased process efficiency, avoidance of human errors, and avoidance of potential corruption, which, ultimately, leads to better use of financial and non-financial resources to create higher added value. A good example of such process automation comes from the State Tax Service where the ranking component of the Single Tax Account has already been developed and deployed for the benefit of the taxpayers. Based on legislation, the system will automatically decide on the order of tax obligations to be covered. The taxpayers will benefit from using a common, single tax account, instead of paying different taxes to different accounts. As of now, more than 2000 taxpayers have already decided to take advantage of this newly developed functionality.  

5. Open access to data for citizens. It is not uncommon for public officials to have access to public finance data. However, because citizens provide the main source of government revenue, they have a right to know how their taxes are spent. Deployment of IT systems is a tool that allows citizens to access this information, including with the provision of opportunities for analytics. EU4PFM has already helped partners implement several T tools to increase information transparency.

In particular, the State Customs Service was assisted in creating a business intelligence platform for internal and external users https://bi.customs.gov.ua, which contains information on Ukraine’s foreign economic activity by key indicators and analytical tools, a new web portal, interactive maps customs services https://map.customs.gov.ua

And more about planning

A necessary addition to the above. Public financial management is associated not only with the mobilization of revenues (which was mostly discussed above) but also with the optimization of expenditures and modernization of the budget process. Flexible systems are needed here for budget planning (both at the local and national level) and for further control over actual expenditures. And here, too, IT solutions must be used.

Together with partners, the Program is ready to assist the Ministry of Finance in modernizing the areas of planning and cost control. Thus, it is already planned to develop a decision platform together with the Ministry of Finance, which covers the requirements for state budget planning. The platform to be developed is to cover the functionality of the budget planning at the national level. The solution will provide a transparent environment to fully control the budget creation process, allowing for inputs for all budget organizations in a controlled manner. As a result, the State budget is consolidated, formulated, and approved, taking into account the strategic objectives and goals of the Government for the next budget cycle.

Why the reform is irreversible

Public finance management reform is a process, not a one-off event. The reform may have a set start date but cannot (and should not) have a set end date. Especially now that most of the reforms are somehow related to the application of IT solutions that are improving too fast.

The reform of PFM (and related IT reform) in Ukraine is much longer than the EU4PFM Program. It is also clear that UDF reform is irreversible, if only because the world will never return to the “pre-computer era”. However, the effectiveness of the reform for Ukraine will depend on whether the vectors of change that we now support together will be actively developed, as well as on the speed with which government agencies will be able to use new and new opportunities in IT technologies.

We are confident that during its work, the EU4PFM Program, together with international and national partners, will contribute to positive changes in the socio-economic development of Ukraine – in particular, by helping to improve public financial management systems.

Koit Puusaag

International Key Expert/IT