Capital Budgeting and Public Investment Projects in Ukraine

Capital Budgeting and Public Investment Projects in Ukraine

Olha Krupa (Seattle University, USA)
Copyright: © 2019 |Pages: 20
DOI: 10.4018/978-1-5225-7329-6.ch005

Abstract

This chapter discusses the budget process for public capital investments in Ukraine, presents controversies in the current process, and offers several avenues for improvement. In doing so, the author provides a description of the country's normative capital public budgeting framework, presents the institutional setup, and tracks Ukraine's public capital expenditure trends for nearly three decades (1991-2016). The study then discusses implementation, audit, and performance issues in Ukraine's public capital expenditure management and provides recommendations. Because of the country's limited fiscal capacity as compared to its massive infrastructure needs, the author posits that Ukraine can no longer afford to delay or ignore its most pressing public capital investment needs. Because the current list of capital investment proposals is underfunded and too long, the author suggests that the government focuses on finishing strategic, high-priority public projects, while other capital spending proposals target private sector financing once it becomes more readily available.
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Introduction

Considering Ukraine’s limited fiscal capacity, the country is in particular need of well-developed, strategic capital budgeting practices. Without this strategic focus, Ukraine will continue lagging behind its nearest neighbors in investment climate, global market competitiveness, and public service provision. Essential to future economic growth, public capital expenditures create an economic multiplier, increase income and employment, and update the country’s capital infrastructure. Despite the significance of public capital investments, the detailed comparative cross-country examinations of public capital budgeting processes in public finance literature are rare (Srithongrung, 2008; Ermasova & Ermasova, 2019). Contributing to this important research area, this chapter examines Ukraine’s normative public capital expenditure framework and offers several avenues for improvement. The chapter describes project proposal-setting, submission, consideration, implementation, audit, and review stages for public capital expenditures in Ukraine.

For much of the twentieth century, Ukraine’s extensive public project infrastructure received capital financing through the Soviet command-and-control central planning system. Once Ukraine gained its independence from the USSR in 1991, the country began a jarring, poorly thought out transition from a centrally planned economy to a market economy. Between 1991 and 2018, its challenges included a series of macroeconomic shocks accompanied by hyperinflation, the interrupted, discontinued access to markets, the “fire sale” of the public assets, and the resulting manufacturing collapse (Economist, 2003; Economist, 2015). Compounding these abrupt transformations were government bureaucracy, red tape, and government corruption (Economist, 2017). As a result, between 1991 and 2016, Ukraine lost 13.4 percent of its population and a quarter of its per-capita GDP and became the poorest country in Europe (Organization for Economic Cooperation and Development, 2014; Economist, 2015; World Bank, 2017). Similar transformations occurred in other Soviet republics during that period Ermasova & Ermasova, 2019; Guzman, 2019).

Between 2002 and 2007, Ukraine experienced a short period of macroeconomic stabilization, a credit boom, and economic growth (Duenwald et al., 2005; Economist, 2015). However, that trend has had little effect on renewing the country’s aging capital infrastructure, as it was too short to absorb any newly available capital financing. Following the Global Financial Crisis, Ukraine lost its economic momentum. In the summer of 2010, a pro-Russian President Victor Yanukovych came to office, representing the oligarch interests in Eastern Ukraine. He has reversed Ukraine’s pro-Western position and triggered the Revolution of Dignity in November 2014 – February 2015. That resulted in his own retreat to Russia, Russian annexation of Crimea, and a war with Russia over Ukraine’s Donetsk and Luhansk regions (Economist, 2015; Economist, 2017a; Economist, 2017b).

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