PROJECT INFORMATION DOCUMENT (PID) APPRAISAL STAGE Report No.: PIDA693 Public Disclosure Copy Project Name Social Safety Nets Modernization Project (P128344) Region EUROPE AND CENTRAL ASIA Country Ukraine GEF Focal Area Sector(s) Other social services (80%), Central government administration (20%) Theme(s) Social safety nets (60%), Other social development (20%), Other social protection and risk management (20%) Lending Instrument Specific Investment Loan Project ID P128344 Borrower(s) Ministry of Finance Implementing Agency Ministry of Social Policy Environmental Category B-Partial Assessment Date PID Prepared/Updated 25-Mar-2014 Date PID Approved/Disclosed 25-Mar-2014 Estimated Date of Appraisal 18-Feb-2014 Completion Estimated Date of Board 19-Jun-2014 Public Disclosure Copy Approval Decision I. Project Context Country Context In 2009, Ukraine experienced a 14.8 percent decline in GDP and has not yet recovered. After recovering somewhat over 2010-11, GDP growth remained flat around 0 percent over 2012-13. Weak demand for exports and delays in domestic policy adjustments led to widening and unsustainable macroeconomic imbalances. Achieving a sustainable macroeconomic framework requires, among other things, tightening of fiscal policy including through aligning wages with productivity growth. About 9 percent of the population is considered poor by national standards. Ukraine uses multiple poverty measures. According to the relative definition of poverty, about a quarter of the population was poor during 2010-2012. About 11 percent was living in extreme poverty, which is also the commonly used domestic definition of poverty. Only 2.3 percent of the population was living below US$5 in PPP terms per adult equivalent per day in 2012, or the international absolute poverty line for the ECA region. Income inequality is among the lowest in the ECA region, with a Gini index of 24.3 during 2011-2012. Page 1 of 7 In Ukraine, as in other countries of the ECA region, women are disproportionately represented in lower paid occupations, such as sales services, social sector, education and health. The unadjusted Public Disclosure Copy monthly earnings gender wage gap is 22 percent (UNECE 2010), which is similar to other ECA region countries, but higher than the EU average. The number of firms with female managers is 28 percent - higher than the average of countries in the same income group. Approximately 52 percent of households in poverty are headed by females. The economic slowdown and recent policy debates about reform of the energy sector has refocused attention on the importance of a well-functioning social assistance program to protect the poor. Although Ukraine spends generously on social assistance programs, the overall effectiveness of the social assistance system is moderate. Most social assistance programs are categorical, while the coverage of the means-tested last-resort program is low. An efficient and effective social protection system is essential, given the nature and potential impact of important structural reforms. Having a larger last-resort income program in place could assist in cushioning the impact of the reduction or elimination of gas and heating subsidies, as well as respond quickly in times of crisis. Sectoral and institutional Context Sectoral context Ukraine operates a complex social assistance system that redistributes a large share of GDP. By 2012, spending on social assistance programs accounted for about 3.3 percent of GDP, placing Ukraine among the higher spending countries in the ECA region. However, the targeting accuracy of social assistance spending in Ukraine is relatively low, due to a preference for categorical programs. Only 43.2 percent of Ukraine’s social safety nets reached the poorest quintile in 2012. Similar to other countries in the region (Bulgaria, Croatia, and Romania), the contraction of income-tested programs was due to a preference for programs that transfer money to a broad Public Disclosure Copy income spectrum, and not due to difficulties in identifying the poor. The country operates 16 major social assistance programs with the vast majority of these programs focused on broad categorical groups, which reduces the efficiency of social assistance spending in reducing poverty. These include programs targeted at families with children or foster families, persons with disabilities, elderly without contributory pensions, privileged citizens, or households with a high relative cost of their heating and utility bill. Only two programs, the Guaranteed Minimum Income, or GMI program, and a small fraction of child benefits target low-income households based on a means-test. Coverage of the GMI program has eroded. In 2005, GMI covered about four percent of the population, but by 2012, only 0.9 percent was covered. Stricter eligibility criteria resulted in fewer qualifying households and lower benefit levels. The share of the GMI program in GDP fell from 0.27 percent in 2005 to 0.08 percent during 2009-2011. As a result of lower coverage, the impact of the GMI program on reducing poverty has deteriorated. This trend was reversed in 2012, in response to a slowing economy when GMI eligibility thresholds were revised upwards over and above inflation. By 2013, 1.3 percent of the population was covered by the GMI. The Government intends to expand the GMI program and transform it into an effective and efficient poverty reduction program. Over 2014-2019, the number of beneficiary families is expected to Page 2 of 7 increase to 300,000 (1,140,000 individuals), equivalent to coverage of 2.5 percent of the population. This expansion will improve coverage among beneficiaries from the poorest quintile, from five percent on average per month in 2012 to a projected 10 percent in 2019. The simulated impact of Public Disclosure Copy the expansion is about 1.2 percentage points reduction in the absolute poverty rate, lifting at minimum an additional half million people out of absolute poverty and narrowing the poverty gap for those remaining in absolute poverty. To counteract a possible deterioration of the GMI targeting accuracy through expansion, the Government of Ukraine (GoU) intends to revise its eligibility procedures by 2016 to boost targeting accuracy while simplifying the eligibility criteria and procedures in order to reduce the administrative and client costs. The GoU is expected to adopt new eligibility criteria that would result in at least a 10 percent increase in the predicted (simulated) targeting accuracy, i.e. the share of GMI benefits predicted to accrue to the beneficiaries in the poorest quintile. By 2018, the GoU intends to implement activation services and incentives nationwide, to support the transition of work-able beneficiaries from benefits to employment. Concerns that the GMI program discourages work are high in Ukraine. Three features of the GMI program justified such concerns: (i) the program’s benefit is higher, relative to the beneficiary’ income, than elsewhere in ECA or other regions; (ii) the benefit formula imposes a 100 percent implicit tax on earnings; and (iii) about half of the adult GMI recipients are not in employment, education, training, disabled or receiving pensions (NEETDP). Compared to other similar programs in ECA region, the Ukrainian GMI has relatively few measures to discourage benefit dependency. The only such measure is the condition to be registered with the unemployment office, which does not offer ALMPs that could help the beneficiary to transition from assistance to employment. To mitigate the likely work disincentives, the GoU intends to develop and adopt a package of co-responsibilities for NEETDP adults by 2016, pilot it in two oblasts during 2017, and then roll them out nationwide during 2019. Supporting the expansion and transformation of the GMI program is one key element of the proposed Social Safety Nets Modernization project (the Project). Public Disclosure Copy The expansion of the GMI program will require additional fiscal space, but there is scope for off- setting these costs within the social assistance system. In 2013, the GMI cost 0.28 percent of GDP; by 2019, it is projected to increase to 0.57 percent of GDP. However, this expansion would be gradual, averaging about 0.05 percent of GDP per year. The GoU could manage the gradual increase in GMI budget through a combination of the following measures: (i) cap the indexation of categorical benefits to inflation. By 2019, this measure could reduce non-GMI social assistance spending by 0.53 percentage points; (ii) eliminate or cap privileges generating savings of around 0.05 percent of GDP per year; and (iii) reduce error and fraud in the social assistance system, which would require building the capacity of the Social Inspectorate and deploying it across the largest risk-prone benefits. Starting with the third year of the project, the GoU could expect fiscal savings ranging from 0.1 percent to 0.2 percent of GDP per year. The Project would provide assistance to elaborate and evaluate options for these policy reforms, finance public communication campaigns to mitigate the political opposition to such reforms and provide needed investments in the newly created Social Inspectorate to make it effective and efficient. Institutional context Benefit administration for social assistance programs is decentralized in Ukraine. Benefits are administered through 756 ‘one-stop-shop’ local welfare offices (LWOs). This network operates Page 3 of 7 with oversight from the Ministry of Social Policy (MoSP) and reports to the respective divisions at the level of oblast administrations, but is funded out of local budgets. The administrative costs of these offices amount to about 0.09 percent of GDP. A one-stop-shop business model introduced Public Disclosure Copy under the World Bank-financed Social Assistance System Modernization Project (SASMP) allows clients to undergo an eligibility check and sign up for all benefits via a single application supported by a standard set of documents. To support the administration of benefits, monitoring and reporting, a new management information system (MIS) called IASSPP has been developed and piloted in 30 LWOs in Vinnytska oblast. The Government has allocated funds to update the software and start the national roll-out of IASSPP in 2014. The Project will support actions to expand IASSPP’s functions by adding data from the system of publicly funded social services delivered to children, families and specific vulnerable groups, and make the MIS operational nationwide. The Ukrainian benefit administration system has a number of weaknesses that the Project plans to address. The delivery system for cash transfer programs and social services is centrally financed and regulated, but is implemented by a network of autonomous units. Without a unified MIS in place and without a strong central unit to oversee and control the delivery of benefits and services, the oversight of performance of all local offices is relatively weak. The Project will support the development of instruments and institutions to help align national objectives with local office operations, through the full deployment of IASSPP, its continuous expansion to cover new business functions and a centralized social inspection unit. In addition, Ukraine has a large number of children in institutional care and service provision is scattered between the Ministry of Education (MoE), the Ministry of Health (MoH), and the MoSP. In total, over 61,000 children are in institutional care in Ukraine, or 0.6 percent of Ukraine’s children. Ukraine has developed several national strategies and state programs aimed at de- institutionalization of orphans and children deprived of parental care and the development of alternative forms of care for such children. The Project will help to implement these programs in Public Disclosure Copy four selected oblasts (Chernihiv, Zhytomir, Donetsk, Dnipropetrovsk) by introducing a new business model for social patronage of the vulnerable families in rayon level centers for social services for families, children and youth; training of the staff; and linking centers to the new MIS. II. Project Development Objective(s) / Global Environmental Objective(s) A. Project Development Objective(s) The Project’s Development Objective is to improve the performance of Ukraine’s social assistance and social services system for low-income families. The Project Development Objective would be achieved by: • Expanding the GMI program to increase the access of the extreme poor to a last resort poverty reduction program; • Supporting measures for more efficient administration of social benefits and services through: (a) strengthening performance management to be supported by the national MIS; (b) streamlining oversight and control procedures under a central unit for social inspection, and (c) integrating data on benefits and services into a single MIS for all local offices under the MoSP’s subordination and • Designing and implementing the entire range of social welfare servies aimed at vulnerable children in four selected oblasts, from prevention to quality of service delivery and deinstitutionalization of children. Page 4 of 7 Public Disclosure Copy III. Project Description Component Name Expansion of the enhanced last resort anti-poverty program (the GMI program) Comments (optional) This component will support the Government’s reform agenda within three specific results areas, namely by: (i) accelerating poverty reduction through the gradual expansion of the GMI program; (ii) strengthening SSN administration to ensure efficient oversight and controls in both social assistance and social services delivery, and improved data management tools (MIS system) to support operational decisions and policy making; and (iii) aiding in the provision of effective social support to families in need and vulnerable families through integrating provision of benefits and services and supporting de-institutionalization of children’s services. Achievement of results in these three areas will be monitored with disbursement-linked indicators (DLIs). Component Name Institutional Strengthening for Administration of Benefits and Services Comments (optional) This component finances provision of goods, non-consulting services, consultants’ services, training and operating costs to support strengthening the institutional capacities of MoSP and local offices to implement and monitor benefits and service. These investment and technical assistance are necessary, but not sufficient, conditions to achieve the results indicators under Component 1; they will be complemented by the MoSP own efforts and investments. This component helps develop institutional capacities at central, oblast and local levels needed to support the reforms of benefits and services. Component Name Increasing provision of family-based care for children and vulnerable families in four oblasts. Public Disclosure Copy Comments (optional) This component finances investments to support: (i) childcare de-institutionalization by providing orphans and children deprived of parental care with a family environment through foster care, adoption and placement in family-type homes; (ii) transformation of residential institutions, and (iii) purchasing of new services from private providers for vulnerable families. These investment and technical assistance are necessary, but not sufficient, conditions to achieve the results indicators under Component 1; they will be complemented by the MoSP own efforts. These activities will be implemented in four selected oblasts according to action/ transformation plans on transforming residential care in family based care. Individual action plans for each oblast will be developed. IV. Financing (in USD Million) Total Project Cost: 300.00 Total Bank Financing: 300.00 Financing Gap: 0.00 For Loans/Credits/Others Amount Borrower 0.00 International Bank for Reconstruction and Development 300.00 Total 300.00 Page 5 of 7 V. Implementation As the central government body responsible for social assistance policy development, the MoSP will be the main implementing agency for the Project. This is the third project financed by the World Public Disclosure Copy Bank and executed by the MoSP. The Project will use the same implementation arrangements that were effective under SASMP: the Deputy Minister of the MoSP will be made responsible for overall project implementation and will lead the Project Management Group established in the MoSP to guide implementation and make decisions.External consultants hired by the MoSP will provide additional technical assistance and expertise required to implement project activities. The team of consultants hired under the ECAPDEV grant that are helping the MoSP to prepare the Project will continue working on the Project. The current core team of consultants comprises a Procurement Specialist, an FM Specialist and a Project Adviser responsible for the preparation of the POM. Given the satisfactory level of performance of the current staff, the existing arrangements for procurement and financial management under the ongoing ECAPDEV Grant will also be applied for the Project. Enhanced procurement expertise and controls will be applied, given the high governance risks in Ukraine. Oblasts’ State Administrations will play a supervisory role in project implementation, but will not execute any of the project activities. Renovations of family homes and internats under Component 3 of the Project will be delegated to the Ukrainian Social Investment Fund. USIF was created by Ukraine Decree #740 of April 28, 2000 to support socially vulnerable groups of the population and the initiatives of local communities and NGOs. The proposed flow of funds will remain within the framework of the State Treasury Service system of Ukraine. Civil works, supervision of civil works performance and minor new construction needed for transformation of institutions for orphans and disabled children under Component 3 will be procured by and financed through the Ukrainian Social Investment Fund (USIF), an autonomous public non-profit organization created by a Cabinet of Ministers of Ukraine (CoM) decree. USIF possesses adequate fiduciary capacity to ensure compliance with World Bank procurement and financial management rules, and the capacity to address the requirements of the environmental and social safeguards. USIF will be designated as a recipient of the state budget Public Disclosure Copy funds by a CoM decree (under preparation). An internal administrative agreement between the MoSP and the USIF will set the division of responsibilities between them in implementing renovations under Component 3 of the Project; payment procedures, accounting and reporting. USIF will use a tripartite agreement to govern the relationship between USIF (a payer/customer), a family house or internat (owner/property holder/beneficiary) and a construction firm (executor). VI. Safeguard Policies (including public consultation) Safeguard Policies Triggered by the Project Yes No Environmental Assessment OP/BP 4.01 ✖ Natural Habitats OP/BP 4.04 ✖ Forests OP/BP 4.36 ✖ Pest Management OP 4.09 ✖ Physical Cultural Resources OP/BP 4.11 ✖ Indigenous Peoples OP/BP 4.10 ✖ Involuntary Resettlement OP/BP 4.12 ✖ Safety of Dams OP/BP 4.37 ✖ Projects on International Waterways OP/BP 7.50 ✖ Projects in Disputed Areas OP/BP 7.60 ✖ Page 6 of 7 Comments (optional) Public Disclosure Copy VII. Contact point World Bank Contact: Katerina Petrina Title: Sr Social Protection Specialist Tel: 5256+230 Email: kpetrina@worldbank.org Borrower/Client/Recipient Name: Ministry of Finance Contact: Viktoria Kolosova Title: Head, Division for Cooperation with International Finance Or Tel: 38044 2775333 Email: kolosova@minfin.gov.ua Implementing Agencies Name: Ministry of Social Policy Contact: Social Protection of Disabled; Social Services Title: Tel: (380-44) 289-5448 Email: VIII. For more information contact: The InfoShop The World Bank 1818 H Street, NW Public Disclosure Copy Washington, D.C. 20433 Telephone: (202) 458-4500 Fax: (202) 522-1500 Web: http://www.worldbank.org/infoshop Page 7 of 7