Report No. 41314-YF Serbia Public Financial Management Assessment February 16, 2007 Operations Policy and Services Europe and Central Asia Region Document of the World Bank TABLE OF CONTENTS PREFACE...........................................................................................................................I EXECUTIVE SUMMARY ............................................................................................III CHAPTER 1: INTRODUCTION.................................................................................... 1 CONCEPTUAL FRAMEWORK FOR THE PFM ASSESSMENT................................................. 1 CHAPTER 2: COUNTRY BACKGROUND................................................................. 4 COUNTRY POLITICAL SITUATION..................................................................................... 4 COUNTRY ECONOMIC SITUATION .................................................................................... 4 LEGAL FRAMEWORK........................................................................................................ 6 INSTITUTIONAL FEATURES AND FRAMEWORK .................................................................. 9 CHAPTER 3: PUBLIC FINANCIAL MANAGEMENT PERFORMANCE INDICATORS................................................................................................................. 11 A. PROGRESS SINCE 2002 WORLD BANK ASSESSMENTS AND OVERVIEW OF PFM PERFORMANCE ................................................................................................ 11 B. PFM OUTTURN: CREDIBILITY OF THE BUDGET...................................................... 13 C. KEY CROSSCUTTING ISSUES: BUDGET COMPREHENSIVENESS AND TRANSPARENCY ............................................................................................................. 18 D. BUDGET CYCLE.................................................................................................... 25 (I) POLICY BASED BUDGETING........................................................................................ 25 (II) PREDICTABILITY AND CONTROL............................................................................... 27 REVENUE COLLECTION.................................................................................................. 27 TREASURY AND CASH MANAGEMENT ........................................................................... 29 PUBLIC PROCUREMENT .................................................................................................. 33 INTERNAL CONTROL....................................................................................................... 34 (III) ACCOUNTING, RECORDING AND REPORTING........................................................... 35 (IV) EXTERNAL SCRUTINY AND AUDIT........................................................................... 38 E. DONOR PRACTICES.............................................................................................. 40 CHAPTER 4: GOVERNMENT REFORM PROCESS.............................................. 43 RECENT AND ON-GOING REFORMS.................................................................................. 43 INSTITUTIONAL FACTORS SUPPORTING REFORM PLANNING AND IMPLEMENTATION ....... 44 ANNEX I: PEFA SCORING METHODOLOGY ....................................................... 46 ANNEX II: KEY REFERENCES ................................................................................. 48 ANNEX III: UPDATE OF 2002 CFAA AND CPAR RECOMMENDATIONS ...... 50 LIST OF FIGURES AND TABLES FIGURE 1. COMPARED PFM PERFORMANCE IV TABLE 1. SUMMARY OF PERFORMANCE INDICATORS IX FIGURE 2. CORE DIMENSIONS IN PUBLIC FINANCIAL MANAGEMENT (PFM) SYSTEM 3 TABLE 2. FISCAL PERFORMANCE 2003-2005 6 FIGURE 1. COMPARED PFM PERFORMANCE 13 TABLE 3. EXPENDITURE OUTTURNS FOR CENTRAL GOVERNMENT OF SERBIA, 2003-2005 14 TABLE 4. COMPOSITION OF EXPENDITURES 15 TABLE 5. AGGREGATE REVENUE OUTTURN 2003-2005 16 TABLE 6: VARIATION OF STOCK OF ARREARS OF CENTRAL AND GENERAL GOVERNMENTS 17 TABLE 7. ESTIMATE OF THE COMPOSITION OF EXPENDITURE FOR THE 2005 GENERAL GOVERNMENT BUDGET 19 TABLE 8. STATE AND SOCIALLY-OWNED ENTERPRISES IN SERBIA 2003-2004 24 TABLE 9. TAX ARREARS 29 TABLE 10. CHOICE OF PROCUREMENT PROCEDURE 2002-2004 33 TABLE 11. NUMBER OF INTERNAL AUDITS AND RECOMMENDATIONS 35 Serbia PFMA: Preface i PREFACE The primary objective of the Public Financial Management Assessment is to provide an assessment of the strengths and weaknesses of the PFM system in the Republic of Serbia, which can help the government to prioritize and measure progress in Public Financial Management reform. As stated in the Country Assistance Strategy for Serbia, a "single, integrated Public Financial Management (PFM) report" shall be produced in the World Bank's Fiscal Year 2006, which will draw on previous analytical work, including the findings of recent Bank studies: the updates of the 2002 Public Expenditure and Institutional Review (PEIR), the Country Financial Accountability Assessment (CFAA)1 and the Country Procurement Assessment report (CPAR)2. The updates, including the combined CFAA and CPAR Fiduciary Assessment Update (FAU) were completed in 2005. The assessment is based on the Public Financial Management performance indicators developed by PEFA3. The 28 PFM performance indicators and 3 donor indicators are assigned a score from A-D with "A" reflecting high performance and "D" low performance, with "B" and "C" as intermediate scores. The scores are assigned in accordance with the interpretations and the scoring methodology provided by PEFA4. The World Bank team has coordinated closely with the donor community in Serbia. The Ministry of Finance was engaged from the outset at a very senior level. The work on technical issues and requests was based on contacts with technical level officials who demonstrated willingness to share with the Bank all relevant reports and data. The donors most active in the field of PFM have been closely involved, both in designing and assuring the quality of the Assessment. Cooperation has been particularly close with the IMF, the European Agency for Reconstruction (EAR), the UK Department for International Development (DFID) and the Norwegian Ministry of Foreign Affairs. The PFM Assessment focuses mainly on the central government institutions (Direct Budget Beneficiaries) of the Republic of Serbia and the main Extra-Budgetary Funds (EBFs). Although the PFM Assessment (PFMA) does consider issues related to the integration of "Indirect Budget Beneficiaries" into the Treasury system, the main focus of the report is on the functioning of the Direct Budget Beneficiaries (DBBs) within central government and the Mandatory Social Security Organizations (MSSOs)5. 1Federal Republic of Yugoslavia Country Financial Accountability Assessment, December 15, 2002. 2Federal Republic of Yugoslavia Country Procurement Assessment Report, June 2002. 3"PEFA" stands for Public Expenditure and Financial Accountability and is a partnership program of the World Bank, the European Commission, the UK Department for International Development, the Swiss State Secretariat for Economic Affairs, the French Ministry of Foreign Affairs, the Norwegian Ministry of Foreign Affairs, and the International Monetary Fund. The PEFA secretariat is located at the World Bank's headquarters in Washington DC. 4See Annex I for scoring methodology. The detailed interpretation used to score the indicators in this assessment are provided from the PEFA web-site: http://www.pefa.org 5These include the: (i) Republic Health Insurance Institute; (ii) Republic Pension and Disability Insurance Funds (including the funds for the employees, farmers and entrepreneurs); and (iii) Republic Labor Market Office. These are referred to in the BSL as the "mandatory social security organizations" (MSSOs). Serbia PFMA: Preface ii Information was gathered through a combination of on-the-spot interviews and analysis of publicly available data and reports. For the collection of data, the PFMA team relied on information obtained in connection with the work on the FAU and interviews conducted during the course of a mission to Belgrade. In addition, local country-based staff held several additional meetings in order to clarify some of the outstanding issues. A list of interviewees is available in Annex II of this report. The data needed for the quantitative analysis was obtained directly from representatives of the MOF or publicly available sources, such as the MOF's website. The PFMA draws significantly on reports from the IMF, including Country Report No. 05/232 ­ Selected Issues and Statistical Appendix (July 2005) and Country Report No. 06/58 ­ Sixth Review under the Extended Arrangements etc. (February 2006). A complete list of references is provided in Annex III. A World Bank team prepared the report following a mission to Belgrade and follow-up work by local World Bank staff. The team consisted of Tiana Mitrovic Kocovic (Economist), Aleksandar Crnomarkovic (Financial Management Analyst), Plamen Kirov (Procurement Specialist), Olav Rex Christensen (Senior Financial Management Specialist (Sr. FMS)) and Johannes Stenbæk Madsen (Sr. FMS, Task Team Leader (TTL)). A member of the team, Pascale Kervyn de Lettenhove (Sr. FMS), did not participate in the mission, but provided current feedback on the quality of drafts and made considerable contributions to the report. The team would like to acknowledge the assistance of many people who contributed to the Assessment, including officials and staff of the Government of Serbia, the National Assembly and donor organizations. Thanks go to Deputy Minster of Finance, Vesna Arsic, and Vice-Chairman of the Finance Committee of the National Assembly, Radojko Obradovic, for their participation and input. Thanks also go to Vesna Dzinic (Assistant Minister and Head of the Treasury), Zivko Nesic (Deputy Treasurer, Head of the Public Payment Agency (PPA)), Assistant Ministers, Danica Magovac and Vlada Vukojevic (both Ministry of Finance), Predrag Jovanovic (Director of the Public Procurement Office), Lars-Andre Skari (Advisor to the Deputy Prime Minister financed by the Norwegian Government), George McLaughlin (DFID, Belgrade); Gianluca Vannini (EAR, Belgrade), Mila Konikovic (Organization for Security and Cooperation in Europe (OSCE, Belgrade), and Peter Doyle and Harald Hirshhofer (both IMF) for their valuable assistance. Special thanks go to Anna Ivanova (IMF) who provided much appreciated advice, data inputs and interpretations at critical stages of the drafting process. In addition, grateful thanks go to Country Director, Orsalia Kalantzopoulos, and to Country Manager, Carolyn Jungr, for engaging with the team. Further, the team would like to thank World Bank staff members John Hegarty, Siew Chai Ting, Pamela Bigart, Devesh Mishra, Manuel Vargas, Mathew Verghis, Mike Edwards, Matthew Andrews, Lazar Sestovic, Junghun Cho, William Dillinger, Nicola Smithers and Frans Ronsholt who offered much appreciated feedback and comments. Thanks also go to Desanka Stanic, who coordinated the FAU and PFMA assessment missions and data-collection; and to Sioban Farey who assisted with the editing of this report. Serbia PFMA: Executive Summary iii EXECUTIVE SUMMARY 1. This assessment of Serbia's Public Financial Management performance is based on 28 indicators developed by PEFA and organized around 6 pillars representing core dimensions of PFM performance (see graph below). PFM performance, as measured by PEFA indicators, informs of key outcomes in public expenditure management (fiscal discipline, allocative efficiency, and operational performance). PEFA assessments provide snapshots of a country's PFM performance allowing for international comparisons. Repeated assessments aim at assisting governments in monitoring the progress of PFM performance over time. The scores are assigned in accordance with the interpretations and the scoring methodology provided by PEFA6. 2. Overall PFM performance, as measured by the indicators grouped under the above six pillars for Serbia, is mixed (Figure 1). Serbia scores well on Pillar III. This score reflects the fact that the budget preparation process supports the use of the budget as a policy tool. Serbia also scores reasonably well on Pillars I and II. While the government's annual financial statements have not been audited since 2001, the unaudited financial statements point tentatively to the conclusion that budgets are fairly reliable, transparent and comprehensive. Serbia's performance on Pillars IV, V and VI is weaker, suggesting that there is considerable scope for improvement in accountability, one of the corner principles of good PFM. Pillar IV assesses predictability of resources and control over budget funds; Pillar V assesses quality, availability, comprehensiveness and timeliness of fiscal accounts; and Pillar VI addresses the main elements of financial accountability. 6The assessment methodology used to measure indicators PI-1 ­ PI-28 is publicly available from the PEFA web- site: http://www.pefa.org. Serbia PFMA: Executive Summary iv Figure 1. Compared PFM Performance7 Overall PFM performance Average PFM performance per PFM pillar Serbia Score I. Credibility of the budget 3.5 3.0 Average "B" 2.5 2.0 VI. External scrutiny and audit II. Comprehensiveness and Transparency 1.5 1.0 0.5 0.0 V. Accounting, recording and reporting III. Policy-based budgeting IV. Predictability and control 3. Pillar I assesses the credibility of the budget based on revenue and expenditure outturns compared to budgets. Numbers, which need to be confirmed by external auditing8, point towards reduced variance between budgets and outturns for the central government budget over the past 3 years. Absolute numbers for the Republican budget show that revenue outturns, while consistently above budget, have tended to become more realistic9. On the expenditure side, the government tightened fiscal spending from 29 percent of GDP in 2002 to 24.5 percent in 200510. At the same time, variance between total budget and total expenditure outturns decreased for the Republican budget. The composition of outturns, compared to the original budget using an administrative basis, (ministries/agencies) has also improved considerably over the past three years. 7Caution should be exercised while using this figure. A simple average for indicators within each pillar has been used. The ratings A, B, C, and D have been converted into numbers: 4, 3, 2, and 1, without translating the "+", i.e. B+ is considered to be 3. Average numbers for the six pillars I to VI are: 3.3, 2.7, 3.0, 2.3, 2.5 and 1.3. Please refer to the full list of ratings at the end of the executive summary and the details for each indicator in the main text of the report. 8Reliability of data can be assessed based on independent assurance of their integrity. As external audit has not yet been performed on the government's budget, overall reliability of data is deemed uncertain. 9Since the indicator is based on absolute numbers, it does not reflect government's efforts in revenue collection. Total revenue of the Republican government increased from 24.7 percent of GDP in 2002 to 25.4 percent of GDP in 2005 (source: IMF). 10Republican budget, Source : IMF Serbia PFMA: Executive Summary v 4. The total stock of expenditure arrears has been reduced significantly over the last 5 years as percentage of GDP. However it remains significant at around 4 percent of GDP at end 2005. Moreover, if public enterprise arrears estimated at 1.6 percent of GDP in 2004 are added, total public sector expenditure arrears would be around 5 percent of GDP. Maintaining arrears at such a level can seriously undermine credibility of the budget and introduce distortions in the economy. 5. Pillar II assesses comprehensiveness and transparency of the budget. In Serbia, considerable efforts have been made to increase availability of budget, but challenges remain with respect to the transparency of budget data, reporting on public expenditures, and data reliability. Total government resources are the sum of different budgets: Republican, state union11, provincial12, local governments and EBFs. Some allocation processes could benefit from enhanced transparency, such as clearer justifications for subsidies to public enterprises. In addition, despite recent improvements13, annual budget documentation lacks information on: (a) the composition of financial assets; (b) previous years' estimated outturns including justifications for discrepancies; and (c) explanations of budgetary implications of policy initiatives. This missing information is key to evaluating policy choices. Equally important is the explicit inclusion of information on classification of the budget along functional lines. These weaknesses blur the transparency of how government policies and priorities are translated into budget allocations. 6. Reporting on and monitoring of all public expenditure is the other side of the comprehensiveness and transparency equation. The team has assessed the comprehensiveness of fiscal transparency using the unpublished annual accounts, as well as the regular monthly Bulletin on Public Finances. As mentioned above, these annual accounts have not yet been audited, presented to and approved by the National Assembly, and made publicly available. The current delay is due to the problems encountered by the National Assembly in finalizing the appointment of the external auditors. The establishment of the Supreme Audit Institution has been delayed because the National Assembly has not yet appointed the Council that will lead this institution. 7. Pillar III and Pillar VI evaluate PFM performance through the budget cycle from planning, preparation to execution, monitoring, evaluation and control. The overall performance of Serbia shows that, while budget preparation processes have improved, the overall credibility of the budget is hampered by serious weaknesses in checks and balances for the budget execution, particularly the absence of orderly financial accountability through external auditing. 8. Pillar III evaluates links between policy and budgets through the budget process. While improvements could still be made in the budget's policy focus, recent improvements in the budget process mean that Serbia's performance on this Pillar compares favorably with other countries. In keeping with the provisions of the Budget System Law (BSL), a budget circular (the Budget Memorandum) and an improved and clear budget calendar, which 11Federal government of Serbia and Montenegro. 12Autonomous Province of Vojvodina 13Namely the introduction of a comprehensive budget circular (the Budget Memorandum) Serbia PFMA: Executive Summary vi is largely followed, has been introduced. The Budget Memorandum, which has been developed in preparation for the annual budget exercise starting in 2002, contains key fiscal forecasts and sector strategies. This is an important step forward, but the next step is to build in a direct link between these strategies on the one side and actual costing of investments and recurrent costs on the other. 9. Pillar IV, Predictability and Control in Budget Execution, assesses whether the budget is implemented in an orderly and predictable manner and whether there are arrangements for the exercise of control and stewardship of the management and use of funds, including revenue and expenditure. In Serbia, the average score for Pillar IV is close to C, pointing to weaknesses, particularly in the area of post-control over budget execution, which remains insufficient to secure integrity in the use of funds. 10. While tax obligations are clear and easy to meet, tax arrears are still relatively high. Transparency and measures to protect taxpayers against arbitrary rulings could still be improved. Also, the effectiveness of measures for taxpayer registration and tax assessment is undermined by the fact that the relevant information systems are not integrated and practices are not harmonized. Despite over-performance on overall budgets for tax revenues and recent improvements in collections of tax arrears, tax arrears are still very significant based on international comparators, but the lack of information on the impact of tax arrears from state- owned companies under privatization is preventing a clear picture of the efficiency of the tax collection. 11. Commitment ceilings are provided on a three-month rolling basis, but ceilings are not always reliable and cause delays and disturbances in the execution of this task. Better projections on the revenue side are needed to improve reliability. In-year budget reallocations are frequent and a 5 percent reallocation limit on individual appropriations does not effectively limit the frequency or the total of reallocated amounts. 12. The quality and frequency of debt recording and reconciliation is considered fairly good. However, while some controls over payroll exist and improvements are being made, they are still inadequate to ensure the full integrity of data, mainly due to lack of ex-post control through internal and external audit. Public procurement management suffers from inefficiencies due to inadequate enforcement of competitive mechanisms. Around 70 percent of the contracts are awarded through open competition but justifications for a less competitive procurement method are weak. A complaint mechanism exists but is not yet fully operational. In line with the provisions of the Budget System Law, financial controls of payments are carried out while appropriate procedures and practices for entering and monitoring large contractual obligations are missing. The Ministry of Finance has established an Internal Audit Unit within the Budget Inspection and Audit Department. While procedures, scope of work and quality of the internal audit unit seem adequate, the current very low number of internal auditors (in total 11) is seriously hampering its effectiveness. 13. Pillar V assesses whether adequate reports and information are produced, maintained and disseminated to meet decision making, control, management and reporting purposes. Poor scoring on Pillar V is influenced by the absence of externally audited accounts, which Serbia PFMA: Executive Summary vii means that integrity of budget data cannot be secured despite availability and timeliness of information on budget execution. Serbia has a performing Public Payment Agency (PPA) inherited from the abolished Clearing and Settlements Bureau (ZOP). As a result, bank accounts for ministries and other Direct Budget Beneficiaries are reconciled and cleared daily, but accounts of Indirect Budget Beneficiaries (such as primary schools and health institutions) are not. Recent changes of the Budget System Law and other related legal acts will ensure that indirect budget users get the same status as all other users. Monthly and quarterly budget execution reports are submitted by Direct Budget Beneficiaries to the Ministry of Finance following a standard Chart of Accounts. While summary data per economic classification is made public, audited consolidated annual financial statements for the fiscal years 2002, 2003, 2004 and 2005 have not yet been presented to the National Assembly for approval. 14. Pillar VI assesses whether arrangements for scrutiny of public finances and follow-up by the Executive are operating. In Serbia, external independent audit of the Government's accounts has yet to become reality. A law on the State Audit Institution was adopted by the National Assembly in November 2005 but no decisions on appointments or other actions have yet been taken to set up a functional institution. The budget calendar and procedures allow the National Assembly enough time for a meaningful budget debate but, as discussed under Pillar II, budget documentation could be improved. With significant delay, the Government and the National Assembly have taken action to ensure that the Government's accounts for 2002, 2003, 2004 and 2005 will be subject to an independent external audit, but the auditors have not yet been formally appointed. Availability of audited financial statements in the public enterprise sector is incomplete, though major progress has been made since the start of the reforms. 15. Scores under Pillar IV, V and VI tell a consistent story of limited accountability in the use of public funds. The paradox is that budget execution data are readily available and efforts have been made to increase availability of data to the policy makers and the public, but mechanisms to control and account for the use of funds are deficient. A major problem is the tardiness in agreeing to the process for selection of external auditors in the interim period, while the Supreme Audit Institution is not yet fully functioning. When the use of funds cannot be ascertained through an independent evaluation, the PEFA indicators cannot help in informing as to what extent the budget supports operational efficiency or efficient implementation of programs. The limited accountability experienced and the lack of follow-up recommendations from a systematic audit process raise questions on the credibility of the budget preparation process, and allocative efficiency. 16. Addressing weaknesses in Serbia's PFM management and institutions is essential to ensure a strong and dynamic private sector. In the December 2004 Serbia Economic Memorandum, the overlap of control authorities, including on taxes, and the need for restructuring of Socially or State-Owned Enterprises (SSOEs) and ensuring audit of state- support funds were mentioned as specific burdens on the investment and business climate in Serbia. Recent changes in tax laws and the publishing of audited financial statements from SSOEs have somewhat addressed the concerns expressed in the Economic Memorandum. 17. Assessment of donor practices under Indicators D1-D3 shows that donors may contribute to disbursement unpredictability and still largely use ring-fenced PIUs. As PIUs are temporary in nature, they do not necessarily have robust, sustainable accounting Serbia PFMA: Executive Summary viii systems and financial control practices, but the World Bank and other donors have been unable to rely on country systems to date. Based on the limited publicly-available information, donors' funding projections appear unpredictable and this may compound weaknesses discussed under Pillar IV. 18. Considerable challenges in PFM reforms require strategic leadership of the overall PFM reform process and stronger coordination within the Government and among development partners. Donors have committed considerable amounts to capacity development in PFM, including in cash management, financial reporting and external auditing functions. To ensure successful PFM reform in the future, the government needs to take the lead by setting strategic directions and actively coordinating ongoing and planned support from developing partners. 19. Recent steps in the right direction are significant and encouraging milestones. These include making budget execution data publicly available; modernizing the Treasury and internal control system; adopting a law for the establishment of a Supreme Audit Institution; and seeking and obtaining parliamentary approval of the appointment of an external auditor for the 2002, 2003, 2004 and 2005 accounts. In addition, the Government is committed to further Public Financial Management reforms as demonstrated in ongoing reforms on, for example, introduction of program budgeting and integrated planning, budgeting, monitoring and reporting across Government as further described in Chapter 4. Serbia PFMA: Executive Summary ix Table 1. Summary of Performance Indicators PEFA INDICATOR PEFA SCORE A. PFM OUTTURNS Pillar I. Credibility of the Budget PI-1: Aggregate expenditure outturn compared to original approved budget A PI-2: Composition of expenditure outturn compared to original approved budget C PI-3: Aggregate revenue outturn compared to original approved budget A PI-4: Stock and monitoring of expenditure payment arrears C+ B. KEY CROSS-CUTTING ISSUES Pillar II. Comprehensiveness and Transparency PI-5: Classification of the budget C PI-6: Comprehensiveness of information included in the budget documentation B PI-7: Extent of unreported government operations B+ PI-8: Transparency of intergovernmental fiscal relations B+ PI-9: Oversight of aggregate fiscal risk from other public sector entities. C PI-10: Public access to key fiscal information B C. THE BUDGET CYCLE Pillar III. Policy based budgeting PI-11: Orderliness and participation in the annual budget process A PI-12: Multi-year perspective in fiscal planning, expenditure policy and budgeting C Pillar IV. Predictability and control PI-13: Transparency of taxpayer obligations and liabilities B PI-14: Effectiveness of measures for taxpayer registration and tax assessment B PI-15: Effectiveness in collection of tax payments D+ PI-16: Predictability in the availability of funds for commitment of expenditures C+ PI-17: Recording and management of cash balances, debt and guarantees. B PI-18: Effectiveness of payroll controls C+ PI-19: Competition, value-for-money and controls in procurement C+ PI-20: Effectiveness of internal controls for non-salary expenditure C PI-21: Effectiveness of internal audit C+ Pillar V. Accounting, recording and reporting PI-22. Timeliness and regularity of accounts reconciliation B+ Serbia PFMA: Executive Summary x PEFA INDICATOR PEFA SCORE PI-23: Availability of information on resources received by service delivery units. B PI-24: Quality and timeliness of in-year budget reports B+ PI-25: Timeliness of the presentation of audited financial statements to the legislature. D Pillar VI. External scrutiny and audit PI-26: Scope, nature and follow-up of external audit. D PI-27: Legislative scrutiny of the annual budget law C+ PI-28: Legislative scrutiny of external audit reports. D Assessment of Donor Practices DI-1: Predictability of Direct Budget Support D DI-2: Financial information provided by donors for budgeting and reporting on project D+ and program aid DI-3: Proportion of aid that is managed by use of national procedures D Serbia PFMA: Country background 1 CHAPTER 1: INTRODUCTION Conceptual Framework for the PFM Assessment 1. It is widely recognized that effective institutions and systems of public financial management (PFM) have a critical role to play in supporting implementation of policies of national development and poverty reduction. The PEFA/PFM Performance Measurement Framework has been developed as a contribution to the collective efforts of government, donors and other stakeholders to assess and develop essential PFM systems by providing a shared information pool for measurement and monitoring of PFM performance and a common platform for dialogue. 2. The PFM Performance Measurement Framework is an integrated monitoring framework that allows measurement of country PFM performance over time. It has been developed through a concerted international effort by PEFA partners in collaboration with the OECD/DAC Joint Venture on PFM.14 The framework incorporates a set of high-level indicators, which draw on HIPC15 expenditure- tracking benchmarks, the IMF Fiscal Transparency Code and other international standards, and a PFM Performance Report that provides information on PFM performance as measured by the indicators. The PFM Performance Report recognizes efforts by government to reform its PFM system by describing recent and ongoing reform measures, which may or may not have impacted on PFM performance. 3. Against six core dimensions of PFM performance, the high-level indicators measure the operational performance of the key elements of the PFM systems, processes and institutions of a country central government, legislature and external audit. Following an assessment, the individual indicators are assigned a score of "A", "B", "C" or D, with "A" assigned to the highest performance and "D" to the lowest performance.16 The Performance Measurement Framework identifies the six critical dimensions of performance of an open and orderly PFM system as follows17: I. Credibility of the budget - The budget is realistic and implemented as intended. II. Comprehensiveness and transparency - The budget and fiscal risk oversight are comprehensive and fiscal and budget information is accessible to the public. 14 PEFA (Public Expenditure and Financial Accountability) is a multi-agency partnership program sponsored by the World Bank, the IMF, the European Commission, the UK's Department for International Development, the French Ministry of Foreign Affairs, the Royal Norwegian Ministry of Foreign Affairs, the Swiss State Secretariat for Economic Affairs, and the SPA Strategic Partnership for Africa. 15Heavily Indebted Poor Countries. 16As mentioned previously, scores are assigned using the methodology described in Annex I. The full methodology for measurement of the PEFA indicators is available from the PEFA website: http://www.pefa.org/about_test.htm 17These core dimensions have been determined on the basis of what is both desirable and feasible to measure and define the nature and quality of the key elements of a PFM system captured by the set of high- level indicators. Serbia PFMA: Country background 2 III. Policy-based budgeting - The budget is prepared with due regard to government policy. IV. Predictability and control in budget execution - The budget is implemented in an orderly and predictable manner and there are arrangements for the exercise of control and stewardship in the use of public funds. V. Accounting, recording and reporting ­ Adequate records and information are produced, maintained and disseminated to meet decision-making control, management and reporting purposes. VI. External scrutiny and audit - Arrangements for scrutiny of public finances and follow up by executive are operating. 4. The Performance Measurement Framework also uses the indicator analysis to evaluate the likely impact of PFM weaknesses on the three levels of budgetary outcomes: aggregate fiscal discipline, strategic allocation of resources, and efficiency of service delivery.18 5. The main focus of the PFM indicator set is on PFM performance at central government level, including the related central institutions of oversight. The framework does not measure factors impacting on performance (such as capacity of institutions or the legal framework) nor does it involve fiscal or expenditure policy analysis. This would require detailed country-specific data analysis. Instead, the framework focuses on the extent to which the PFM system is an enabling factor for the achievement of policy outcomes. The selected indicators are structured into three categories: A. PFM system outturns: these capture the immediate results of the PFM system in terms of actual deficit, expenditures composition and revenues by comparing them to the original approved budget. B. Cross-cutting features of the PFM system: these capture the comprehensiveness and transparency of the PFM system across the whole of the budget cycle. C. Budget cycle: these capture the performance of the key systems, processes and institutions within the budget cycle of the central government. The diagram in Figure 2 below illustrates the structure and coverage of the PFM system measured by a set of high-level indicators and links with the six core dimensions of a PFM system: 18These core dimensions have been determined on the basis of what is both desirable and feasible to measure and define the nature and quality of the key elements of a PFM system captured by the set of high- level indicators. Serbia PFMA: Country background 3 Figure 2. Core dimensions in Public Financial Management (PFM) system C. Budget cycle Policy-based budgeting A. PFM Outturns Predictability External B. Key cross- and control in scrutiny cutting features Budget credibility budget and audit execution Comprehensiveness Transparency Accounting, recording and reporting Serbia PFMA: Country background 4 CHAPTER 2: COUNTRY BACKGROUND Country Political Situation 6. Under the 2003 Constitutional Charter, the two Republics of the former State Union of Serbia and Montenegro (SAM) were required to fund the institutions and activities of the Union. The total expenditures in the budget for the Republic of Serbia were RSD 416.6 billion in 2005, of which the contribution to SAM totaled RSD 49.9 billion. The grant to SAM is clearly identified in the Serbian budget, and expenditures are broken down per economic and administrative classification. 7. In light of the aspirations of the Republic of Serbia for membership of the European Union, the Stability and Association Agreement together with the Poverty reduction Strategy constitute a strategic framework for the Government's policies. While not officially a European Union (EU) candidate country, Serbia's political cooperation and rapprochement with the EU is defined via the Stabilization and Association Process (SAP). The SAP was confirmed at the Thessaloniki European Council summit in June 2003 as the EU's policy framework for South Eastern Europe for accession to the EU. In it's April 12, 2005 communication the European Commission concluded that it considered Serbia and Montenegro sufficiently prepared to negotiate the SAA and that it recommended that the Council [of EU ministers] open the negotiations. The Poverty Reduction Strategy (PRS) is a broad social and economic development strategy that was drafted based on a broad government lead consultative process. The PRS progress report was submitted to the World Bank and the IMF in October 2005 and the positive joint IDA-IMF staff advisory note was issued on February 16, 2006. 8. Recent political events make the political situation volatile. The political agenda is dominated by highly sensitive issues such as the negotiations of the future status of Kosovo, Montenegro's recent independence and events related to Serbia's cooperation with the International Criminal Tribunal for the Former Yugoslavia (ICTY). Country Economic Situation 9. Growth in Serbia has been sustained but volatile since 2002 (2.4 percent, 9.3 percent and 4.8 percent in 2003, 2004 and 2005 respectively). It has been fed by strong domestic demand, and has led to maintaining large current account deficits19 (from 8.9 percent of GDP in 2002 to an estimated 12.5 percent in 2004 and an estimated 8.8 percent in 2005), despite tightening of fiscal policies. Overall fiscal balance on a cash basis for Serbia and Montenegro increased from 4.5 percent in 2002 to an estimated 0.4 percent in 2005. The Serbia Republican government overall balance (before grants) also improved from -4.5 percent in 2002 to an estimated 0.8 percent in 2005. Also fueled by strong demand and external shocks, inflation has remained high in Serbia during the same period and is estimated at 17.7 percent in 2005 (end of period). While FDI and grants have largely financed the current account deficit, the challenge will be to reduce Serbia's external vulnerability by sustainable shrinking of the current account deficit. In the 19For Serbia and Montenegro. Serbia PFMA: Country background 5 future, the need to increase domestic savings will warrant further fiscal tightening (overall fiscal balance before grants of the Serbian Republic is projected at 1.9 percent of GDP in 2006). Continued fiscal tightening highlights the importance of qualitative fiscal adjustments in the Serbian budget, a significant challenge in the coming years (see below). 10. The Serbian government has made significant progress in implementing its economic program, although structural reforms required in the second stage of the program have been relatively slow. On the structural front, as mentioned in the 2005 update of the Public Expenditure and Institutional Review20, Serbia has made important strides in implementing the initial stage of its economic program, which focused on stabilizing the economy, carrying out first generation reforms--that is, price and foreign exchange liberalization--laying the foundations for second generation reforms and urgent reconstruction. Indeed, according to the recent World Bank Country Policy and Institutional Assessment (CPIA) and Doing Business 2005, Serbia has made significant progress in tackling structural problems and in establishing a more conducive environment for private sector- driven economic growth and in this respect ranked first in the effectiveness of reforms in 2004. However, progress in the second stage of the program involving structural reforms necessary to ensure long-term economic stability and sustainable growth has been relatively slow: the implementation pace of reforming public finances, encouraging private sector growth, and addressing the structural problems of the enterprise sector should be accelerated. 11. Slow progress in the noted structural reforms and policy slippages, in turn, put some of the earlier achievements at risk, as evidenced by widening macroeconomic imbalances and the rekindling of inflationary pressures. The authorities have further tightened the fiscal policy stance beyond program targets to respond to the noted adverse developments. As evidenced by the data in Table 2 below, fiscal adjustments to date have relied somewhat on modest increases in revenues but mostly on reductions in spending21. In order for the current policy stance to be sustainable, the underlying structural causes of the large current account deficit and high public expenditures need to be addressed. 20The Republic of Serbia: A Policy Agenda for a Smaller and More Efficient Public Sector (Draft of December 1, 2005). 21Total revenues (excluding grants) were increased from 24.7 percent of GDP in 2002 to an estimated 25.4 percent of GDP in 2005, whereas expenditures were reduced from 29.1 percent of GDP in 2002 to 24.7 percent of GDP in 2005. Serbia PFMA: Country background 6 Table 2. Fiscal performance 2003-2005 Republican General Government fiscal operations fiscal operations22 As percentage GDP23 As percentage GDP Fiscal Year 2002 2003 2004 2005 2003 2004 2005 est. proj. est. proj. Total expenditure and net lending 29.1 27.2 25.9 24.7 43.0 42.3 40.2 1.Total expenditure 29.0 26.6 25.9 24.5 2. Current expenditure 27.1 24.5 23.6 22.9 40.0 39.6 37.4 2.1. Expenditure on goods and Services 5.9 7.4 6.9 7.3 17.5 17.6 16.7 2.1.1. Wage-bill related 4.3 5.5 5.0 5.1 9.5 9.5 9.8 2.1.2 Other purchases of goods and services 1.5 1.7 1.7 1.9 8.0 8.1 6.9 2.2. Interest payments 0.7 0.9 1.0 1.0 0.9 1.3 1.4 2.3 Subsidies and transfers 20.6 16.2 15.6 14.6 21.6 20.7 19.3 2.3.1. Subsidies 3.4 2.6 2.5 1.6 2.3.2. Transfers to households 3.2 3.1 2.3 2.7 2.3.3. Transfers to other levels of government 14.0 10.4 10.8 10.3 3. Capital Expenditure 1.9 1.8 2.2 1.6 2.4 2.6 2.5 4. Lending minus repayment 0.1 0.6 0.1 0.3 0.6 0.1 0.3 Total Revenues excl. grants 24.7 24.2 25.0 25.4 39.9 42.3 41.3 Overall balance excluding grants -4.5 -2.8 -0.9 0.7 -2.9 0 1.1 Public sector debt 79.2 67.3 52.1 Source: IMF, Serbia and Montenegro: Sixth Review Under the Extended Arrangement, Financing Assurances Review, Request for Waivers of Non-observance of Performance Criteria, and Proposed Post- Program Monitoring, January 2006. 12. Fiscal adjustments have gradually improved fiscal outcomes but the quality of adjustments remains an issue. The current account deficit is still high, reaching an estimated 10.8 percent in 2005. Expenditure reduction has been born by: (i) reduction in transfers to households; (ii) under-spending in goods and services; and (iii) maintaining capital spending at low levels. Subsidies to public enterprises also declined as a result of reforms in the sector (although more effort is needed to carry through the restructuring/privatization agenda). The wage bill has been largely preserved. Legal Framework 13. The Budget System Law (Official Gazette of the Republic of Serbia (OG) No. 9/2002 and No. 87/2002) provides a sound, general legal framework for PFM. 22Includes the state union, Republican and local governments, social security funds and extra-budgetary programs in Serbia. 23Compared to GDP of the State Union of Serbia and Montenegro. Serbia PFMA: Country background 7 Specifically, the BSL provides a legal framework for the following, essential aspects of PFM: · The introduction of a comprehensive budget memorandum setting out the preconditions and general policy guidelines for the annual budget. · A new budget calendar and detailed procedures for budget preparation. · Planning, preparation and enacting of the budgets of local government24 into the budget process of general government. · Streamlining of the budgeting process for main Extra-Budgetary Funds (EBFs)25 in line with the general government budget processes, applying similar budgeting, accounting, and control and oversight mechanisms as for Direct Budget Beneficiaries (DBB). · An estimate of the total amount of new borrowing and a summary of anticipated proceeds from foreign and domestic borrowing in the revenues for the general part of the consolidated budget. · Inclusion and identification of donor contributions to individual DBBs in the budget breakdown26. · The creation and operation of a Treasury Single Account (TSA) in which all cash assets of the Republican budget and the main EBFs must be deposited27. · The application of a single, standard budget classification, including an economic, organizational, functional and "accounting fund classification"28. · A calendar and assignment of responsibilities for the preparation and submission of final and audited government accounts statements29. 24Local governments comprise "territorial autonomies" and "local authorities". The "territorial autonomies" are Vojvodina and Kosovo, while "local authorities" consists of 191 municipalities of which 118 are outside Vojvodina and Kosovo. 25This includes the: (i) Republic Health Insurance Institute; (ii) Republic Pension and Disability Insurance Funds (including the Farmers' Pension and Disability Fund); and (iii) Republic Labor Market Office; and (iv) Pension fund for self-employed. These are referred to in the BSL as the "mandatory social security organizations". 26The Law on the Budget of the Republic of Serbia 2005 contains an annex with detailed breakdown of budgets of DBBs, The economic classification distinguishes between revenue sources such as "Donations from international organizations" (06); Donations from NGOs and Individuals (08) etc. 27Article 8 of the BSL. For one of the most significant EBFs, the Health Insurance Fund, once funds allocated in the budget are transferred to the Treasury sub-account of the central office of the Health Insurance Fund, funds are no longer controlled by the Treasury and payments are authorized by the Health Insurance Fund and disbursed through bank accounts of individual branch offices of which there are 32 (including 4 non-operating branches in Kosovo). 28Article 11 of the BSL does not refer to the more commonly used term "programmatic" classification but uses the term "accounting fund classification", which it defines as the classification that "identifies receipts and outflows pursuant to requirements for carrying out specific activities or for attaining certain objectives, in accordance with special regulations (separate identification of funds obtained from international agreements, funds from additional postal stamps for particular humanitarian purposes, etc)." 30Article 61 and Articles 62-65 of the BSL Serbia PFMA: Country background 8 · The obligation for the MOF to regulate the method of budget accounting and financial reporting.30 · Assigning the responsibility for legal, correct, economic and effective use of budgetary appropriations to the Head of the DBB, while granting him/her the right of delegation.31 · Assigning the responsibility for the establishment of sound financial services and internal control systems to DBBs and Indirect Budget Beneficiaries (IBBs).32 · The segregation of authorizing, accounting and financial control functions.33 · The establishment of a central, government-wide Inspection and Audit Service at the Ministry of Finance.34 · The requirement for an external audit of the "annual account statement of the Republic, local authority and financial plans of mandatory social security organizations" as well a mandate to temporarily appoint a suitably qualified external auditor until a Supreme Audit Institution has been established.35 14. A comprehensive set of detailed laws and regulations regulate public sector accounting, financial reporting, procurement, cash management, internal and external auditing and the prevention of conflict of interest. This includes the Decree on Budget Accounting (OG No. 125/2003); the Bylaw on Standard Classification Scope and Account (OG No. 92/2002) and the Rules on the Manner in which Resources in Sub- Accounts and/or Other Accounts of the Treasury Single Account of the Republic Shall be Used (regulation No. 110-00-292/2003/06). Internal audit and budget inspection activities are regulated through the Decree on the Method of Operation and Authorities of Budget Inspection and Audit (OG No. 10/2004). A Public Procurement Law (PPL) entered into force on July 13, 2002. It is in line with EU procurement regulations but needs some revisions to provide a firmer basis for transparency, accountability and competitiveness. The Law on Alterations and Amendments to the PPL entered into force on July 1, 2004. It streamlined procurement procedures and defined protection of tender's right more precisely. The PPL was altered to allow for publication of all contract awards, allowed award of contract below a threshold, even if only one tender (which was correct, adequate and acceptable) was received. Also the status, composition and functioning of the Commission for the Protection of Tenderers' Rights (CPTR) was better defined in the modifications. Whereas the BSL provides a basis for contracting an external auditor to audit the consolidated budget of the Republic, the National Assembly passed a Law on the State Audit Institution on November 14, 2005. A Law on Prevention of Conflict of Interest in Discharge of Public Office (OG No. 43/2004) provides a legal basis for fighting official corruption. In support of the Government's anti-corruption efforts a revised Law on the Prevention of Money-Laundering was passed by the National Assembly on December 30, 2005. 30Article 62 of the BSL. 31Article 50 of the BSL. 32Articles 9 and 66 of the BSL. 33Article 51 of the BSL. 34Articles 67-70 of the BSL. 35Articles 71 and 80 of the BSL. Serbia PFMA: Country background 9 Institutional features and framework 15. The central administration of the Republic comprises some 72 ministries and other central government bodies, which are the Direct Budget Beneficiaries (DBB). In total there are some 9,000 budget beneficiaries of which most are second tier In- direct Budget Beneficiaries (IBB). IBBs include primary schools and health care institutions. In addition to this there are 130 local government administrations and five mandatory Social Security Organizations. The public sector of the Republic comprises a total of 416,103 (2004) staff. Health care and Education are by far the largest sectors, employing 164,743 and 131,101 staff (2004) and constituting 6.9 percent and 3.7 percent of GDP respectively (2004)36. 16. The Minister of Finance oversees the implementation of the Budget System Law, which regulates budget execution, debt management, budget accounting and reporting through the establishment of the Treasury. The Ministry of Finance comprises 11 "sectors" or units/departments and supervises seven "administrations", including the Tax Administration, the Treasury, the Administration for the Prevention of Money Laundering (APML), the Customs Administration, the Gaming Administration and the Administration of Public Debt (still to be established). 17. The administrative capacity in terms of number of skilled staff in the government administration, including key departments of the MOF, continues to be low.37 This includes the administrative capacity of the MOF's Cash and Debt Management units and Macroeconomic and Fiscal Analyses Department. The same goes for the financial services and internal audit units in the line ministries and DBBs. Whereas the Law on a State Audit Institution has been adopted, the first steps to actually establish and staff the institution are still to be taken. It is essential to build capacity for effective horizontal co-operation within MOF to succeed with the challenging PFM reforms. This could partly be achieved through the strengthening of the coordination role of the State Secretary and the Modernization Council of the MOF. 18. A key feature of the Serbia PFM system is the infrastructure of the abolished Clearing and Settlements Bureau (ZOP) of ex-Yugoslavia which today, as the Public Payment Agency, is an integral part of the Treasury system. The ZOP system handled all payments in ex-Yugoslavia, including transactions of local and central government and private individuals and businesses. Although the system in its original form has now been abolished and no longer covers transactions in the private sector, a part of the system, the Public Payment Agency (PPA), today constitutes the backbone of the Government's treasury system. Today the PPA is an integral part of the Treasury, executes payments and maintains a registry and accounts for some 9,000 Budget Beneficiaries. PPA maintains the TSA and some 200 sub-accounts in the National Bank 36The source for the staff numbers is the draft PEIR update of December 2005, table 23, p. 23, which refer to the Republican Statistical Office as its source. Budget numbers come from the Memorandum of the Budget 2006, table 11, p. 34) 37The total number of staff in the MOF's central offices is very modest. In its report: Balkans Public Administrative Reform Assessment: Serbia and Montenegro, May 26, 2004, SIGMA reported that the central functions of the Ministry of Finance and Economy (including the Budget and central Treasury departments (not including the PPA)) had less than 65 staff. Serbia PFMA: Country background 10 of Serbia (NBS) and executes payments including electronic transactions on behalf of the Government. This includes payments for the DBBs covered by the Interim Treasury Ledger System (ITLS), which ensures ex-ante authorization of payment requests from DBBs, including approved payment requests from IBBs. The PPA shares 30 of its 34 branch offices and 111 sub-branch offices with the NBS and has a staff of some 1,000 people. 19. The institutional framework for public procurement in Serbia has been completed but the development of appropriate practices are still under way. The system of public procurement in Serbia rests on three pillars: the Ministry of Finance and Economy, the PPO and the CPTR. The PPO began operating on January 15, 2003. The PPO was set up according to the Law as an independent agency of the Government of Serbia assigned with establishing an economic, efficient and transparent system of public procurement. The functioning of the CPTR Committee is closely regulated by its Operational Procedures, which contains issues not covered by the PPL. These are treatment of requests, case allocation, decision-making, record maintaining and filing. These Procedures were published on July 27, 2004. Lack of stability in the work of the CPTR has been caused, among other factors, by the fact that its members are easily appointed, and dismissed by the Government. The procurement institutional framework needs to be complemented by the introduction of external audits that will include procurement audits. Serbia PFMA: Public Financial Management Performance Indicators 11 CHAPTER 3: PUBLIC FINANCIAL MANAGEMENT PERFORMANCE INDICATORS A. PROGRESS SINCE 2002 WORLD BANK ASSESSMENTS AND OVERVIEW OF PFM PERFORMANCE 20. Since the 2002 Country Financial Accountability Assessment (CFAA) and the 2002 Country Procurement Assessment Report (CPAR), the legal and institutional framework for PFM has improved in a number of areas. This followed the adoption of a Budget System Law (BSL) and an improved Public Procurement Law (PPL) in 2002. In the wake of the new legislation, new administrative entities were created and budget management processes were developed. Part A of Annex IV provides an overview of the status of implementation of the 2002 CFAA recommendations. 21. New administrative entities for budget analysis, treasury management (including cash and debt management and accounting policies), financial control, internal audit and procurement have been established. Visible progress has been made in consolidating the budget and establishing and institutionalizing commitment and payment controls. A Public Procurement Office (PPO) which issued secondary procurement legislation and standard procedures has been established and a Commission for the Protection of Tenderers' Rights (CPTR) was created. Another institution, the Administration for the Prevention of Money Laundering has, in concrete cases, proven its ability to investigate and initiate prosecution of high-profile money laundering cases. Similarly, the Anti-Corruption Council has been an active promoter of greater transparency in public finance. Meanwhile, it appears that the cooperation between the Council and the Government thus far has not been optimal and that the Government has prepared a law which will establish a new anti-corruption body. 22. Whereas many recommendations of the 2002 CFAA have been implemented, some of the most fundamental ones, related to external accountability, have not. This is the case in particular for financial reporting and external oversight, both basic foundations of fiscal transparency and accountability. Specifically, public accounts for 2002, 2003, 2004 and 2005 have not yet been submitted to Parliament and the law for the creation of a Supreme Audit Institution was only adopted in November of 2005. Moreover, contrary to the provisions of the 2002 BSL no external auditor was appointed in the interim. 23. Despite considerable progress since the 2002 CPAR, procurement legislation and institutions still require consolidation. Further improvements are needed in legislative framework, overall business environment and in the process for decision making for projects, as already underlined in the 2002 CPAR. However, the main challenge today is strengthening the procurement institutions and enforcing PPL implementation at all levels, including improving budgeting for procurement and particularly procurement planning. Part B of Annex IV provides an overview of the status of implementation of the 2002 CPAR recommendations 24. Overall PFM performance, as measured by the indicators grouped under the above six pillars for Serbia, is mixed and confirms the above update. On the positive Serbia PFMA: Public Financial Management Performance Indicators 12 side, Figure 1 shows that the budget preparation process supports the use of the budget as a policy tool (Pillar III). In that area, Serbia has reached an adequate performance level. While appropriate caution is needed in assessing credibility, comprehensiveness, and transparency of the budget (Pillar I and II) due to lack of independent assurance of data, the available data tentatively points to improved reliability of the budget. On the negative side, Figure 1 clearly shows that accountability, the corner principles of good PFM, is weak, as shown by low performance under Pillars IV, V and VI. 25. In comparison with a desirable "B" rating, Serbia's Public Financial Management performance clearly shows the weak areas. As Figure 1 below shows, Serbia's performance is, for three out of six dimensions, well below the desirable rating that EU-aspiring countries should strive to achieve.38 38While between 15 and 20 PEFA assessments have been carried out in countries across the world so far, no PEFA assessment exists for EU countries or EU candidates. It is, however, reasonable to assume that scores for EU members rate an average of B or above. Serbia PFMA: Public Financial Management Performance Indicators 13 Figure 1. Compared PFM Performance39 Overall PFM performance Average PFM performance per PFM pillar Serbia Score I. Credibility of the budget 3.5 3.0 Average "B" 2.5 2.0 VI. External scrutiny and audit II. Comprehensiveness and Transparency 1.5 1.0 0.5 0.0 V. Accounting, recording and reporting III. Policy-based budgeting IV. Predictability and control B. PFM OUTTURN: Credibility of the Budget PI-1: Aggregate expenditure outturn compared to original approved budget Dimension to be assessed: the difference between actual primary expenditure and the originally budgeted primary expenditure (i.e. excluding debt service and externally-financed project expenditure. 26. Considering the fact that the consolidated accounts for the Republic have not been presented to the National Assembly nor audited for the last four fiscal years (2002-2005), the reliability of the available data is considered uncertain. However, based on the still unaudited financial statements provided to the team by MOF, data presented in Table 3 below, point tentatively towards reduced variance between budgets and outturns for the Republican budget. Between 2003 and 2005, total outturns as a percentage of budgets have decreased, showing increased reliability of expenditure budgets. Variance decreased from 6 percent in 2003 to 4 percent in 2005. In only one out of the past three years (namely 2003), expenditure outturns deviated from the budgeted expenditure by more than 5 percent. In accordance with the PEFA scoring methodology, the score for this indicator is therefore set at A. 39Please refer to footnote 8 for details on the calculation of the ratings for each pillar. Serbia PFMA: Public Financial Management Performance Indicators 14 INDICATOR BRIEF EXPLANATION SCORE PI-1: Aggregate While the reliability of available data is uncertain, the expenditure outturn budget deviations observed for the period 2003 to 2005 A compared to suggest that the annual expenditure budgets are increasingly original approved credible. budget. Table 3. Expenditure outturns for central government of Serbia, 2003-2005 2003 2004 2005 EXPENDITUR ES in Billion RSD Budget Actual Differ Budget Actual Differ Budget Actual Differ ence ence ence 1.1. Personnel 56.4 59.3 -2.9 74.7 81.8 -7.1 91.8 94.2 -2.4 Expenditure 1.2. Goods 29.4 24.1 5.3 33.9 37.2 -3.3 41.5 48.6 -7.1 and Services 1.3. Interest 11.0 11.0 0 14.1 14.1 0.0 22.3 17.3 5.0 Payment 1.4. Subsidies 49.2 30.8 18.4 41.3 35.1 6.2 32.9 29.5 3.4 1.5. Social 32.1 32.2 -0.1 33.8 32.9 0.9 43.2 43.2 0.0 Protection Payments 1.6. Other 8.0 4.4 3.6 11.7 4.7 7.0 5.2 5.5 -0.3 expenditures 2. Current 79.2 120.5 -41.3 147.4 150.7 -3.3 167.2 185.2 -18.0 transfers 3. Capital 16.8 16.6 0.2 39.7 29.2 10.5 41.5 33.6 7.9 Outlays Total Billion 271.1 287.9 -16.8 382.5 371.6 10.9 423.3 439.8 -16.5 RSD (ex. interest payment) Variance total -6.2% 2.8% -3.9% in percentages Source: The Law on the Budget of Republic of Serbia 2003, 2004, 2005 (Budget) and unpublished Annual Financial Statements for 2003, 2004, 2005, Ministry of Finance. PI-2: Composition of expenditure outturn compared to original approved budget Dimension to be assessed: Extent to which variance in primary expenditure composition exceeds overall deviation in primary expenditure (as defined in PI-1) during the last 3 years. 27. Data according to administrative classification show a sharp decrease in variation from 2003 to 2005 When the composition of expenditure varies considerably from the original budget, the budget will not be a useful statement of policy intent. As an administrative level composition is preferred by PEFA guidance and is available in Serbia, the assessment is based on the administrative composition (ministries/agencies). 28. Expenditure deviation across the budgetary heads shows that the absolute value of the deviations as a percentage of total primary expenditure was as follows: 24.0 percent Serbia PFMA: Public Financial Management Performance Indicators 15 in 2003, 9.0 percent in 2004, and 7.9 percent in 2005. Deducting these percentages from the overall primary expenditure deviation for each year (shown in indicator 1), as required by the PEFA methodology, provides the following absolute measures by which variances in expenditure composition exceeded overall expenditure variance: 2003 ­ 17.8 percent, 2004 ­ 6.2 percent, 2005 ­ 4.0 percent (see Table 4). The degree of deviation has declined drastically over the three years. The variance in 2003 was influenced by the political conditions during the preparation of the budget due to the Presidential elections in December 2002, as well as the formation of the Union between Serbia and Montenegro in early 2003. In accordance with the PEFA scoring methodology the score for this indicator is set at C. Table 4. Composition of expenditures for PI-1 for PI-2 variance in excess of Year total exp. deviation Total exp. variance total deviation 2003 6.2 24.0 17.8 2004 2.8 9.0 6.2 2005 3.9 7.9 4.0 Source: The Law on the Budget of Republic of Serbia 2003, 2004, 2005 (Budget) and unpublished Annual Financial Statements for 2003, 2004, 2005, Ministry of Finance. INDICATOR BRIEF EXPLANATION SCORE PI-2: Composition Variance in expenditure composition exceeded overall of expenditure deviation in primary expenditure by 10 percentage points in C outturn compared no more than one of the last three years. to original approved budget PI-3: Aggregate revenue outturn compared to original approved budget Dimension to be assessed: actual domestic revenue collection compared to domestic revenue estimates in the original approved budget. Serbia PFMA: Public Financial Management Performance Indicators 16 Table 5. Aggregate revenue outturn 2003-2005 REVENUES 2003 2004 2005 in Billion RSD Budget Actual Out- Budget Actual Out- Budget Actual Out- turn turn turn Revenues from budget, thereof: 214.6 262.0 122.1 329.3 334.3 101.5 396.1 418.5 105.6 1. Tax revenues 195.5 245.8 297.5 310.7 362.3 390.1 1.1 Profit and Gains Tax 54.4 57.0 60.2 61.3 55.7 60.0 1.3. VAT and Excise Tax 137.3 159.7 191.2 202.8 262.1 287.2 1.4. Customs 23.3 33.0 34.3 39.2 39.0 1.5. Other Tax Revenues 3.8 5.8 13.1 12.3 5.3 3.9 2. Non-tax revenues40 19.1 15.8 31.9 22.8 33.8 27.5 3. Capital Income 0.2 0.03 0.8 4. Donations 0.8 5. Transfers 0.1 0.1 Source: The Law on the Budget of Republic of Serbia 2003, 2004, 2005 and "Public Finance Bulletin" December 2005, Ministry of Finance, p. 14-15. 29. Based on the available data presented in Table 5, revenue budgets appear increasingly realistic. Revenue performed consistently better than budgets largely explained by better-than-anticipated proceeds from the newly introduced VAT. In accordance with the PEFA scoring methodology, the score for this indicator is therefore set at A. INDICATOR BRIEF EXPLANATION SCORE PI-3: Aggregate The available data shows that actual collected revenue has revenue outturn exceeded the budgeted revenue for the last three fiscal years, A compared to but seems to become more realistic in later years. original approved budget 40Excluding interest revenues (number 7411 in the economic classification): RSD 374.8 million (2003); RSD 670.5 million (2004); RSD 962.9 million (2005)). Serbia PFMA: Public Financial Management Performance Indicators 17 PI-4: Stock and monitoring of expenditure payment arrears Dimension to be assessed: (i) stock of expenditure payment arrears (as a percentage of actual total expenditure for the corresponding fiscal year) and any recent change in the stock; and (ii) availability of data for monitoring the stock of expenditure payment arrears. 30. The stock of expenditure arrears for general government is significant, as is presented in Table 6 below. If adding public enterprise arrears estimated at 1.6 percent of GDP in 2004, total public sector expenditure arrears would hover around 5-6 percent of GDP. At such levels, arrears can seriously undermine the credibility of public sector financial management with adverse consequences on the economy. Table 6: Variation of stock of arrears of central and general governments Difference In billion RSD end 2003 end 2004 end 2005 Sep-06 2005/2004 EXPENDITURE ARREARS 60.7 67.7 70.9 73.9 3.2 Republican unspecified expenditure 15.4 14.5 22.3 31.1 7.8 pension arrears 33.9 40.6 37.0 33.0 -3.6 other MSSO arrears 11.4 12.6 11.6 9.8 -1.0 Arrears as of gen. gov. exp. 12.5 11.7 10.6 8.9 Arrears as percent of GDP 5.2 4.7 4.1 3.4 Source: MOF, IMF 31. At the level of the Republican budget, arrears amounted to 4 percent of the budget in 2005. The largest arrears are generated by the following institutions: (i) Road Directorate (RSD 5.0 billion); (ii) Directorate for Commodity Reserves (RSD 2.8 billion); (iii) Ministry of Labor, Employment and Social Policy (RSD 2.7 billion); and (iv) Refugee Commissariat (RSD 2.5 billion). While no information is available about the nature of these arrears, it is noteworthy that these institutions include those who typically manage a lot of state property and large investment and maintenance contracts. This is particularly true in the case of the Road Directorate and the Directorate of Commodity Reserves. 32. For the entire General Government, including the major EBFs, expenditure arrears were significantly higher, at an estimated RSD 70.9 billion or 10.6 percent of total General Government expenditures in 2005, but arrears have declined to just below 10 percent in 2006. Both in relation to GDP and general expenditure, arrears have decreased substantially since 2003. In absolute terms, total expenditure arrears at end 2005 are still above their 2003 levels. However, it is noteworthy that the government brought down pension arrears (more than 75 percent of total expenditure arrears) by 10 percent in 2005. Arrears within the pension insurance systems were accumulated during the 1990s due to lack of funds and overall mismanagement. Since the beginning of transition, the Serbian government made partial payment of arrears together with regular payment of pensions and importantly a recent conversion of arrears into public debt which will be repaid in six equal tranches until mid-2008. Pensions are now paid regularly. A new initiative was launched in October 2006 to ensure decreasing arrears. Serbia PFMA: Public Financial Management Performance Indicators 18 33. The significant level of arrears in relation to general expenditure, as well the marginal decline in value since 2004, warrant a score - C on dimension (i). The Government monitors the stock of expenditure arrears, at least on an annual basis, although data for identified expenditure categories and specified budget institutions appear to be incomplete41 (dimension (ii) score - B). The overall score for this indicator is set at C+. INDICATOR BRIEF EXPLANATION SCORE PI-4: Stock and The stock of expenditure arrears is significant and, despite a monitoring of recent reduction in pension arrears, the total stock of arrears C+ expenditure has not been reduced significantly during the last two fiscal payment arrears years. Arrears are currently being monitored on a regular basis. C. KEY CROSSCUTTING ISSUES: Budget Comprehensiveness and transparency PI-5: Classification of the budget Dimension to be assessed: the classification system used for formulation, execution and reporting of the central government's budget. 34. The Republic of Serbia's budgets for 2005 and 2006 have not yet been presented using functional classification (reflecting the Classification of the Function of Government (COFOG)). The budgets were presented as per economic and administrative classifications. However the MOF can produce data as per functional classification, and in the budget memorandum of 2006, the budget projections for 2006- 2008 are presented as per functional classification. The score for the indicator is on this basis set at C. INDICATOR BRIEF EXPLANATION SCORE PI-5: Classification The classification used in the budget presented to the of the budget National Assembly has not yet included a functional C classification. PI-6: Comprehensiveness of information included in the budget documentation Dimensions to be assessed: information listed in the budget documentation most recently issued by the central government. 35. Total government resources are made up from the sum of different budgets: the Republican (central), the state union, local governments and EBFs. As seen from Table 7 below, a total of 43.2 percent of the total expenditure for the consolidated government 41Arrears information from public enterprises is not reported routinely. Serbia PFMA: Public Financial Management Performance Indicators 19 budget comes from extra-budgetary expenditures, including the MSSOs. Figures below have been netted out for transfers between budgets and funds. Table 7. Estimate of the Composition of expenditure for the 2005 general government budget 42 In percentage of total expenditure Government of the Republic 33.8 Local government 16.2 State Union 6.8 Pension funds 25.8 Health insurance funds 13.4 43.2 Labor funds 1.7 Other extra-budgetary social security funds 2.4 Total43 100 Source: IMF estimate, March 2006 36. The PEFA indicator for comprehensiveness of the information included in the budget documentation (PI-6) is measured as the share of nine selected benchmarks for information in the budget documentation most recently issued by the central government. The nine benchmarks are as follows: (1) Macro-economic assumptions, including at least estimates of aggregate growth, inflation and exchange rate; (2) Fiscal deficit, defined according to GFS or other internationally recognized standard; (3) Deficit financing, describing anticipated composition; (4) debt stock, including details for the beginning of the current year; (5) Financial assets, including details for beginning of the current year; (6) Prior year's budget (either the revised budget or the estimated outturn), presented in the same format as the budget proposal; (8) Summarized budget data for both revenue and expenditure according to the main heads of the classifications used (see PI-5), including data for the current and previous year; and (9) Explanation of budget implications of new policy initiatives, with estimates of the budgetary impact of all major revenue policy changes and/or some major changes to expenditure programs. Meeting 7- 9 of the benchmarks qualifies for an "A" score; 5-6 for a "B" score; 3-4 for a "C" score, and; 2 or less produces a "D" score. 37. The budget for 2006 contained summary information about the basic macro- economic assumptions (Benchmark 1) and included information about the overall fiscal deficit (surplus) (Benchmark 2), debt stock (Benchmark 4) and summarized budget data for both revenue and expenditure according to the main heads of the economic 42Social contributions from employers subtracted to avoid double accounting. Estimates are still under revision. IMF totals include expenditures financed by own-source revenues and cannot be reconciled with actuals presented in table 3 and 4. 43IMF estimates total at RSD 701.0 billion. Serbia PFMA: Public Financial Management Performance Indicators 20 classifications (Benchmark 8). The budget for 2006 also provides information about how the budget surplus will be spent (Benchmark 3). However, the budget and the budget memorandum was lacking basic information about the composition of financial assets (Benchmark 5), prior year's budget or estimated outturn (Benchmark 6) and explanation of budgetary implications of policy initiatives (Benchmark 9). With six out of nine benchmarks being met, the score for this indicator is set at B. INDICATOR BRIEF EXPLANATION SCORE PI-6: Despite recent improvements, the annual budget Comprehensiveness documentation is still lacking key information such as B of information previous years' estimated outturns. included in the budget documentation PI-7: Extent of unreported government operations Dimensions to be assessed: (i) the level of extra-budgetary expenditure (other than donor- funded projects) which is unreported; i.e. not included in fiscal reports; and (ii) income/expenditure information on donor-funded projects which is included in fiscal reports. 38. No major unreported expenditures exist, although the annual financial statements for the years 2002 to 2005 have not been made public or presented to the National Assembly. The expenditures financed through "own-source revenues" are reported only in the yearly financial statements while EBFs (other than MSSOs) are reported in the MOF's "Public Finance Bulletin" introduced in the fourth quarter of 2004 (dimension (i) score - A). 39. Unlike expenditures funded from own-source revenues and other EBFs, the MSSOs have separate but similar budgeting and reporting requirements to the DBBs. Also the revenue and expenditure reports for the MSSOs are made public in the "Public Finance Bulletin". In terms of day-to-day cash management, the most significant MSSOs, including the Health Insurance Fund, are however not part of the Interim Treasury Ledger System (ITLS). 40. Aggregate data revenues provided for projects funded from both loans and grants were included in the annual budgets and annual financial statements and have been included in the Ministry of Finance's "Public Finance Bulletin" since the fourth quarter of 2004. Data on grant-funded projects are provided by the Ministry of International Economic Relations' ISDACON44 website and included in the regular annual fiscal reports. Although it is difficult to assess capital spending funded by foreign loans and grants reported as "own source" revenues in the Budget Beneficiaries annual financial statements, this is probably not done consistently and many expenditures funded by such assistance have traditionally not been fully reported through the budget system (dimension (ii) score ­ B). The score for the indicator is set at B+. 44The Inter-Sectoral Development and Aid Coordination Network.. Serbia PFMA: Public Financial Management Performance Indicators 21 INDICATOR BRIEF EXPLANATION SCORE PI-7: Extent of The level of unreported government expenditure is unreported insignificant and full inclusion of information on loans and B+ government at least 50 percent of grant funding is provided. operations PI-8: Transparency of inter-governmental fiscal relations Dimensions to be assessed: (i) transparent and rule-based system in the horizontal allocation among sub-national (SN) governments of conditional and unconditional transfers from central governments (both budgeted and actual allocations); (ii) timeliness and reliable information to SN governments on their allocations from central government for the coming year; and (iii) extent to which consolidated fiscal data is collected and reported for general government according to sectoral categories. 41. Intergovernmental fiscal relations in Serbia were going through major reforms over the last couple of years, resulting in more transparency and objectivity in allocations to local governments. Most importantly, as of July 2006, Serbia has a new Law on Local Self-government Financing. This law has modified the previously existing system of intergovernmental fiscal relations to make it more transparent and predictable by clearly defining sources of local revenues and establishing an explicit formula for distributing intergovernmental transfers. The total amount of funding for the non-earmarked transfers for all municipalities is now fixed at 1.7 percent of projected GDP and clear rules are specified for the allocation of transfers among individual municipalities. Transfers would primarily serve to reduce disparities in revenues among municipalities. According to the formula specified in the law, sufficient funds would be transferred to each municipality to bring the per capita tax revenues of all local governments up to 90 percent of the national average. 42. The new law also provides for earmarked transfers to finance certain functions to be delegated to local governments in the future. Primary health care will begin to be decentralized in 2007. Primary and secondary education will follow. The formulas to be used to finance these functions are to be developed by the ministries of health and education, respectively. Performance against this indictor should be reevaluated once these two functions have been decentralized and the new financing system is put in place. (Score for dimension (i) is A.) 43. Recent legal changes set the basis for more predictability to local governments on their allocations from central government. This primarily relates to adoption of clear calendar of activities of both central and local governments. The local authorities are provided for the Government-adopted Budget Memorandum six months in advance (June 1) of the scheduled submission of the budget to the National Assembly (November 1), giving sufficient time to make adjustments. Thus, local governments are provided reliable information on the allocations to be transferred to them ahead of Serbia PFMA: Public Financial Management Performance Indicators 22 completing their budget proposals, making changes to the proposal possible (dimension (ii) score - B). 44. Reporting and consolidation of fiscal operations has been improved but there is still room for further improvements. Fiscal reports of all sub-national governments are provided to the MOF in accordance with the budget economic classification on a monthly basis. The monthly bulletin publishes these data separately for all municipalities and Vojvodina. Since 2006, municipalities also collect and report monthly fiscal operations based on functional classifications; however these reports are not regularly published. Consolidation of all layers of government is done only annually and could be significantly increased. Local governments regularly report on any new borrowing to the Treasury. On this basis, the score for dimension (iii) is set at B and the score for the indicator at B+. INDICATOR BRIEF EXPLANATION SCORE PI-8: Transparency The rules regulating allocations to sub-national governments of inter- are not fully transparent. Fiscal reports from sub-national B+ governmental fiscal governments are provided on a current basis. relations PI-9: Oversight of aggregate fiscal risk from other public sector entities Dimensions to be assessed: (i) extent of central government monitoring of autonomous government agencies (AGA) and Public Enterprises (PE); and (ii) extent of central government monitoring of SN governments` fiscal positions. 45. Data on Public Enterprises are generally available but quality is questionable. In the 2005 Republican government budget, more than 7 percent45 of the budgeted expenditures consisted of subsidies to various non-financial public corporations (number 451 in the economic classification)46. The budget document does not provide references to the legal basis for these corporations or information about the financial reporting requirements and, only in some cases, a brief description of the specific intended purpose of the subsidy. Business plans of Public Enterprises founded by the Republic are submitted to the Government for adoption. Financial statements for the state owned enterprises are reported to the National Bank of Serbia and disclosed to the public. 45In the 2005 budget subsidies were set at RSD 32,402.30 million with a total budget of RSD 416,592.00 million (7.8 percent). A small proportion of subsidies were to financial public corporations (RSD 251.00 million) 46 85.5 percent of subsidies are provided for the following four areas: (i) support for agricultural production (35.5 percent); (ii) subsidies to the state railroad company (ZTP) (26.6 percent); (iii) Restructuring of State- Owned Companies (16.6 percent); and (iv) state television (RTS) (6.8 percent). Numbers are based on IMF estimates for 2005. Serbia PFMA: Public Financial Management Performance Indicators 23 For an overview of the most significant SSOEs and the subsidies provided to them, see Table 8 below. 46. In July 2005, an IMF report concluded that the data quality for the large state-owned companies is poor and that more transparency and accountability is needed to address governance problems and improve public understanding of SSOE performance. The report provides essential information about the budget subsidies and other deficit financing for 19 SSOEs47. An overview showing budget subsidies and other deficit-financing sources for 2003 and 2004 is presented in Table 8 below. The IMF concludes that the SSOEs' deficit rose from an estimated 1.2 percent of GDP in 2003 to 1.6 percent of GDP in 2004 and that the increases in deficits in 2004 reflects deteriorating operating results in the energy companies and lower deficits in socially owned enterprises. It also finds that data on subsidies and arrears confirm that the reduction of subsidies to public utilities or payment of arrears by public utilities may have contributed to deficits. As seen in Table 8, total budgetary subsidies and indirect support in the form of payment arrears to NIS and EPS declined from 2003 to 2004. 47. The Sector for Public Enterprises and State Assistance in the Treasury of MOF regularly monitors the financial performance of public enterprises, while socially-owned enterprises are monitored by the Ministry of Economy. Public utility enterprises are monitored by local governments. Finally, the Sector for Public Debt of the Treasury Department monitors public debt and issuance of guarantees. Although the reporting on entities monitored by the sub-national governments have improved, not all aspects for public enterprises are covered and a consolidated overview is missing (score for dimension (i) ­ C). Currently the IMF Resident Representative's Office is undertaking a more comprehensive survey of public enterprises in cooperation with the Government. The annual audited financial statements, in-year financial reports, annual plans, as well as new debt contracting for sub-national governments are monitored by the unit, but a consolidated overview is missing. (dimension (ii) score set ­ C). On this basis the score for the indicator is set at C. 48. Strong comprehensive oversight of public enterprises is needed. The Government's current plans to enable public-private partnerships to undertake major road-constructions, such as the planned Horgoz-Pozega highway, could potentially generate considerable contingent liabilities and add to the existing fiscal risks. This is also reported on by the IMF in the Sixth Review under the Extended Arrangements (Country Report No. 06/58, p. 65), which provided a number of recommendations to avoid adding to existing fiscal risks. 47IMF Country Report No. 05/232 of July 2005: Serbia: Selected Issues and Statistical Annex. As above the line data are not available and the SSOEs' cash deficits are estimated from the financing side (subsidies and borrowing). Serbia PFMA: Public Financial Management Performance Indicators 24 Table 8. State and Socially-Owned Enterprises in Serbia 2003-200448 Change in arrears Budget Bank Billion RSD (excl. penalties) Total subsidies financing To EPS To NIS Name Sector 2003 2004 2003 2004 2003 2004 2003 2004 2003 2004 1) State-owned enterprises 12.1 13.4 NIS Energy-oil and 0.0 0.0 gas EPS Electricity and 0.0 0.0 mining PTT Post 0.0 0.0 ZTP Transport ­ 9.5 8.9 railway RTS Media 1.9 3.2 JAT Air 0.0 0.0 transportation Airport Transport ­ 0.0 0.0 Beograd airport Telekom Telecommuni- 0.0 0.0 cation Mines Mining 0.7 1.3 2) Socially owned 6.9 6.5 enterprises 49 Other 3.4 3.3 Total for 10 largest socially- 3.4 3.3 1.2 0.6 0.8 1.1 2.1 0.1 7.6 5.1 owned ("Other" excluded) RTB Bor Mining 0.8 0.5 0.0 0.0 0.5 0.6 -0.1 0.1 1.2 1.2 Zastava Manufacturing 2.1 1.9 -0.1 .0.0 0.1 0.2 0.3 0.2 2.3 2.3 Azotara Chemical 0.0 0.1 0.0 0.1 0.0 0.0 0.5 0.2 0.5 0.4 Pancevo Matroz Chemical 0.1 0.2 0.0 0.0 0.1 0.1 0.0 0.0 0.3 0.3 Viskoza Chemical 0.1 0.1 0.0 0.0 0.0 0.1 0.3 0.0 0.4 0.3 Magnohrom Manufacturing 0.1 0.1 0.0 0.0 0.0 0.0 0.1 0.1 0.1 0.2 Fabrika Manufacturing 0.0 0.0 0.0 0.0 0.0 0.0 0.2 0.0 0.3 0.0 Vagona Kraljevo Industrija Glass industry 0.1 0.0 0.0 0.0 0.0 0.0 0.2 0.0 0.2 0.0 Stakla Pancevo HIP Petrochemical 0.0 0.0 1.3 0.5 0.1 0.0 0.7 -0.4 2.1 0.1 Petrohemija Ivo Lola Manufacturing 0.1 0.1 0.0 0.0 0.0 0.1 0.0 0.0 0.1 0.2 Ribar Source: IMF Country Report No. 05/232: Selected Issues and Statistical Annex, July 2005. 48Does not include SSOEs owned and operated by sub-national governments. There may also be considerable transfers to SSOEs from unreported EBFs such as the Transition Fund. 49Include enterprises under reconstruction. Discrepancies in totals of 0.1 billion are due to rounding errors. Serbia PFMA: Public Financial Management Performance Indicators 25 INDICATOR BRIEF EXPLANATION SCORE PI-9: Oversight of Although monitoring of financial performance is done, not aggregate fiscal all aspects are covered and there is no systematic, annual C risk from other reporting of financial risks of public enterprises and sub- public sector national governments in Serbia. entities PI-10: Public access to key fiscal information 49. The PEFA indicator for public access to key fiscal information (PI-10) assesses the observance of the following six dimensions: (i) Annual budget documentation; (ii) In- year budget execution reports50; (iii) Year-end financial statements; (iv) External audit reports; (v) Contract awards; and (vi) Resources available to primary service units.51 Of these elements: "(i) Annual budget documentation"; (ii) In-year budget execution reports; and (v)"Contract awards" are available to the public in Serbia. On this basis, the score for the indicator is set at B. INDICATOR BRIEF EXPLANATION SCORE PI-10: Public The government makes 3 of the 6 listed types of information B access to key fiscal available to the public. information D. BUDGET CYCLE (i) Policy based budgeting PI-11: Orderliness and participation in the annual budget process Dimensions to be assessed: (i) existence and adherence to a fixed budget calendar; (ii) clarity and comprehensiveness of and political involvement in the guidance on the preparation of budget submissions; and (iii) timely budget approval by the legislature or similarly mandated body. 50 Budget execution reports (Bulletins) are now available on the MOF`s website since end 2004. Whereas it presents budget execution figures as per economic classification, there is no comparison between the original budgets and actual outcomes. 51 (1) Annual budget documentation: A complete set of documents can be obtained by the public when it is submitted to the legislature; (2) In-year budget execution reports: The reports are routinely made available to the public within one month of their completion; (3) Year-end financial statements: The statements are made available to the public within six months of the completed audit; (4) External audit reports: All reports on central government consolidated operations are made available to the public within six months of the completed audit; (5) Contract awards: Award of all contracts with a value of above approximately USD 100,000 equivalents are published at least quarterly through the press or website; and (6) Resources available to primary service units: Information is publicized or available upon request at least annually for primary service units with national coverage (such as elementary schools or primary health clinics) in at least two sectors. If the government makes available to the public 5-6 of the 6 listed types of information the score is set at "A", whereas the availability of 3-4 of the 6 types produces a "B" score, 1-2 a "C" score and the absence of all 6 types gives a D score. Serbia PFMA: Public Financial Management Performance Indicators 26 50. The budget process defined by the Budget System Law (BSL) allocates more time than the previous law to budget planning, preparation, scrutiny and debate. The BSL provides a clear timetable for budget submissions, which has largely been adhered to for the last three fiscal years (score for dimension (i) set at A). The strategic planning phase is, however, not recognized in the budget calendar, and more time is needed for line ministries' medium-term planning and budgeting under a medium-term budget constraint. The Budget Memorandum is comprehensive and clear and includes indicative ceilings per economic and administrative, but not functional, classification. It appears, however, that the Memorandum is almost exclusively produced by the responsible department of the MOF, with few indications of involvement by policy-makers or even other departments. Approval of the indicative ceilings in the Budget Memorandum takes place before Budget Beneficiaries have completed their submission (score for dimension (ii) - B). According to the BSL, the National Assembly has 1.5 months to reach agreement on the budget (between November 1 and December 15). Simple procedures for the National Assembly's budget review exist and are generally respected. The score for dimension (iii) is set at A, while the overall score for the indicator is set at A. INDICATOR BRIEF EXPLANATION SCORE PI-11: Orderliness In keeping with the provisions of the Budget System Law, a and participation in budget circular (the Budget Memorandum) and an improved A the annual budget and clear budget calendar has been introduced and is largely process adhered to. PI-12: Multi-year perspective in fiscal planning, expenditure policy and budgeting Dimensions to be assessed: (i) preparation of multi-year fiscal forecasts and functional allocations; (ii) scope and frequency of debt sustainability analysis; (iii) existence of sector strategies with multi-year costing of recurrent and investment expenditure; and (iv) linkages between investment budget and forward expenditure estimates. 51. Since the budget for fiscal year 2002, the MOF has prepared a Budget Memorandum containing forecasts of fiscal aggregates on the basis of the main categories of economic classification for two years on a rolling annual basis. Since the 2007 budget, the Budget Memorandum will cover three years, but, mainly due to weaknesses in macro forecasting, the links between multi-year estimates and subsequent setting of annual budget ceilings are not clear (score for dimension (i) - C). Debt sustainability analyses, including external and domestic debt, are undertaken regularly and published by the National Bank of Serbia on their website. The latest analysis was made in connection with the preparation of the Budget Memorandum for 2006 (score for dimension (ii) - B). Sector strategies are prepared for all key sectors but they do not include costing of investments and recurrent expenditure (score for dimension (iii) - D). It appears from the Budget Memorandum, as well as from the practices observed, that many investment decisions have weak links to the sector strategies and, in only a few cases, are their recurrent cost implications brought forward in the budget estimates (dimension (iv) score set at C). On this basis, the score for the indicator is set at C. Serbia PFMA: Public Financial Management Performance Indicators 27 INDICATOR BRIEF EXPLANATION SCORE PI-12: Multi-year The Budget Memorandum contains key fiscal forecasts and perspective in fiscal sector strategies, but there is no link between strategies on C planning, the one side and actual costing of investments and recurrent expenditure policy costs on the other. and budgeting (ii) Predictability and Control Revenue Collection PI-13: Transparency of taxpayer obligations and liabilities Dimensions to be assessed: (i) clarity and comprehensiveness of tax liabilities; (ii) taxpayer access to information on tax liabilities and administrative procedures; and (iii) existence and functioning of a tax appeals mechanism. 52. The rules and procedures for the newly-introduced VAT are clear, and the introduction of new legislation has eliminated most tax exemptions and reduced the discretionary powers of the Tax Administration (score for dimension (i) is set at B). Taxpayers appear to have relatively easy access (for instance through the internet) to comprehensive, user friendly and up-to-date information on tax liabilities and administrative procedures for some of the major taxes. Whereas the information provided on VAT appears to be comprehensive, the information on income taxes appears less comprehensive, although advice is offered to clients, for instance through the Tax Administration's website (dimension (ii) score - B). An appeals system has been established in accordance with the Tax Administration and Procedures Law (TAPL) Part 4. Accordingly, appeals can be submitted against first-level rulings. The second-level rulings are the responsibility of five units of the Tax Administration. In each case the procedure is authorized by the Minister of Finance, but the decision is made by the relevant Tax Administration unit. Finally, tax cases can be tried in regular Courts with the Supreme Court as the ultimate course of appeal. Whereas the tax appeals system has been established, it appears that it still needs redesigning to be considered fair, transparent and effective, as it appears to leave considerable discretion to the authorities and does not provide for arbitration in cases of dispute by an independent, specialized arbitration body (for instance a Tax Tribunal) (score for dimension (iii) - C). The score for the indicator is set at B. Serbia PFMA: Public Financial Management Performance Indicators 28 INDICATOR BRIEF EXPLANATION SCORE PI-13: Whereas a clear legal framework for tax procedures and Transparency of B administration is in place, transparency and appropriate taxpayer protection for taxpayers against arbitrary rulings could still obligations and be improved. liabilities PI-14: Effectiveness of measures for taxpayer registration and tax assessment Dimensions to be assessed: (i) control in the tax payer registration system; (ii) effectiveness of penalties for non-compliance with registration and declaration obligations; and (iii) planning and monitoring of tax audit and fraud investigation programs. 53. Whereas taxpayers are registered in database systems for individual taxes, these systems are not fully and consistently linked to other relevant systems. This is somewhat compensated for by control activities, including reconciliations, carried out as part of the internal control functions (score for dimension (i) - C). In accordance with Article 75 of the TAPL, interest on underpaid or overpaid taxes and secondary tax duties shall be calculated and paid at a rate 15 percent greater than the annual discount rate of the National Bank. Given that the discount rate of the National Bank is 8.5 percent and the market rate on an overdraft in RSD varies between 24-30 percent, the penalty interest appears to be set at an appropriate level. If proven in the court of law, tax evasion is punishable with fines and up to 10 years' imprisonment, depending on the size of the tax evasion. On this basis, it appears that penalties for all areas of non-compliance are set sufficiently high as to act as a deterrent (score for dimension (ii) - A). There is a continuous program of tax audits and fraud investigations, including through an internal control group, but audit programs are not based on clear risk assessment criteria (score for dimension (iii) - C). On this basis the overall score of the indicator is set at B. INDICATOR BRIEF EXPLANATION SCORE PI-14: The effectiveness of measures for taxpayer registration and Effectiveness of B tax assessment is moderately low and systems are not measures for integrated, nor are practices harmonized. taxpayer registration and tax assessment PI-15: Effectiveness in collection of tax payments Dimensions to be assessed: (i) collection ratio for gross tax arrears; (ii) effectiveness of transfer of tax collection to the Treasury by revenue administration; and (iii) frequency of complete account reconciliation between tax assessments, collections, arrears records and receipts by the Treasury. Serbia PFMA: Public Financial Management Performance Indicators 29 54. The first dimension of the indicator assesses the collection effort of tax arrears. This indicator seeks to compare annual collection rates over two years and data is not readily available for measuring that dimension. Data on the stock of arrears at end-2004 and end- 2005 is available. Table 9. Tax Arrears 2004 2005 Stock of arrears end of year 20.9 14.3 Aggregate revenue 334.3 418.5 Arrears in percentage of total revenue 6.3 3.4 Source: Tax Department The 2005 figure does not include arrears on VAT introduced in 2005. The stock of arrears is influenced by the large number of state-owned enterprises in the privatization process. According to the law on privatization, the tax authorities (and other creditors) cannot collect their debt before the privatization process has ended. The share of arrears from SOEs under privatization could be as high as 50 percent, but the information on the collection ratio, as well as total arrears segregated between companies in the privatization process, and the rest of the debt is not clearly reported by the tax authorities. As the privatization process is progressing, the stock of arrears will decrease considerably. The arrears in percentage of total revenue are above 2 percent which would warrant a D score. Since the collection rate of tax arrears is unknown, the score for dimension (i) is D. 55. Tax revenues are paid into accounts controlled by the Treasury and each taxpayer can be identified. On a daily basis the Treasury provides information about account balances to the Tax Administration, which is then responsible for reconciliation and identification of arrears (score for dimension (ii) - A). Reconciliation of tax assessments, collections, arrears and transfers to Treasury takes place monthly (score for dimension (iii) - A). The overall score while incomplete, as discussed above, is D+. INDICATOR BRIEF EXPLANATION SCORE PI-15: While tax obligations are clear and easy to meet, tax arrears Effectiveness in are significant. D+ collection of tax payments Treasury and Cash Management 56. A time-bound plan for the implementation of a Modernized Treasury System (MTS) providing treasury services for all budget beneficiaries has been established and is being implemented. The Ministry of Finance is in the process of creating a comprehensive Treasury Single Account (TSA) system, referred to as the Modernized Treasury System (MTS) or the Financial Management Information System (FMIS). The development has started with the existing Interim Treasury Ledger System (ITLS), which Serbia PFMA: Public Financial Management Performance Indicators 30 has been operational since April 15, 2003 and will remain as a transitional module until the implementation of the new applications. Through the European Agency for Reconstruction (EAR) the EU is financing a project to support the Ministry of Finance to design and implement the MTS, which has already suffered from some delays. An action plan to set up the MTS, which was presented to the Ministry of Finance in March 2005, was also supported by the EAR. 57. The Minster of Finance has appointed a special IT Advisor to supervise the implementation and detailed technical specifications of the project. The PPA, now an integral part of the Treasury is a key player in the implementation of the MTS, which is scheduled to be completed by the end of 2007. The project aims to complete the consolidation of the TSA and enlarge the treasury network to offer treasury services not only to DBBs but also to the IBBs currently serviced by the PPA. It should also provide improved debt and cash management and new functionalities to ensure central access to accounting information from all Budget Beneficiaries. The Treasury is also working on an interim solution to ease the current administrative burden of manually processing payment orders for the users of the ITLS by enabling electronic submission of payment orders. Due to the very tight timetable for the MTS implementation, some project delays can be expected. PI-16: Predictability in the availability of funds for commitment of expenditures Dimensions to be assessed: (i) extent to which cash flow is forecasted and monitored; and (ii) reliability and horizon of periodic in-year information to budget users on ceilings for expenditure commitments; and (iii) frequency and transparency of adjustments to budget allocations, which are decided above the level of management of Budget Users. 58. Cash flow forecasts are prepared annually and updated quarterly, based on information on actual cash inflows and outflows (dimension (i) score - B). Budget beneficiaries are provided information about commitment ceilings on a three months' rolling basis, but ceilings are not always reliable and cause delays and disturbances in task execution. Better projections on the revenue side are needed to improve reliability (dimension (ii) score - C). In-year reallocations of less than five percent of the appropriation in question are allowed for DBBs. Such adjustments appear to be frequent but they are done in accordance with the provisions in the BSL, which gives considerable flexibility to Direct Budget Beneficiaries to redirect appropriations. Whereas section 7 of article 41 of the BSL establishes that appropriations may be redirected "for certain expenditures up to 5 percent of the appropriation for the expenditure being reduced" there are no explicit limitations on the number of such reallocations that can be made during the year. No statistical information about the frequency of budget reallocations within the 5 percent limit or with MOF approval was available to the team but adjustments are frequent. Measures to "benchmark" budget institutions are being implemented with regard to the number of reallocations (dimension (iii) score ­ C). The overall score for the indicator is therefore C+. 59. Budget revisions requiring the approval of the National Assembly have been initiated three times within the last three fiscal years: (i) Revision of 2003 budget (April 3, 2003); (ii) Revision of 2004 budget (October 25, 2004); and (iii) Revision of 2005 Serbia PFMA: Public Financial Management Performance Indicators 31 budget (July 15, 2005). Although the 2003 revision was never formally passed by the National Assembly, it is noteworthy that the proposed revision laws are characterized by an almost complete lack of narrative and explanatory text. At the same time the revised budget figures are not presented together with the original budget figures but in a way that does not allow a direct comparison with the originally adopted budget. An analysis of the budgets and budget revisions for the period 2003-2005 reveals an overall trend of reducing subsidies and capital investments and spending on goods and services, while increasing transfers to the MSSOs, including pension funds. Typically, the budget revisions bring the revised expenditure budgets very close to actual expenditure reported by the MOF at the end of the year. INDICATOR BRIEF EXPLANATION SCORE PI-16: The lack of predictability in availability of funds for Predictability in the commitment of expenditures hampers budget execution. C+ availability of Reallocations appear to be frequent, although undertaken in funds for accordance with current rules. commitment of expenditures PI-17: Recording and management of cash balances, debt and guarantees. Dimensions to be assessed: (i) quality of debt data recording and reporting; (ii) extent of consolidation of the government's cash balances; and (iii) systems for contracting loans and issuance of guarantees. 60. Domestic and foreign debt records are updated and reconciled on a quarterly basis. Information on the debt stock of the Government of the Republic is published in the monthly Bulletin, issued by the MOF. The available debt data is considered to be of fairly high quality and complete (dimension (i) set - B). Calculation and consolidation of cash balances for some 9,000 Budget Beneficiaries with sub-accounts52 in the PPA take place daily. Some of the MSSOs, including the Health Insurance Fund53, do not make payments through the PPA system and perform their own reconciliation of cash balances (including the accounts of the 28 operating branch offices) in connection with the quarterly and annual reporting to the MOF (dimension (ii) score - B). A single responsible government agent, the MOF, approves central government contracting of loans and issuance of guarantees, which are limited, for total debt and/or guarantees set in the annual budget laws. The BSL provides the general guidelines for the issuance of government guarantees (Articles 52-58), while more detailed criteria for the issuance of guarantees are provided through provisions of the law on Public Debt (Official Gazette No. 61/2005). As an indicator of the level of implicit or explicit contingent liabilities faced by the Government, the stock of banking loans by the eight largest state-owned enterprises amounted to RSD 11.0 billion in 2004. This represented an increase of 155.8 52Some 23,000 sub-accounts administrated by the PPA. 53In 2005 the Health Insurance Fund alone constituted 13.4 percent of total Republican expenditure. Serbia PFMA: Public Financial Management Performance Indicators 32 percent in two years from RSD 4.3 billion in 200254. Accordingly, the score for dimension (iii) is set at B and the score for the indicator is set at B. INDICATOR BRIEF EXPLANATION SCORE PI-17: Recording The quality and frequency of debt recording and and management of reconciliation is considered fairly high and debt records are B cash balances, debt complete. and guarantees. PI-18: Effectiveness of payroll controls Dimensions to be assessed: (i) degree of integration and reconciliation between personnel records and payroll data; (ii) timeliness of changes to personnel records and payroll; (iii) internal controls of changes to personnel records and payroll; and (iv) existence of payroll audits to identify control weaknesses and-or ghost workers 61. Currently aggregated, central reconciliation between payroll and personnel data exists for around 170 DBBs. Primary and secondary schools will be covered in early 2007 and army and police will be covered later in 2007. Payroll data seems to be adequately documented and checked (dimension (i) score - B). It is the individual BB's personnel units that are responsible for updating the Ministry of Public Administration and Local Government on changes in personnel details, and submitting salary sheets to their respective ministries. Personnel data should be updated on a monthly basis in connection with the submission of time sheets, while some retroactive adjustments are made occasionally (dimension (ii) score - B). The authority and basis for making changes to personnel records and payroll is clear. Until 2006, ministries and other central DBBs still submitted timesheets to the Mutual Services Agency (MSA), which processed and kept records of submitted timesheets and forwarded summary payment requests to the Treasury for formal endorsement before payments were processed. However, since January 1, 2006 the payroll has been managed and accounted for directly by the Treasury (dimension (iii) score is set at B). The internal audit has conducted audits of the payroll as part of most of their audits (15 in 2004 and 2005). However, because of limited overall coverage of internal audits, these have been partial audits only (dimension (iv) score is set at C). The indicator score is set at D+. INDICATOR BRIEF EXPLANATION SCORE PI-18: Whereas adequate systems to control payroll comparing C+ Effectiveness of with the HR database system are being implemented, the payroll controls lack of sufficient audit coverage does not ensure full integrity of data. 54The gas company, NIS, accounted for RSD 6.7 billion and the postal company, PTT, accounted for RSD 2.2 billion. Source: IMF country report no. 05/232, p. 37. Serbia PFMA: Public Financial Management Performance Indicators 33 Public procurement PI-19: Competition, value for money and controls in procurement Dimensions to be assessed: (i) evidence on the use of open competition for awards of contracts that exceed the nationally established monetary threshold for small purchases; (ii) extent of justification for use of less competitive procurement methods; and (iii) existence and operation of a procurement complaints mechanism. 62. Although more than half of the procurement is done using open competition, the required justification for the use of less competitive procurement methods, as well as the operation of a satisfactory complaints mechanism, is not adequate. Based on the information provided from the Public Procurement Office, the public procurement system of Serbia consists of 12,000 purchasers and 80,000 bidders who conclude over 250,000 contracts each year, worth in excess of USD 1.5 billion. It is recognized that open competition in the award of contracts provides a basis for achieving efficiency in acquiring inputs and value for money in delivery of programs and services for the government. However, the use of open competition has not increased between 2002 and 2004. Available data on public contract awards (see table 10 below) show that 69 percent (more than 50 percent but less than 75 percent) of contracts above the threshold are awarded on a basis of open competition, but the data may not be accurate (dimension (i) score ­ B). Table 10. Choice of Procurement Procedure 2002-2004 Method Year 2002 Year 2003 Year 2004 Open Procedure 45% 63% 50% Restricted Procedure 25% 12% 19% Negotiated Procedure 30% 25% 31% Source: Report on Awarded Public Procurement Contracts in Serbia for 2004 The legal framework is ambiguous when it comes to a preference for open and restricted versus negotiated procedures. This is evidenced by the use of negotiated procedures, which was at a slightly higher level in 2004 compared to 2002 (31 percent compared to 30 percent). The team has found that proper justification for the use of less competitive procurement methods is typically weak or missing (dimension (ii) score ­ C). A process exists for submitting and addressing procurement complaints, but it is designed poorly and does not operate in a manner that provides for timely resolution of complaints (dimension (iii) score ­ C). The overall score for the indicator is set at C+. INDICATOR BRIEF EXPLANATION SCORE PI-19: Competition, Public procurement management suffers from inefficiencies C+ value for money due to inadequate enforcement of competitive mechanisms, and controls in lack of clear justification for the use of less competitive procurement procurement methods, and inefficient complaint mechanism. Serbia PFMA: Public Financial Management Performance Indicators 34 Internal control PI-20: Effectiveness of internal controls for non-salary expenditure Dimensions to be assessed: (i) effectiveness of expenditure commitment controls; (ii) comprehensiveness, relevance and understanding of other internal control rules-procedures; and (iii) degree of compliance with rules for processing and recording transactions. 63. Direct Budget Beneficiaries are required to establish "financial services" to prepare and execute the budget. In some cases DBBs have appointed controllers that are independent of the financial services to perform ex-ante checks of the legality of individual commitments and payments. In other cases legality is ensured via the double signature of the head of the DBB and the head of the financial service for authorizing commitments and payments. The existence of considerable payment arrears (see indicator PI-4 above) however suggests that these controls are only partially effective in limiting commitments to actual cash availability (dimension (i) score - C). In the DBBs and the EBFs visited, financial services' managers were appropriately aware of the basic MOF regulations and internal procedures for authorizing commitments and payments. Whereas ex-ante controls for even small transactions are clearly regulated and routinely carried out, written procedures and appropriate practices for approving and monitoring the implementation of contracts are not in place (score for dimension (ii) - C). In a repeated reference to the existence of a relatively large stock of expenditure arrears, it appears that while rules are complied with for the majority of transactions, the use of simplified procedures in unjustified situations is a matter of concern (dimension (iii) score set at C). On the basis of the above, the score for the indicator is set at C. INDICATOR BRIEF EXPLANATION SCORE PI-20: In line with the provisions of the Budget System Law, Effectiveness of financial controls of payments are carried out but C internal controls for appropriate procedures and practices for entering and non-salary currently monitoring large contractual obligations are expenditure missing. PI-21: Effectiveness of internal audit Dimensions to be assessed: (i) coverage and quality of the audit function; (ii) frequency and distribution of reports; and (iii) extent of management response to internal audit findings. 64. While serious efforts have gone into developing methodological guidelines and training of staff, available staff resources for the Budget Inspectorate and the MOF's Internal Audit Unit (IAU) are limited to 17 and 11 respectively. Both departments have government-wide inspection and audit responsibilities but are the only specialized ex- Serbia PFMA: Public Financial Management Performance Indicators 35 post financial control units evaluating entities in the administration of the Republic. Internal audit is deemed functional for at least the most important central government entities. The MOF IAU's audits comprise systems evaluating and monitoring elements. Whereas the internal audit methodology being developed reflects relevant international standards (ISPPIA), it does not yet cover all audit areas. It is estimated that IAU spend at least half their time on systemic issues (dimension (i) score - C). In 2004 and 2005, the MOF's IAU carried out 15 audits, producing approximately 300 recommendations. Audit reports are submitted to and discussed with the auditee, but as the SAI is not established, information is not shared with them and this negatively impacts the score (dimension (ii) score - C). The follow-up on reports has been prompt and comprehensive for the first two years of operation (dimension (iii) score ­ A). Table 11. Number of Internal Audits and Recommendations 2004 and 2005 Year Number of Num. of recommendations Number of implemented audits provided due recommendations 2004 3 98 98 84 2005 12 369 222 220 The legal framework for internal audit has still to be completed and the MOF's IAU needs to be fully staffed. Similarly, managers across the administration need to be better informed about the role of internal audit. The overall score for the indicator is set at C+. INDICATOR BRIEF EXPLANATION SCORE PI-21: The Ministry of Finance has established an IAU within the Effectiveness of Budget Inspection and Audit Department but it has very C+ internal audit limited staff capacity to audit and assess financial management and control systems of all Budget Beneficiaries. Follow-up of the audits has been prompt. (iii) Accounting, Recording and Reporting PI-22. Timeliness and regularity of accounts Dimensions to be assessed: (i) regularity of Bank reconciliations; and (ii) regularity of reconciliation and clearance of suspense accounts and advances. 65. The Public Payment Agency (PPA) which was merged with the Treasury on August 1, 2005, performs daily reconciliations between the cash balances of Direct Budget Beneficiaries (DBBs) bank accounts and transaction records in its payments and accounting systems (dimension (i) score - A). Suspense and advance accounts are cleared at least annually. Some accounts may have uncleared balances brought forward (dimension (ii) score - B). It is foreseen that the ongoing implementation of the Modernized Treasury System (MTS) system, will integrate all Budget Beneficiaries into Serbia PFMA: Public Financial Management Performance Indicators 36 the Treasury Single Account and that the Indirect Budget Beneficiaries bank accounts will be closed. On the basis of the above the score for the indicators is set at B+. INDICATOR BRIEF EXPLANATION SCORE PI-22. Timeliness Bank accounts for ministries and other Direct Budget and regularity of Beneficiaries are reconciled and cleared daily, whereas B+ accounts accounts of Indirect Budget Beneficiaries (such as primary reconciliation schools and health institutions) are not and may have idle balances. Suspense and advance accounts are cleared at least annually. PI-23: Availability of information on resources received by service delivery units Dimension to be assessed: collection and processing of information to demonstrate the resources that were actually received (in cash and in kind) by the most common front- line service delivery units in relation to overall resources made available to the sector(s), irrespective of which level of government is responsible for the operation and funding of these units. 66. Accounting and transactions systems managed by the PPA and the Treasury provide reliable information on all cash resources received by primary schools and health care institutions. The institutions do not receive in-kind resources. It is not clear to what extent reports are being produced and utilized based on the available information (score for the indicator - B). INDICATOR BRIEF EXPLANATION SCORE PI-23: Availability Whereas information about cash resources received by of information on primary service units is available at least on an annual basis, B resources received and in-kind resources are not provided, it is not clear how by service delivery this information is utilized. units. PI-24: Quality and timeliness of in-year budget reports Dimensions to be assessed: (i) scope of reports in terms of coverage and compatibility with budget estimates; (ii) timeliness and issue of reports; and (iii) quality of information. 67. As mentioned above, comparison to original budget figures is possible for main administrative headings using data from a MOF data bulletin, but only with some Serbia PFMA: Public Financial Management Performance Indicators 37 recalculation of certain headings. Expenditures are captured both at the commitment and payment stages, but as it is common practice that the two are submitted to the Treasury at the same time, commitment information often adds no value (score for dimension (i) - B). The Treasury prepares monthly and quarterly summary reports with expenditure breakdowns as per economic classification. Reports on cash flows and monthly revenue reports are produced from the Treasury's accounting system typically within four weeks of the end of the previous month (dimension (ii) score - A). The implementation of a new chart of account, generally consistent with GFSM 2001, is being implemented. Although an adequate independent assurance mechanism is lacking, there is no other indication to question the accounting accuracy when comparing in-year reporting with the annual financial statements produced. The Bulletin does provide an explanation on the methodology used and this does not fundamentally compromise overall consistency and usefulness (score for dimension (iii) - B). The overall score for the indicator is set at B+. INDICATOR BRIEF EXPLANATION SCORE PI-24: Quality and Monthly and quarterly budget execution reports are timeliness of in- submitted by Direct Budget Beneficiaries to the Ministry of B+ year budget reports Finance following a standard Chart of Accounts. PI-25: Timeliness of the presentation of audited financial statements to the legislature Dimensions to be assessed: (i) completeness of the financial statements; (ii) timeliness of submission of the financial statements; and (iii) accounting standard used. 68. Since financial statements have not been presented to the National Assembly for the last four fiscal years, the score for this indicator is set at D55. While transaction data for the four fiscal years 2002-2005 are readily available from the PAA, no consolidated annual statements have been presented to the National Assembly. The provisions of the BSL set the deadline for submission of the final consolidated statement to the National Assembly as June 1 in the year following the fiscal year and their provisions have therefore not been complied with for the last four fiscal years. As mentioned previously, the MOF has produced the financial statements for the relevant years in a timely manner and these statements have been used for this report. However, due to the National Assembly's lack of timely decisions, the statements have not been audited and the SAI Council has not been established. 55PI-25 is measured through the assessment of these dimensions: (i) Completeness of the financial statements; (ii) Timeliness of submission of the financial statements; (iii) Accounting standards used. Serbia PFMA: Public Financial Management Performance Indicators 38 INDICATOR BRIEF EXPLANATION SCORE PI-25: Timeliness Consolidated annual financial statements for the fiscal years of the presentation 2002, 2003, 2004 and 2005 have not been presented to the D of audited financial National Assembly for approval. statements to the legislature. (iv) External Scrutiny and Audit PI-26: The scope, nature and follow-up of external audit Dimensions to be assessed: (i) scope of audits performed; (ii) timeliness of submission of audit reports to the legislature; and (iii) evidence of follow-up on audit recommendations. 69. A sub-committee under the Finance Committee of the National Assembly has been responsible for preparing the establishment of a Supreme Audit Institution (SAI). The finalization of the constitutional and legal framework for establishing an SAI has been expected and under way for a number of years, and was a short-term recommendation in the 2002 CFAA. The National Assembly and the Government has received advice and support from several multilateral and bilateral donors in conceptualizing the establishment of an SAI.56 On May 18, 2005 the OSCE mission to Serbia and Montenegro organized and hosted a seminar to present and discuss the draft law. On November 14 2005, the law was formally adopted by the National Assembly but none of the formal appointments of the State Audit Institution's top management, a Council consisting of a President, a Vice President, and three members, have yet been made. The absence of an SAI means that the score for the indicator is set at D. INDICATOR BRIEF EXPLANATION SCORE PI-26: The scope, External, independent audit is still to become reality. A law nature and follow- on the State Audit Institution was adopted by the National D up of external Assembly in November 2005 but no decisions on audit. appointments or other actions have yet been taken to set up a functional institution. PI-27: Legislative scrutiny of the annual budget law Dimensions to be assessed: (i) scope of the legislature's scrutiny; (ii) extent to which legislature procedures are well established and respected; and (iii) adequacy of time for the legislature to provide responses to budget proposals. 56Bilateral donors have included the Swedish and Canadian International Development Agencies. The multilaterals include the EU, OECD/SIGMA and the OSCE. Serbia PFMA: Public Financial Management Performance Indicators 39 70. The National Assembly's review of the annual draft budget includes consideration of fiscal policies and aggregates for the coming year and detailed estimates of expenditure. The revenue budget is, however, only presented at a very aggregate level. Whereas the Budget Memorandum that accompanies the budget also comprises some aggregate estimates for the subsequent three fiscal years, these are not presented in the actual budget, nor detailed as per economic or administrative classification (score for dimension (i) - C). Basic procedures for the legislature's review of the Budget are set out in the BSL, the Budget Memorandum and actual budget document and are largely respected (dimension (ii) score - B). According to the BSL, the National Assembly has 1.5 months to reach agreement on the budget (between November 1 and December 15) (dimension (iii) score - B). While clear rules exist for in-year budget amendments by the executive, which are usually respected, they do not allow for extensive administrative allocations57 (dimension (iv) score set at B). Indicator score is set at C+. INDICATOR BRIEF EXPLANATION SCORE PI-27: Legislative The budget calendar and procedures allow the National scrutiny of the Assembly enough time for a meaningful budget debate but C+ annual budget law the budget does not include detailed estimates of revenue sources or medium-term frameworks to guide the debate. PI-28: Legislative scrutiny of external audit reports Dimensions to be assessed: (i) timeliness of examination of audit reports by the legislature; (ii) extent of hearing on key findings undertaken by the legislature; and (iii) issuance of recommended actions by the legislature and implementation by the Executive. 71. Apart from contributing to the drafting of a legal base for the establishment of an SAI, the National Assembly has launched a public tender for a firm to undertake the audit of the 2002, 2003 and 2004 consolidated accounts of the Republic. Despite the fact that provisions in the 2002 BSL allowed for an audit of the consolidated financial statements to be contracted out to an audit firm, the tender for the independent external audit was not initiated until 2005. An inconclusive tender for the external audit of the 2002 and 2003 government accounts was launched by the MOF on February 8, 2005. The selection was subsequently left to the National Assembly on the recommendation of a working group appointed by the Assembly's Finance Committee on September 13, 2005. On February 7, 2006 the National Assembly's Finance Committee endorsed the recommendation of its working group to let the Secretary of the Assembly initiate the tender for the audit of the consolidated Government accounts for 2002-2004. The tender for the audit of the 2005 57See information provided under PI-16 concerning budget revisions. Serbia PFMA: Public Financial Management Performance Indicators 40 accounts has not yet been launched. The absence of an external audit of the consolidated government accounts means that the score for the indicator "legislative scrutiny of external audit reports" is set at D.58 INDICATOR BRIEF EXPLANATION SCORE PI-28: Legislative No external audit of the most recent years of the D scrutiny of external consolidated government accounts has taken place. audit reports. E. DONOR PRACTICES Donor Indicator (DI) 1: Predictability of Direct Budget Support Dimensions to be assessed: (i) annual deviation of actual budget support from the forecast provided by the donor agencies at least 6 weeks prior to the government submitting its budget proposals to the legislature; and (ii) in-year timeliness of donor disbursements 72. Three of the PEFA indicators relate directly to the use of beneficiary countries' own PFM systems for donor support. The first Donor Indicator (DI-1) concerns predictability of direct budget support. In recent years, only the World Bank has provided budget support to Serbia in the form of structural adjustment operations and, in 2005, Development Policy Lending. Due to the many problems in fulfilling on time all conditionalities, it has not been possible to make firm quarterly disbursement estimates before the beginning of the fiscal year for the last three years and budget support has fallen short of forecasts by more than 15 percent. Consequently the indicator is measured to be D. INDICATOR BRIEF EXPLANATION SCORE DI-1: Predictability Due to difficulties in timing the meeting of conditionality, it of Direct Budget has not been possible to make firm quarterly disbursement D Support estimates for the proceeds of budget support. 58PI-26 is measured through the assessment of these dimensions: (i) Scope/nature of audit performed (including. adherence to auditing standards); (ii) Timeliness of submission of audit reports to the legislature; and (iii) Evidence to follow up on audit recommendations. PI-28 is measured through the assessment of these three dimensions: (i) Timeliness of examinations of audit reports by the legislature (for reports received within the last three years); (ii) Extent of hearings on key findings undertaken by the legislature; and (iii) Issuance of recommended actions by the legislature and implementation by the Executive. Serbia PFMA: Public Financial Management Performance Indicators 41 DI-2: Financial information provided by donors for budgeting and reporting on project and program aid Dimensions to be assessed: (i) completeness and timeliness of budget estimates by donors for project support; and (ii) frequency and coverage of reporting by donors on actual donor flows for project support. 73. Based on the unaudited financial statements comparing budget outturn and budgets, it is estimated that, in terms of submission of budgets on donor flows, at least half of the donors provide complete budget estimates for the coming fiscal year no less than three months prior its start. The dimension (i) is therefore rated C. Furthermore, it is estimated that quarterly reports on disbursements of less than 50 percent of the externally financed project estimates in the budget are provided by donors within two months of end-of-quarter, giving a rating of dimension (ii) at D. On this basis, the indicator is set at D+. It should be noted however that the ISDACON59 website provides an overview of disbursed and allocated funds per donor and project. Also, the unpublished annual financial statements for 2004 and 2005 include budget and outturn for all loans and at least 50 percent of grants. INDICATOR BRIEF EXPLANATION SCORE DI-2: Financial At least half of the donors provide complete budget information estimates for the coming fiscal year three months prior to its D+ provided by donors start. Quarterly reports on disbursements of less than 50 for budgeting and percent of the externally financed project estimates in the reporting on project budget are provided by donors within two moth of end-of- and program aid quarter. DI-3: Proportion of aid that is managed by use of national procedures Dimension to be assessed: overall portion of aid funds to the central government that are managed through national procedures 59 The Inter-Sectoral Development and Aid Coordination Network (ISDACON) was formally established through the Government Decision from September 2003, as the network of units for international cooperation with the mandate to proactively program, coordinate, manage and monitor international assistance in the Republic of Serbia. ISDACON falls under the responsibility of the Ministry of Economic International Relations. The scope of work of the ISDACON Network was defined based on the activities and tasks already performed by the Development Aid Coordination Unit and line Ministries. The purpose of ISDACON is to facilitate collection and disbursement of data within the Government of Serbia. It is expected to facilitate policy-making within the Government of Serbia from the aspect of international assistance and to promote proactive planning in order to ensure that aid complements the budget planning process and reforms towards EU integration and PRSP implementation. Serbia PFMA: Public Financial Management Performance Indicators 42 74. The PEFA indicator on proportion of aid managed by the use of national procedures (DI-3) is measured as the overall proportion of aid funds to central government that are managed through national procedures. Due to the lack of confidence in the fiduciary system in Serbia, national procedures are not accepted by donors and the indicator is set at D. INDICATOR BRIEF EXPLANATION SCORE DI-3: Proportion of Due to the lack of confidence in the fiduciary system in D aid that is managed Serbia, national procedures are generally not used by by use of national donors. procedures Serbia PFMA: Fiduciary Risk Assessment and Mitigation 43 CHAPTER 4: GOVERNMENT REFORM PROCESS Recent and on-going reforms 75. Reform in the area of Public Financial Management is carried out under the umbrella of broader government strategies such as the Stabilization and Association Process and the Poverty Reduction Strategy. The Government of Serbia's reform programs are embedded in two complementary strategies: the Stabilization and Association Process (SAP), and the Poverty Reduction Strategy (PRS). As part of the broad SAP agenda the Government is envisaging: (i) reforming the public administration (including the civil service pay system); (ii) preparing a comprehensive anti-corruption strategy; (iii) implementing a tax reform package (including VAT); (iv) establishing an effective public procurement regime; and (v) developing reliable statistics. As part of the PRS, the Government envisages improving costing, establishing clear linkages with the republics' budget processes and strengthening the framework for implementing the PRS. 76. A number of major donors provide support for reforms in Public Expenditure and Financial Management and are making efforts to coordinate their support. Support for reforms has come from EAR and the Untied Kingdom's Department for International Development (DFID), the United States' Treasury and the DFID on public expenditure management and public administrative reform, and USAID on pension reform. Also, the Norwegian Ministry of Foreign Affairs is supporting the MOF budget department in preparing for the introduction of program classification. Furthermore, Norwegian Ministry of Foreign Affairs is supporting the "Joint project" where MOF is participating as one of the central institutions. This project is aimed at improving implementation of reforms through building systems and capacity for integrated planning, budgeting, monitoring and reporting across the Government of Serbia. 77. Several key reform activities in the field of public financial management and financial accountability have been funded by the EU via the EAR. The funds provided for capacity building in core PFM areas totaled EUR 21 million in 2004; EUR 16.2 million in 2003, and EUR 7 million in 200260. The funded projects and commitments made have been aimed at supporting the development of the MTS, financial control systems including internal audit, and assistance in the development of a SAI. 78. USAID and the US Treasury have also been providing considerable amounts of assistance for institution building, including for PFM. A jointly conceived USAID- US Treasury Tax Policy and Administrative Reform project is ongoing. The project aims to improve collections, audit, taxpayer services, information technology (IT) and other areas of tax policy and administrative reform. Progress is reportedly satisfactory, and has accelerated with the introduction of a VAT in 2004 or 2005. USAID has commenced work on broad fiscal reform (including pension), which is deemed critical to keeping the 60These amounts reflect the sums appropriated and not the sums disbursed. Serbia PFMA: Fiduciary Risk Assessment and Mitigation 44 social benefits systems afloat. The proposed annual obligation for the entire USAID program for Economic Reform, Restructuring and Policy in Serbia is US$17 million for each of the years 2004 and 2005. The US Treasury has a resident advisor in Belgrade, who has assisted the MOF in modernizing the budget preparation process. Among other things, the Advisor and her team contributed to the development of the budget memorandum for 2004. They were, however, not involved in the Budget Memorandum preparation for 2005. 79. While important and far-reaching reforms in Treasury management and internal control are ongoing, strong strategic leadership of the overall PFM reform effort is needed. Progress has been made through the revisions of the Budget Systems Law and the integration of the Public Payments Agency (PPA) into the Treasury. A new comprehensive Treasury System, the MTS, is in preparation and will replace the Interim Treasury Ledger System (ITLS) currently in place. According to the project's technical specifications, the implementation of the MTS will be completed at the end of 2007. The MTS will integrate all Budget Beneficiaries (BBs) into the TSA and enable them to access accounting and transaction information on-line. DBBs will be able to submit commitment and payment orders online, while IBBs will do so via a PPA branch office. In addition to the MTS, the MOF intends to move towards a program-based budget approach and reinforce the multi-year expenditure framework. Considerable investment and efforts are currently being lent to develop Public Internal Financial Control and internal audit in line with EU practices. All of the above reform activities are strongly supported by the donor community, including the EAR, DFID, Norwegian Ministry of Foreign Affairs, IMF and the World Bank. However, the overall coordination and management of the reforms appear to be missing as the individual reform components seem to be owned and driven by individual technical project counterparts in the Ministry of Finance rather that the Ministry of Finance as such. This creates a risk for overlapping and uncoordinated technical solutions. Institutional factors supporting reform planning and implementation 80. There have been significant problems in starting some of the PFM reform projects. Examples include the funding appropriated by the EAR in 2002 for establishing an SAI and building capacity at the Public Procurement Office. As stated in the reports from the EAR, it was not possible to start the projects due to weak absorption capacity in key institutions, such as the MOF. 81. Although progress has been slow, the most recent government initiatives in PFM reform have been encouraging. This includes making budget execution data publicly available; modernizing the Treasury and internal control systems, adopting a law for the establishment of a Supreme Audit Institution and seeking and obtaining parliamentary approval of the appointment of an external auditor for the 2002, 2003, 2004 and 2005 accounts. The delays in appointment of the external auditor can at least partly be explained by the delays inherent in the democratic process that has required the National Assembly's active and legitimate engagement in authorizing the tender process. 82. Recent World Bank diagnostics point to the need to develop an integrated reform management approach in Serbia, which basically reflects the consensus Serbia PFMA: Fiduciary Risk Assessment and Mitigation 45 between the Government and the Serbian donor community. The draft 2005 update of the Public Expenditure and Institutional Review (PEIR) argues that management weaknesses are reflected in: (i) disjoints in the reform program; (ii) coordination problems within government and with donors working on various projects; and (iii) continued difficulty in accessing and retaining the talent needed to implement and sustain this aggressive reform agenda. These weaknesses have different levels of severity across reform types, with some reform entities recently initiating good communications with others. An integrated approach to thinking about reforms or ensuring the appropriate sequencing of steps across the expenditure management system is needed. This assessment is generally shared by the main donors, including the EAR, DFID, Norwegian Ministry of Foreign Affairs and IMF. 83. The Government has committed itself to prior actions that will facilitate public expenditure and financial management reforms. It is anticipated that the Government will take concrete steps to improve the overall coordination of Public Expenditure Management (PEM) reform, including: (i) assigning a senior MOF official as Champion for PEM reform; and (ii) developing an integrated vision document covering all relevant PEM reform areas, providing implementation plans for a three-year period, with time-bound implementation and performance milestones to facilitate monitoring. Concrete reform initiatives are expected to be aimed at: (a) moving towards a program-based, multi-annual Government budget approach; (b) modernizing the Treasury (including payroll) system; and (c) establishing a Supreme Audit Institution. The Government of Serbia has received a Policy and Human Resource Development (PHRD) grant from the Government of Japan. The grant has so far financed a consultant who has drafted a report titled "Developing Integrated Vision of Public Financial Management Reforms". The report is expected to serve as a foundation for the development of a government-led PFM reform vision. In support of this process, the PFMA provides a baseline assessment that can be used to measure and currently monitor PEM and PFM reform progress. Serbia PFMA: Annex I - Scoring methodology PEFA indicators 46 ANNEX I: PEFA SCORING METHODOLOGY Most of the indicators have a number of dimensions linked to the subject of the indicator and each of these dimensions must be assessed separately. The overall score for an indicator is then based on the assessments for the individual dimensions of the indicator. Combining the scores for dimensions into the overall score for the indicator is done by Scoring Method 1 (M1) for some indicators and Scoring Method 2 (M2) for others61. It is specified in the indicator guidance for each indicator what methodology should be used. Method 1 (M1) is used for all single dimensional indicators and for multi-dimensional indicators where poor performance on one dimension of the indicator is likely to undermine the impact of good performance on other dimensions of the same indicator (in other words, by the weakest link in the connected dimensions of the indicator). For indicators with 2 or more dimensions, the steps in determining the overall or aggregate indicator score are as follows: · Each dimension is initially assessed separately and given a score. · Combine the scores for the individual dimensions by choosing the lowest score given for any dimension. · A `+' should be added, where any of the other dimensions are scoring higher (Note: It is NOT possible to choose the score for one of the higher scoring dimensions and add a `-` for any lower scoring dimensions. And it is NOT possible to add a `+' to the score of an indicator with only one listed dimension). Method 2 (M2) is based on averaging the scores for individual dimensions of an indicator. It is prescribed for selected multi-dimensional indicators, where a low score on one dimension of the indicator does not necessarily undermine the impact of a high score on another dimension of the same indicator. Though the dimensions all fall within the same area of the PFM system, progress on individual dimensions can be made independent of the others and without logically having to follow any particular sequence. The steps in determining the overall or aggregate indicator score are as follows: · For each dimension, assess what standard has been reached on the 4-point calibration scale (as for M1). · Go to the Conversion Table for Scoring Method M2 (below) and find the appropriate section of the table (2, 3 or 4 dimensional indicators). · Identify the line in the table that matches the combination of scores that has been given to the dimensions of the indicator (the order of the dimensional scores is immaterial), · Pick the corresponding overall score for the indicator. 61M1 is used for the scoring of the following indicators: PI-1 ­ PI-7; PI-9 ­PI-10; PI-15; PI-16; PI-18; PI- 20; PI-21; PI-23 ­ PI-28; DI-1 ­ DI-3. M2 is used for the scoring of: PI-8; PI-11 ­ PI-14; PI-17; PI-19; PI- 22. For details see PEFA methodology on: http://www.pefa.org/about_test.htm Serbia PFMA: Annex I - Scoring methodology PEFA indicators 47 The Conversion Table applies to all indicators using M2 scoring methodology only and cannot be used for indicators using M1, as that would result in an incorrect score. The Conversion Table should NOT be used to aggregate scores across all or sub-sets of indicators, since the table was not designed for that purpose. In general, the performance indicator set has not been designed for aggregation, and therefore, no aggregation methodology has been developed. PEFA - PFM Performance Measurement Framework, June 2005. Conversion Table for Scoring Method M2 Washington DC, USA Serbia PFMA: Annex V: Comparison with countries in Europe and Central Asia 48 ANNEX II: KEY REFERENCES Budget Revision Act 2003, April 3, 2003, Ministry of Finance. Budget Revision Act 2004, October 25, 2004, Ministry of Finance. Budget Revision Act 2005, July 15, 2005, Ministry of Finance. Budget System Law, Official Gazette (OG) No. 9/2002. Decree on Budget Accounting, OG No. 125/2003. Decree on Direct Budget Beneficiaries (DBBs) that Organize Special Internal Audit Body and on Common Criteria for Internal Audit Organization and Procedure of DBBs and Mandatory Social Insurance Organizations, OG No. 22/2004. Decree on the Method of Operation and Authorities of Budget Inspection and Audit, OG No. 10/2004. Draft internal World Bank document: Fiduciary Assessment Update, October 31, 2005. Draft Law on Alterations and Amendments to the Public Procurement Law. Draft law on the State Audit Institution (First draft). National Assembly Sub-committee for SAI Establishment. Draft World Bank Report: Update of Public Expenditure and Institutional Review: The Republic of Serbia: A Policy Agenda for a Smaller and More Efficient Public Sector (Draft of December 1, 2005). IMF Country Report No. 05/232 of July 2005: Serbia: Selected Issues and Statistical Annex. IMF Country Report No. 05/435 of January 2005: Serbia and Montenegro: Report on the Observance of Standards and Codes; FATF Recommendations for Anti-Money Laundering and Combating the Financing of Terrorism. IMF Country Report No. 06/58: Serbia and Montenegro: Sixth Review Under the Extended Arrangement, Financing Assurances Review, Request for Waivers of Non-observance of Performance Criteria, and Proposed Post-Program Monitoring, January 2006. IMF Country Report No. 06/96: Serbia and Montenegro: Serbia ­ Financial System Stability Assessment, including Reports on the Observance of Standards and Codes on the following topics: Monetary and Financial Policy Transparency, Banking Supervision, and Payment Systems. Law on the National Bank of Serbia, OG No. 72/2003 and 55/2004. Law on the Prevention of Conflict of Interest in the Discharge of Public Office, OG No. 43/2004. Serbia PFMA: Annex V: Comparison with countries in Europe and Central Asia 49 Memorandum on the Budget and on Economic and Fiscal Policy for 2006 with Projections for 2007 and 2008, Ministry of Finance, Belgrade, October 28, 2005. Public Finance Bulletin, Ministry of Finance, Belgrade, December 2005 (In Serbian). Public Finance Bulletin, Ministry of Finance, Belgrade, February 2006 (In Serbian). Public Financial Management: Performance Measurement Framework, June 2005, PEFA Secretariat, World Bank. Technical Specifications for a Financial Management Information System: Supply, Installation and Commissioning of IT Equipment, Software ad Applications, Peripherals and IT Networking Material for the Establishment of a Financial Management Information System (EAR project No. EAR04SER01/01/001). The Law on the Budget of Republic of Serbia 2003, 2004, 2005 (Budget). World Bank Report No. 23689 of February 2003: Serbia and Montenegro - Public Expenditure and Institutional Review. World Bank Report No. 28801 of December 2002: Federal Republic of Yugoslavia - Country Procurement Assessment Report. World Bank Report: Federal Republic of Yugoslavia Country Financial Accountability Assessment (CFAA), December 2002. World Bank Report: Governance Matters IV: Governance Indicators for 1996-2004. World Bank Institute, May 2005. 50 ng eht the line eht the usion of giese in of in and no rat n.o eht de publicly clni borrowi st specific of igne ati for ocess ensur donor to the (BSL) or or government pr for epar pr ctes eparati enacting also for pr sect ded om Law amount fr in toni ovi and identify ded pr budget has general transfers to whichr budget ed eht It ovi the and talot implemented pr be made oceeds Systems e fo eht has ot ples. eht eparation in into BBs has pr to to anslat BSL pr possible D it of wer tr e princi it e pated Budget budgets, not th EBFs dual linked of made the Finally, estimat were planning, main antici g.n ovements 2006 and government eht and indivi s.e an of the to of y owi under plans. government status impr and tegiesa of local of risp ocess of ions borr 2005 str pr enter Recommendation ficant developed but budget summar required or implementation tiona central a = the Current As signi 2004, were Sect expenditure The regul budgets with integration budget contri owned in and domestic ST )b( , c-i text. (a) )a( the es and as ur of publ bold k: k; RECOMMENDATIONS non-wage meas [ST] (b) such local rom . yc . would and with and donor to/f 62 amewor amewor framework: budget own-generated definitions [ST] fr fr poli [MT] MOF CPAR issues, wage ralization gies;e debt, ans The funds, CFAA transfers marked -fiscal budget cutting venueer budget rat pl government, c decent st inclusive ary public AND d between consolidated are 2002 ntral governments in tegica macro oss- and nditure. ev cr mentn ce strategi ndituree ries, the str of planne usi a a expe of balance clear cln and CFAA eht exp minist direct/indirect gover extra-budget expenditure se all-i all and comprising line and develop medium-term analysis risp impact develop sector establish an implemented Term eht an y 2002 ar MOF icing,vres ns,o sector e for ion, at government enter but MOF MOF ement OF Recommendations The design conduct budget debt allocati The prepare formul The general impl framework, governments, revenues contri owned partially Medium recommendations the recommendations iesc and ng only in CPAR PDATE , udi or poli Multi- new and U term, and (incl CFAA poor. ped.o The grants short CFAA III: Currently ndsuf MANAGEMENT devel the revenues units, governments); government of in implemented 2002 all ng 2002 not revenues). implemented of generally een reign uses be of s is allocations. (i) NNEX could, complete. fo own to wa ng betw A process. spendi in and CFAA update BUDGET is lla( by been se and Preparation Law include: and 2002 plannila resource not linkage budget planning not funds received items in of the System coverage do of have expenditur Budget financi budgetary all that Overview SECTOR: & Status Quality year Insufficient and Budget improve Budget budgets sources donations (ii) off-budget IV: Recommendation Implementation = Annex of in MT PUBLIC Planning Coverage PFMA: Area CFAA ng term; Status Key 2002 1. 1.1 Recommendations Financial Planni Budget Serbia A. 62 Short 51 eht be the the of a are Law on BSL of ve donors of where to CFAA. and One hen key seda with been be revenues MOF the plans ce planning, nte ls.o tof undertaken reignof from B theta ot facilities f. in 2002 of appears has MOF th rlye and strengt oduction ot trni public venueer The Faculty af the differ contr staf the uncompetiti by st staff c in budget teds basis e rto on 2002. fiedi eht MOF accordan ge quart activities to ded training with funds. wer payments doing the in calendar ugs the of Analysis eff The ot and Law of ovi Belgrade Economists, senior on in and time y execution and an e for ed qual e pr the for academi by reported ereht BBs ts in th training e budget D Fiscal nistry. its terviews ed, mpar tract Ministry. stainable on w more MOF a Mi and basis at of In of e co becaus with of monthl ailability budget eht eht ot th the mostly, Su made capacity eht CFAA, ne av a d respected. by review by most to the icesv and blisheda of (VAT) har number staff Department ts ements allocates debate. ectpser set proper commitmen Department y is nctionsuf ser a y by BSL, at ot EBF est Tax changed it ysis Treasury. and offered cooperation sit st and significantly status ysis been US erv cruier the DBBs which generally limits ensure has capacit has that anal the and of have administrative comparable by required n financial is to Added anal the to Uni Bs MOF oeconomic ytical xesat levels have as eht ons scrutiny of DBBs budget Ministry above level DB a recommended ovisi the DBBs Current The Macr anal Value and estimations complai budget salary There by such limited and the the Ministry, at As pr introduced, cycle, heads timetable The expenditure submitted In solutions the la rof and to is meti debate law nanci to F fi Officer MOF revenue including the y to and unit MO ng accounts also rle e e budget bla basis, 62 th and quart w, new Financial e forecasts, sector analysis lat increasi scrutiny CFAA cycle, the account epar monthly ge the ndar Chief pr fiscal a public for bud with se [ST]. cale atn and [MT]. 2002 rigorous on [ST]. budget in as new d ciari MOF MOF strong e an a th budget allocated eht appoi such funds ng benefi ot tot eht budget tracking thi accordance by the non-financial w new time in uni of and social establish cen the planni ng the oved services to budget sfactory rda ed budget, cte appr sati spendi MOF ccoa dir the execution Recommendations The provide estimation consolidated off-budget In implement allocat increasing of [ST]. All plans Each (CFO) the recommendations to y CPAR and are cientl very and MOF the CFAA in ffiusni,e guidelines plans calendar was de and new es. intra-year government- a decade 2002 ation s. st submitt tions out of ocedur have func adequatni pa pr eht overall e inform budget sets not the an CFAA isf ar ul in do update af law st budget nor, give to and 2002 DBBs ans an. in ted;a new budget pl pl management Insufficient meaningf execution e separ new Overview Status Budget not trained. prepar The prescribes Execution Budget ineffective. spending consolidated spending IV: Annex in and Budget for spending execution PFMA: Area CFAA (DBBs). direct Key 2002 Institutional development Procedures timetable 1.2 Strengthen capacity budget in units Serbia 52 case the to y the ur the IMF, this eas and and eht limits Finance Tr (in all recording National sub- commitment previous introduced a establishment whereas ITLS ents in with ITLS. eht the established debt new DBB m the ting the the been eht tho of B Also, been and the the controller/co- in accurate for a for co-sign s MOF. has vi de to of commit tracking simultaneously cash insi controller, ad more eht bmitus ttee. has of data. MOF. nances. basis ired counts gn a arrear fi eett for He financial ncial eht Arrangement by unting ce Committee hed ac nditure of B ed available Commi on legal ible lis naif requ the the orizih by tated IMF acco requests is a nment commi DB was with ren nted cases, oved all autrof expe practit tend of estab stocks the no facili and Ex commitment respons of e od to Legislati gover Institution. es ri cur of Accounts it been MOF. DBB appr also thr de a payment nanceiF appoi both pe- the units eht her requests improved nI has de controls but and rmatiofni the Aud have status an pre- ocedur value Public and preparation of is has It Un end pplius e oversees ot by anot olidation pr eme y y es. th no y ee the of ster). or ars. TLSI or accrual is in fied payment cons Mini Current veri Head and a signat The statut payments ministri rerafo on arere the uprS taad a quart Commitment via commitment information Some There Committee Assembl committ assist of Organizational management department lo of . ng contr ual other es all would accr department ncludi in hc ent prevent tracking ]. m .] from be ocedur (i to ed whi strengthened teda pr 62 ars)e [ST and [MT tures is should arr ng,i commit rears modifi of a system) ar a pares Treasury CFAA y to are expendi or nagement account blish new [MT]. function itch considered mmittee formed management of ma ta of onsi nt 2002 nventi ent es easuryrt sw co be ng in e m d on a d TREASURY cash cash new funct newly- rackit of rm, shoul functionst the creati coul te ght the e accurat commit oversight manageme AND on the abl an of improved MOF system oversi debt within reli [ST]. ng oni eh umide oversigh m hi T (based optimization control e and oduce oduct ars.e em or threv budget cash implement Recommendations Intr establis ministries Intr allow arr syst and/ O accounting Parliamentary The legislative A established to [ST]. recommendations and MANAGEMENT CPAR OBL lso proper e. been for a and new SH e established has contr The mandat CA an CFAA been m neither cash ear cl on has has responsibl 2002 s chair a commitment OF of nor mmitments. of A. M e focuse co ept onali th CFAA update Committee committee in conc nctuf the sources,er PAYMENTS, management. and 2002 system control the to yet but in and cash Accounts e capacity not ev present is Overview unable SECTOR: ecti Status The is introduces accounting. Public but appointed structur Limited eff IV: Management Annex ­ y in eru PUBLIC Cash PFMA: Area CFAA ght of Key 2002 Expendit Management Lack commitment control Parliamentar Oversi 2. 2.1 Strengthening institutional capacity Serbia 53 the as a new of pedo on been de aseeler to via TSA. of A to the anned bas pl ed devel and have seem DBBs is oject). ojections and into denominated government ment all been pr 2006. pr this to ed schedul triages. of has controls at collected but is establishment MTS completed depart some tioningar reports ng h daily gretni y accounts end yru integrated the ated (the been zation en gr easur IBB the ng reas unti ovide cas venues T ncial pr re and be Tr by hed placed inte all has, authori acco onal alu fina re hed now be The of blisa does implemented. ITLS y's act to completi est newrof emented. for aditi not ory rrencyuc tr on have for the establis still oject. ure pr impl fully payment easurr the de A. have ventni ign been ctu Data T are str llya and PP the status but bas been MTS lluf re plan fo has m,ets sy management m accounts d em ent the h triages has eht a oni ntia by e an rim m ed cas needs DBB accounts te of syst subst from in TSA RSD time-bound ganizat a n Current The cash mechanis prevail. Weekly A ITLS. All IBB part complet in A TSA or and Recommendation A commit institutionalized. prepar dat n ng T]. s se ory T]. cia tio de [M close e ra [S late enable y still ciari [ST]. th making account ope ryu ablelier [ST]. in gementa repl SA) invent call are e [ST]. eas plement and and [ST]. ugh T( for including an th s benefi e expenditure age establishing tr would mi ro that the to nd system is 62 man release eseht tri and payments laws thtn emati s fu Account and for new ice budget accurat cash cash Account syst ries e ot rv cial yru accounts, CFAA weekly nist preparing manage plan users, se so rect treasury management a h governments budget arrangements plan mi ertt ehtrof all dil dgerella Treas w ovide fective revenue ec heduled Singl pr w DBB ure al ne cas 2002 ef c resentp of manageme be so ti e gener to ne yru new of no -bound to al of in treasury ctu the y/ its an th e e those budget acti Single non-sc cash ure accounts, time and str of ur and realis levelsl for all ove introdu th, e Treas devis os an a new ts eht eas pr l,o al for rm a cl of oni on of own of tr replace te d uni accounts mi at of eht otni m [ST]. on eir procedures adopt of to contr introduce to improv ng should F O asedb( th sms F triage umi ganizat to shoul on accounts to g completion and interi ent O hment accounts med endips or stries OF an M m reports M em M the daily e th MOF MOF ementati DBB MOF transfer mini giro all the Recommendations The syst schedules) mechani The the In the establis The payments impl the operatin of policies [ST]. The implementation of Finalize The and Until 2003, by commit budget recommendations a in as CPAR are eredd s ni y d.e major Thi later aft system been and and regular earl flows eht the been new dr cienti the consi DBB's treasury, has has re e the oved. of items System CFAA effni ar emsit been cash su major eht to outside new en appr some e a venueser has (TSA) accounting the gent ar all 2002 and to actice, of questser ur hings ish but es Treasurer ized chart pr sis, meet weak in ba questser atht important switched ude aboli Treasury cl to y 2001 establ not OBL. no Account in is classification. CFAA ansfer zati update daily tr ityro more ministri mpli ber will new not computer a funds started have few MOF. Single and her pri 2002 can Octo a eht gani y budget Although, on of ot had still modern Or does and displace the sound in gea in in and of of ed d.e but es. a new management day tri can easur of y week. MOF em, government Tr the Overview Status Cash presently. monitored availability payments, each dail week the The accounts ministries syst control The specifi appoint The opened ministri Lack for IV: l e Annex in cash Development a ngl of system Si Genera ry y ) PFMA: Area CFAA ry ngementsa su ur su Key 2002 Inadequate management Banking arr 2.2 Creation Trea Treas Account Trea Ledger Serbia 54 ot to a e is the (OG By- the ing on em DBBs. by llyuf and ni ord rda to the or been ed apply ce softwar ee by syst cc reviewing yet issued A Account andts and sect has to is ne advi and Decr TSA generally not e accounting prepar not Auditing th ng but and new installed lluf been is Accounting, and gn Accounting or Government thi Decree deadli policy accounting the being arof EBFs.r w budget bei Division has jo publicrof COA the auditi 2001 Scope g e The k onali No for ar ent to new of ma of Budget in ly n. iting whether ts w OA) new rts Nat ing. curr ng on no (C and on FSM) cation basis of amewor Aud repo e Accounting is ements the cations (G comp on fr ainit BBs the us porter si an Cash. and ovides per D Decree the pr requir report assifi a Classifi classificatio that deci s requiremen Account government. the cl of recommended software the of Manual 64/2003) execution by IPSAS IMF which matter has of eht meets The arth d across issued established and budget appropriate eness Government on status drafted. C ielp Standard with has an requiring with Accounting in has ap recent the budget vision which is nte Statistics on out sd Government ng. Di Treasury been and and andard F most MOF 92/2002 set MOF's appropriat st arof MOF yc Current The DBBs Accounting. Specifications have A MO the consist Finance implemented The By-Law No. COA law accounting cash, accordance The the Standar set NAS. The poli Government accounti ng a full NAS Under the [MT]. the of meantime, and totn nki thi using and and for are gn use the icy rtme gice se institutions the In adopted pol 62 regulates Reporting epa strat of be D polici [MT]. budget that accounti sector ry cal ng su CFAA the of eness requirements [MT]. at reporting. should comprehensive book public "Financial accounting Trea e system of om 9 odologih 2002 fr no th leur lla and ng" an accounti h the in cati a andards aft met ed of st to in appropri Dr n y onita assifi and Accounti sar detail [ST]. financed adopt the establis cl tioc accounting d specification ats applied accounting of d eht em m fun be neces e full users Exposure shoul review shoul gy syst budget for to Basis lo the epar d e, pr implement out budget MOF MOF Cash MOF odo ot government the ry Recommendations The computerized Complete treasury All standar The structur reporting [ST]. The in IFAC-PSC the The m car and recommendations REPORTING of the CPAR ing. and users. for cture and AND pi GFS all report ZOP reporting are to full and a eht CFAA IMF standards limited 2002 using havet extended ministries, of unting no because butr ared not acco accountingla ns, clea line does CFAA prep was the update ACCOUNTING had was but nancifi to MOF and transactio 2002 which in appropriate ctores the y budget Standards of system financial MSA, Overview SECTOR: Status Classification 2002 classification Lack public Presentl all the responsibilities IV: C Annex in PUBLI Budget Accounting Accounting policy gn in PFMA: Area CFAA Key 2002 3. 3.1 Budget Classification 3.2 Accounti standards 3.3 Enhancing institutional capacity accounting Serbia 55 . y and isl eeS of ur es. osing in eht ol a control; eas reports cl ocedures the de d.e pr payr eht Tr e eral so made operations ar ations purpos ve and al with cipat least caltiy as number ZOP's eh a T st plement e for ). guler le not it at are summary ry ows anti covering Accounting fl and, for e mi ar bm on expenditure between repor go system. as su banking te (iii) hed units and ous-anal MSA hed reportingla ion cash portser to fast accordance relevant as reports reports ve ponsibl DBBsrof quarterly on ired fi ices udi tablis the es in eht d ca-bus rts bstantially of gement; st es (r nanci by establis executt F an to accounting fi su requ s nagement, serv A by poe venueer budget is ma and MO R y e mana been edd PP nctionuf for execution been budge the y. hl happened been consist cash not not liabler y debt corer the data to Monthly mont Treasury's (i) (ii) e-Legalv have have has and prescribed breakdowns easurr T as udgetb has public. Accounting and payment the and easur ce de aces em PPA's quarterly DBBs ats MOF. Government status Tr and m the well the areas: (iv) offi of eht syst by ng the and for the by as from CFAA. to payments; Normati)v( oll ocess interf d on by ed However, pr expenditure level payr ncesa 2002 Current Today following and reporting; and A still DBBs, Treasury accounti relies Monthly submitted standar issued with prepar bal available Implementation the Recommendation above. available Each comprehensive ude: ers t to new that and; or a)c( eht within clni ctlye dgetu and us be and dir B and es y or neib on d unit her least y ng; [ST]. ent budget the these Ca providing ehtrof of ot at nctiuf deal m salari execution nces;a including woul d Direct stemys to ot s, monthl the porter execution y bal able report 62 tiona gn the no basi tea monthl to spendi provide e n sub-category of woul standards of commit ledger ati DBBs' [ST]. ly budget to P ar osing reporting, ement the O budget presented gener and epar up account CFAA functions atht s accounting m the rof pr ecutio mmarus cl consolidated [ST]. accounti it unit ng ffice ge infor Z to ce on y quarterly impl un and guler a is ports and exte down b-itemsus and made 2002 in ehtrof offi s re a) s budget counting and whose ing dg meaningful (b si e annual ac de lizeda on ed ocessi back-o mana pr a dailyra am,et re monthl flow revenues MSA report nment on bufo a break and on ary centr s), s quirer a accounting management (b) B guler Treasury mo lectes liabler payroll (a) cash rnment y,l execution e B with ier accounts, to a) ussic gover new and on and Department, D( (c on ma gove necess and accurate the uding: transactions; reports -year creat es yru disrof The of financial requests; by e budget management mus introduce items half law aries access prepare and MOF; ed rly clni, expenditure all report of y, MOF front-office the de atur for level Treas a MOF MOF ocedur ovi the coordinati Recommendations pr budget The the (a) with benefici payment would pr in (d) Timely prepar legisl quarterly. quarterly the terauq ilsa monthly [ST]. The reports providing level det monthly (d) Each comprehensive monthl recommendations y the ur law, CPAR ng. be ot last of gh- eas and to hi tr and acki the reporting under will will tr lack budget a and and CFAA meos planned new capable reporting. system is new budget MOF. from e procedures available, weak the the for 2002 the with established ized d ffers fiscal are phas y of to commitment accounting still an of su ng lar is implementation based of function polices, bei reports. rts rting reports and law CFAA poer edz sound regu computer update cash- system repo is ements on system for 2002 budget accountabilit and 2002 lluf el es accounting adevelopment introduction budget in ary andardits ogi monthly these July 2003. new no the reporting. of hed, dedu by accounting de odolh provides Treasury into new to was Overview ovi comprehensive Status precl Bookkeeping rudiment The centralized pr met quality Reporting The OBL Although quality inadequate. A establis finish well The introduce Prior there IV: for Annex ogy in Budget odolh reports PFMA: Area CFAA portinger reporting met Key 2002 and Enhancing centralized accounting function 3.4 Fiscal Budget Accountability budget Serbia 56 in with 1 to and yet nalif and and still debtrof 2003 not eht June is the are 2005 2005 Treasury in have ting years the s 2004, annual 2004, ocedures National by pr the Assembly practices the for s. fiscal the in or edlia for basi statement bmitusrof established epared tional budget ts gement pr uded Det the Na been moranda anc incl annual emen and rnment but deadline eht year. mana has e me developed. stat y ot and Gove fiscal or unit debt wer policies. not yl PAA, Republi eht the ios budget atut oad compiled the still the to st ement fol br -year of financial de eh The stat modern are status been from port half down y, velel ent T.y following but ped.o management debt have pres the mble budgets. idal year debt devel Current monthl At consolidated 2004 data-input been Ass consolidated the A Treasury be Major 2006 2006 management c will the in publi being for which es [MT]. ng 62 function management debt, em T]. aini tr M[ ocedur debt syst pr c CFAA and public nagement and all red publi 2002 ma hi es of treasury w in new parliament a ne debt to beingf polici zei [ST]. the and staf . nal ement accounting fi with reports cash the a with [ST] to impl for blish MOF management MOF ganized integrated Recommendations execution Esta Treasury, or The debt The system, be recommendations CPAR and atht debt se the and debt. establish an the to in out rispre CFAA public positions ry ent need servicing beneficiaries. a car 2002 is to ctores of le of manage included financial dget c to and e bu th been There CFAA or of publi incapab update not control eht be capacity to and 2002 has budget. of audit of holders tse in debt ns.o Management limited mentsu ass d budget claiming atig Overview Status by Very Public Republican instr independent liqui are obli IV: Debt Annex in Public PFMA: Area CFAA debt c management em Key 2002 3.5 Publi management Debt syst Serbia 57 a l by ­ rnale more iac the vidual d heds and of of and workr ster ni int DBBs ile affts Fs, s ear finan erent indi ta cl also de basis wef blia B ev Mi est E with eiht eht and etn eht oces drafted e diff facilitated -a in h pr are ic the and line stant and exr e very been another the in been dinat wh on Assi have fo duals stance,nirof or has in cesiv s between Ther tot have ied, to DBBsro coor illts have comprehensi a U ser managementrof litiei divini nso ect. AI same DBBs, ot ati appl icesvres tenxe aborated el uesn AU)I( maj are guidelinest oj the of es nsib ndards under pr the vari onsibility. the Unit the cesi to . spo being to of out and re s been gulations.er sta conti audi act financial heads is sper et e assigned pr some financial me Audit ried ndeduf et report DBB onsibilitipser the Th have some R are BSL of co vante Minister Internal car to ls. control it in audit A eyht rel recognized E the the rot of rmallyof eht alnre ereh e en Head Inspectora Int and aln been Inspectora and to status of onc T ped.o wh ved systems are . how the other an ng e lesor lso ni ex-ant ns procedures 17. terni has ni gnment ivtc iot MOF and devel ai MOF the Budget of ng concei Budget tr portser Current The assi control fefe contr the DBBs whether has riaav the gn written BSL The total Whereas in modern bei internationally traini well The and who are its and amounts stage and phases and audit and ent post all budget y m essn aln ni aln AUDIT ex- [ST]. proper and 62 rect h terni and budget that terni legalit commit cor their blisa reporting), strengthening se the ments and strengthened and (covering eht CFAA the eck 'seru the and est by se and by be d ng fy d rul ciarifi depart buil 2002 ch ns,o veri oulhs es, bene gement ution checks could ot EXTERNAL to endip in to controls, audit y) exec expendit overs ur mana used transacti ocedur the d budget n,o be eas pr AND of at Tr internal ati internal procedures avoi compliance or ot introduced ies,c finance across epar inspectorate could [ST]. (the pr by [ST]. edc are poli de public ons ex-ante ansactions opriateness MOF ng budget tr the Recommendations The of reinfor controls appr recording The institutionalize existi regulations of planning, support inspectorates The experiences functi INTERNAL recommendations L, to ex- this and have CPAR y some tion carried gn nc its and Agency, fu BI and ons limited ­ osest out within cl 2001. CONTRO nctiuf been ces compliance rol ni satisfactor ons CFAA have rvieS were accounti (IA)tid eh T insufficiently carry Budget out cont AL the llowed.of nso is to y. functi 2002 rol of Aula eht elv control neither lo nt controllers alutu ontrolsc sense). by of carries ndate, la e co M tern n h rnaletni ectipsni uipped fecti ar units. In er properly of ma eq ef contr the checks done CFAA These no k whic gn update FINANCI nanci internal ng. by fi there yra West and whether financial by tly bei wor poorly and ­ eht e 2002 heni (BI), number MOF. spending ex-post, ar is ting of of the a inadequate in ngte stries, ZOPs, eht rrenuc (in si check es cientlyi and exis weak nor an str document is ,e by mini by ating to,k eff se Overview SECTOR: Controls ere ellla formed has ocedur Status The been ant need Elements out line and basic reporting Audit Th oper par Inspectorate wor pr per BI staffed, duti IV: C Annex in PUBLI Financial Internal te ra PFMA: Area CFAA financial ecto sp Key 2002 4. 4.1 Poor controls 4.2 Budget In Serbia 58 al ). the the of to audit the EAR has ttee de the audit speci Assistant eht onsi in by the law aff and mmio been heads an st audit and by internal ganizat C not SAI to ganize internal or adopted The telya wide or for users requires an has supporting " DBBs funded report that and Finance been SAI MOF. the both .retsi opri 18 community. for criteria budget onsi in ranceusni audit. out eht an has appr users ect project ot of basis donor in units e alnre law Min not government decentralized dir ganizat e a is of or cialos rried ent int ca the hed ectorate th as good budget common y a audit of Financ to on or The.y to IAU been or d Insp establis orts the "direct an has establishm mandate procedure ranceusni mbl internal mandat Public pmento sub-committee .y rep on a however, Asse the public been Budget h eh staff body T status ich and devel study by the is, government-wide, 11 cialos of (the for has the to National IAU and wretsi y current It a oni y Fs M. the ted of Decree audit Assembl or B 7 onl its em. Ero draf onal 2004 ganizat EUR feasibility the timetable Current The IAU Min With fulfill function. rollout syst A internal or mandat establishment maj A supports A been of Nati A presented a to rnale e an for to th and of le its for Int visit a annual up line those a licab the the [ST]. be who models f adopt internal and enable for choice set ppa lish Assistant the af 2003 to 62 st and milestones ouldhs ot d an Serbian established on least include estab y for nt responsibilities future ant within forward at out the blea individual different an department, for ely adequate based of lev take CFAA plan equatel appoi avail should falling become desirable re ad functions, units, y to setting audit that ies, within to ility basis [ST]. be s a be 2002 its audit Departments operational re y stud ble immediat and it should made in plan rnale bodies is ma suitab as,a eh model [ST]. ensu int other it spending [MT]. would outline annual Aud T. MOF any independence, the timeta SAI establish eht action aln SAI should or a . eht eht any ould responsibilit on department department which an to and ternI sh term, [ST]. other Serbirof model of head overall financing budgets broad is [ST] have or es step, MOF ng to nte their [ST]. study [ST]. audit Department, not the remit out plan ngerol audit a audit audit model a MOF priority, first larger a a provide ocedur the alnre alnre a Westminster government Serbi Recommendations The Audit pr As developi developed As Minister should within audit's To governm sustainable internal carry work In internal ministries with Finalize ext ext pure Select the The provisional, development recommendations lli to a, and the CPAR w pure a ia a and of (BIAS), and . the from Group Sloveni (UNDP) needed velel regulations, is Finance. inh Serb for 2002. of in s tour CFAA Service of wit .k in ance include Transparency creation SAI calol Working not ed wor Agency start assist Program a the study detailed to and eht 2002 establishment Audit operate AI IAfot ith did its for of e en d the in th allocat m due 2001 d an at ghuo ill w de it w Minister do pment but for n thr eht ot lope in European SAI. visit CFAA tio been AR), model update Audit by forwar an ec bodies dev the (E Develo oup sp and 2002 nte dance, edb yet e Assembly, of Gr France by on Accountability way SAI provides In Finance thr in val gui and Internal escri tary havef of fo ucti for established the Nations ingkro OBL equi dge ileda pr ort how staf National W Overview be pp provided Audit Status The Bu and Det on to No Ministry Su be Reconstr The United Program (PACT), consider establishment The Germany Westminster activities. IV: Annex of in a eme External of audit Supr PFMA: Area CFAA opment on e Institution model ecti Key 2002 Devel internal 4.3 Sel suitabl Audit (SAI) Serbia 59 is a a s It ciali wa L and hed a onal year with off engaged establish of Nati to therof active publis event ers uption- pr eht Auditing corruption. very operating and ni action ed ot omot a corr redo pr on how n.o been against lead pending INTOSAI contract s es on ati concrete y en ha fight institution onsps udi eht the no be th eht st has of dialog ntler Declar It and a wi has cur taken 2005. ni Council ni one line Lima has firm and ution independent grity.e in portser als been the restetnI is an int fici of audit 2004 instit of of has of status as It and law sd ble ee cts .y 2003, number SAI Government SAI. external Anti-Corruption visi degr y Confli Current The Standar The the No 2002, The ver recognized high great Government corruption. on Assembl et of oad audit and and plan br both [ST]. civil no Gazet the eht and finances Lima [ST]. standards, SAI work [MT]. th for start and ganization the and in 2001 wi ipatic ficial supreme with Corruption ps public Of 62 Or in 1998 nalo for staff, Serbian special parti in of of annual (including the should uptionr T]. the independent) Budget an nershi anti-corruption technology Cor M[ use ni CFAA framework comply d ationaln methodology, adequate tion,a internati available to and the Fighting part ng legal ternI [MT]. investments functioning r vi (INTOSAI) training and that ed for a fo ve 2002 shoul publisheder ation s ti accountsl established il NGOs re made of against invol [MT]. in and the and oss-cutting by is decisions) meeting Government wly (private fina gn consultre cr that by and independence, ensu inform ne Counc allocation necessary the ghti SAI standard ld the great the Fi collaborati ationl ement media SAI, Institutions financing eht 1977 of the and of of of of decisions the an poused of overall shou financing external expenditure) for gisel (SAI), audit uding common a of ocur of es pr constitutional Audit no ent recruitment budget with nte turec establishment ples ati mpo to and oni T]. clni in and no ation ma the hening [S y, including am dingu possibly, provide ogr Recommendations Finalize oper princi Supreme Declar Devel including development adequate To Parli sustainable activities, and infrastru Until institution contracting auditors revenue Strengthening Commiss strengt Crime Strengthening societ scrutiny pr Publicati (incl and, recommendations will gn that ting CPAR n bei eh ia audi rb and T not citizens of onged (EAR) and on problems Se are i-pr SAI. Institution Union CFAA ng rveyus 2001, The y mult a 2002 oni Audit peano no serious e accounts phenomenon day.ot ng of construction nctiuf establishment Eur Januar most y Re e opini in corruption. the e CFAA no for update throf and Suprem budget out atht th societ of a nalo nal public of fi a ried one naib implementi is and 2002 Initiatives combating Agency Ser in currently pportus is rnatietni ot car is the y gn believe on a eht for de rupti ovi rbieS ng Overview Status There European pr development meets standards. Presentl audited Accordi cor of corruption faci Government strategy IV: and of Annex in of Anti-Corruption audit PFMA: Area CFAA budget uption Key 2002 Establishment development SAI External final accounts 4.4 Corr Serbia 60 had In far ofile y has pr so eht at gn entit and fraud. but ney-o eh high with ot T aimed pendi ces M (FIU) led is is y of financial shed. on Unit practi unit investigated blia level which .y est ence eht gh ationalln were law hi by Preventi ehtrof been gn APML's ed inter Intellig atg cases eht Assembl has 15 cases. FIUs on confronti vestini laundering align by tional Na Financial ni 2005, court and (APML) a In to the status as cases applied o led by success wt anti-money hening cases. Administrati has ples new Current The Laundering functions some 2004, court none A strengt princi adoption anti- criminal passing its money of 62 confront CFAA including( to) problems 2002 plan ated in ev associ legislation eht and comprehensi [ST]. a po laundering nmento Recommendations Devel money envir laundering recommendations CPAR financial and and CFAA 2002 undering of la n. CFAA money concer update of ous and 2002 seri in a is incidence Overview Status The crime IV: Annex in laundering PFMA: Area CFAA financial Key 2002 Money and crimes Serbia 61 s la a of leg e bidder th of 2005 CPAR in provide eht ble. in in to edt ment om possi new ent competitiveness. fr as ora reatt or rp transparency, below. and al co onos expressed in for amendm moveder as given be erenti an base ef be to by pr d ation Outstanding recommendations Details Comments 0022 text firmer accountability Any shoul legisl c s ,4 ,1 all ubliP were ure 2002 ly before good of and atus, st CPAR percent) ed ni Ju de ulyJ of LPP one been the was 61( of was in of if eht better age no eh d eht of 7.5 Proc e on T 2002 report Amendments e of iab has byt vingsas es d act to y. on aver awar adequate was 2005) te forc requirll even otecti Also ng the of conductingrof el sti forc d Ser risk, edur 2003 contr own to and pr ect, otecti in h" Repor higher iato the in to gr ingredients but procurement ved. (End nois publicationrof Pr cant".i eg me d in Proc per precis rroc (CPTR) "hig ce,i N sa re d e has key wo allowed resholht s ceier nctioniuf eht lu 2003 re defined nc nmento a wa ement h a Off the the modifications. enacted, mor Open dders ente ement, Alterations tene all ds, and for to Rights status co wit "signif ot to bi and wo which 2003. chi ocur to was law ocur on streamlined es awar bel ion oni the in envir gn in int ghtir was)e pr ing of 3, ni in ma eht ated ement wes pr PPL dere abl lo rdo contained e 8.5 law act act (whr e percent). PPL new Law alt Current Th that public associ changed Accordi Procur achieved dna cc Th ocedur nde (2 A the number around and The 2002 public improvements. The to 2004. This pr tender's was contr contr te accept composit Commiss Tenderers' defined an gn ld new CPAR be the w.a hous enacti L ia standard to rb 2002 should Se and in rityo ement in ons governing w rules pri utions. rocurP Acts c Latn comprehensive below. give regulati the instit by d documents. in no Publi emer given recommendations procurement oulhs Uni ement a oved Procu e supported ocur recommendations Recommendations Details Clear included State Serbi impr Th be implementing pr CPAR and in es a a at CPAR as high for through and wa 2002 CFAA been of is L key cienci June eht defi GDP). value of 2002 2002 public of of accounts vingsas nmento weaknesses ement Parliament the of cal of recently, of ez total and Federation ocur of the public criti CPAR of procurement. envir the Pr many CPAR until ement percent update ealir gaps c Republic but the on. in good before ained a in has, ement and percentage (9.5 can percent public ubliP law, 2002 functi procur many put completion for Federal in c 20 ocur system aft of contt ed as pr were dr was for af ement ect publi ficant dr identified legal time Overview new ocur Status Procurement negl Yet signi expenditure Government much competitive Public risk. There the Serbia. A (PPL) the CPAR Yugoslavia. This ingredients pr were IV: Implementation Annex of in ev in PFMA: Area CPAR ati Status Key 2002 Overall Assessment Legisl Reforms Procurement Serbia B. 62 y the er rof eht s appl ate bett frequently the ion 2005 e by at may and ar guler in which e ot member ed new erd TRP guler TR C hed or under ocedur PPL CP of dismissed pr d"eta consier eht s Proper. of functioning. in and establis ent be ed be m conditions d member d effective Outstanding recommendations The "negoti shoul specifi The appointed Government shoul appoint its e eu in e fied eh a- to wa ed val L out the ocedur T. ctedi romf fo on ng eht and ement. that of 22, phas phase pr Providers access ement wol (PPO) 2003 with equali prior strer e k ers PPO PPO. y of model ot ocur nted pr cle bidst us lac 15, the ficient pr two- ocal bidders compar the keeping d ttees ocur ding nderet ding of ef 2005) poi a first open all no restricted noticed ot quester appl percent nderet blishia pr cts,a public services. for Office as of be Arti, si to ecti est udes c PPL. c and assigned with n aderp awar ase, bmius (iii);s ciprer 20 2003, legislation and public accor (End use LPP omic, aki ph to Sel a of commi contr ure excl PPL publi on model January acts agency of ­ de must PPO wides ed eht v)i( of backwar ofr of on Serbia (i) ep econ em should opening, an, goods ciencies, the ocedure" bidding no the atht uptes (ii) and st ement ement pl contr of an status (It ot content pr condes nviti entity ocrp ni domestirof a quarte secondary model for Procurement stys AR: Defi gn de icati d was the are ng romf e.); te ency ocur edu regulation ocur ent CP in nion iato ce;iv "club" pr pr countries. tesu first of introduction tender,d ement ement operating independent Ser original iss Public PPO ocedur eg the ocur ocur an Current Critical 2002 procedure accordi "restrict competitive prequalif and, bidders purchasi opi pr N transpar of sort other The preference constit the In introduced implementation recor public also notices, public pr pr documents The began The as Government establishing transpar the CPAR proposes institutions Law Public reporting Until 2002 in latory enforcement. new a (PPO) regu of improve Procurement Government. Office to the stronger ishment Public bla to recommendations and needed est new Recommendations New are A the Procurement directly CPAR and is the ly, early ni CFAA for cl staff oper not 2002 e impr of art procurement ne specialist weaknesses oft duct CPAR responsibility the non update con and to ement, and 2002 procuremen in ocur Untrained, pr compounds authority capacity Overview Status The conducting defined. The weak. handle which IV: for Annex in PFMA: Area CPAR ement ocur Key 2002 Institutions/ Organization pr function Serbia 63 of y,itv an velsel ement high be strategy ocur trainers, to 2005 rbia.eS of on de actira public a in ni de pr of for guler cludeni, ng cul ers new bas training graduat proval make ng, aini curri ap or be h to tr cent o d wit, ng out int on-goi developed shoul curriculum need institutions. a an rainit budget be ement is carry in ement d ng ning ot comprehensive ocur ocur Outstanding recommendations A shoul Trai approved pr complexity. There traini and develop pr education Delays eliminated. eht y ed Jul the and in of not ment Law and with on about than of s Ministry eat filing. PPO prepar a PPO Committee ational tr re ndsuf and aim without ed. the issues are decision and The otection the, purchasers mo training of been heds Procurement- Oper atn 2005) the ars: Pr ith ocurement CPTR its ains procurement eseh published both: lic Comment ontia e (w Pr publi pill by T tailed have elimi tenance report with contracts (End lic the cont om de opri L. wer gs has "Pub pub reeht ehtrof fr ce. alsi Economy, on (CPTR).th of ed allocation, minarsesro of at PP main es inr 2003 Public slation- cally appr of on which case rd a maj advi PPO gie status and rig the bidders) eht mater ng regul co ot . 20 L practi rs' es, y procuring by rests re, gn theagr re Procedur lela and ng ngire eminated. handbook participants quantities nalo of system a been Finance Commissi functioning osely ngi 2004. nde cl requests, ms aini off diss example, respondi ganized Current The Serbi of the Te The is Procedur covered of mak These 27, Accordi or 04 3000 entities expl and Large educati and For seminar Secondar Examples" Cases cor have be oved should with, in term. training s thatf CPAR will ec through appr required .y place . and long the cial Staf be entities. 2002 rvieS an eht fill on xite take the offi maybe de to itions activities in function de ocurement pos should ng pr nmento deepen over public spending its bas compl should to Mutual established. of eligible traini be envir ng complet ement the d public Law ni be be major of to ully functions by for level identified procurement, trai sf ocur in planned relationships. of pr functional, edg ped.o shoul de initiatives on should audit a ement ed recommendations is ning Faculty am devel graduat ogr stemys ccesus cat ocur Recommendations PPO dischar Agency. Comprehensive be Trai curriculum a Training within institutions The pr twinning A pr have training dedi Internal established CPAR and as it e such ng CFAA s ons and maki zati inadequately requir exist 2002 e s of ar usht gani internal cial organizations or c weak. th offi capacity list laws, CPAR update bidder bo are of Law. to e publi the lso ning of d and 2002 fails host of audit, hol in s Trai by contr to number law ght ri eg ed Faculty cult Overview otected. alnre lar limit the Status legislation. The pr Regarding ext A training. A in Budget governed diffi IV: Annex in and Building PFMA: Area CPAR ng rol Key 2002 Traini Capacity Cont Environment Serbia 64 ry car of the hc ot oy with Council, ecialps Mar ement. in s its of 2005 empl Supreme testal conduct eht rioretnI asing with Organized zed rch of in d auditors ocur of the pu eht ev the pr needed. and of gani discus new of d is est shoul of an oni ert with or collaboration Orrof SOFC),- to rg Directi la audit of law EC audits Anti-Corruption spectni Minis no Prevention the contracts compliance independent y the Crime g (2004/18/EC). de the the for and Institution ement ar ectiS of llin to ement Government annual establishment ce rot es Government as 2004 ocur Outstanding recommendations The qualifi out The Audit pr Enforcement CPTR, budget offi (Office Crime, Financial onc ocur entiti The EC pr consolidated 31, as his of well (t to on.i for C). the oval a e e as nister Serbia the been E to costs. ni seen of ingllo rupt Mi of ia'sbreS ment of with eat appr ocess s wher wer be blisheda Organized and has eht establishing while outstanding tr pr ad e d cor est the contr capacity ces done that by le 2005) competitive and for ni developed ali higher ur k ntment s and gn Anti-Corruption of Office EU, and key budget is acti been inspection, be les k, oulhs ce Prevention entities porte k appoi (End the ni Th.ra pr wor legal ghti the ewed fi R the to the ng depart ces offi harmonized revi preferent ocurement ye yi ereforeht eht ni has for Section and by of SOFC),- procurement acti 2003 be O,PP ysa pr eht) nt ement proper pr ation the appl budgetary needlo (ii the status and ated, a framewor framewor special (Office Crime, purchasing Procurement to na del poi means in of CPTR public issued (i) cause es ocur their and no contr e: and the pr guler eht ement ant Crimela cooper ni of completely Serbi ar late y needs both acts. Public ocess ocedur ocur with Interior largest ms ostp m per Current Frequent pr start situati pr Given public poorl introducing institutional pr import Close with Council as of Organized Financi the contr The clai system almost directives institutional ex- clai As issues bidders; one draft as CPAR of at med 2002 expedited ai in be ementation pl to wsal mi is five law of and corruption. ation ement recommendations package ocur a Recommendations Prepar pr of tackling CPAR and y not budget weak no e major LDS) and ni and y level ar Center eht the CFAA of uti ement. ver tiny.urcs a a (C is the ed Anti- heavil "a by exceeds es public." esv of es on nso ement as that it external Pact 2002 ocur are Instit udi reli recti rent. republic Serbi St decisions from onsis icati aspects. draft of pr and decisions edd used, cur rruption ni c n.o demonstrat cklingat Di eligibility Procur (SPAI). Act the stating xpendituree on Audit ovi and co ati qualif be rnal auctions" the regar ni pr and by EU by CPAR update the atht ement upti has Stability to inte ocurement ni eme dependentni hidden si ement of otherla eh uption as significant or T is of pr corr vigor dders' taken and for gap 2002 uprS deralef ot Democr es h rro were e bi sever procur C financial although in cludingni, over of of bot atht of ­la nformal "all sect of mentn "i such Initiatives Procur ation e h Procurement U E and oach icat absence lso major at bjectus that ar a ncee ber Gover a) repl Procedure gn em. ract. Li healt draft mulrof ment appr The Overview obl Status accountable funds The contr and Abs (SAI) means bei Procurement-related pr "Report for stated transactions There Cont The "epicenter" New commendabl corruption Corruption The on their treat (technical, criteri The large Directive, Open IV: Annex in with PFMA: Area CPAR uption Acquis Key 2002 Procurement Related Corr Alignment EU Serbia 65 2005 in new or Outstanding recommendations than rather 2005) (End Government status the by Current CPTR Parliament. CPAR 2002 in recommendations Recommendations CPAR and een the w to have CFAA bet es EU ce eht 2002 The choi ocedur that of ni pr the ded procedurest ovi CPAR update pr andard leaves st Restricted y, and 2002 This and entit in mum ni gn advertisemen followed. mi Open Overview ocuri Status the Directive. the pr required been IV: Annex in PFMA: Area CPAR Key 2002 Serbia