Republic of Kosovo. Public Financial Management Reform Action Plan (PFM RAP)

Transcription

1 Republic of Kosovo Public Financial Management Reform Action Plan (PFM RAP) November

2 Table of Contents 1 INTRODUCTION REFORM THEMES CREDIBLE POLICY BASED BUDGET TAX ADMINISTRATION DECENTRALISATION FISCAL RISK BUDGET EXECUTION, ACCOUNTING AND RECORD-KEEPING AND PUBLIC INTERNAL FINANCIAL CONTROL PUBLIC SECTOR PERSONNEL AND PAYROLL INTERNAL AUDIT PROCUREMENT EXTERNAL AUDIT LEGISLATIVE SCRUTINY DONOR COORDINATION RESPONSIBLE IMPLEMENTING AGENTS AND REPORTING...30 Annex 1 PFM ACTION PLAN Platforms and Matrix

3 AC ACDEI AGA AMP ANP BO BDMS CEP CFA CHU CHU/FMC CIAHU COFOG DB DCFDM DIA DMU EC ECLO EPAP GDP GFS HQ IA IAU IACHU ICT IFAU IMF IPA IPSAS IRB ISPPIA KCB KDSP KEK KIPRED KFMIS KPA LLGF LPFMA LPOE Acronyms Audit Committees Agency for Coordination of Development and European Integration Autonomous Government Agencies Aid Management Program International Airport of Prishtina Budget Organizations Budget Development Management System Central Public Enterprises Central Fiscal Authority Central Harmonization Unit Central Harmonization Unit for Financial Management Control Central Internal Audit Harmonization Unit Classification of the Functions of Government Database Division of Cash Flow and Debt Management Department of Internal Audit Debt Management Unit European Commission European Commission Liaison Office European Partnership Action Plan Gross Domestic Product Government Finance Statistics Headquarters Internal Audit Internal Audit Unit Internal Audit Central Harmonization Unit Information Computerized Technology Internal Financial Audit Unit International Monetary Fund Instrument of Pre-Accession International Public Sector Accounting Standards Independent Review Board International Standards for the Professional Practice of Internal Auditing Kosovo Consolidated Budget Kosovo Development Strategy and Plan Kosovo Energy Corporation Kosovo Institute for Policy Research and Development Kosovo Financial Management Information System Kosovo Privatization Agency Law on Local Government Finances Law on Public Financial Management and Accountability Local POE's 3

4 MDA MEF MFE MIT MPS MTEF MTC MYR MESP OAG OPM PE PER PEFA PEMTAG PM PIFC PFMA PIP PISG POE POEMU PPA PPL PPRC PRB PTK RTK SN SOE SRSG STA SIGTAS TAK ULT UNIREF UNMIK VAT GFS Ministries, Departments and Agencies Ministry of Economy and Finance (synonymous with MFE) Ministry of Finance and Economy (synonymous with MEF) Ministry of Industry and Trade Ministry of Public Services Medium Term Expenditure Framework Ministry of Transport and Telecommunication Mid-Year Review Ministry of Environment and Spatial Planning Office of the Auditor General Office of the Prime Minister Public Enterprises Public Expenditure Review Public Expenditure and Financial Accountability Public Expenditure Management Technical Assistance Grant Prime Minister Public Internal Financial Control Public Financial Management and Accountability Public Investment Program Provisional Institutions of Self-Government Publicly Owned Enterprise Publicly Owned Enterprise Management Unit Public Procurement Agency Public Procurement Law Public Procurement Regulatory Commission Procurement Review Body Post and Telecom of Kosovo Radio and Television of Kosovo Sub National Socially Owned Enterprise Special Representative of the Secretary-General Single Treasury Account Standard Integrated Government Tax Administration System Tax Administration of Kosovo Unit for Large Taxpayers Unified Reference Payment Code United Nations Interim Mission in Kosovo Value Added Tax Government Financial Standards 4

5 1 INTRODUCTION The Government of Kosovo has embarked on a wide review of Public Financial Management. In the first quarter of 2009, a Public Expenditure Financial Accountability (PEFA) assessment was carried out and this updated and extended a similar analysis in As well, under a World Bank supported project Public Expenditure Management Technical Assistance Grant (PEMTAG), work was carried out to identify the direction of PFM reforms. The PEFA concluded that the strength of the existing PFM system is centred on the successful introduction and implementation of the Financial Management Information System. This has ensured that commitment control is applied in budget execution and that reporting on budget execution is timely and meets the need of management for effective decision-making. Other strengths are found in the areas of internal audit and control and external audit where the process is in place and capacity is being built up for effective implementation. Nevertheless both diagnostic exercises have identified significant and continued weaknesses across the range of the PFM cycle which requires action. The purpose of this paper is to present a reform programme tied into addressing theses weakness and also ensuring that the strengths are maintained and built upon. This paper marries the two approaches used to determine the PFM action plan. Under the PEFA methodology, PFM is analysed using 28 high level indicators (further subdivided into 69 dimensions) analysing Government PFM processes and 3 indicators (with 5 dimensions) focusing on donor government interaction. 1 The PEMTAG work developed the Platform Approach which aims to implement a package of measures or activities designed to achieve increasing levels ( platforms ) of PFMA competence over a manageable timeframe. Each platform establishes a clear basis for launching to the next, based on the premise that a certain level of PFMA competence is required to enable further progress to take place. 2 Following the PEFA, a questionnaire was sent to each of the PFM implementers to collect information needed for the Action Plan that was not generated during the PEFA. This exercise was also used to disseminate the draft PEFA and get feedback. This paper is organised as follows. The next section presents in summary form the strengths and weaknesses of PFM in Kosovo using the broad themes of the PEFA approach. In each of the themes, the reform goals and reform actions to be undertaken are then outlined and linked to the platforms which show their sequencing. Existing technical assistance support under each of these themes is finally presented. Section 3 outlines the agencies responsible for implementation and reporting arrangement. There is an annex which summarises the Platform Approach and provides a PFM Action Plan matrix which details the relationship between the PEFA analysis of the PFM strengths and weaknesses and the planned action for each of the 31 indicators and the 74 dimensions, indicating under which platform they would be addressed. 1 See PEFA Public Financial Management Performance Measurement Framework The Kosovo 2009 PEFA Assessment Report was published in May See DFID Briefing July 2005 A Platform Approach to Improving Public Financial Management on Platform Approach available from DFID website. A paper Kosova Public Financial Management Reform Action Plan was produced for Kosovo applying this approach. 5

6 2. REFORM THEMES 2.1 CREDIBLE POLICY BASED BUDGET Existing Situation The recent 2009 PEFA assessment found certain strengths in our existing approach to Budgeting in Kosovo, including: Legislation in place that is well understood and generally implemented, including the Law on Public Financial Management and Accountability. Annual budget legislation which provides each year s appropriations and policy guidelines. Annual budget process established which includes all the necessary ingredients Budget calendar is well-articulated and works on a familiar schedule. Revenue forecasts which are generally conservative. MTEF process in place. However, the PEFA also identified opportunities for improvement in the following areas: Planning and budget formulation including Budget Organisations capacity to develop strategies and integrate the planning of the investment cycle into these strategies. Budget calendar where slippages in recent years have impacted on the effectiveness of budget preparation. Cabinet engagement in the strategic elements of the budget process. MTEF and the annual budget, where links are not as well defined as they should be. The annual budget and the first year of the MTEF are not the same. Lack of uniformity in quality and clarity in the mission statements, description of the existing situation, and goals for sectors in the MTEF document. Relationship between the expenditure outturn and budget. Aggregate outturn expenditure was much lower than budgeted in the period from 2006 to Under-spending on the capital account which has resulted from over budgeting and inadequate planning. Stock of arrears recording and monitoring, particularly within the year requires better recording invoices in KFMIS. Reform Program Kosovo seeks to attain best practice in Budget preparation, as characterised by the following: A credible budget that is feasible to be fully executed with proper program and project management. A capital program that maximises the net economic and social benefit for citizens based on government priorities. Allocation of funding based on Government policy rather than simply historical funding patterns. A multi-year approach to budgeting based on the MTEF and rolling forward estimates approach. Budget presentation that seeks to link funding for inputs to identifiable and potentially measurable program outputs. Access to performance information, including results of monitoring and evaluation, to assist budget decision making at all levels. Reform Goals We will implement key reforms in seeking to address current weaknesses and move towards the more comprehensive budget where the inputs are more effectively linked to service delivery. Our goals for these reforms are to: 1. Improve linkage between Government policy, organisational strategy and the budget, using the MTEF as the key link. Improved links between Government Policy and the Budget implies enhanced engagement by the Cabinet at key stages of the Budget process. 6

7 2. Improve capital planning based on enhanced project planning, execution and monitoring. 3. Implement a system or rolling forward estimates using appropriate information systems. 4. Increase the capacity of all Budget Organisations to undertake analytical work required for existing and proposed planning and budget functions. 5. Introduce some elements of performance management to assist public sector management, including a budget that links inputs to specific program outputs. Reform Actions We will take the following actions to achieve these reform goals. These are specified under the platform approach, recognising the linkages and sequencing of the actions and reforms. Platform 1: 1. Capacity Building for line ministries in capital project planning based on PIP. 2. Requirement of enhanced analysis, incorporation and presentation of the recurrent costs of capital projects in the budget. 3. Capacity building program for line ministries in capital project execution. 4. Design and implement a monitoring program for capital budget execution, including regular monitoring meetings and reports. 5. Activate the Fiscal and Budget Committee of the Government according to previous Government decision to track MTEF and Budget development and advise government on strategic resource allocation. 6. Re-structure the Budget Department in accordance with the LPFMA and MFE plan and formalise executive appointments. Platform 2: 7. Draft and implement a Budget Circular for the preparation of the MTEF. Link the preparation of the government-wide strategic planning process (led by OPM) with the MTEF process (led by MFE). 8. Develop and commence implementation of a mechanism for linking strategic planning activities in line ministries to the MTEF with aim of having properly costed and realistic sector strategies that reflect considered policy choices. 9. Commence implementation of a system of rolling forward estimates, e.g. where the multiyear estimates of the 2010 budget form the starting point for the 2011 budget. 10. Re-design the fiscal rule in consultation with the IMF to act as a benchmark in establishing a credible budget. 11. Undertake measures to enforce legal and procedural requirements for the costing of draft laws and new policy prior to consideration by Government. 12. Finalise design requirements for Budget Development Management System that improves this tool for managing aggregate fiscal discipline including multi-year estimates and features for enforcing multi-year ceilings. Platform In the context of the Budget, identify several programs for pilot implementation of a monitoring and evaluation framework. Identify output based performance targets for these programs. 14. Laws on Civil Service and civil service pay are passed and appropriate subordinate legislation developed having regard to fiscal impact. 15. Revise the current set of Government priorities prior to the MTEF to facilitate allocation of scarce additional resources. 16. Implement a mechanism for improving cooperation between ministries within a sector in developing MTEF sector strategies. 17. Payroll is moved to the Treasury. 18. Functional changes are implemented in line ministries to link and improve strategic planning and budgeting (Functional Review). 19. Monitoring and Evaluation Unit is established within Budget Department and commenced collection and reporting of outcomes against targets for pilot programs. 1-2 initial evaluations are conducted of pilot programs. Broader identification of performance targets is implemented for Budget. 7

8 Platform Conduct comprehensive Public Expenditure Review (PER), being a one-off zero-based assessment of public expenditure allocation. 21. Continue the PER process in annual ministerial reviews as part of the MTEF and budget process. Technical Assistance We are currently assisted in this field by the following technical assistance: The EC project: Improving the quality of public investments in Kosovo and preparing the grounds for EU funds supports the PFM reform programme from July 2009 to July The ToRs specify that the assistance will be split into eight activities (components): Component 1 - Review and documentation of the strengths and weaknesses of the Kosovo planning and budgeting system; Component 2 - Further integrate the planning and budgeting systems using, recommending mandatory use of, among other tools, the BDMS and the PIP systems; Component 3 - Review of existing strategic documents in the MTC and MESP and make recommendations that will allow them to drive budgeting in those ministries; Component 4 - Introduce modern costing techniques in the core line ministries and municipalities; Component 5 - Introduce modern project planning and management techniques in the core ministries and municipalities; Component 6 - Provide IT support to the BDMS and PIP systems to ensure ownership and sustain their use in the budget process; Component 7 - Provide on the job and classroom training on the various components; and Component 8 - Provide workshops and study tours so that participants can gain experience and knowledge from EU and accession countries in policy prioritization, planning, budgeting, and managing EU funds. UK DFID Functional Review and Institutional Design of Ministries (FRIDOM) project which is assessing, inter alia, the structure and roles and responsibilities of budget organizations across the Government. UK DFID project support for developing strategic planning (through Office of the Prime Minister) UK DFID Support to the PEFA Secretariat assisting in the Action Plan World Bank Public Sector Modernisation Project Component 1 includes: Improving public financial management performance in selected budget organizations and includes Capacity building for PFM. This activity will focus on building skills and capacity in line budget organizations by addressing weaknesses in budget planning, preparation, execution, budget management, and review. The activities will be concentrated in the Budget and Finance Departments of five major budget organizations: Ministries of Education, Health, Agriculture, Justice, and the Judicial Council. USAID project Economic Management for Stability and Growth provides technical assistance in this field. 8

9 2.2 ADMINISTRATION of TAXES Existing Situation The recent 2009 PEFA assessment found certain strengths in our existing approach to tax administration as applied by Customs Kosovo and Tax Administration Agency in Kosovo, including: Published tax laws, which can be downloaded from the Government website. Taxpayer education documentation exists in various forms written, electronic and face-to face including workshops and seminars. No discretionary exemptions Appeals process in place Transfers from the tax authorities to the treasury account are timely Reconciliation of accounts and payments is timely. However the PEFA assessment also found several weaknesses at the time of the assessment which we were addressing at the time of the assessment and are now in place, including Registration of tax payers was conducted by the Agency for Business Registration (Ministry of Trade and Industry) which did not allow the Tax authorities to maintain a master file of tax payers under their control. The Tax Authorities are now implementing their own system. Nevertheless there are opportunities for improvement that we are now addressing that will require time to be realised, including 3. Interpretation of the tax laws is inconsistent and low quality and reduces taxpayer confidence. Cumbersome appeals process provides for delays Ineffective procedures for collecting penalties for non compliance. Audit function is not managed effectively Recorded arrears are high. Reform Goals The objective of our reform program is to create a modern tax administration to meet our revenue collection goals by adopting modern, efficient, and transparent processes and systems, lowering cost of compliance for tax payers and achieving a high level of voluntary compliance. This purpose is to be achieved by a combination of inputs to support Improved management structures and staff capability; Computerisation; and Self-assessment. These inputs are structured in a way that contact between taxpayer and the tax authorities are minimised, which also can influence the minimisation of corrupt practises. These features are also enhanced by A focus on tax payer services and taxpayer education; and Audit (based on risk assessment) which are designed to increase voluntary compliance. 3 The two tax collecting agencies are at different stages of development with Customs being further ahead than Tax Administration Agency. While there are improvements to be made in both agencies, most of the administrative reforms fall in the area of Tax Administration Agency. 9

10 Payment of assessed tax is though the banking system, which also removes face-to face contact between the Kosovo tax authorities and taxpayer. Reform actions Platforms 1 and 2 All reform actions are articulated in the overall strategic plans of TAK, including to. 1. Ensure that all tax laws are further supplemented by sub-legal acts which provide clear explanations of the way in which TAK will implement specific provisions. 2. Require that all written advisory opinions on matters of interpretation of law or technical issues be approved by Managers and distributed to field components only by managerial staff, to ensure that laws are applied uniformly in all regions and with respect to all taxpayers. 3. Provide Team Leader of Rulings function training in all aspects of all tax laws, establish specific expectations for learning and development. 4. Provide refresher training in tax laws to all taxpayer education personnel and train them in application of new laws as they are published 5. Revise and update Handbook on Taxes in Kosovo to reflect new laws, sub-legal acts, rulings, and procedures by 30 June Modify the organizational structure of headquarters to introduce an interpretation division 7. Provide refresher training in tax laws to Appeals officials and train them in application of new laws as they are published. 8. Conduct a writing workshop for Appeals officials so that their Appeals decisions are in a standard format and provide clear explanations of the appeals decisions and the basis for those decisions. 9. Finalize and implement taxpayer registration procedures and sub-legal act. 10. Establish a taxpayer registration function at TAK which would: a) receive registration applications b) conduct validation and risk assessments c) issue taxpayer identification numbers and registration certificates and d) maintain a proper up-to-date taxpayer register. 11. Finalize Penalty Handbook and sub-legal act (one document). 12. Train enforced collection officers and taxpayer education inspectors in new penalty regime. 13. Train tax inspectors in application of penalties during audit so that penalties are imposed, as appropriate, at the time of audit. 14. Finalize rollout of audit tool and training staff in its use 15. Activate the SIGTAS audit module so that management control over audit cases is improved. 16. Update audit risk system (audit tool) to include individuals and partnerships. 17. Update audit tool for use in reviewing VAT refund cases 18. Utilize audit tool for centralized case selection for 50% of all cases to be audited in the first half of 2010 and 100% of all cases to be audited by the end of Modify the organizational structure of headquarters to introduce an audit quality review function and audit risk and analysis unit. 20. Finalize and implement enforced collection sub-legal act. 21. Activate the Enforced Collection module in SIGTAS. 22. Train enforced collection officers in new procedures provided in the sub-legal act related to enforced collection. 23. Continue monitoring of payments made to commercial banks to ensure that revenue is timely transferred to the Central Bank and errors in transmitting payment data are minimized. 24. Explore capability of electronic transfer of funds to facilitate the use of electronic filing of tax declarations. 25. Continue timely reconciliation of revenues with Treasury. 10

11 Technical Assistance Support USAID has an assistance program in place in TAK, which includes two tax administration experts and one IT expert. The two tax administration experts are expected to remain until the end of the current USAID contract (30 June 2010) and the IT expert is expected to remain until 31 December Description and Timetable: The current USAID project began on 1 July 2007 and is a three-year commitment, scheduled to end 30 June The primary goal of the project is to assist the tax administration achieve its strategic plan goals, with specific expectations of finalizing and implementing an audit risk selection system and increasing the effectiveness of the tax administration. For Customs EC TA to 1. Establish the legal framework for the implementation of simplified procedure and customs warehouse procedures. 2. Define specific additional Customs Laboratory equipment Draft manuals and guidelines on safety for customs laboratory Train Customs Laboratory Chemist on use of customs laboratory equipment 3. Improve quality of intelligence produced by the Sector Establish and develop sustainable cooperation with other law enforcement agencies Produce guidelines for Intelligence Sector IMF Fiscal Affairs Department will field a technical assistance mission to review progress in implementation of our Strategic Reform Plan and to outline for us an IT reform strategy 11

12 2.3 DECENTRALISATION Current Situation The recent 2009 PEFA assessment found certain strengths in our existing approach to decentralisation in Kosovo, including: Transparent rules for transfers determination and allocation ensured in the legislation and generally applied during budget process. Secured funding for the delivery of minimum standard services by local governments in the education and health sectors. Timely reporting of municipal fiscal information consolidated into quarterly budget execution reports and annual financial statements. Nevertheless, certain opportunities for improvement were also noted, including: Timeliness of the information on the allocation of final grants; e.g., delays in the determination of final grants disrupted the 2009 Municipal Budget. Clarification, determination, and application of standards in the education and health sectors, including linkage with respective sector strategies. Reliability and availability of necessary statistical information underpinning determination of grants. Reform Goals We are now seeking to speed up and strengthen the Municipal budget formulation process by introducing greater capacity building and process. Decisions on government transfers, ceilings and other MTEF related issues to be made and disseminated more promptly in accordance with timeliness foreseen in the LPFMA so that follow-on actions and decisions can be made with sufficient time for implementation. Reform Actions In seeking to attain these reform goals we plan to take the following actions: Platforms 1 and 2 ongoing: 1. Grants Commission Secretariat to assume its role in technical and analytical support to the Grants Commission, including provision to the Grants Commission the assessment of compliance with rules based system established in the LLGF before municipal budget development cycle is finalized 2. Grants Commission Secretariat to be staffed with competent and capable professionals 3. Grants Commission to ensure that the LLGF rules are applied transparently and in their entirety 4. Grants Commission Secretariat to maintain regular publication of decisions made by the Grants Commission 5. Strengthen the role, capacity, and accountability of the Grants Commission Secretariat; e.g., introduce mandatory quarterly reporting of the Secretariat to the Minister and Grants Commission. 6. Before authority to borrow is granted to a municipality, the Auditor General should issue unqualified audits of financial reports for two consecutive years. 7. Looking forward, a certification mechanism of municipalities financial management capacity should be developed. 8. Intergovernmental transfers accounted for in the medium term macro-fiscal framework and MTEF processes (i.e. Government to refrain from ad hoc policy decisions affecting distribution or allocation of transfers) 12

13 9. Introduce in the applicable legislation, such as LPFMA, provisions specifying timetable for dissemination of reliable and binding information on allocation of intergovernmental transfers to the units of local government 10. MFE, in its internal activities and processes, to adhere to and respect all aspects of the municipal budget calendar to ensure that municipal officials are able to start the budget process in time and will have sufficient time and information to perform all necessary internal procedures throughout budget development process. It is also essential for Municipal Assemblies to be able to review and approve the proposed municipal budgets within the timeframe defined by law (including citizen participation) 11. Maintain application of rules and procedures governing Kosovo Financial Information Management System to municipalities 12. Ensure that periodical financial and budget reports issued by the Treasury Department account for consolidated municipal fiscal data. Technical Assistance USAID Economic Management for Stability and Growth: advisors provide technical assistance to Municipal Budget Department/MFE in municipal budget process and policies. They also provide support and capacity building to the Grants Commission Secretariat in the implementation of intergovernmental transfers system established in the LLGF. World Bank: advisor who provides his support in preparing documents all the while the government grants are appropriated and Grants Commission performance. IMF Fiscal Affairs Department mission to review LLGF and implementation of existing provisions 13

14 2.4 FISCAL RISK Existing Situation The recent 2009 PEFA assessment found certain strengths in our existing approach to fiscal risk in Kosovo, including: Auditing of SOEs under direct KPA administration Quarterly reporting of SOEs to the KPA Nevertheless, certain opportunities for future enhancement of fiscal risk management were also noted. No consolidated report on POE finances is produced No report on overall fiscal risk of POEs is prepared or published. POEs are not reporting routinely to the MFE. Moreover a potential emerging fiscal risk has been identified with respect to municipalities. The current legal framework prohibits local governments to enter into any borrowing arrangement, thus creating fiscal obligations for the central government. While the (draft) Debt Law will regulate responsibilities, criteria, and limits for municipal debt, it is foreseen that municipal debt shall be subject to a prior written approval of the MFE, while such approval shall not constitute a guarantee, or in any way establish any liability of the Government for the payment of the debt. Municipal debt will not represent a direct or indirect obligation of the Government unless the MFE Minister issued a written guarantee. The new Debt law makes it difficult for the MFE to say no if underlying rules are met even for Municipalities with extremely low FM capacity. We have commenced capacity building in this field, including upcoming intensive training by US Treasury experts on debt and risk management, including contingent liabilities. All incoming board members for POEs have received basic training on corporate governance. In addition, A USAID funded adviser has commenced in the POE Policy and Monitoring Unit to assist us in this field. Reform Goals Our goal is to minimise fiscal risk by timely reporting and monitoring of financial commitments of POEs, SoEs and Municipalities. Reform Actions SOEs and POEs The POE Monitoring Unit is only newly established and we are in the process of implementing new corporate governance arrangements for POEs. We will start with training as well as issuing sub-legal acts, developing co-operation with all POEs and ensuring all POE Boards are functioning. Platform 1: Collect, collate and publish information regarding the financial position of the POE sector. Identify risks associated with POEs in the next MTEF. Finalize implementation of model by-laws for POEs. Platform2: Include POE financial outcomes in KCB financial statements as a note. Platform 3 Implement risk management approach to POEs a comprehensive system for identifying and managing POE financial risks. Reporting regularly to the inter-ministerial committee on POEs. Municipalities Platform 1 14

15 Discuss and clarify that a pre-condition to allowing municipalities to borrow is the issuance of unqualified financial audits by the Auditor General for three consecutive years. (May require a change in draft law on debt) Technical Assistance We are assisted in this field with technical assistance provided by the EU TAIEX program, USAID, and training and consultation for POEMU. 15

16 2.5 BUDGET EXECUTION, ACCOUNTING AND RECORD KEEPING AND PUBLIC INTERNAL FINANCIAL CONTROL Existing Situation The recent 2009 PEFA -assessment found certain strengths in Budget Execution, Accounting and Record-keeping and public internal financial control. These strengths include: Appropriations approval by the Parliament is provided to budget organizations without delay at the start of each quarter, annually. This function is managed by forecasting the cash flow by the Treasury and BOs, through monitoring revenues and expenditures. Efficient financial planning. Projections of revenues and expenditures are generated at the beginning of the fiscal year. Monthly updates are undertaken by analyzing deviations between actual and forecasts. Adequate legal framework and system for debt management. The Debt Law has been finalized and approved by the government and sent to the Assembly. The law will regulate the authority and procedures for borrowing, debt management, and guarantees for central and local governments. Financial management information system (KFMIS) which allows electronic links to be created between BOs and Treasury, and between Treasury and Central Banks. KFMIS keeps track of commitment for planning and control purposes, and effectively contributes to implementing internal financial control by limiting commitments to actual cash availability and approved budget allocations. Payments system is currently centralized and majority of payments are made on time. Arrears are insignificant as a proportion of total expenditure. Chart of Accounts is comprehensive and integrates accounts containing assets, liabilities, government equity, revenues and expenditures to facilitate the preparation of financial statements. Accurate and timely revenue identification through implementing Unified Reference Payment Code (UNIREF) Treasury Single Account (TSA) that centralizes cash balances efficiently. The TSA consists of several sub-accounts (for revenue collection, expenditures and trusted money). TSA is reconciled on the daily basis while sub accounts are reconciled at least monthly. Reconciliation reports are generated on a weekly, monthly and quarterly basis from KFMIS. The PEFA assessment also identified opportunities for improving budget execution and accounting, including: Stock of arrears data are generated annually and show that in percentage terms they are very low. However, analyzed in the timeframe base - there is a higher percentage of late payments (greater than 30 days) within a fiscal year. Functional classification for budget formulation can only be produced manually as the coding for administration within a ministry is the same as if administration were a function. Cash flow forecasts are prepared only on a monthly basis. If liquidity issues, more frequent forecasts are needed to inform possible borrowing and issuing of debt. The Debt Law (when passed) has to have in place effective debt management and monitoring procedures as well as a linkage between cash and debt management. Accurate daily reports are not generated through the monthly account reconciliation process. 16

17 Lack of managerial reports for higher management which contain budget comparison analysis with previous years and between different categories. Ideal Situation The ideal situation at the end of the reform program would be the achievement of: Public Internal Financial Control (PIFC) policy and practice in accordance with European standards, including a fully functioning Central Harmonisation Unit for Financial Management Control (CHU/FMC). Fully functioning debt and cash management function, supported by modern debt management computer software and cash forecasting tools. Comprehensive financial reporting system and procedures to support transparency and accountability in budget execution. Complete implementation of modules for Kosovo Financial Management Information System, including comprehensive information on arrears. Gradual extension of accrual information in fiscal reports. Fully-integrated electronic revenue and expenditures systems which supports electronic reconciliation. Reform Goals Our efforts in reform of budget execution and accounted are directed at achieving the following goals: Improve the compliance by BOs with financial rule number two for spending public money. (All claims that are received by the Budget Organization should be paid within the period of time as specified in the contract which is no later than 30 days after being received.) Strengthen the framework for recording transactions, and accounting events, including some "accrual" information (such as obligations, change in assets and liabilities etc) to enhance the cash based accounts. This strengthening will improve the linkages between the cash-flow statement and balance sheet as envisaged under GFS Strengthen financial planning to include daily cash flow forecasts (which are consolidated into weekly forecasts). Develop transparent and predictable system and processes for the management of government debt. Introduce daily reconciliation of bank accounts which allows the generation of daily managerial reports. Strengthen the efficiency of public finance internal control system by making it more relevant (in terms of controls required for risk management), meaningful to the finance officers, and comprehensive in the public finance internal control area. Reform Actions In seeking to attain these reform goals we will undertake the following actions, set out by platform: Platform 1 1. Amendment of Article 44 of Treasury Financial Rule 02-Spending of Public Money. 2. Development of Central Unit for Internal Financial Control within Treasury. 3. Increase the KFMIS capacity for keeping track on timeframe of payments. 4. Include in the payroll system (Ministry of Public Administration) all payments to individuals (payments for participation in sessions of the Assembly, all allowances, University participations etc.) except for staff of donor projects. 5. Treasury review of existing guidelines and rules for asset management, and provide additional training for budget organizations. 17

18 6. As part of the delegation of expenditures, a team will work with budget organizations to provide assistance to improve a range of criteria relating to financial management, including asset management. 7. Increase the frequency of cash flow forecasts on daily and weekly basis as well as the coordination and exchange of reports with the BOs for revenues and expenditures. Implement the software for debt management and staff training. 8. Implement automatic accounts reconciliation. 9. Standardise terminology used in reports. 10. Ensure that budget organisations submit their financial statements within the deadlines. 11. Upgrade financial reporting, in order to generate specific reports based on requests from specific users. 12. Training of financial officers in Budget Organisations on public sector accounting, reporting and internal control. Platform 2 (continuation of Platform 1 no 4) 1. Increase the frequency of cash flow forecasts on daily and weekly basis as well as the coordination and exchange of reports with the BOs for revenues and expenditures. Implement the software for debt management and staff training. 18

19 2.6 PUBLIC SECTOR PERSONNEL AND PAYROLL Existing Situation The recent 2009 PEFA assessment found certain strengths in our existing approach to Public Sector Personnel and Payroll, including: Timely updating of the payroll monthly, prior to the execution of the payroll, Rarely made retroactive adjustments to the payroll. Nevertheless, certain opportunities for us to improve the management of personnel and the payroll, including Improved expenditure control, recognising that payments regularly held back by Treasury due to overspending related to the lack of consideration of appropriations and allocations. Improving Internal Controls, which do exist for changes to the payroll but which often fail to ensure that budget allocations or staff limits are not exceeded Developing a linkage between personnel data base and payroll which can form the basis for audit. Reform Goals Our intention is to implement a personnel and payroll system linked together and maintained centrally with software that is manageable and effective. Reform Actions Platform 1 1. Payroll administration and laying the foundations for a professional civil service (a) Human resource management in the civil service, including pay and grading reform; and (b) Upgrading of ICT systems for human resource management (HRMIS and payroll). 2. Improving human resource management in the core civil service 3. Upgrading human resources management information systems. (a) Development of a strategic plan for human resource information management and reorganization of HR-related management processes. (b) Modifying the current information systems and implementing the upgraded systems. (c) Linkage of the HR and payroll systems with the Treasury system (Free Balance). Technical Assistance Technical assistance is to be provided through specific components in the World Bank supported Public Sector Modernisation Project which includes: Technical assistance and training for the implementation of the pay and grading reform in the core civil service. Technical assistance to build capacity for the implementation of key human resource management functions (staff planning, recruitment, promotions, and performance appraisal). This activity is to include development of secondary legislation (e.g. on performance appraisal), guidelines and manuals, as well as training modules for human resource management functions 19

20 2.7 INTERNAL AUDIT Existing Situation The recent 2009 PEFA assessment found certain strengths in our existing approach to Internal Audit in Kosovo, including: 1. Internal Audit decentralized - 50 BO have established Internal Audit Units (IAU) staffed by 84 Internal Auditors. 2. Internal Audit Manual ensuring harmonization with International Standards and Professional Practices of Internal Audit 3. Audit Committees in 24 BOs to ensure the independence and protection of IAU auditors and promote the implementation of recommendations to senior management. 4. International standards and professional practices underpin internal audits and follow ISPPIA standards and the Code of Ethics of Institute of Internal Auditors. 5. System audits performed are comprehensive based on compliance, performance and finance 6. System audits linked to the Internal Control assessment process to be evaluated if these are functioning effectively. 7. Financial audits include examination and reporting on financial statements. 8. Audit Plans implemented to include continuing professional education of internal audit staff 9. Regular submission of Internal Audit reports to senior management in line with the Law 10. Quarterly and Annual reports on BOs` internal audit activities are received by the Central Harmonization Unit 11. Implementation of recommendations undertaken by the Chief Administrative Officer of a BO. Nevertheless, certain weaknesses were also noted in our existing approach, including. No Internal Audit in 10 BO Only one auditor in 33 BOs insufficient for efficient functioning of internal audit in terms of capability and capacity for planning and managing of effective Internal Audit. Lack of certification training - training courses on internal audit provided by international companies did not provide the certification required by the Internal Audit Law Lack of comprehensive effective implementation Internal Audit Law and Internal Audit manual Low quality of implementation of recommendations issued by internal auditors. Ineffective operating of IAU in some public entities No continuous professional development to increase the knowledge and skills of internal auditors. Lack of understanding by senior management of the importance of the role of Public Internal Financial Control and Internal Audit. Reform Goal Our overall goal is to ensure that internal audit is implemented effectively in line with the Internal Audit Law in accordance with internationally accepted standards. Reform Actions To achieve this goal we will undertake the following actions: 1. Application of Law to be full. 2. Improved implementation of IA manual (ISPPIA, code of ethics) 3. Full management understanding of the audit role meetings, contacts, trainings (short term) and Management support for audit (independence and work conditions, payment and other technical conditions) 4. Operationalization of effective internal audit units in public entities 5. Certification and licensing of internal auditors (long term) and Post-certification/-licensing and continuous professional education (long term) 20

21 Platform 1 1. Increase number and quality of actions undertaken by BO Senior Management on implementation of Internal Audit recommendations 2. Continuous contact and cooperation with sector management and other relevant parties in order to further operationalize IAUs. 3. Certification of IA from an internationally licensed organisation (within two years) 4. Capacity building, recruitment of more than 60 IAs (within two years) 5. Training for senior management to increase their awareness on the importance of Public Finance Management and Internal Control, including IA s role. 6. To full meet ISPPIA standards 7. Implementation of annual plan based on IA strategic plan 8. Comprehensive establishment of IA Committees - increasing auditor s independence and measures for implementation of audit recommendations from management 9. Drafting Administrative Instructions for implementation of IA Law, by CHU. 10. Increase further the rate implementation of recommendations (above 55%) Platform 2 Establishment of IAUs in BOs where they are not present Continuous training for IA to increase their knowledge, skills and competencies (continuous professional development Post-certification/-licensing ) Coverage of more than 80% BOs with regards to IA system issues Technical Assistance Support Our current endeavours to improve internal audit are assisted by support from donors, including: Support for further improvement of IA and Public Governance project supported by European Commission ECLO June 2009 to June Main components for IA are: Support to IACHU on performing the responsibilities set out in Law on Internal Audit. Design and introduction of training program for internal audit that leads to certification. Design and implementation of first cycle of an Introduction to Financial Administration program to politicians and senior civil servants. 21

22 2.8 PROCUREMENT Current Situation The 2009 PEFA report indicates that our public procurement institutional and legal framework has been strengthened in recent years, but there are still improvements to be made. The public procurement legislation has improved our position with respect to approximation with EU public procurement directives. This current legislation vests procurement powers to all contracting authorities, but such powers are initially vested in three central public procurement bodies: (1) Public Procurement Regulatory Committee, (2) Public Procurement Agency, and (3) Public Procurement Review Body. As well, the Kosovo Institute for Public Administration is responsible for the training and certification of procurement officers, and the Office of Auditor General has the responsibility for external audit of all procurement undertaken by Budget Organisations in Kosovo. The PEFA report also shows that more than 80% of contracts have been awarded by using open competition procedures, based on the data provided. Nevertheless, this outwardly impressive figure has to be judged and understood in the overall procurement environment in Kosovo. Studies and reports on procurement indicate the following: Market not reached by public tendering significantly Complex and too ambitious tender dossiers and qualification requirements regarding the obligatory requirements for participation in the tender procedure. Limited monitoring performed by the PPRC Monitoring and Oversight Department - limited only to the ad hoc checking of contract documentation of completed procurement. This has been considered as a significant weakness of current legislation. The Office of the General Auditor monitors the same set of procurement but also monitors the contract implementation phase. Weak communication and cooperation between any central procurement institution and/or economic operators organisations Uncoordinated monitoring and implementation of Law on Public Procurement - appears uncoordinated as the roles of central institutions do not seem to be clearly defined. Hard to comprehend structure of procurement packages and time consuming to process, and unnecessarily confusing for both the contracting authorities and potential bidders. No routine modalities and procedures to update existing procurement law in place. Level of training does not meet Kosovo s needs. Existing standards, even when achieved, do not provide adequate skills to Procurement Officer for effective and efficient performance. Existing certification system is comprised of only one 10-day training course which has not changed with developments in procurement. Top up refresher courses are merely repetition of the basic training. Overall Goal of the Reform We have a public procurement improvement initiative in place that is supported by technical assistance provided by the European Union. The objective of the reform programme is to ensure the proper administration of public money, transparency and effectiveness of public expenditures by improving the public procurement framework to develop a well-organised, effective and transparent governance framework. Planned reform activities As the PPL was found to contain translation errors capable of causing confusion and complaints by both the Contracting Authorities and Suppliers as a matter of priority any variables found will be altered in the respective languages. In addition clauses will be added to the PPL to make it more compliant with the EU Acquis and will also include corrections to some restrictive practices. The 22

23 secondary legislation forms and templates are often cumbersome and clumsy. Their construct will be reviewed and simplified. In addition to these initial actions, we intend to undertake the following activities in support of this programme: 1. Monitoring the implementation of Law on Public Procurement and providing for its update to reflect emerging developments. 2. Review of secondary legislation associated with procurement. 3. Managerial and organisational review of PPRC and PRB. 4. Review of IT capacities in PPRC and PRB, recommendations for improvement and assessing the feasibility for introduction of e-procurement. 5. On-the-job training and coaching for all involved in the procurement process. 6. Increasing the awareness for public procurement reforms in government, business and civil society 7. Comprehensive development of the public procurement training program 8. Development of certification system for public procurement officers. The activities are foreseen to be undertaken during 2009 and A detailed plan of action with expected results has been developed by PPRC, PPA, PPR, European Commission Liaison Office to Kosovo and Kosovo Institute for Public Administration. See the Inception Report Support to Public Procurement Reform Service Contract No 2008/ Project period: January 19, 2009 January 18, 2011 for a comprehensive presentation of the actions to be undertaken. 23