Implementation of the Kosovo Government Capital Investment Projects

Transcription

1 Masters of Science Degree in Professional Studies Center for Multidisciplinary Studies Rochester Institute of Technology & American University in Kosovo Implementation of the Kosovo Government Capital Investment Projects Mentor: Prof Brian Bowen Student: Selim Thaçi 1

2 Contents, Acknowledgements... 5 List of Abbreviations and Acronyms... 6 Executive Summary... 7 CHAPTER 1, KOSOVO CAPITAL PROJECTS IMPLEMENTATION General Overview of Kosovo s Economic Developments Kosovo Capital Projects Implementation Kosovo Capital Expenditure Projects and Implementation in 2009 and Study of Ministry of Economy and Finance in 2007 on Capital Expenditure Execution of Kosovo capital expenditure projects in Execution of Kosovo Capital Investments Projects in Execution of Kosovo Capital Investments Projects by line Ministries, 2009 and CHAPTER 2, LEGAL FRAMWORK FOR CAPITAL EXPENDITURE IMPLEMENTATION Law on Public Finance management and Accountability The Capital Spending Plan should include: MTEF, Role on Identifying Capital Projects CHAPTER 3 INVESTIGATIVE OUTCOMES FROM MINISTRIES Interviews with Line Ministries Structure of Capital Projects in Past and Plans for the future level of capital projects funds and project execution Problems identified from the survey, as the main causes for under execution of capital projects International Comparison on capital expenditure execution CHAPTER 4, PROBLEMS IDENTIFIED ON LEGAL AND PROCEDURAL ISSUES Legal and procedural issues Procedural issues Public Procurement Problems

3 5.4 Procurement process CHAPTER 5, FINAL DISCUSSONS AND POLICY RECOMMENDATIONS Final Discussions Better Planning and clear schedule of procurement activities Better Planning the Start of Procurement Procedures Training of Staff for Procurement Procedures Creation of a Investment project Unit Better Coordination of the Work with Local Authorities Better Project Selection Monitoring of the projects implementation Apendix1, Questionnaire made with line ministries Appendix 2, Capital expenditures by line ministries 2009, in millions of euro s Appendix 3, capital expenditures by line ministries 2010, in millions of Euros List of References

4 LIST OF TABLES AND FIGURES FIGURES Page 1.1 Kosovo capital expenditures in millions of Euros Kosovo Capital expenditure for 2009 as a share of total budget Kosovo Capital expenditure execution for Kosovo Capital expenditure as a share to total budget Kosovo Capital expenditure execution for Execution of Kosovo capital expenditures 2009 and Unspent allocated Investments funds, percent by each ministry 2009 and TABLES 1.1 Under-Execution of Kosovo Capital Expenditures in millions of Euros Results of the survey under question no Results of the survey under questions Does line ministries received adequate funds How much larger should be the budget for next year Results of the survey under questions

5 Acknowledgements I wish to express my deepest gratitude to my supervisor, Prof. Brian Bowen, for his invaluable guidance, his continuous encouragement, and for all the productive input throughout the project. Without Professor Bowen s knowledge and assistance this study would not have been successful. I would also like to thank two of my advisors, Mr. Hajdar Korbi and Mr. Naim Baftiu, who have helped me during the preparation of this project with their advice and concrete proposals. I also thank my capstone project supervisor, Ms. Marie- Lou Fernendes, who helped me to select a topic directly related to my every-day responsibilities at the Ministry of Finance, and to develop carefully the capstone project proposal. Lastly, I offer my regards to all of my colleagues from line the ministries who have been very cooperative during my visits to their institutions and have provided very frank and professional feed-back on the issues I raised. 5

6 List of Abbreviations and Acronyms BO Budget Organizations FMIS Financial Management and Information System FY Fiscal Year GFS Government Finance Statistics IMF International Monetary Fund KCB Kosovo Consolidated Budget LMFPA Law on Public Finance Management and Accountability LPP Law on Public Procurement MEF Ministry of Economy and Finance MFE Ministry of Economy and Finance MTEF Medium Term Expenditure Framework MTPT Ministry of Transport and Telecomunications BORPP Body-Review of Public Procurement PIP Public Investment Program PPA Public Procurement Agency PPRC Public Procurement Regulatory Commission WB World Bank 6

7 Executive Summary The aim of this project is to identify the shortfalls of the budgeting process, with a particular focus on allocation procedures and execution of the funds allocated for public capital projects. Based on the findings of the project, a set of recommendations has been produced. These recommendations have the potential to assist policymakers in optimizing allocation procedures for capital projects, and to support them in designing a more efficient fiscal framework. Based on the project findings, the Government should: 1 Improve planning and provide a clear schedule of procurement activities 2 Provide a clear activity based timeline of procurement procedures 3 Provide extra staff training for procurement procedures. 4 Create an Investment Project Unit (IPU) 5 Improve coordination of with local authorities 6 Enhance criteria for Project Selection 7 Ensure accurate monitoring of the projects implementation The findings and recommendations of this project are of a great importance as budget allocations for capital projects have tripled since 2007, and as capital spending is foreseen to increase as a share of total Government expenditure in the following years. This rapid fiscal expansion calls for a more educated input into policy making, with the ultimate aim of maximizing the benefit Kosovo receives from these investment initiatives. Kosovo Capital Expenditures, millions of Euros Description Total Budget ,135 1,202 1,434 1,457 1,485 Capital expenditures Capital expenditures % of total budget 23% 37% 35% 38% 40% 40% 41% Source: Ministry of Finance, Macroeconomic Department 7

8 This project has followed a double-stage institutional approach. The research problem, namely the appropriateness of allocation and overall budget execution of capital projects, is examined both from the perspective of the Ministry of Finance as the provider of funds to other budget organizations, and from the perspective of other budget organizations which through various project proposals are the ultimate users of Government funds. More specifically, the study looks at the decisions of the Central Budget Department, the Government Treasury, and at the decisions of relevant policy agents such as the Minister of Finance, on one hand, and on the other hand it looks at Budget Organizations (each ministry) that proposes capital projects. This research is expected to contribute in creating a better planning framework for capital spending, based on a realistic and more optimal implementation schedule, with a planning span longer than a year, which in turn could significantly reduce the level of under-spending of individual projects. 1 1 Three types of analysis have been conducted: quantitative analysis, where data from official reports has been used to identify the level of budget under-execution; qualitative analysis, where information gathered from all relevant actors is used to explain the results of the quantitative analysis; and, in the end, using the results of the abovedescribed analysis, a set of recommendations are provided which can be used to improve the decision-making process and lead to an optimal allocation for capital investment. 8

9 CHAPTER 1, KOSOVO CAPITAL PROJECTS IMPLEMENTATION Under this chapter will be presented a brief overview of main economic developments in Kosovo, with a particular focus on the experience in capital investment projects and their implementation over recent years. It presents some observed differences in the overall level of execution by line ministries and how these have changed from one year to another year. 1.1 General Overview of Kosovo s Economic Developments The average real GDP growth in Kosovo for the years has been 4.8%. Evidence shows that the government decision to increase the level of public investment by more than 120% in 2008 has been a major driver of economic growth. Furthermore, this shift in the level of allocations for public investment has proven to be a timely stimulus for the economy in 2009, maintaining its ability to generate growth of above 4%, at the time when most of the regional countries faced economic recession. The increase in the price levels experienced throughout 2008 was followed with a decline of the price level in 2009, boosting purchasing power and offsetting the negative effects of the drop in total exports and external injections such as Foreign Direct Investment and Remittance. Government policies have so far succeeded in increasing the level of utilization of the factors of production in the economy. A two-fold strategy has been the rationale behind the allocations in the yearly budgets for 2008 and A short-term boost has been provided through the direct effects of investment projects, namely the utilization of the factors of production through road and school infrastructure construction. At the same time, the basis for a long-term shift in the potential growth of the economy has been laid which promises to feed back into a sustainable higher GDP growth. Nonetheless, major imbalances remain in the factor markets that must be addressed. These imbalances are not in the immediate outreach of the government policies, and must be addressed with a collective commitment to undergo the much needed structural reforms. However, because of the fact that we are a new country and we have a very uncompetitive economy, Kosovo now faces many economic challenges which are: - a high level of trade deficit reaching over 40% of GDP, 9

10 - the highest rate of unemployment in Europe - the highest poverty figures in the region Kosovo has seen a number of positive developments. In the economic sphere these developments are related to tax reform, growth of capital investments, Kosovo's membership in international institutions such as the World Bank and International Monetary Fund, the expansion and stability of the banking sector, etc. Revenue collection has shown significant progress which allowed the government to build a sustainable budget. 1.2 Kosovo Capital Projects Implementation The objective of this project is to find the best opportunities for allocation and improvements in capital spending implementation. Subsequently Kosovo has been facing lack of capital projects execution during the years. In order to create a clear opinion and broader understanding of this problem, this project has taken into consideration all documents, legal infrastructure, and other relevant information in order to be able to identify reasons behind this situation. The Government's strategic priorities, included in the document called Medium Term Expenditure Framework (MTEF), are designed to provide the basis for sustainable economic development of the Republic of Kosovo. The research on this issue has continued with the Ministry of Economy and Finance/ Budget Department which is in charge to approve spending from the line ministries. In order to create a clear opinion where the main problems are a survey uses conducted with a list of questions (attached in Appendix 1). For each question, this project has required alternatives in order to make identification of those that might be considered of the interest. The survey was made with all 16 line ministries, by visiting them individually, the office of the Permanent Secretaries, or others delegated by him. The reason why this project has consulted with the permanent secretary s office is because they are responsible for implementation of the budget in all line ministries. 10

11 Figure 1.1, Kosovo Capital Expenditures in Millions of Euros Source: Ministry of Finance, Treasury Department and Macroeconomic Department As we could see from the figure 1.1, the level of capital expenditures has shown a significant increase throughout the years. Projections for the following years show that this category is going to be increased significantly. 1.3 Kosovo Capital Expenditure Projects and Implementation in 2009 and 2010 Despite the entire legal and policy infrastructure that have been in place, we have noticed some large scale of under execution of capital spending projects throughout the period This fall in execution has been reflected by the delay in implementation of specific projects, and also huge budget surpluses, at the end of each calendar year. The level of under execution has been much larger during the period from 2002 until 2007, however even from 2008 and until now there is still some level of under execution. 11

12 Table 1.1 Under-Execution of Kosovo Capital Expenditures in millions of Euros by Each Ministries, 2009 and 2010 Description Ministry of Energy and Mining 47,202 40,579 Ministry of Agriculture 125, ,759 Ministry of labor and Social Welfare. 226, ,789 Ministry of Justice 332, ,626 Ministry of Environment 338,577 2,241,708 Ministry of Education 569,037 2,631,599 Ministry for Foreign Affairs 581,356 10,519,513 Ministry of Comunties and returns 735,162 1,257,824 Ministry of Culture 772,969 1,223,268 Ministry of Security force 952,272 4,139,455 Ministry of Internal Affairs 1,039,091 3,734,302 Ministry of Health 1,059, ,924 Ministry of Local Government 1,078,790 1,128,173 Ministry of Trade and Industry 1,107,769 2,272,728 Ministry of Public Administration 1,872,826 2,412,012 Ministry of Finance and Economy 1,936,519 2,760,297 Ministry of Transport 3,177,182 23,433,355 Total 15,952,758 60,004,912 Source: Ministry of Finance, Treasury Department and Macroeconomic Department 1.4 Study of Ministry of Economy and Finance in 2007 on Capital Expenditure. The Ministry of Economy and Finance has undertook a study in 2006, to identify reasons why it was facing the problem of under execution, and what were the main causes fro it. This study has identified that some of the reasons behind this situation are: Lack of strategic vision in Budget Organizations (Ministry) Planning focused on single year with few BOs planning for the future. 12

13 Procurement planning, BOs do not prepare for procurement prior to the start of the Fiscal Year. Failure to Follow Expenditure Rules From 2008 until there has been some noticeable improvements regarding the execution of projects, but still there is large room for improvements in this area. We have to more clearly analyze those reasons and try to solve them for the future. This is more interesting because the public sector investments are one of the biggest contributors to the economic growth, and execution of these projects in time will play a significant role in the economy. The focus of this analysis is concentrated on the execution of capital investments during 2009 and Execution of Kosovo capital expenditure projects in 2009 The budget for 2009 and for 2010 has been approved over time respecting all legal obligations during preparation process which has created a base for implementation of individual projects. Execution of the budget has started from 1 st of January for each calendar year until the end of the year. Allocation of funds to specific ministries has been made based on the priorities of the Government presented on the MTEF when line ministries have to present specific projects during the budget process in order to be approved and added to the annual budget for the following calendar year. 13

14 Figure 1.2, Kosovo Capital Expenditures for 2009 as a Share of Total Budget by each Ministry 100% 90% 80% 70% 71% 74% 79% 84% 85% 88% 91% 60% 50% 47% 53% 53% 40% 30% 20% 14% 17% 20% 27% 31% 10% 0% 2% M of Transport M. of Education M. of local Governemtn M. of Environment M. of Trade and Industry M. of Public Administration M. of comunties and returns M. of security force M. of Foreign affairs M. of Culture M. of Agriculture M. of Internal affairs M. of Justice M. of Health M. of Finance and Economy M. of labor and social Welfare. Source: Treasury Department Ministry of Finance It is very interesting to see the distribution of capital investment by line Ministries. As we seen in figure 1.2, those ministries that are mostly oriented in building large infrastructure projects do receive higher capital investment funds. From the Figure 1.2 it can been seen that the budget of the Ministry of Transport for capital investments projects consist 91% of their total budget. The situation looks differently in other ministries when we have some ministries that have only 14 or 20% of capital investment as a share to their total budget. From this perspective it is realistic to assume that those ministries that have higher share of capital investment funds in their budget should do more work on building their internal capacities in order to be prepared for better investment plans and executions. 14

15 Figure 1.3, Kosovo Capital Expenditure Execution for % 100% 80% 60% 56% 66% 68% 77% 78% 80% 81% 84% 84% 87% 89% 89% 90% 94% 94% 95% 40% 20% 5% 0% M. of Energy and Mining M. of Health M. of Education M. of Public Administration M. of Finance and Economy M. of local Governemtn M. of labor and scoial W. M. of Agriculture M of Transport M. of Justice M. of comunties and returns M. of Culture M. of Internal affairs M. of Trade and Industry M. of Environment M. of security force M. of Foreign affairs Source: Treasury Department Ministry of Finance From the figure 1.3, the level of execution of capital investment plans from each Ministry can be seen. The percentage is different for each ministry the lowest rate of execution is noticed in the Ministry of foreign affairs with only 5% execution. This rate of execution in the Ministry of Foreign Affairs is mostly due to the fact that the biggest project that has been planned for this ministry in 2009 was to buy buildings for embassies of Kosovo in countries with whom we have established diplomatic relations. This project has consisted 76% of total capital investment for this ministry and has been planned to be implemented during this year but the procedures to buy a building in those countries has taken so much time and procedures which influenced this level of under execution for this ministry. The second lowest rate of execution has been the Ministry of Security Force with only 60% of the plan for this year followed by the other ministries with higher rates of execution which contributed to an average of less than 80% in total level of execution for all ministries during

16 1.6 Execution of Kosovo Capital Investments Projects in The budget for 2010 has been approved on time and all ministries were able to start implementing the projects based on their internal plans. The budget for capital investments has shown a significant increase, especially for road construction and school building compare to the previous year budget. Figure 1.4, Kosovo Capital Expenditure as a Share to Total Budget by each Ministry, % 94% 90% 80% 70% 60% 50% 40% 30% 20% 14% 20% 23% 25% 30% 38% 39% 47% 48% 55% 62% 65% 69% 80% 85% 10% 0% 2% M of Transport M. of comunties and returns M. of Environment M. of local Governemtn M. of Trade and Industry M. of Education M. of Public Administration M. of Foreign affairs M. of Culture M. of security force M. of Energy and Mining M. of Finance and Economy M. of Agriculture M. of Internal affairs M. of Justice M. of Health M. of labor and scoial W. Source: Treasury Department Ministry of Finance The figure 1.4 shows the share of capital expenditure to the total budget by each ministry, as we could see from the figure 1.4, some ministries are heavily involved on capital expenditure implementation. The lowest share of capital expenditure is under the ministry of labor and social welfare with only 2% in This is mostly due to the fact they are responsible for implementation of social welfare programs. Capital projects in this Ministry have to do mostly with regional offices restructuring of them and some small projects. 16

17 In 2010 the rate of execution of capital expenditures has been increased compare to The rate of execution has started from 67% in the Ministry of Foreign Affairs going to 98% of execution in the Ministry of Transport and Telecommunication. Despite this improvements, on average the rate of execution for all ministries is around 90% which suggests that we have to see what are the main factors influencing this level of execution. During 2010 there were significant improvements on this area, but still there is a lot to be done in order to create a system when execution of capital projects will reach almost 100%. Figure 1.5, Kosovo Capital Expenditure Execution % of Total Budget % 100% 80% 67% 74% 79% 81% 86% 86% 87% 89% 89% 91% 92% 94% 94% 94% 94% 97% 98% 60% 40% 20% 0% M. of Energy and Mining M. of Health M. of Education M. of Public Administration M. of Finance and Economy M. of local Governemtn M. of labor and scoial W. M. of Agriculture M of Transport M. of Justice M. of comunties and returns M. of Culture M. of Internal affairs M. of Trade and Industry M. of Environment M. of security force M. of Foreign affairs Source: Treasury Department Ministry of Finance The lowest rate of execution is foreseen in the Ministry of Foreign affairs with 67% of total plan for this year. Main project that has contributed to this rate was under execution of the project for buying cars for embassies which was partially implemented. There are also some small projects under this ministry which have not spent anything from them, projects mostly related to embassies new IT equipment, photocopy machines, etc. From the figure 1.5, we could notice that 8 ministries have excided the level of 90 percent, and other ministries are still below this level. 17

18 1.7 Execution of Kosovo Capital Investments Projects by line Ministries, 2009 and 2010 Most of the ministries have shown progress on the execution rate during this two years, but there are some ministries that have shown also a small decline on the rate of execution. This decline is something that should be considered and analyzed during this research Figure 1.6, Execution of Kosovo Capital Expenditures 2009 and % % 80% 60% 40% 20% 0% M. of Energy and Mining M. of Health M. of Education M. of Public Administration M. of Finance and Economy M. of local Governemtn M. of labor and scoial W. M. of Agriculture M of Transport M. of Justice M. of comunties and returns M. of Culture M. of Internal affairs M. of Trade and Industry M. of Environment M. of security force M. of Foreign affairs Source: Treasury Department Ministry of Finance From the figure 1.6, we could see the comparison between two years for each ministry. There is a progress on the level of the execution in almost all ministries. The average rate of execution has been increased by almost 10 percentage points (from 80% in 2009 to 90% in 2010). 18

19 Figure 1.7, Unspent allocated Investments as a percent of each ministry 2009 and % 100% 95% % 60% 40% 20% 0% 44% 33% 34% 32% 26% 21% 23% 19% 22% 20% 19% 14% 14% 13% 16% 16% 11% 11% 13% 9% 8% 11% 11% 10% 6% 6% 6% 6% 6% 6% 3% 5% 2% M. of Energy and Mining M. of Health M. of Education M. of Public Administration M. of Finance and Economy M. of local Governemtn M. of labor and scoial W. M. of Agriculture M of Transport M. of Justice M. of comunties and returns M. of Culture M. of Internal affairs M. of Trade and Industry M. of Environment M. of security force M. of Foreign affairs Source: Ministry of Finance, Treasury Department and Macroeconomic Department From the figure 1.7, we can see the percentage of unspent investment projects by each Ministr, this figure shows that there were improvements in all ministries. It is very interesting that the highest rate of unspent projects in two years has been under the Ministry of Foreign Affairs 19

20 CHAPTER 2, LEGAL FRAMWORK FOR CAPITAL EXPENDITURE IMPLEMENTATION Under this chapter will be presented main issues related to legal requirement for capital expenditure implementation. Most of the discussions on this chapter will be oriented on the Law on Public Finance Management and Accountability. 2.1 Law on Public Finance management and Accountability The budget process in Kosovo is governed by the Law on Public Financial Management and Accountability (LPFMA), which provides a modern framework for Public Financial Management (PFM). The law stipulates that revenue estimates and Budget Organizations (BO) resource ceilings should be provided for a three year period and rolled forward annually. It also requires the preparation of a capital spending plan as part of the Kosovo Consolidated Budget 2 (KCB) documentation. Section of the Law on Public Financial Management and Accountability (LPFMA) 3 requires the presentation of a capital spending plan as part of the supporting documentation for the annual budget. 2.2 The Capital Spending Plan should include: (a) A statement setting forth a long-range capital investment plan for Kosovo that identifies and includes the higher priority needs within affordable spending limits. (b) Capital program consisting of proposed capital projects for the upcoming year and the two succeeding fiscal years. Insomuch as is practicable, and recognizing emergent needs, the capital program shall reflect the priorities, projects and spending levels proposed in previously submitted capital budget documents in order to provide a reliable long-range planning mechanism for the Assembly and budget organizations; 2 Kosovo consolidated Budget, 2009, Law on Public Finance Management and Accountability 20

21 (c) Statement of the purpose of each project; (d) Statement about the proposed site, size and estimated life of the project; (e)estimated total project cost and the cost for each year during which the project is implemented; (f) Estimated on-going operating budget costs or savings resulting from the project, including staffing and maintenance costs. The Law on Public Financial Management and Accountability (LPFMA) sets out specific provisions for the presentation of a Capital Spending Plan as supporting documentation to the annual budget. These reflect many of the key requirements for effective public investment management. In particular, the Law emphasizes a full cost approach to the funding of investment. Thus the Capital Spending Plan is required to provide details of the total cost of each project broken down to show actual or estimated expenditure for each year of project implementation. In practice, the Law on Public Finance Management and Accountability is not yet fully implemented. Planning and budgeting still tends to be focused on a single year time horizon. 2.3 MTEF, Role on Identifying Capital Projects There are initiatives that have been taken to introduce a Medium-Term Expenditure Framework (MTEF) and a Public Investment Program (PIP 4 ), for better public financial management in Kosovo. The management of public finances in Kosovo is characterized by a strong liquidity situation and a sound treasury financial management and information system (FMIS) that is comprehensive and able to provide timely analytical reports, on the progress made for spending their capital expenditures. Consequently once the KCB is promulgated budget organizations (BO) know their allocations and that the financing will be available to incur commitments and expenditures. 4 Public Investment Program is software created by the Ministry of Economy and Finance which enables all line ministries to include their capital projects into the system. 21

22 In order to have clear information and the dynamic for implementation of specific projects, at the beginning of the year budget organizations (BOs) are required to submit an annual cash-flow plan to the Treasury Department. This forms the basis for the Treasury Department to authorize the allocation of funds against the BOs appropriation. This authorization, which is issued without delay, is required before the BO may enter into a spending commitment and initiate tendering procedures on capital investment projects. Delays in the preparation of the cash-flow plan can therefore have a Domino effect on the start of implementation of the capital spending program. Another part which has a very important role on the execution of capital spending are procurement procedures, which are regulated by the Law on Public Procurement (LPP) which was promulgated in February 2004 and amended in June

23 CHAPTER 3 INVESTIGATIVE OUTCOMES FROM MINISTRIES On this chapter will be presented results of the survey which has been concluded based on the answers received from line ministries. By doing this analysis, it is expected to obtain clear understandings on what are the main challenges of each ministry, and what are their needs for having better budget process (preparation and execution of it). 4.1 Interviews with Line Ministries Interviews with all 16 ministries with one interview for each ministry have been made and all of them have been very cooperative on answering the questions from the questionnaire that has been designed for this purpose. Because of the fact that each ministry is engaged in doing specific projects, there are also different reasons that have reflected their work. The survey has was considered as a tool to help them identifying what are the key challenges and what needs to be changed in order to improve current situation. Results of the survey have been reflected bellow specifically. 4.2 Structure of Capital Projects in Past and Plans for the future Question no 1, Please prioritize the following areas of investment in order of importance to your ministry in past The main focus of this questions was to identify which where the main areas of capital investment during the past. Based on the analysis of the financial reports of the MFE and the answers from line ministries, investments during the last two years were oriented mostly on construction of new roads, school buildings, road maintenance, etc. This allocation of investments funds it understandable because road infrastructure projects have been selected as one of the main priority of the government during past years. Also investments on new buildings and the maintenance the existing buildings is another area of investments which has taken large part of capital investments during past years. Investment on 23

24 equipment mostly IT equipment, and computer systems is also something which is highly appreciated from all ministries. This result has been made based on the answers received from line ministries and close consultation of the budget data for these years. Allocations of funds to line ministries have been oriented on financing specific projects following the priorities of a specific ministry. The percentages have been calculated based on the answers received from line ministries. All ministries have mentioned that investment on new equipment and new buildings have been main priority in the past, however this does not reflect the amount of money invested in this area. In nominal terms most of the funds has been allocated for building new roads, new buildings and maintenance of the existing ones. Table 4.1, results of the survey under question no 1. Please prioritize the following areas of investment in order of importance to your ministry in past 24 Percent 1 New building and construction projects 80 2 Equipment Computer systems 40 4 Transportation vehicles 20 5 New roads or road maintenance 60 6 Other 20 Question 2, Please prioritize the following areas of investment in order of importance to your ministry in future? Investments on new roads and maintenance of the existing ones are going to be main focus of capital investments for the following period. This investment on new roads is mostly due also to the fact that now we have started large project on building the Highway which will absorb largest part of capital investment. Orientation of investments for road infrastructure is also in line with the priorities of the government for the next period. Building new roads and maintenance of the roads seems to be main area of investments not only for the Ministry of transport but also for ministry of Local government and Ministry of community and returnees. Building new buildings and new equipment also it is another interesting area of investment.

25 Table 4.2, results of the survey under questions 2 Please prioritize the following areas of investment in order of importance to your ministry in future? Percent 1 New building and construction projects 80 2 Equipment 80 3 Computer systems 40 4 Transportation vehicles 20 5 New roads or road maintenance 30 6 Other 20 Under this question, the percentage has been ranked based on the answers received from ministries. Investments on new equipments continue to be something that ministries are planning to invest in the future. In nominal terms situation looks different because investments in new roads will continue to receive highest level of investment funds. 4.3 level of capital projects funds and project execution Question No 3 and 4, has been mostly oriented on specific projects under each ministry what was the cost of a specific project and what was the level of execution for those projects. Some projects did not start at all due to the specific problems that those ministries had. For example in Ministry of foreign affairs which had the lowest rate of execution in 2009, was mostly due to the project for buying new building for embassies, which did not happen due to the long term procedures that has to be taken in order to buy an embassy in a foreign country. There are also some other projects which have started partially or they did not start yet. Question no 5, has your ministry received adequate investment fund in 2009 and 2010? Most of the ministries are requiring more funding for the following period despite of the fact that they were not able to spend their budget as they have planned during past years. 25

26 Table 4.3, does line ministries received adequate funds Has you ministry received adequate investment fund in 2009 and 2010? Percent 1 Yes 30 2 No 70 Source: results of the survey with line ministries Most of the ministries have not spent their budget fully; however they were not happy with the level of the budget that has been allocated to them. Question no 6, How much larger, would your ministry recommend that its 2011 investments funds to be increased? On this questions most of the ministries has been asking for additional % more budget for 2011 Table 4.4, by how much should be increased the budget for 2011 How much larger, would your ministry recommend that its 2011 investments funds to be increased? no of ministries % 4 ministries % 6 ministries % 3 ministries % 2 ministries 5 300% and over 2 ministries Source: results of the survey with line ministries 26

27 4.4. Problems identified from the survey, as the main causes for under execution of capital projects Questions no 7, Reasons that have affected the level of under execution Under this question it seems that legal problems related to the procedural issues, procurement procedures, property issues, the need for enhancement of the management skills, better coordination of the work with MFE, and internal coordination within a ministry between budget department and procurement office is almost necessary. Weather implication is another reason affecting mostly in road construction but also construction and maintenance of the buildings, political motivation, etc. Table 4.5 Main reasons that influenced large scale of under spending Circle the reasons that have delayed implementation of investments? Percent 1 Cash flow problems 5 2 Legal problems 90 3 Procedural issues related to construction process 80 4 Administrative instruction from the treasury for closing books. 5 5 Lack of Coordination between department of budget and procurement office 40 6 Procurement procedures Allocation of funds from the treasury to budget organizations 10 8 Weather implication very short period for project implementation 30 9 Coordination with MEF Lack of skilled staff Need to improve staff training Need to enhance management skills Staff rational 0 14 Political motivation Salary scale and hazard financial incentives Other 10 Source: results of the survey with line ministries 27

28 Question no 7 (Table 4.5), was the most important question from this survey when all ministries are required to identify what are the main reasons that have affected this level of under execution. Almost all ministries have identified that procurement procedures are the main factor that reflects current situation. Legal problems which have to do mostly with property issues has been identified as the second reason that has affected current situation. Prioritization in order of importance reasons that has been identified in question no 7, from the interviews with line ministries. Procurement procedures are main reason mentioned by all ministries. Legal and procedural issues is the second in the list of the reasons specified in the interviews. Lack of skilled staff and enhancement of management skills. Weather implication Better coordination with Ministry of Economy and Finance Proposals form line ministries on what should be changed to improve the situations? There are different proposals what needs to be changed for a specific reason to help improving current situation. There are proposals to make some changes to the Public Procurement Law mostly on the field of the procurement procedures they need to be shortened, training of staff for procurement procedures, adjustment of the procurement procedures with the cash flow, shortening the period for appeals of bidders from tendering process. Potentially there is a proposal to create a joint unit of Budget and procurement office, this will potentially help them on making better planning of the tendering process with budget. There are also proposals related to the improvement of the legal and procedural issues including also property issues. 28

29 Most of the projects that have to do with road construction and construction of building need some preparation of legal issues such are the property issue of the place when the project will be made. Procedures for clarification of property issues should be shortened, better coordination with local level (municipalities) for property and other legal issues. Weather implications is another factor that has an impact on the implementation of the capital investment plans, this requires that budget and tendering procedures should be done on time. Lack of skilled staff and enhancement of management skills, training of the staff it is It is expected that after finalization of the research would be possible to prepare a list of recommendations and alternative changes that need to be made for improvements of capital spending execution. This research will also contribute on creating a better planning of capital spending based on a realistic and more optimal implementation schedule spread over more than one year which could significantly reduce the level of under spending on individual projects. Many countries successfully handle the funding of multi-year investment projects through successive annual appropriations which are managed and monitored against the approved total estimated cost of the project. 4.5 International Comparison on capital expenditure execution The Kosovo capital investment budget consists of a large part of the budget t has been almost 35% during the past two years. Projections for the following period shows an increase of this category, mostly due to the large projects planned to be implemented such is highway project with total cost of around 1 billion for three years and some other large capital projects. In comparison to other countries we see differences on the structure of the budget. when the share of capital expenditure projects in other countries is much lower compare to Kosovo. In this 29

30 regard they can be more effective on implementing these projects. Execution rate of capital investments in Kosovo during 2008 and 2009 was 80%, and for 2010 the rate of execution of capital investments has shown an increase to almost 90%. Execution of capital investment projects is a challenge in all countries and the certain level of under execution is present everywhere. Kosovo has made a progress on establishing capable institutions within each ministry who are responsible to implement capital investment projects that are budgeted. In comparison with the countries in the region, Albania has made a significant progress on implementation of capital investment projects when the rate of execution is almost 95%. Albania has made reforms on this process; they have implemented online tendering which has had a very positive impact on this process by shortening the time and also eliminating procedures. In Macedonia the execution rate of capital investment projects is in the range between 85 and 90 percent, which is almost in the same level that Kosovo has experienced during past two years. CHAPTER 4, PROBLEMS IDENTIFIED ON LEGAL AND PROCEDURAL ISSUES 30

31 This chapter will provide information about two main issues that has been considered as the main reasons that has had an impact on the under execution of capital investment s projects. Specific issues related to legal requirements will be addressed on this chapter. 5.1 Legal and procedural issues One of the most challenging issues for capital expenditure implementation is legal and procedural issues for each specific project planned to be implemented. Before the start of the implementation of a specific project there is a need that all budget organizations prepare detailed analyses of their proposed capital projects. The budget organizations should prepare the estimated cost of the project for three years: the year of initiation, and for the two subsequent years. The estimated cost of each project is expected to be updated for the current year and for the two subsequent years as additional information becomes available. In other words, a multiyear project that begins in this year should have estimates of what will be needed in next two years. This process should be followed until the Project is completed. That is, if the project is a fouryear project the cost for 2013 must be added prior to the 2011 budget cycle and any changes to the estimates for 2011 and 2012 should also be entered into the system. In addition to estimating costs, budget organizations are required to: Identify the need for the project; Specify why the Government should be undertaking the project; Explain how the project is compatible with overall Government policies and sector policies; Submit complete projects (that is, projects that cover all stages from the conceptual to the operational stage) on a stand-alone basis (rather than partial projects that require additional components before they become operational); 31

32 Identify options for both large and small scale projects; Conduct an analysis of the benefits and costs of each option, along with a recommendation of the preferred option; Ensure that project risks have been identified and mitigated; Ensure that necessary processes related to any relevant regulatory measures have been undertaken; and Ensure that management processes are in place to implement the project. Budget Organizations are also expected to prioritize projects so that MFE Analysts can take that into account in making their recommendations on the allocation of KCB funds for capital projects. After the Budget Organizations determine their capital investment needs for the budget process, they enter relevant data into the government-wide PIP data base. Budget Analysts in the MFE use the projects included in the system to make Capital Budget recommendations. However, for the MFE Budget Analysts to make recommendations that support Government Goals, Budget Organizations need to put more emphasis on how Sector Strategies, and MTEF are supported by the specific projects submitted and why the projects are given the priorities they are. This requires much greater involvement of strategic planning activities or units in the Budget Organizations in the whole process of project selection, preparation, and prioritization. The presentation of financial information, such as receipts, expenditures and financing, in the proposed Kosovo Consolidated Budget and the format of the documentation therein shall be comprehensive, transparent and consistent with the GFS cash basis classification system published from time-to-time by the IMF The Chief Financial Officer of a budget organization shall inform the General Director of Treasury of (i) any contract entered into by the budget organization, any modification to a 32

33 contract previously entered into by the budget organization if the contract obligates the budget organization to make payments from public money in the current fiscal year or in future fiscal years, and (ii) any non-contractual payment obligation of the budget organization. The General Director of Treasury shall maintain records of each budget organization s contractual and non-contractual payment obligations. A non-contractual payment obligation is a payment obligation that a budget organization would be required to fulfill in future years if the existing programs and subunits (administrative and functional) of such budget organization were to be continued and funded in such future years at the same level and to the same extent as in the current. 5.2 Procedural issues Problems that are mostly faced with procedures have to do with: Projects that are included into the annual budget after some time are not considered as the priority of that ministry. The land when the projects is going to be built is not defined there are property issues which has not been fixed yet. As a result of this, the process can be blocked and implementation of that specific project may be delayed. Solving the issue of the property takes so much time and efforts which has a huge impact in the overall process. Communications between budget department and the procurement office, sometime does not work properly and this may have also an impact on project implementation. All these procedures are set for the help of budget organizations to prepare their projects, which could result on better spending throughout the implementation stage. Budget organizations when they list projects that are planned to be implemented they do not take all necessary measures to identify the property issue and other legal obligation. 33

34 From this perspective they should prepare all procedural and legal requirements before the project is entered into the PIP system. This will result on better planning and execution of capital investment projects. 5.3 Public Procurement Problems One of the most challenging problems for capital projects implementation is the issue related to the procurement rules and regulation. Almost all ministries have identified that procurement procedures are main factor influencing under spending. The LPP defines open tendering as the standard method for public procurement. It also provides for: (i) a restricted tender process in situations where it is efficient to review the qualifications of potentially interested suppliers prior to submission of tenders; and (ii) a sole source negotiated procedure for when there are compelling technical reasons to award a contract to a particular supplier. The minimum period between issuing of a Contract Notice and the deadline for receipt of tenders for contracts in excess of 250,000 was reduced from 52 to 40 days under the amended legislation. The LPP also specifies a complaints procedure that allows interested parties to submit complaints up to 8 days following the issuing of a Contract Award Notice. Procurement is undertaken by the Procurement Department in each BO. A Procurement Officer holding a professional procurement certificate is designated for each particular activity. Regarding the public procurement process in Kosovo during past three years have been taken some measures in order to improve this process of public procurement. In 2007 there has been made changes to the Public Procurment Law nr. 02/L-99 (LPP) in order to make harmonization of our legjislacion with European Union regulations. Based on the procedure set in the LPP in Kosovo, procurement process is decentralized to individual budget organizations. 34

35 Based on this regulation each budget organization is required to have specialized people for procurement process authorized to do public procurement procedures and also to sign the contract with selected companies. This law requires that all budget organizations should strengthen their cpacities with training and certification of officials dealing with this process. Although each organization carried out procurement budget (contracting authority), under the Law on Public Procurement part V, VI and VII provides for three central bodies with responsibilities relating to public procurement: Public Procurement Regulatory Commission (PPRC), Public Procurement Agency (PPA), Body-Review of Public Procurement (BORPP). a) Public Procurement Regulatory Commission (PPRC), a body which reports to the Assembly, whose functions include the following Prepare and promulgate secondary legislation, including manuals, guidelines and standard bidding documents and standard contracts; Maintain electronic database of public procurement; Publish all procurement notices and contract award notices on its website; Collects, analyzes and publishes data on public procurement procedures and contracts of public data, included in the annual report sent to the Assembly; Start development of electronic procurement processes; Contributes to the professional standards for training and certification of procurement officers (along with the Kosovo Institute of Public Administration). b) Public Procurement Agency (PPA), an executive body within the Office of the Prime Minister, whose functions include Prepare recommendations for government procurement of common goods or high value that can be procured more efficiently under a consolidated procurement or joint; Acting as contracting authority on behalf of one or more budget organizations or government request budgetary organizations concerned; Assisting budget organizations in carrying out specific procurement activities and their application 35