Annex_8_-_Municipal_PEFA_Evaluation_Report.pdf

PARTNERSHIPS FOR

DEVELOPMENT

EVALUATION OF MUNICIPAL PEFA

July 29, 2015 This report was produced for review by the United States Agency for International Development. It was prepared by USAID Partnerships for Development implemented by Chemonics International, Prime Contractor, and Crimson Capital Corp. and Policy and Management Consulting Group, Subcontractors.

PARTNERSHIPS FOR DEVELOPMENT

EVALUATION OF MUNICIPAL PEFA

JULY 2015

Consortium Members: Crimson Capital Corp.

Policy and Management Consulting Group

Award No.: AID-OAA-I-12-00035

Order No.: AID-167-TO-14-00002

Contracting Officer Representative: Dardane Peja

Chief of Party: Terry Slywka

DISCLAIMER

The author’s views expressed in this publication do not necessarily reflect the views of the United States Agency for International Development or the United States Government.

CONTENTS

BACKGROUND

PURPOSE:

PROCESS

FINDINGS

THE PEFA EXERCISE WAS WELL RECEIVED

MANY KEY ISSUES IDENTIFIED IN PFM REMAIN

INSTITUTIONALIZATION

EMERGING FOCUS ON MUNICIPAL PERFORMANCE

FUTURE DIRECTION FOR MUNICIPAL PEFA

ACRONYMS

AC Audit Committees AGA Autonomous government agencies AI Internal Audit BO Budget Organizations CHU Central Harmonization Unit COFOG Classification of Functions of Government GFS Government Finance Statistics IPSAS International Accounting Standards in Public Sector KCB Kosovo Consolidated Budget MDA Ministries, Departments and Agencies MoF Ministry of Finance (previously Ministry of Finance and Economy) MPS Ministry of Public Services MTBF Medium Term Budget Framework OAG Office of the Auditor General PIFC Public Internal Financial Control PIP Public Investment Program POE Publicly Owned Enterprises TSA Treasury Single Account LPFMA Law on Public Financial Management and Accountability

BACKGROUND

The Public Expenditure & Financial Accountability (“PEFA”) framework is a diagnostic tool for public financial management. It is a report card that compares current practice to a set of internationally accepted standards of good practice.

During the period 2010 to 2013, PEFAs were completed for 12 municipalities supported by USAID GFSI Project. PEFA reports were produced for each of these municipalities and a consolidated report also prepared. Based on the findings of the PEFA, reform action plans were developed by these municipalities.

Partnerships for Development is a 4 year 8 month activity to (1) improve the business environment,

(2) improve implementation of construction reforms, and (3) enhance macro-economic stability and public financial management (PFM) at the central and local levels of Kosovo Government.

Component Three - enhanced macro-economic stability and public financial management (PFM) at the central and local levels focuses on providing support to the Government of Kosovo institutions in key PFM areas such as budget, treasury management, fiscal planning and tax administration.

One of the objectives of Component 3 is to enhance national and municipal Public Financial Management and support increased participation in the formal economy.

To achieve this objective, the Project aims to support key PFM institutions to identify ways to improve revenue and expenditure administration and management, streamline processes and facilitate formalization. In addition, it will complement the specific macro and budget initiatives under the other objectives of Component 3, by using the Public Expenditure and Financial Accountability (PEFA) tool to provide a sound basis for mapping ways to enhance PFM in a wider context.

PURPOSE

In order to inform planning for future support to municipalities under Component Three, Partnerships for Development initiated an evaluation of the prior experience and future options for use of the PEFA tool.

This evaluation is intended to provide:

• An assessment of the degree of institutionalization of PEFA within the MoF MBD and the Association of Kosovo Municipalities,

• An assessment of the previous PEFA and implementation of the PFM Action Plans in 5 sample municipalities,

• A summary of best and worst practice within the 5 municipalities,

• Recommendation as to whether the PEFA tool should be rolled out to more municipalities, and

• If the recommendation is to continue the roll-out of PEFA at the municipal level; additional recommendations on how to improve the process and how to promote further institutionalization of the process within the MoF (and the Association of Kosovo Municipalities, if appropriate) should be provided.

PROCESS

During the period 17 June to 2 July, 2015 public financial management expert Mr Kris Kauffmann travelled to Pristina to work with the USAID Partnerships for Development in undertaking the evaluation of municipal PEFA. Discussions were held with finance executives in a sample of five of the municipalities who previously participated in the PEFA process, being Gjakove, Podujeve, Fushe Kosove, Peje and Strpce at the offices of each municipality. In addition, meetings were held with the following key stakeholders:

Mr Agim Krasniqi Deputy Minister of Finance

Mr Petrit Popova Director of the Municipal Budget Department of the MoF

Mr Nysret Koca Deputy Director for Reporting, Treasury, MoF

Mr Sazan Ibrahimi Executive Director, Association of Kosovo Municipalities

Mr Artan Venhari Deputy Auditor General, Office of the Auditor-General

Mr Lage Olofsson Advisor to the Office of the Auditor-General

Mr Avni Sahiti Director of Department for Municipal Performance and Transparency in Ministry of Local Government Administration

Mr Ertan Munoglu Deputy Project Manager, DEMOS Project

FINDINGS

THE PEFA EXERCISE WAS WELL RECIEVED

The feedback provided by the five sample municipalities was that the PEFA exercise was a positive experience for the municipalities. Those municipal staff that were involved in the PEFAs advised that the PEFA process assisted in identifying areas of weaknesses in existing practice and alternative models of good practice. Municipal staff benefited from substantial training and on-the-job capacity building provided by the USAID GFSI and DFID local and international advisors.

The process used for the prior PEFAs, where a self-assessment approach was taken with coaching from the GFSI project, was viewed very favorably. The process and training associated with the prior PEFA exercise is outlined in Annex A to this report. Teams were formed within each municipality to undertake the self-assessment and lead the development of the PFM action plan. These teams included participants from across the municipality, including from both the executive and legislative branches of each municipality and mayors. Participants viewed the engagement between these participants, and the associated dialogue regarding the need for change, as one of the positive features of the PEFA exercise.

The representatives of the sample municipalities advised that the PEFA process led to specific improvements in PFM practices:

• In Gjakova, PEFA led to new procedures for external audit findings to be sent to the municipal Assembly which improved transparency, and resulted in enhanced engagement of Assembly in responding to external audit;

• In Podujeve, PEFA contributed to improvements in the timeliness of internal management reporting, and

• In Peje, PEFA led to changes in internal controls directed at avoiding further build-up of arrears.

The results reported by these municipalities, reflect the initial findings reported by GFSI in their review of the impact of the PEFA and PFM action plans in the 12 municipalities. In March 2013 GFSI reported that the following implementation achievements were identified1:

• Improvement of budget credibility, where deviation of budgeted expenditures with actual has been reduced;

• More realistic planning of municipal own-source revenues (OSR);

• A considerable increase of the debt collection level from property tax, particularly in Serbian majority municipalities;

• As highlighted by the OAG further improvements were made in the quality of 2011 Annual

Financial Statements;

• External scrutiny over municipal finances commenced with audited financial statements being tabled and discussed by local assemblies; and

• Increased review and preparation on management response to OAG recommendations.

Over the period since the PEFA there have been improvements in municipal public financial management due to a range of factors not necessarily attributed to the PEFA process, including:

1 GFSI quarterly report Q1 2013

• Improvement in property tax processes and systems managed by the Property Tax Department in the MoF and supported by USAID and SIDA;

• Enhancements in internal audit processes and responses to internal audit being driven by the Central Harmonization Unit of the Ministry of Finance with the support of EU technical assistance projects. USAID GFSI provided support to amending the internal audit law;

• Enhancements in external audit as a result of enhanced capacities in the Office of the Auditor General;

• Improved internal controls and audit follow-up within municipalities as a result of considerable support provided to municipalities during the period 2010 to 2013 by the Treasury. This support helped municipalities to meet the minimum standards required of them for the decentralization of payment controls. This effort was supported by USAID funded technical assistance;

• MTBF has become institutionalized in most municipalities, becoming a requirement for the budget circulars and has been consistently supported by the MoF MBD with USAID technical assistance; and,

• Enhancements in the governance and democratic structures of municipalities, which is bringing enhanced internal dialogue and outreach to citizens regarding PFM issues.

The sample municipalities interviewed indicated that they would welcome the opportunity to do a repeat PEFA assessment, following the same process as before.

MANY KEY ISSUES IDENTIFIED IN PFM REMAIN

While municipalities viewed the PEFA exercise favorably, and there have been many positive developments, there are several important areas where progress has not been achieved in public financial management in Kosovo municipalities. The evaluation identified that several key areas of weakness in municipal PFM that were previously identified in the PEFA, remain evident today, including:

• Credibility of the budget – where the capacity of municipalities to forecast revenues accurately has not improved and in fact has deteriorated in some of the sample municipalities;

• Existence of payment arrears – where weak scores for PI-4 and PI-20 would be repeated if a full PEFA assessment would be performed today. While the reported arrears are low in some of the sample municipalities, the unreported arrears are understood to be significant;

• Lack of complete multi-year focus in budget planning – where municipalities are preparing forward estimates in their MTBF documents but forward estimates are only published for capital projects in the Budget documents prepared by the MoF and approved by the national assembly; and,

• Weaknesses in oversight of Publicly Owned Enterprises at regional and municipal level, as would be shown in weak scores for PI-9 due to poor governance and reporting arrangements for regional and local POEs.

The overall focus of the budget preparation and execution system is on seeking to ensure adequate control over the use of resources by municipalities – predominantly driven by a concern to closely manage the macro-fiscal policy. Focus is only now starting to shift to the questions of efficiency and effectiveness in delivery of services at municipal level in Kosovo.

The observed lack of progress in these areas reflects both the internal dynamics of each municipality but also exogenous or systematic impediments to progress in municipal financial management.

Almost all of the areas of weakness are common concerns across municipalities. The previous PEFA results, and the more recent annual external audit of all municipalities, show that most of the issues identified are common among municipalities. It was only in very few of the PEFA indicators that there was significant variation in the scoring between municipalities.

Many of the PFM issues identified as weaknesses in PEFA require a coordinated response (with central government). e.g. budget calendar, multi-year budget, asset management regime.

Key central/local relationships, such as the relationship between the MoF MBD and municipalities have not evolved. The MBD continues to be caught up in a reactionary approach to managing municipal finances, often required to meet General Government fiscal targets associated with an IMF program and/or seeking to accommodate top-down whole-of-government spending initiatives (such as general public sector wage increases). While MBD has been successful in driving some systemic improvements, for example in institutionalizing the MTBF and encouraging enhanced outreach to citizens in municipal budget planning, most of their attention is directed at the careful management of fiscal aggregates.

Indeed, the perceived need to maintain aggregate fiscal discipline and the tacit acceptance of the mandate of the national government to set revenue and expenditure policy for municipalities, as well as the reliance of municipalities on transfers from the central government, means that municipalities in reality have little room to maneuver in setting their own fiscal policy. Examples of central government imposing policy decisions that impact on municipal finance include:

• Political leadership at national level setting policy for setting wages of all civil servants, including for staff employed to perform municipal functions, and

• Political leaders at national level imposing policy regarding property tax – for example the recent announcement of an amnesty for property tax debt that is now impacting on the ability of municipalities to collect their main source of own-source revenue.

A further challenge for municipal governance and financial management is the politicization of the Director of Finance position in each municipality. Many municipalities do not have a permanent executive head of the finance function, such as a CFO, so changes in the political regime results in major loss of institutional memory and loss of reform momentum.

Opportunities for peer learning are not consistently available to municipal executives.

INSTITUTIONALIZATION

Institutionalisation of the PEFA/PFM Action Plan process has been weak, despite several initiatives having been established. The elements of institutionalisation developed at the time of the original PEFA process included:

• PFM action plans were approved by the mayors and Municipality Board of Director of each municipality;

• Municipalities (at least initially) produced 6 monthly reports on progress against the action plans;

• A seminar was held with all municipalities to explain the PEFA process;

• A workshop was held with municipalities to report progress on implementation of the PFM action plans and share experiences;

• Ministry of Finance MBD nominated 4 staff to be trained on PEFA and participate in a PEFA assessment with the intention that these staff would support future PEFA activities in other municipalities as well as continuing to support the reporting of progress2; and

• The Association of Kosovo Municipalities participated in PEFA training and events.

Despite these endeavors, PEFA and the associated PFM action plans are not institutionalized within the sample municipalities and nor within the MBD or AKM.

Neither the PEFAs, nor associated action plans, were maintained or updated in any of the sample municipalities. The six monthly reports stopped after the first iteration and there has not been any formal tracking of progress against these plans.

The Association of Kosovo Municipalities did not use or follow-up on PEFA and the action plans.

Ministry of Finance did not follow-up on the PFM action plans. There were no further events arranged for municipalities to report progress and share experiences on the PFM action plans. No other PEFAs have been done at municipal level.

The MBD and municipalities see donors as being the key driver of future PEFA related activities.

If we contrast the apparently successful institutionalization of municipal MTBF with the unsuccessful institutionalization of PEFA, it appears that the required elements for successful institutionalization may be (1) the fact that MTBF is a mandated activity, (2) it is done on a repetitive annual basis (3) it involves structured engagement of executive and political levels of municipalities, and (4) constant support has been provided for the activity by central government and their technical assistance partners.

EMERGING FOCUS ON MUNICIPAL PERFORMANCE

Across government and the donor funded technical assistance community in Kosovo, there is a growing emphasis on measuring and promoting municipal performance. Current endeavors in measuring and using municipal performance data include:

• MLGA collecting and publishing a broad set of indicators of municipal performance – where DEMOS project is now supporting this endeavor and using the data in allocating performance grants. A key element of the Government strategy on local self-government is “to specify and advance modalities for monitoring the performance of municipalities, municipal ranking, increase competition among municipalities and grant incentive funds to successful municipalities”;

• The MoF CHU collecting and publishing the results of a municipal self-assessment survey on PIFC (Public Internal Financial Control) outcomes, where municipalities score their performance on range of internal control indicators; and

• Auditor-General in 2014 published a municipal performance report, which included performance indicators on service delivery.

These efforts have not come together in a meaningful way, the performance management cycle is fragmented, in the sense that there is not a clear linkage between strategic planning, performance setting, allocation of resources, recording of results and reporting of performance. An integrated performance management cycle might look as follows:

2 “The Director appointed four staff members to be trained and receive practical experience in facilitating PEFA self-assessments through their participation in the field visits to the Fushe Kosova municipality” GFSI Q4 2012

Figure 1: Example of an Integrated Performance Management Cycle

The Ministry of Finance has issued a financial rule (05/2011) that requires each agency to publish an annual report that includes performance information as well as financial data. However, this financial rule does not apply to municipalities and has not been enforced.

FUTURE DIRECTION FOR MUNICIPAL PEFA

The evaluation sought to answer the subsidiary question as to what is likely to happen if we were to roll out the previous PEFA exercise to the additional 26 municipalities that did not participate in the previous exercise. The findings of the evaluation indicate that such an approach would likely achieve the following:

• It would enable those municipalities to map out their strengths and weaknesses in an organized and system way;

• It would create positive dialogue within those municipalities on PFM issues; and,

• More data would be gathered on the PFM challenges in municipalities

But:

• It would be costly to support a full PEFA assessment and the development of an action plan in a further 26 municipalities;

• It would not necessarily see the issues resolved. As outlined above, there are exogenous factors and impediments that prevent in individual municipalities. In many cases a change in the PFM framework and systems is required (many of which are managed or imposed by central government);

• The additional data from additional PEFAs may not provide additional knowledge of PFM issues – due to the high commonality of issues between municipalities, we can expect the same issues to arise as identified in prior PEFAs and in the annual external audit reports; and

• Without a change in approach, institutionalization would likely remain weak

At the time that the original concept for municipal PEFA in Kosovo was developed, a sampling approach was taken as “the conduct of PEFA assessment for all units would be time consuming and most likely inefficient in the use of resources. Given the current stance of the PFM system – single treasury account, unique financial management and control rules, and overarching PFM legislation – a lot of similarities between municipal budget organizations can be reasonably anticipated in terms of strengths and weaknesses. Thus, the PEFA Framework application was based on the selection of a representative sample”3.

The same issues exist today.

The evaluation identified an alternative approach, which seeks to both broaden the application of PEFA to all municipalities but also make it better institutionalized and cost effective. That alternative approach is to report selected PEFA indicators within a broader Performance Management Framework. Specifically, the recommended approach involved the following:

1. Require each municipality to include PEFA based performance measures in their Annual Financial Statements and include these in a published annual report. These measures would be pre-determined selection of 10 to15 of the most relevant and objective (mostly data-driven) performance indicators. Annex 2 contains a list of possible relevant indicators;

2. Municipalities would score the indicators themselves, with an appropriate level of support being provided by the MBD. These scores would then be published in the annual report (with the Annual Financial Statements) of each municipality and signed-off by the head of the municipality;

3. As the PEFA indicators form part of the annual report, and would be required by the Financial Rules and accounting standards, they would be subject to audit by the Auditor- General. As Kosovo has adopted IPSAS standards, the IPSAS advice regarding performance reporting would be a relevant reference4; and

4. Municipalities would plan their performance in the context of their MTBF, setting performance targets for the same set of indicators.

Recommendation 1:

Revise Financial Rules 05/2011 on annual reporting to require publishing of selected PEFA performance indicators in annual reports and have these auditable by the Auditor-General.

Recommendation 2:

Include the selected PEFA indicators in a broader municipal performance management framework that involves planning performance in the context of the MTBF and reporting in the context of the annual report (with Annual Financial Statements).

This approach would be a first step towards a complete performance management approach, where a broader (but still highly selective) set of performance targets coving the main aspects of municipal service delivery and administration would be planned (with targets set) in the context of the MTBF, support a performance focus in day-to-day management of the municipality, and be reported against in management report and the annual report.

In order to make maximum use of the comparability of the data and its ability to highlight strengths and weaknesses in municipal PFM, the MoF should prepare an annual report comparing/benchmarking the results. This report could identify models of good practice and be a catalyst for promoting dialogue for addressing weaknesses.

3 Quote from the PEFA report for the first 5 municipal PEFA’s 4 IPSAS Exposure Draft 54, Reporting Service Performance Information, 2013

Recommendation 3:

Municipal Budget Department to prepare an publish an annual PFM benchmarking report that compares performance across municipalities using published PEFA performance indicators and identifying models of good practice.

This is not to say that full PEFA assessments are not appropriate in specific circumstances. A full PEFA assessment and development of an action plan may be appropriate for a municipality that is newly engaged in municipal finance structures, for those that have fallen significantly behind in PFM performance and desire to catch-up and/or where there is new municipal leadership that wants to seek a change in focus or approach on PFM.

The MBD needs be in a position to support full PEFA self-assessments and PFM action plans in municipalities that have special needs to improve their PFM performance.

Recommendation 4:

The MBD have available the resources and capacity to support full PEFA self-assessments and PFM action plans in municipalities that have special needs to improve their PFM performance.

The benefits of the recommended approach are:

• That PEFA will become better institutionalized by having key indicators scored on a routine annual basis;

• It is a simple first step in introducing performance measures in AFS. It is simple in the sense that it avoids the issue of municipalities selecting and scoring appropriate indicators. There is a complete framework and supporting materials to enable accurate scoring. These indicators have a built in benchmark to international models of good practice. Later, a broader set of indicators can be introduced measuring performance of the municipality in producing outcomes for citizens;

• Scoring PEFA largely draws on existing data sources;

• Brings broader PFM performance issues into the political and technical dialogue around the external audit findings;

• Audit action plans likely to become a broader PFM action plans; and,

• More cost effective that full-blown PEFA exercise.

Implementing these recommendations requires a careful change management approach, which involves not only capacity building in institutions but also communication, coordination and consensus building:

1. Building the capacity of municipal administration to score the selected indicators. This will involve initial training before the scoring is done;

2. Coaching of municipal staff by a core group of PEFA experts during first iterations of scoring;

3. Training of auditors in the Office of the Auditor-General to enable them to undertake meaningful auditing of performance reporting; and

4. Engaging with the various institutions supporting municipalities to build consensus regarding the need for a simple integrated performance management framework.

Institutionalizing the recommended approach requires the following elements in key institutions:

Municipalities:

• Integrating performance management with their broader strategic planning, budgeting, management and reporting activities, and

• Actively pursue better performance by routinely monitoring results and seeking solutions to improve outcomes.

Ministry of Finance:

• Build performance management into the internal financial planning and control framework.

Initially by updating the financial rules to require it but also ensure centralised systems support the performance-based approach;

• Prepare and publish an annual municipal PFM performance benchmarking report;

• Routinely engage with municipalities regarding opportunities for performance improvement;

• Set a performance target for the MBD for all municipalities to improve their scores;

• Manage the introduction of performance management elements into the budget cycle; and

• Build or acquire capacity to support PEFA activities in municipalities.

Ministry of Local Government Administration:

• Transition towards municipalities taking ownership of performance management and including performance information in their MTBF and annual reports, and

• As municipalities broaden their own reported performance indicators (to cover service delivery), take a more targeted approach to MLGA performance reporting.

Office of Auditor-General:

• Audit performance indicators in AFS, and

• Produce performance audits on selected topics

Implementing the recommendations and achieving the desired level of institutionalization will not come without a cost. These costs would be associated with delivering the following:

• PEFA training for municipalities, MBD and OAG staff;

• Coaching/help-desk during preparation of 2015 and 2016 AFS and during 2016 MTBF preparation;

• Technical assistance to MoF in preparing an annual PEFA benchmarking report;

• Providing support to the MBD and municipalities in conducting a small number of full PEFA assessments; and

• Engagement with MLGA, AKM and municipalities for change management.

ANNEX 1: LIST OF POSSIBLE PEFA-BASED PERFORMANCE

INDICATORS

PI D Description of Performance Indicator (dimension)

PI-8 Performance information for achieving efficiency in service delivery

(iii) Monitoring of resources received by service delivery units

PI-11 Public investment management

(ii) Costing over the project life cycle

(iii) Project monitoring and reporting

PI-12 Public asset management

(ii) Quality of non-financial asset monitoring

PI-13 Management and reporting of debt and expenditure arrears

(iv) Stock and monitoring of expenditure arrears

(iii) Difference between actual and the originally forecast fiscal balance

PI-19 Revenue administration compliance

(iv) Management of revenue arrears

PI-22 Effectiveness of payroll controls

(iii) Internal controls on changes to personnel records and the payroll

PI-23 Transparency, competition and complaints mechanisms in procurement

(ii) Use of competitive procurement processes

(iii) Public access to complete, reliable and timely procurement information

PI-24 Effectiveness of internal controls for non-salary expenditure

(ii) Effectiveness of expenditure commitment controls

(iii) Compliance with systems of control for making payments

PI-25 Effectiveness of internal audit

(iii) Extent of management response to internal audit findings

PI-26 Accounts reconciliation and financial data integrity

(iii) Regularity of reconciliation and clearance of advance accounts

PI-27 Quality and timeliness of in-year budget reports

(i) Coverage and comparability of reports

(ii) Timeliness of issue of reports

U.S. Agency for International Development Mission in Kosovo

Ismail Qemali Street, No. 1 Pristina, Kosovo 10130

Tel: +381 (0) 38 243 673 Fax: +381 (0) 38 249 493