Fiscal_Sector_Reform_Final_RFP.pdf

May 16, 2014

TO: Prospective Offerors

SUBJECT: Request for Proposal No.: SOL-168-14-000006

Fiscal Sector Reform Activity in Bosnia and Herzegovina

The United States Agency for International Development (USAID), through the Mission in Bosnia and

Herzegovina (BiH), is seeking proposals from qualified local Bosnian and Herzegovinian entities interested in providing the services as described in this solicitation. This Request for Proposal incorporates comments received on the special notice (Request for Comments on the draft Statement of

Work) earlier posted on FedBizOpps website (dated April 16, 2014).

The justification for the use of other than full and open competition which limits competition to the local

Bosnian and Herzegovinian market for this contract has been approved by the Contracting Officer. To be considered a local BiH entity , an Offeror must: (1) be legally organized under the laws of BiH; (2) have as its principal place of business or operations in BiH; and (3) either is (A) majority owned by individuals who are citizens or lawful permanent residents of BiH; or (B) managed by a governing body the majority of whom are citizens or lawful permanent residents of BiH. “Majority owned" and "managed by" include, without limitation, beneficiary interests and the power, either directly or indirectly, whether exercised or exercisable, to control the election, appointment, or tenure of the organization's managers or a majority of the organization's governing body by any means.

Please note that offerors must be registered in SAM - System for Award Management

(https://www.sam.gov) in order to do business with the U.S. Government. A successful registration in

SAM means the Offeror has obtained a DUNS number, has registered in CCR (Central Contractor

Registration) and has secured an NCAGE number to successfully complete the Online Representation &

Certifications Application (ORCA). Please refer to Attachment J.7 “Quick Start Guide for New

Foreign Registrations” for further instructions.

This solicitation is subject to amendment at any time. Any amendments to this solicitation will be issued and posted on the Federal Business Opportunities (FedBizOpps) website. In order to be informed of changes that may affect proposal preparations, Offerors are encouraged to check this website

(http://www.fedbizopps.gov ) periodically. It is the responsibility of the prospective Offerors of this solicitation to ensure that the solicitation has been received from the internet in its entirety. USAID bears no responsibility for data errors resulting from transmission or conversion processes.

Offerors must carefully adhere to Section L – Instructions to Offerors and Section M – Evaluation

Factors for Award. Section B through J of the solicitation will become the basis for the final contract, if any. Any blanks or “TBD” in Sections A-J will be completed by the Contracting Officer before award.

This RFP in no way obligates the United States Government to pay any cost incurred in preparing and submitting your proposal. In addition, the Government reserves the right to reject any and all offerors, if such action is considered in the best interest of the Government. Furthermore, the Government reserves the right to make an award with or without discussions.

Local Entity means an individual, a corporation, a nonprofit organization, or another body of persons.

https://www.sam.gov/ http://www.fedbizopps.gov/

Request for Proposal No.: SOL-168-14-000006

PART I—THE SCHEDULE

SECTION B—SUPPLIES OR SERVICES AND PRICES/COSTS

B.1 Purpose

B.2 Contract Type

B.3 Estimated Cost, Ceiling Price, Fixed Fee, and Obligated Amount

B.4 Price Schedule

B.5 Indirect Costs

B.6 Ceiling on Indirect Cost Rates

B.7 Cost Reimbursable

B.8 Payment of Fixed Fee

SECTION C—STATEMENT OF WORK

C.1 Objective

C.2 Scope of the activity

C.3 Country background and Development context

C.4 Problem Statement and Major Issues

C.5 Executive Summary

C.6 Relationship to the CDCS, and applicable agency policies

C.7 USAID Achievements in the Fiscal Sector to Date

C.8 Other Donors in the Fiscal Sector

C.9 Recent Achievements in Support of the Activity

C.10 Methodologies

C.11 Illustrative activities

C.12 Monitoring, Evaluation, and Learning

C.13 Critical Assumptions and Risks

SECTION D—PACKAGING AND MARKING

D.1 MARKING

D.2 BRANDING STRATEGY

D.3 BRANDING AND MARKING POLICY

SECTION E—INSPECTION AND ACCEPTANCE

E.1 Notice Listing Contract Clauses Incorporated by Reference

E.2 Inspection and Acceptance

SECTION F—DELIVERIES OR PERFORMANCE

F.1 Notice Listing Contract Clauses Incorporated by Reference

F.2 Period of Performance

F.3 Place of Performance

F.4 Performance Standards

F.5 Key Personnel

F.6 Authorized Work Day/Week

F.7 Periodic Progress Reports

F.8 Reports

F.8.1 Reports Submission Schedule

F.8.2 Annual Work Plans

F.8.3 Monitoring and Evaluation (M&E) Plan

F.8.4 Quarterly Performance Reports

F.8.5 Quarterly Financial Report

F.8.6 Quarterly Accrual Report

F.8.7 Annual Summary Report

F.8.8 Demobilization Plan

F.8.9 Completion Report

F.8.10 Submission of Development Experience Documents

F.9 Evaluation

F.10 Audit

F.11 Deliverables

SECTION G—CONTRACT ADMINISTRATION DATA

G.1 Administrative Contracting Office

G.2 Contracting Officer’s Authority

G.3 Contracting Officer’s Representative

G.4 Technical Direction

G.5 Acceptance and Approval

G.6 Paying Office

G.7 Documentation of Payment

G.8 Invoicing Instructions

G.9 Accounting and Appropriation Data

SECTION H—SPECIAL CONTRACT REQUIREMENTS

H.1 Notice Listing Contract Clauses Incorporated by Reference

H.2 302.3.5.17 Limitation on Subcontracting to Non-Local Entities (May 2012)

H. 3 Language Requirements

H.4 Emergency Locator Information

H.5 Source and Nationality Requirements

H.6 Authorized Geographic Code

H.7 Worker’s Compensation Insurance (Defense Base Act)

H.8 Defense Base Act Insurance and Services

H.9 Medical Evacuation (MEDEVAC) Services

H.10 USAID Disability Policy—Acquisition (DEC 2004)

H.11 Reporting of Foreign Taxes (JUL 2007)

H.12 Personnel Compensation

H.13 Additional Requirements for Personnel Compensation

H.14 Salary Supplements for Host Government (HG) Employees

H.15 International Travel Approval and Notification Requirements

H.16 Leave and Holidays

H.17 Employment Costs of TCNs and CCNs

H.18 Nonexpendable Property Purchases

H.19 Information Technology Resources

H.20 Management of Information Technology Resources

H.21 Title to and Care of Property

H.22 Government Furnished Facilities or Property

H.23 Logistic Support

H.24 Contractor-Mission Relationships

H.25 Disclosure of Information

H.26 Organizational Conflicts of Interest

H.27 Organizational Conflicts of Interest Discovered After Award

H.28 Executive Order on Terrorism Financing

H.29 Foreign Government Delegations to International Conferences

H.30 Environmental Compliance

H.31 Standards of Conduct—Improper Business Practices

H.32 Consent to Subcontract

H.33 Nondiscrimination (JUNE 2012)

H.34 Prohibition on the Use of Federal Funds to Promote, Support, or Advocate the Legalizations or Practice of Prostitution – Tip Acquisition (May 2007)

PART II—CONTRACT CLAUSES

SECTION I—CONTRACT CLAUSES

I.1 Notice Listing Contract Clauses Incorporated by Reference

I.2 52.203-17 Contractor Employee Whistleblower Rights and Requirement to Inform

Employees of Whistleblower Rights (Apr 2014)

I.3 52.232-40 Providing Accelerated Payment to Small Business Subcontractors (Dec 2013)

I.4 52.252-2 CLAUSES INCORPORATED BY REFERENCE (FEB 1998)

PART III—LIST OF DOCUMENTS, EXHIBITS, AND OTHER ATTACHMENTS

SECTION J—LIST OF ATTACHMENTS

PART IV—REPRESENTATIONS AND INSTRUCTIONS

SECTION K—REPRESENTATIONS, CERTIFICATIONS, AND OTHER STATEMENTS OF

OFFERORS

K.1 Notice Listing Contract Clauses Incorporated by Reference

K.2 52.204-8 Annual Representations and Certifications (JAN 2014)

K.3 52.209-7 Information Regarding Responsibility Matters (JUL 2013)

SECTION L—INSTRUCTIONS, CONDITIONS, AND NOTICES TO OFFERORS

L.1 52.252-1 Solicitation Provisions Incorporated by Reference (FEB 1998)

L.2 Notice Listing Contract Clauses Incorporated by Reference

L.4 52.216-1 Type of Contract (APR 1984)

L.5 52.233-2 Service of Protest (SEP 2006)

L.6 Acquisition Schedule

L.7 General Instructions to Offerors

L.7.1 Questions and Clarifications

L.7.2 Electronic Submission Procedures for the Technical and Cost Proposals

L.7.3 Hard Copy and CD-ROM Submission Procedures for the Technical and Cost Proposals

L.8 Instructions for the Preparation of the Technical Proposal

L.8.1 Technical Approach (See Section M.4.1)

L.8.2. Management Approach (See Section M.4.2)

L.8.3. Key Personnel Qualifications and Experience (See Section M.4.3)

L.8.4 Past Performance (See Section M.4.4)

L.9 Instructions for the Preparation of the Cost Proposal

L.9.1 Part 1—Standard Form 33

L.9.2 Part 2—Proposed Costs/Price

L.9.2.1 Salary and Wages

L.9.2.2 Fringe Benefits

L.9.2.3 Travel and Transportation

L.9.2.4 Equipment and Supplies

L.9.2.5 Communications

L.9.2.6 Subcontracts/Consultants

L.9.2.7 Other Direct Costs

L.9.2.8 Indirect Costs

L.9.2.9 Fixed Fee

L.9.3 Part 3—Representations, Certifications, and Other Statements of Offerors

L.9.4 Part 4—Policies and Procedures

L.9.5 Part 5—Evidence of Responsibility for prime and major subcontractor

L.9.6 Part 6—Letters of Commitment (Subcontractors)

L.9.7 Part 7—Information to Support Consent to Subcontractors

L.9.8 Part 8—Joint Venture

L.10 Instructions for the Preparation of the Branding Implementation Plan and the Marking Plan

SECTION M—EVALUATION FACTORS FOR AWARD

M.1 Award Without Discussions

M.2 Source Selection

M.3 Determination of Competitive Range

M.4 Technical Proposal Evaluation Factors

M.4.1 Technical Approach (30 points) (See Section L.8.1)

M.4.2 Management Approach (30 points) (See Section L.8.2)

M.4.3 Key Personnel Qualifications and Experience (30 points) (See Section L.8.3)

M.4.4 Past Performance – (10 points) (See Section L.8.4)

M.5 Evaluation of Cost Proposals

Attachment J.1

Attachment J.2

Attachment J.3

Attachment J.4

Attachment J.5

Attachment J.6

Attachment J.7

PART I—THE SCHEDULE

SECTION B—SUPPLIES OR SERVICES AND PRICES/COSTS

B.1 Purpose

The Economic Development Office in the United States Agency for International Development’s (USAID or Agency) Mission in Bosnia and Herzegovina (BiH) requires technical services to implement the Fiscal

Sector Reform Activity in Bosnia and Herzegovina. The purpose of the activity is to identify and recommend interventions to be carried out in the fiscal sector, with the ultimate goal of improving fiscal and public expenditure management through a comprehensive approach that will ensure better coordination and management between all levels of economic government, increased compliance, and a simplified business environment and fiscal regulatory framework.

B.2 Contract Type

USAID will award a Cost-Plus-Fixed-Fee Completion Contract. For the consideration set forth in the contract, the contractor must provide the deliverables and results described in Section C and Section F.

The contractor must also comply with all other contract requirements.

B.3 Estimated Cost, Ceiling Price, Fixed Fee, and Obligated Amount

USAID estimates the following price range for this contract: $4,000,000-5,000,000.

(a) The estimated cost for the performance of the work required hereunder, exclusive of fixed fee, if any, is TBD. The fixed fee, if any, is TBD. The estimated cost plus fixed fee, if any, is TBD.

(b) Within the estimated cost plus fixed fee (if any) specified in paragraph (a) above, the amount currently obligated and available for reimbursement of allowable costs incurred by the Contractor (and payment of fee, if any) for performance hereunder is TBD. The Contractor shall not exceed the aforesaid obligated amount.

(c) Funds obligated hereunder are anticipated to be sufficient through TBD.

B.4 Price Schedule

Cost Category Amount

Total Direct Costs TBD

Subcontracts TBD

Total Indirect Costs TBD

Total Estimated Cost TBD

Fixed-Fee TBD

Total Estimated Cost-Plus-Fixed-Fee TBD

(a) The inclusion of any costs in the above budget does not obviate the requirement for prior approval by the contracting officer of cost items designated as requiring prior approval by any of the terms and conditions of this contract, including the applicable cost principles (see FAR §

52.216-7, “Allowable Cost and Payment (JUNE 2013)”; nor does it constitute a determination of allowability by the contracting officer of any item of cost, unless specifically stated elsewhere in this contract. Also, these amounts may not be adjusted without a written modification signed by the contracting officer. The contractor will not bill any amounts against this contract in excess of the amounts specified for each line item.

(b) The contractor agrees to furnish data that the contracting officer may request on costs expended or accrued under this contract in support of the budget information provided herein.

B.5 Indirect Costs*

* In the event that an indirect cost rate is negotiated as part of this contract then Sections B.5 and

B.6 will apply. If not, all indirect costs will be reimbursed based on actual cost allocation methodologies.

For the Prime Contractor:

(a) The contract clause entitled “FAR 52.216-7, Allowable Cost and Payment (JUNE 2013)”, specifies that the indirect cost rates shall be established for each of the contractor’s accounting periods that apply to this Contract. Pending establishment of revised provisional or final indirect cost rates, allowable indirect costs shall be reimbursed on the basis of the following negotiated provisional or predetermined rates and the appropriate bases:

Description Rate Base Type Period

% 1/ 1/ 1/

1/Base of Application:

Type of Rate:

Period:

(b) The contractor will make no change in its established method of classifying or allocating indirect costs without the prior written approval of the contracting officer.

For Major Subcontractor(s)*:

(a) The contract clause entitled “FAR 52.216-7, Allowable Cost and Payment (JUNE 2013)”, specifies that the indirect cost rates shall be established for each of the contractor’s accounting periods that apply to this Contract. Pending establishment of revised provisional or final indirect cost rates, allowable indirect costs shall be reimbursed on the basis of the following negotiated provisional or predetermined rates and the appropriate bases:

% 1/ 1/ 1/

*“Major Subcontractors” are those subcontractors whose proposed cost exceeds 15% of the offeror’s total proposed cost.

B.6 Ceiling on Indirect Cost Rates

For the Prime Contractor:

(a) Reimbursement for allowable indirect costs shall be at final negotiated rates but not in excess of the following ceiling rates:

Indirect Cost X % 1/ 1/ 1/

Indirect Cost Y % 2/ 2/ 2/

Indirect Cost Z % 3/ 3/ 3/

2/Base of Application:

3/Base of Application:

(b) The Government will not be obligated to pay any additional amount should the final indirect cost rates exceed the negotiated ceiling rates. If the final indirect cost rates are less than the negotiated ceiling rates, the negotiated rates will be reduced to conform to the lower rates.

(c) This understanding will not change any monetary ceiling, obligation, or specific cost allowance or disallowance. Any changes in classifying or allocating indirect costs require the prior written approval of the Contracting Officer.

For Major Subcontractor(s):

(a) Reimbursement for allowable indirect costs shall be at final negotiated rates but not in excess of the following ceiling rates:

Indirect Cost X % 1/ 1/ 1/

Indirect Cost Y % 2/ 2/ 2/

Indirect Cost Z % 3/ 3/ 3/

2/Base of Application:

3/Base of Application:

(b) The Government will not be obligated to pay any additional amount should the final indirect cost rates exceed the negotiated ceiling rates. If the final indirect cost rates are less than the negotiated ceiling rates, the negotiated rates will be reduced to conform to the lower rates.

(c) This understanding will not change any monetary ceiling, obligation, or specific cost allowance or disallowance. Any changes in classifying or allocating indirect costs require the prior written approval of the Contracting Officer.

B.7 Cost Reimbursable

(a) The U.S. dollar costs allowable will be limited to reasonable, allocable, and necessary costs determined in accordance with FAR § 52.216-7, “Allowable Cost and Payment,” FAR § 52.216-

8, “Fixed Fee,” FAR § 52.232-20, “Limitation of Cost,” and FAR § 52-232-22, “Limitation of

Funds,” if applicable, and AIDAR 752.7003, “Documentation for Payment.”

B.8 Payment of Fixed Fee

USAID will pay a proportion of the contractor’s fixed fee each month pursuant to FAR § 52.216-8, “Fixed Fee,” upon the receipt of an invoice deemed proper by the Regional Financial Management Center

(RFMC) located in USAID/Bosnia and Herzegovina.

END OF SECTION B

SECTION C—STATEMENT OF WORK

C.1 Objective

The purpose of this SOW is to identify and recommend interventions to be carried out in the fiscal sector, with the ultimate goal of improving fiscal and public expenditure management through a comprehensive approach that will ensure better coordination and management between all levels of economic government, increased compliance, and a simplified business environment and fiscal regulatory framework. Through the Fiscal Sector Reform Activity, USAID will support efforts that facilitate gains in fiscal space and public investment that, in turn, spur increasing private domestic and foreign investment in Bosnia and Herzegovina (BiH).

C.2 Scope of the activity

The project will be implemented in five years, starting in fall of 2014. The focus area of the activity is a fiscal discipline, which entails comprehensive set of initiatives tackling coordination between the different levels of the BiH governments, and additional work with governmental institutions such as the tax administrations. The main activity tasks are:

A.1 Assistance for improved intergovernmental fiscal coordination

A.2 Strengthening of the Treasury Systems

A.3 Strengthening of the PIFC

A.4 Strengthening of the Public Debt

A.5 Increased compliance and improved business environment

A.5.1 Reducing tax evasion

A.5.2 Business environment

A.5.3 Elimination of nuisance taxes

C.3 Country background and Development context

Some seventeen years after the 1992-1995 war BiH still struggles to perform basic governmental functions and has not transitioned to full sovereignty given the remaining outstanding conditions needed for closure of the Office of the High Representative (OHR). OHR is an ad hoc international institution created by the Dayton Peace Accords (DPA) and responsible for overseeing the implementation of civilian aspects of the DPA which ended the war in BiH. While OHR prepares to close, the European

Union (EU) has pledged to increase its commitment to Bosnia and Herzegovina. The EU has recently confirmed this commitment with appointment of a European Union Special Representative (EUSR). The

EU Delegation will take on the fundamental duties for steering the country toward EU membership once

OHR closes.

BiH remains deeply divided along ethnic lines. Divisive ethno-nationalist rhetoric exists at almost every political level, in the popular media, in the education system, and in more subtle aspects of social life.

The most recent examples are the confrontational discussions between Bosniak and Serb government officials regarding the indictments of two Bosniak military commanders from Srebrenica region, initiated by the court in Serbia. Republika Srpska officials threatened to abandon the joint state institutions because BiH state institutions refused to extradite the accused. These political divisions inflame distrust and impede progress in virtually every socio-political and economic area.

The country consists of two entities and one district: Federation of Bosnia and Herzegovina (FBiH), the

Republic of Srpska (RS), and Brcko District (BD). All three entities have governments with almost identical and often overlapping competencies (executive, legal and judicial).

The differences that hamper the harmonization between the entities and establishment of the single economic space are closely tied to the administrative structure of the entities:

FBiH is a highly decentralized entity consisting of three levels of government, with shared competencies and a complex internal administrative structure; Republika Srpska is a highly centralized entity with two levels of government;

the District of Brčko has a special status, it is jointly owned by the two Entities but not managed by either. The BD has fields of competence that are nearly the same as those of the

Entities, as well as social systems that are shared with the entities (e.g. pension system). State legislation directly applies to the District. Federation of BiH consists of ten cantons. There are 78 municipalities and 2 cities in the FBiH and 57 municipalities and 6 cities in the RS. State-level institutions are very limited in their capacities, and there are only a few such institutions that have national-level competencies and authorities that merit support (including the Ministry of Justice and State

Parliament).

What is highly problematic and presently unsustainable is the way in which the continued functioning of the state institutions and the exercise of exclusive state competencies can be undermined by

Entity/constituent people-based quorum and voting rules. Furthermore, competencies shared between the state and Entities are configured in such a way that there are inadequate mechanisms to ensure Entity compliance with state or joint policy. This is a major problem given that policy-making and coordination capacities are also important for the European Integration process. The EU’s Chapter 34 of the acquis requires EU aspirant countries to establish necessary bodies and mechanisms to be able to operate effectively within the EU. The EU’s Stabilization and Association Agreement (SAA) requires BiH to ensure proper policy-making coordination between all levels of government.

SAA’s economic criteria for integration with the EU require the existence of a functioning and competitive market economy in BiH that meets strict EU standards and practices regulating the business environment. Between 2001 and 2010, BiH made significant efforts to improve its business environment and attract more foreign investment. The reforms implemented during this period targeted the regulatory/policy arena, and they were almost exclusively initiated and implemented by the international community. A significant slowdown in implementation, as well as in initiation of new reforms, has been noticeable in the last two years. Recent EU Progress reports (2012 and 2013) on countries from the region show that BiH made very limited progress towards meeting SAA criteria, while Montenegro, Albania and Macedonia were praised for progress in almost all SAA areas. Croatia became a full EU member in July 2013, while Serbia was awarded candidate status enabling the country to access significant accession funds. Meanwhile, BiH continues to lag behind countries in the region in terms of the EU accession process. The EU Country Progress Reports for 2012 and 2013 concluded that “Bosnia and Herzegovina has made little further progress towards a functioning market economy.” The same reports stressed that BiH needs to improve competitiveness and productivity, attract investment, and make economic policy reforms. According to the aforementioned reports BiH’s efforts remain insufficient in

For the latest codification of the acquis chapters, see http://ec.europa.eu/comm/enlargement/negotiations_hr_tk/chapters.htm#Chapters

Bosnia and Herzegovina 2013 snapshots

GDP growth - 1.1%

Government expenditures share of

GDP 45%

CAD % of GDP -9.67%

Public Debt of GDP 43.3%

Unemployment rate 28% http://ec.europa.eu/comm/enlargement/negotiations_hr_tk/chapters.htm#Chapters meeting many European standards criteria areas, including customs and taxation, public procurement, labor and employment, industry, SME business environment, food safety, veterinary and phyto-sanitary sectors, environment, transportation, energy, information and communication sector, fiscal and financial management, and statistics.

If the aforementioned problems are not addressed immediately, BiH will remain unattractive to investors, simply because other countries are advancing at a faster pace than BiH. The World Bank‘s Doing

Business (DB) Report starkly illustrates BiH’s development stagnation. In 2011, DB ranked BiH at 110th place out of 183 countries. Although positive reforms were implemented in BiH during the last three years, other economies improved at a faster pace than BiH. The slow pace of reforms in the last few years resulted in BiH being pushed to 131st place in the 2014 World Bank’s DB report – the worst performance in Europe. All other countries in the region are ranked below 100th place, and the closest ranked

European country to BiH is Ukraine at 119th place.

C.4 Problem Statement and Major Issues

In 2012, the economy contracted by an estimated 1.1%, after a slight improvement recorded during the previous two years. Declining wages and raising unemployment rates, coupled with decelerating lending, resulted in reduced consumption heavily affecting trading and service industries. At the same time, the economic crisis in the EU, BiH’s traditional export markets, led to a negative contribution of net exports to growth. Industrial production fell by 5.3% in 2012, compared with a 5.9% expansion the previous year.

Per capita income, measured in purchasing power standards (PPS), decreased from 30% in 2011 to 28% of the EU average in 2012. The downturn in economic activity has shrunk the tax base with the budget revenue-to-GDP ratio falling to 39.9%, while public expenditures expanded further.

Bosnia and Herzegovina recorded a current account deficit of 386.30 BAM Million in the third quarter of

2013, or -9.67% of GDP. The trade deficit increased by 1.2% and reached 32.7% of GDP, as exports fell by 1.9%, while imports stagnated. The surplus in services also decreased further adding to a higher current account deficit. The current account deficit was financed mainly by external borrowing and to a certain extent by foreign direct investment (FDI). As a share of GDP, FDI has significantly shrunk in the last several years, year-on-year from 2.2% to 0.5 % in 2012, continuing its downward trend in 2013.

(From a high of $2.1 billion in 2007, FDI has dropped to $56 million in 2012).

The financing of the deficit increasingly relied on foreign borrowing, leading to an increase in public external debt. Bosnia and Herzegovina’s public debt increased to 43.3% of GDP in 2013 as compared with 40.9% of GDP a year ago (over 5.5 billion Euros). Of that, 68% is external debt to foreign creditors.

The external public debt expanded by an additional 7.4% to a total of 27.9% of GDP. Public debt servicing doubled since 2007 and reached over 3% of GDP in 2012. The World Bank group remains the largest creditor, while public international creditors (EIB, ERRD, IMF) account for over 90% of the country’s external public debt.

Unemployment remains very high and reached 28.6% in 2012 from 28% a year earlier (ILO measuring accounts for grey market). Total employment levels stagnated through 2012 and marginally decreased (-

0.6%) year on year in the first half of 2013.

Meanwhile, “unproductive employment” continues to be a problem. The number of employees in public administration continued to rise throughout 2012 and the first half of 2013, thus further increasing the overbearing size of BiH’s public sector. Unemployment was particularly high among youth (63.1% for people aged between 15 and 24-- by WB’s Labor Force Study). The very high unemployment rate and the huge difference between the registered and survey-based labor figures (44% vs. 28%) suggest the existence of a large informal labor market and significant structural rigidities culminating in extremely high rates of social security contributions.

The consolidated budget deficit increased to 2.1% of GDP, compared with 1.3% in 2011, due to higher public expenditure growth (2.4%). The share of general government expenditures remained relatively high at approximately 45% of GDP and revenue at about 44% of GDP. Social security contributions – accounting for over 1/3 of the overall revenues –remained the same, and, as noted above, at a relatively very high level.

The breakdown of public spending remained highly unfavorable with current expenditures representing

95% of total expenditures, while capital spending remained demoted. All main expenditure categories increased during the year indicating some loosening of fiscal discipline. Government purchases of goods and services grew by 3.2%, while expenditures on social benefits increased by 1.5%. Fiscal imbalances worsened in 2013 due to reduced revenues from indirect taxes resulting mostly from high VAT refunds.

Lower revenues were partly compensated by delays in the implementation of some capital/public investment projects. The general government balance in the first six months of 2013 turned positive and amounted to 0.4% of annual GDP. (Statistics provided from the 2013 EC Economy Report for Bosnia and Herzegovina).

C.5 Executive Summary

The global economic crisis uncovered the weaknesses of BiH’s public finances and fiscal sector. Before the economic crisis struck, BiH’s consolidated budget-- considerably boosted by introduction of VAT in

2006-- resulted in surpluses (it was positively affected by high economic growth, increased investments and remittances). However, BiH’s weak economic governance, strongly influenced by irreconcilable political interests, instead of financing true economic growth-enhancing activities used earlier fiscal surpluses for unproductive purposes (e.g.

irresponsible/politically motivated expansion of the public sector and increases in public sector wages). These were further compounded with generous social spending that targeted war veterans and other forms of privileged social categories to “buy” their electoral/political support. The sudden contraction of the economy during and following the global financial crisis resulted in declining revenues that forced expenditure cuts Impacting budgetary considerations.

The economic reforms implemented during 2001-2009, in which the USAID Mission in BiH had a significant role (TAMP, ELMO, TARA, TAF), resulted in a gradual reduction of consolidated budget deficits. Although some positive developments over the past several years helped streamline

Bosnia and Herzegovina's growing public sector, improving BiH’s public finances remains one of the key priorities identified by the USAID Mission, as well as the IMF and EU delegations. Presently, the quality of public finances remains low, even though public financial management was somewhat strengthened.

Overall public sector coordination on economic and fiscal policy remains weak, thus impeding systemic reforms. BiH’s large and inefficient public sector with multiple overlapping competences at the state, entity, cantonal (in the Federation), and municipal levels continues to impose considerable fiscal risk. The management and structure of public spending in Bosnia and Herzegovina remain fundamental concerns.

For that reason, fiscal reporting needs to be improved by enhancing the analytical quality of BiH’s fiscal

The IMF delegation that held meetings with the BiH Minister for Treasury, Mr. Nikola Spiric on February 25, 2014, again stressed the need for improved fiscal coordination and discipline at all levels of BiH government.

policy design. Structural rigidities such as excessive labor taxation and poorly targeted social transfers need substantive reform to spur labor demand. Additionally, authorities in the Federation should proceed quickly with pension reform.

As already noted, BiH’s public finances is a focus area for the EU. Public Administration Reform, which entails public finance reform in Bosnia and Herzegovina, is necessary for establishing effective, accountable and financially efficient services for businesses and citizens. This reform is a precondition for integration into the EU. The EU acquis communautaire considers administrative capacities for implementation of projects and EU reforms to be one of the most important criteria for EU membership.

Although the EU does not prescribe any specific budgetary model, the formation of national and entity budgets is closely monitored and analyzed in terms of capability, proficiency and transparency in management of budget funds. There are four major chapters in the acquis that evaluate BiH’s fiscal capacity to join the EU:

1. Chapter 17 of the EU acquis, concerning macroeconomic policy (fiscal and monetary policy), requires mid-term fiscal programming, and monitoring and evaluation of budgetary system results according to the Support for Improvement in Governance and Management (SIGMA) approach.

SIGMA is a joint initiative of the European Union and the OECD that works with EU aspiring countries on strengthening public governance systems. SIGMA uses a comprehensive set of measurements to evaluate the quality of budget legislation, budget scope, medium-term expenditure framework, budget management of public investments, and budget execution, monitoring, accounting and reporting.

2. Chapter 22 of the EU acquis, with the ultimate goal for reducing socio-economic disparities between the regions, and implementation of general regulations and specific regulations related to

Structural Funds and Cohesion Fund.

3. Chapter 32 of the acquis relates to the adoption of internationally agreed upon and EU-compliant principles, standards and methods of public internal financial control (PIFC), which essentially need to be in place to ensure transparent use of public funds.

4. Chapter 33 of the EU acquis, concerning the financial resources made up mainly from contributions from Member States necessary for the funding of the EU budget.

As further reform of the fiscal sector is key for BiH’s sustainable economic growth, particularly given its decreasing revenues and diminishing budgets coupled with excessive government expenditures, USAID decided to design the Fiscal Sector Reform project. This comprehensive project will address the issues summarized above in the following matter:

1. An absence of national coordination of economic and fiscal goals has led to increased independent activities of the two Entities and Brcko District. These uncoordinated actions negatively affect fiscal and tax harmonization within BiH. They further negatively affect the creation of a single economic space by discouraging potential investors, who demand stability and harmonization at the country/sovereign level. The Fiscal Reform project will address these issues through capacity building with the Fiscal Council at the State level, and analytical units of the two Ministries of Finance at the Entity and BD level, to increase their analytical expertise, introduce international standards, improve their coordination and create a common fiscal framework in which BiH’s public finances need to operate (see under A.1).

2. To ensure a more efficient and transparent management of public funds, BiH’s treasury operations has to rely on real-time IT business transactions that include all budget users in the

FBIH and the RS. This project will incorporate currently outstanding municipalities in FBIH’s treasury system; upgrade the current IT system of all Cantons and explore the possibilities for creating and expanding the existing infrastructure for integration and consolidation of the existing and planned IT systems in Federation (BMIS, Treasury, etc.); and integrate RS’s Health Sector transactions into the treasury system. This should significantly improve management of BiH’s public funds in both entities. If sufficient funding, the project will expand to include extra-budgetary funds in the FBiH into the Treasury operations (see under A.2).

3. Public Internal Financial Control is a precondition by the EU, described under Chapter 32 of the

EU acquis. Public Internal Financial Control (PIFC) in Bosnia and Herzegovina (BiH) is still in the early stages of development. The State (BiH State), the Federation (FBiH) and Republika

Srpska (RS) are basically at the same stage. They coordinate technical development of legislation and methodologies through the Coordination Board (CB) for Central Harmonization Units

(CHUs). According to the SIGMA PIFC report for 2013 “FBiH arguably has the most challenging environment, which requires developments to be negotiated through government at the entity, canton and municipality levels”. USAID will work with the Entity Ministry of Finance to introduce the PIFC standards in entity institutions. USAID will also help In training and certification of the auditors. This will ensure increased transparency and internal control over the expenditures from the EU and all other funds (see under A.3).

4. BiH still lacks a fully integrated public sector IT system for debt management. The State, two entities and Brcko district are using independent, old Access databases to record and trace external debt, while internal debt is recorded in Excel files. These are highly inaccurate and unreliable manual methods of recording and reporting on public debt, as they are often exposed to data input mistakes. Public debt risk management and analyses are very poor. To address the current situation, USAID will help the State and two Entity MoFs to implement a state-of-the-art

IT system for debt management. Options would include off-of-the-shelf systems that incorporate best experiences and practices in managing public debt. The system will be tailored to accommodate the specific requests of BIH’s public governance (see under A.4).

5. To address the issue of diminishing public revenues, USAID will assist the FBiH Ministry of

Finance and the FBiH Tax Administration to address tax evasion by helping establish an enforcement mechanism for debt projection and collection from non-complying companies. The effort will focus on the gaming industry in FBiH, which is currently not adequately regulated.

Due to weaknesses in tax administration, large amounts of taxes are being evaded every year in this sector. It is anticipated that this activity will increase public revenues from direct taxes by

20-30 million KM annually (see under A.5.1).

6. The second tax-compliance related activity will target companies that evade publicly mandated collection of debt by transferring money through multiple bank accounts. USAID will assist the

FBiH MoF to implement the Single Registry Account IT solution that will register and link all bank accounts for all companies allowing for the “freezing” of bank accounts until the total debt collection is settled. An additional increase in revenue collection can be realistically expected from this intervention (see under A.5.1).

7. In order to improve the business environment in FBiH, USAID will continue the reform initiated under the TAF project to simplify payroll processing for the private sector. The ultimate goal is to reduce the number of payment orders required for payroll processing down to one. This will result in savings estimated at 24 million KM for employers (see under A.5.2).

8. To improve the business environment, increase transparency and reduce errors, USAID will assist the RS and FBiH MoFs to further improve tax related IT systems for direct taxes. This reform anticipates introduction and expansion of the E-services related to direct taxes, and expansion and sophistication of the existing IT platforms in two entities TAs (see under A.5.2).

9. Cantonal and municipal councils in both entities often impose a number of fees and taxes on cars, incomes, etc., that are earmarked for financing community infrastructure such as water systems, education centers, sports facilities, and cultural venues. Often, the destination of the proceeds is off-budget, and the legality of these impositions and the transparency on the use of such resources are questionable. These para-fiscal taxes (AKA nuisance fees) are unsystematically imposed on all businesses without any clearly defined criteria. In order to increase the legitimacy of such taxes, strengthen their compliance with local tax regimes, enhance fiscal transparency, improve the business environment, and ensure their productivity, these fees/surcharges should be thoroughly reviewed, streamlined, and made explicit in the budget. The establishment of

Registers for para-fiscal taxes is a very common practice for addressing this problem. USAID will assist Entity and BD governments to adopt a systematic approach to resolving the issue of nuisance fees and, thereby, improve the local business enabling environment (see under A.5.3).

C.6 Relationship to the CDCS, and applicable agency policies

U.S. Mission Strategic Plan. The 2012-2016 CDCS for the US Mission in BiH identified economic growth and the strengthening of economic aspects of governance relevant to the business environment and private sector development as key foreign policy priorities for the United States Government (USG) in the country.

Development Objective and Crosscutting Linkages. The proposed Fiscal Sector Reform activity, that will be implemented under this PAD, Improving Economic Governance (IEG) Project, is designed to address critical needs identified in BiH’s CDCS. The overarching objective of this economic development project will indirectly address a number of crosscutting initiatives: 1) inter-ethnic reconciliation by supporting state and entity-level economic institutions that promote a single economic space through regulatory and legislative harmonization; 2) improved business enabling environment; and

3) anti-corruption measures by eliminating nuisance regulations, simplifying procedures, and reducing opportunities for regulatory abuse that deter private sector development.

The activity will also leverage USAID funded projects for strengthening BiH’s Parliament(s), and the relevant departments from the US Embassy in Sarajevo (Economic and Political Sections) to facilitate rapid and smooth adoption of the regulations and policies targeted by this project.

Linkages with the Results Framework. Development hypothesis: “An economy with competition and based on market forces will result in new and better enterprises and ideas that lead to more jobs and opportunities. Private sector-driven economic growth provides the only means for a country to generate public and private resources it needs to address development challenges on its own and emerge from dependence on foreign aid. Economic growth provides the material basis for progress in all other dimensions of development and long-term stability”.

The planned project falls under Development Objective 2: Economic Growth/Economic Opportunity, as identified in the 2012-2016 USAID/BiH Country Development Cooperation Strategy. The activities that will be implemented under this project will directly support Intermediate Result (IR) 2.2 “Improved economic aspects of governance relevant to business activity”, with a focus on Sub IR 2.2.1 “Regulations and policies which foster a single economic space and private sector development and investment”.

This IR was envisioned to improve business-relevant strategies and policies that will stimulate economic growth and attract investment. Regulatory and policy reform assistance proposed under Fiscal Sector

Reform will address harmonization of regulations and procedures in the fiscal arena across Entities.

C.7 USAID Achievements in the Fiscal Sector to Date

This section provides a brief overview of USAID funded activities related to the fiscal sector.

1. TAF Project (2010-2013): Completed the efforts for the Unified Collection System (UCS) in FBiH and RS. Implemented regulations and IT solutions for detecting stop-fillers and non-fillers of direct taxes. Introduced a simplified payroll processing IT system by reducing the number of payment orders for the average of 10 orders down to five. Harmonization of Direct Taxation within Bosnia and

Herzegovina by focusing on Brcko District as the direct taxation differed there from the entities. New

Personal and Corporation Income tax laws drafted and enacted in Brcko District. Development and

Implementation of Audit software to automate the taxpayer audit processes and to avoid discretion among tax administration staff in the selection of returns for audit. Developed the Fiscal Analyses

Capacity in the RS and the FBiH by providing training on micro-simulation models using internationally recognized STATA software.

2. ELMO Project (2006-2010): Introduction of the Unified Collection System (UCS) in Republika

Srpska and FBiH for simplified one-stop-shop registration/deregistration of employees for taxes and social contributions.

3. TARA Project (2006-2010): Reform of direct taxation in both entities. Harmonization of direct taxes by introduction of the Personal Income tax (PIT) and Corporate Income Tax (CIT) in RS and FBiH, at unified/identical rates. Modernized TAX administration systems. Introduction of the Property Tax in RS, and Brcko District (FBiH delayed the implementation).

4. TAMP Project (2001-2006): The reform that modernized tax structures in both entities and Brcko

District. During this project, a work on Personal Income Tax and Coorporate Income Tax commenced in both entities.

C.8 Other Donors in the Fiscal Sector

In addition to the USAID’s efforts in the fiscal sector, other donors recognized the importance of the sound fiscal management for the country’s economic and political stability.

European Commission

Given that the economic criteria for integration with the EU are prescribed in the SAA agreement, it is logical that the EU Delegation to BiH is one of the major donors in the reform of BiH’s public administration, including public finances and the fiscal system. In 2013, the European Commission allocated approximately 47 million Euros for IPA’s Component 1, focusing on Transition Assistance and

Institution Building. Of that, approximately 1.6 million Euros will be provided for assistance in public procurement reform. IPA projects funded in previous years are listed below:

• IPA 2007 project “Development and implementation of overall BiH PIFC strategy” designed to strengthen the financial control environment of public administration. It ended in April 2012.

• IPA 2009 project “Capacity building for the compilation of accounting data within the General

Government and statistics of public finance.” Its purpose is to support the Ministries of Finance of the State and the Entities and the Brcko District Directorate in providing sound and inter-institutional harmonized data on public finance on the basis of accrual accounting in accordance with international, especially EU principles, standards and practices. It will end in early 2014.

• IPA 2010 project “Coordination of policy making capacities and public financial management” with the purpose of improving the quality of fiscal policy and the links between policy makers and budgeting procedures.

• IPA 2011 fund: EC allocated approximately 4 million Euros for public finance restructuring, and financial management in compliance with EU standards. Component I of the project is related to the strengthening of treasury operations at the level of the state and the entities, and is currently in the drafting phase of terms of reference. (Need to verify if some of the funds were cancelled due to failure to implement Sejdic-Finci ruling

PARCO (Public Administration Reform Coordinator’s Office) – Multi Donors

The Government of BiH, through the Council Of Ministers (CoM) and the Public Administration Reform

Coordinator’s Office (PARCO), is tasked with implementation of the public administration reform projects. Under PARCO, a Public Administration Reform Fund (PAR Fund) has been established as a source of financing for technical assistance in the implementation of the projects that were defined in the

Action Plan (later modified and referred to as the Revised Action Plan – RAP 1). Main contributors to the Fund are international donors and foreign governments: Delegation of the European Union in BiH, Ministry of Foreign Affairs of Great Britain, Swedish International Development Agency (SIDA), The

Royal Netherlands Embassy, and Ministry of Foreign Affairs of the Kingdom of Norway. However, the reforms under PARCO are often implemented at a very slow pace and do not meet the expectations of the entity ministries.

IMF (International Monetary Fund)

The IMF Mission is a strong supporter of fiscal sector reform. IMF and USAID coordinated their activities in the fiscal arena in past years: USAID’s ELMO and TAF activities (Unified Collection System and Payroll Processing System) were recognized by the IMF as highly important reforms, and were included in the negotiations for the Stand –By – Arrangement with BiH authorities. IMF is presently supporting the adoption of the FBiH Law on budget, and the State Law on public procurement. IMF also strongly supports work of all four Tax Administrations (TAs) in BiH, and conditions further monetary assistance for the country with direct assistance to the TAs.

GIZ (German Government)

There is ongoing cooperation between the Governments of BiH and the German GIZ project for technical assistance for public administration reform. This project will introduce electronic processing in the public procurement system of Bosnia and Herzegovina.

3 Bosnia and Herzegovina failed to secure implement Sejdić-Finci ruling, human rights and electoral rights decision by the European Human Rights Court, and lost 45 million Euros in IPA funds. European Union deicide to slash funds for Bosnia and to transfer remaining part to Kosovo which will be used in infrastructure and development programs.

DFID (ended in 2010)

The Project for Strengthening Public Expenditure Management in BiH addressed the process of budget planning and preparation at all levels, and has introduced the process of „Budget Planning in 10 Steps,‘ representing basic concepts of program budgeting and strengthened medium term budget planning and preparation.

C.9 Recent Achievements in…