Republic of Kosovo

Public Financial Management Reform Action Plan (PFM RAP)

November 2009

TableofContents
1 2. 2.1 2.2 2.3 2.4 INTRODUCTION ..................................................................................................................... 5 REFORM THEMES .................................................................................................................. 6 CREDIBLE POLICY BASED BUDGET ............................................................................. 6 TAX ADMINISTRATION ................................................................................................... 9 DECENTRALISATION ..................................................................................................... 12 FISCAL RISK ..................................................................................................................... 14

2.5 BUDGET EXECUTION, ACCOUNTING AND RECORD-KEEPING AND PUBLIC INTERNAL FINANCIAL CONTROL ........................................................................................ 16 2.6 2.7 2.8 2.9 2.10 2.11 3. PUBLIC SECTOR PERSONNEL AND PAYROLL.......................................................... 19 INTERNAL AUDIT............................................................................................................ 20 PROCUREMENT ............................................................................................................... 22 EXTERNAL AUDIT........................................................................................................... 24 LEGISLATIVE SCRUTINY .......................................................................................... 27 DONOR COORDINATION ........................................................................................... 29

RESPONSIBLE IMPLEMENTING AGENTS AND REPORTING ...................................... 30

Annex 1 PFM ACTION PLAN Platforms and Matrix .................................................................. 32

Acronyms
AC ACDEI AGA AMP ANP BO BDMS CEP CFA CHU CHU/FMC CIAHU COFOG DB DCFDM DIA DMU EC ECLO EPAP GDP GFS HQ IA IAU IACHU ICT IFAU IMF IPA IPSAS IRB ISPPIA KCB KDSP KEK KIPRED KFMIS KPA LLGF LPFMA LPOE Audit Committees Agency for Coordination of Development and European Integration Autonomous Government Agencies Aid Management Program International Airport of Prishtina Budget Organizations Budget Development Management System Central Public Enterprises Central Fiscal Authority Central Harmonization Unit Central Harmonization Unit for Financial Management Control Central Internal Audit Harmonization Unit Classification of the Functions of Government Database Division of Cash Flow and Debt Management Department of Internal Audit Debt Management Unit European Commission European Commission Liaison Office European Partnership Action Plan Gross Domestic Product Government Finance Statistics Headquarters Internal Audit Internal Audit Unit Internal Audit Central Harmonization Unit Information Computerized Technology Internal Financial Audit Unit International Monetary Fund Instrument of Pre-Accession International Public Sector Accounting Standards Independent Review Board International Standards for the Professional Practice of Internal Auditing Kosovo Consolidated Budget Kosovo Development Strategy and Plan Kosovo Energy Corporation Kosovo Institute for Policy Research and Development Kosovo Financial Management Information System Kosovo Privatization Agency Law on Local Government Finances Law on Public Financial Management and Accountability Local POE's
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MDA MEF MFE MIT MPS MTEF MTC MYR MESP OAG OPM PE PER PEFA PEMTAG PM PIFC PFMA PIP PISG POE POEMU PPA PPL PPRC PRB PTK RTK SN SOE SRSG STA SIGTAS TAK ULT UNIREF UNMIK VAT GFS

Ministries, Departments and Agencies Ministry of Economy and Finance (synonymous with MFE) Ministry of Finance and Economy (synonymous with MEF) Ministry of Industry and Trade Ministry of Public Services Medium Term Expenditure Framework Ministry of Transport and Telecommunication Mid-Year Review Ministry of Environment and Spatial Planning Office of the Auditor General Office of the Prime Minister Public Enterprises Public Expenditure Review Public Expenditure and Financial Accountability Public Expenditure Management Technical Assistance Grant Prime Minister Public Internal Financial Control Public Financial Management and Accountability Public Investment Program Provisional Institutions of Self-Government Publicly Owned Enterprise Publicly Owned Enterprise Management Unit Public Procurement Agency Public Procurement Law Public Procurement Regulatory Commission Procurement Review Body Post and Telecom of Kosovo Radio and Television of Kosovo Sub National Socially Owned Enterprise Special Representative of the Secretary-General Single Treasury Account Standard Integrated Government Tax Administration System Tax Administration of Kosovo Unit for Large Taxpayers Unified Reference Payment Code United Nations Interim Mission in Kosovo Value Added Tax Government Financial Standards

INTRODUCTION

The Government of Kosovo has embarked on a wide review of Public Financial Management. In the first quarter of 2009, a Public Expenditure Financial Accountability (PEFA) assessment was carried out and this updated and extended a similar analysis in 2007. As well, under a World Bank supported project Public Expenditure Management Technical Assistance Grant (PEMTAG), work was carried out to identify the direction of PFM reforms. The PEFA concluded that the strength of the existing PFM system is centred on the successful introduction and implementation of the Financial Management Information System. This has ensured that commitment control is applied in budget execution and that reporting on budget execution is timely and meets the need of management for effective decision-making. Other strengths are found in the areas of internal audit and control and external audit where the process is in place and capacity is being built up for effective implementation. Nevertheless both diagnostic exercises have identified significant and continued weaknesses across the range of the PFM cycle which requires action. The purpose of this paper is to present a reform programme tied into addressing theses weakness and also ensuring that the strengths are maintained and built upon. This paper marries the two approaches used to determine the PFM action plan. Under the PEFA methodology, PFM is analysed using 28 high level indicators (further subdivided into 69 dimensions) analysing Government PFM processes and 3 indicators (with 5 dimensions) focusing on donor government interaction.1 The PEMTAG work developed the Platform Approach which aims to implement a package of measures or activities designed to achieve increasing levels (platforms) of PFMA competence over a manageable timeframe. Each platform establishes a clear basis for launching to the next, based on the premise that a certain level of PFMA competence is required to enable further progress to take place.2 Following the PEFA, a questionnaire was sent to each of the PFM implementers to collect information needed for the Action Plan that was not generated during the PEFA. This exercise was also used to disseminate the draft PEFA and get feedback. This paper is organised as follows. The next section presents in summary form the strengths and weaknesses of PFM in Kosovo using the broad themes of the PEFA approach. In each of the themes, the reform goals and reform actions to be undertaken are then outlined and linked to the platforms which show their sequencing. Existing technical assistance support under each of these themes is finally presented. Section 3 outlines the agencies responsible for implementation and reporting arrangement. There is an annex which summarises the Platform Approach and provides a PFM Action Plan matrix which details the relationship between the PEFA analysis of the PFM strengths and weaknesses and the planned action for each of the 31 indicators and the 74 dimensions, indicating under which platform they would be addressed.
See PEFA Public Financial Management Performance Measurement Framework www.pefa.org. The Kosovo 2009 PEFA Assessment Report was published in May 2009 2 See DFID Briefing July 2005 A Platform Approach to Improving Public Financial Management on Platform Approach available from DFID website. A paper Kosova Public Financial Management Reform Action Plan was produced for Kosovo applying this approach.
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2.
2.1

REFORMTHEMES
CREDIBLEPOLICYBASEDBUDGET

Existing Situation The recent 2009 PEFA assessment found certain strengths in our existing approach to Budgeting in Kosovo, including:

Legislation in place that is well understood and generally implemented, including the Law on Public Financial Management and Accountability. Annual budget legislation which provides each years appropriations and policy guidelines. Annual budget process established which includes all the necessary ingredients Budget calendar is well-articulated and works on a familiar schedule. Revenue forecasts which are generally conservative. MTEF process in place.

However, the PEFA also identified opportunities for improvement in the following areas: Planning and budget formulation including Budget Organisations capacity to develop strategies and integrate the planning of the investment cycle into these strategies. Budget calendar where slippages in recent years have impacted on the effectiveness of budget preparation. Cabinet engagement in the strategic elements of the budget process. MTEF and the annual budget, where links are not as well defined as they should be. The annual budget and the first year of the MTEF are not the same. Lack of uniformity in quality and clarity in the mission statements, description of the existing situation, and goals for sectors in the MTEF document. Relationship between the expenditure outturn and budget. Aggregate outturn expenditure was much lower than budgeted in the period from 2006 to 2008. Under-spending on the capital account which has resulted from over budgeting and inadequate planning. Stock of arrears recording and monitoring, particularly within the year requires better recording invoices in KFMIS. Reform Program Kosovo seeks to attain best practice in Budget preparation, as characterised by the following: A credible budget that is feasible to be fully executed with proper program and project management. A capital program that maximises the net economic and social benefit for citizens based on government priorities. Allocation of funding based on Government policy rather than simply historical funding patterns. A multi-year approach to budgeting based on the MTEF and rolling forward estimates approach. Budget presentation that seeks to link funding for inputs to identifiable and potentially measurable program outputs. Access to performance information, including results of monitoring and evaluation, to assist budget decision making at all levels. Reform Goals We will implement key reforms in seeking to address current weaknesses and move towards the more comprehensive budget where the inputs are more effectively linked to service delivery. Our goals for these reforms are to: 1. Improve linkage between Government policy, organisational strategy and the budget, using the MTEF as the key link. Improved links between Government Policy and the Budget implies enhanced engagement by the Cabinet at key stages of the Budget process.
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2. Improve capital planning based on enhanced project planning, execution and monitoring. 3. Implement a system or rolling forward estimates using appropriate information systems. 4. Increase the capacity of all Budget Organisations to undertake analytical work required for existing and proposed planning and budget functions. 5. Introduce some elements of performance management to assist public sector management, including a budget that links inputs to specific program outputs. Reform Actions We will take the following actions to achieve these reform goals. These are specified under the platform approach, recognising the linkages and sequencing of the actions and reforms. Platform 1: 1. Capacity Building for line ministries in capital project planning based on PIP. 2. Requirement of enhanced analysis, incorporation and presentation of the recurrent costs of capital projects in the budget. 3. Capacity building program for line ministries in capital project execution. 4. Design and implement a monitoring program for capital budget execution, including regular monitoring meetings and reports. 5. Activate the Fiscal and Budget Committee of the Government according to previous Government decision to track MTEF and Budget development and advise government on strategic resource allocation. 6. Re-structure the Budget Department in accordance with the LPFMA and MFE plan and formalise executive appointments. Platform 2: 7. Draft and implement a Budget Circular for the preparation of the MTEF. Link the preparation of the government-wide strategic planning process (led by OPM) with the MTEF process (led by MFE). 8. Develop and commence implementation of a mechanism for linking strategic planning activities in line ministries to the MTEF with aim of having properly costed and realistic sector strategies that reflect considered policy choices. 9. Commence implementation of a system of rolling forward estimates, e.g. where the multiyear estimates of the 2010 budget form the starting point for the 2011 budget. 10. Re-design the fiscal rule in consultation with the IMF to act as a benchmark in establishing a credible budget. 11. Undertake measures to enforce legal and procedural requirements for the costing of draft laws and new policy prior to consideration by Government. 12. Finalise design requirements for Budget Development Management System that improves this tool for managing aggregate fiscal discipline including multi-year estimates and features for enforcing multi-year ceilings. Platform 3 13. In the context of the Budget, identify several programs for pilot implementation of a monitoring and evaluation framework. Identify output based performance targets for these programs. 14. Laws on Civil Service and civil service pay are passed and appropriate subordinate legislation developed having regard to fiscal impact. 15. Revise the current set of Government priorities prior to the MTEF to facilitate allocation of scarce additional resources. 16. Implement a mechanism for improving cooperation between ministries within a sector in developing MTEF sector strategies. 17. Payroll is moved to the Treasury. 18. Functional changes are implemented in line ministries to link and improve strategic planning and budgeting (Functional Review). 19. Monitoring and Evaluation Unit is established within Budget Department and commenced collection and reporting of outcomes against targets for pilot programs. 1-2 initial evaluations are conducted of pilot programs. Broader identification of performance targets is implemented for 2011-13 Budget.
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Platform 4 20. Conduct comprehensive Public Expenditure Review (PER), being a one-off zero-based assessment of public expenditure allocation. 21. Continue the PER process in annual ministerial reviews as part of the MTEF and budget process. Technical Assistance We are currently assisted in this field by the following technical assistance: The EC project: Improving the quality of public investments in Kosovo and preparing the grounds for EU funds supports the PFM reform programme from July 2009 to July 2012. The ToRs specify that the assistance will be split into eight activities (components): Component 1 - Review and documentation of the strengths and weaknesses of the Kosovo planning and budgeting system; Component 2 - Further integrate the planning and budgeting systems using, recommending mandatory use of, among other tools, the BDMS and the PIP systems; Component 3 - Review of existing strategic documents in the MTC and MESP and make recommendations that will allow them to drive budgeting in those ministries; Component 4 - Introduce modern costing techniques in the core line ministries and municipalities; Component 5 - Introduce modern project planning and management techniques in the core ministries and municipalities; Component 6 - Provide IT support to the BDMS and PIP systems to ensure ownership and sustain their use in the budget process; Component 7 - Provide onthejob and classroom training on the various components; and Component 8 - Provide workshops and study tours so that participants can gain experience and knowledge from EU and accession countries in policy prioritization, planning, budgeting, and managing EU funds. UK DFID Functional Review and Institutional Design of Ministries (FRIDOM) project which is assessing, inter alia, the structure and roles and responsibilities of budget organizations across the Government. UK DFID project support for developing strategic planning (through Office of the Prime Minister) UK DFID Support to the PEFA Secretariat assisting in the Action Plan World Bank Public Sector Modernisation Project Component 1 includes: Improving public financial management performance in selected budget organizations and includes Capacity building for PFM. This activity will focus on building skills and capacity in line budget organizations by addressing weaknesses in budget planning, preparation, execution, budget management, and review. The activities will be concentrated in the Budget and Finance Departments of five major budget organizations: Ministries of Education, Health, Agriculture, Justice, and the Judicial Council. USAID project Economic Management for Stability and Growth provides technical assistance in this field.

2.2

ADMINISTRATIONofTAXES

Existing Situation The recent 2009 PEFA assessment found certain strengths in our existing approach to tax administration as applied by Customs Kosovo and Tax Administration Agency in Kosovo, including: Published tax laws, which can be downloaded from the Government website. Taxpayer education documentation exists in various forms written, electronic and face-to face including workshops and seminars. No discretionary exemptions Appeals process in place Transfers from the tax authorities to the treasury account are timely Reconciliation of accounts and payments is timely. However the PEFA assessment also found several weaknesses at the time of the assessment which we were addressing at the time of the assessment and are now in place, including Registration of tax payers was conducted by the Agency for Business Registration (Ministry of Trade and Industry) which did not allow the Tax authorities to maintain a master file of tax payers under their control. The Tax Authorities are now implementing their own system. Nevertheless there are opportunities for improvement that we are now addressing that will require time to be realised, including3. Interpretation of the tax laws is inconsistent and low quality and reduces taxpayer confidence. Cumbersome appeals process provides for delays Ineffective procedures for collecting penalties for non compliance. Audit function is not managed effectively Recorded arrears are high. Reform Goals The objective of our reform program is to create a modern tax administration to meet our revenue collection goals by adopting modern, efficient, and transparent processes and systems, lowering cost of compliance for tax payers and achieving a high level of voluntary compliance. This purpose is to be achieved by a combination of inputs to support Improved management structures and staff capability; Computerisation; and Self-assessment. These inputs are structured in a way that contact between taxpayer and the tax authorities are minimised, which also can influence the minimisation of corrupt practises. These features are also enhanced by A focus on tax payer services and taxpayer education; and Audit (based on risk assessment) which are designed to increase voluntary compliance.

The two tax collecting agencies are at different stages of development with Customs being further ahead than Tax Administration Agency. While there are improvements to be made in both agencies, most of the administrative reforms fall in the area of Tax Administration Agency.

Payment of assessed tax is though the banking system, which also removes face-to face contact between the Kosovo tax authorities and taxpayer. Reform actions Platforms 1 and 2 All reform actions are articulated in the overall strategic plans of TAK, including to. 1. Ensure that all tax laws are further supplemented by sub-legal acts which provide clear explanations of the way in which TAK will implement specific provisions. 2. Require that all written advisory opinions on matters of interpretation of law or technical issues be approved by Managers and distributed to field components only by managerial staff, to ensure that laws are applied uniformly in all regions and with respect to all taxpayers. 3. Provide Team Leader of Rulings function training in all aspects of all tax laws, establish specific expectations for learning and development. 4. Provide refresher training in tax laws to all taxpayer education personnel and train them in application of new laws as they are published 5. Revise and update Handbook on Taxes in Kosovo to reflect new laws, sub-legal acts, rulings, and procedures by 30 June 2010. 6. Modify the organizational structure of headquarters to introduce an interpretation division 7. Provide refresher training in tax laws to Appeals officials and train them in application of new laws as they are published. 8. Conduct a writing workshop for Appeals officials so that their Appeals decisions are in a standard format and provide clear explanations of the appeals decisions and the basis for those decisions. 9. Finalize and implement taxpayer registration procedures and sub-legal act. 10. Establish a taxpayer registration function at TAK which would: a) receive registration applications b) conduct validation and risk assessments c) issue taxpayer identification numbers and registration certificates and d) maintain a proper up-to-date taxpayer register. 11. Finalize Penalty Handbook and sub-legal act (one document). 12. Train enforced collection officers and taxpayer education inspectors in new penalty regime. 13. Train tax inspectors in application of penalties during audit so that penalties are imposed, as appropriate, at the time of audit. 14. Finalize rollout of audit tool and training staff in its use 15. Activate the SIGTAS audit module so that management control over audit cases is improved. 16. Update audit risk system (audit tool) to include individuals and partnerships. 17. Update audit tool for use in reviewing VAT refund cases 18. Utilize audit tool for centralized case selection for 50% of all cases to be audited in the first half of 2010 and 100% of all cases to be audited by the end of 2010. 19. Modify the organizational structure of headquarters to introduce an audit quality review function and audit risk and analysis unit. 20. Finalize and implement enforced collection sub-legal act. 21. Activate the Enforced Collection module in SIGTAS. 22. Train enforced collection officers in new procedures provided in the sub-legal act related to enforced collection. 23. Continue monitoring of payments made to commercial banks to ensure that revenue is timely transferred to the Central Bank and errors in transmitting payment data are minimized. 24. Explore capability of electronic transfer of funds to facilitate the use of electronic filing of tax declarations. 25. Continue timely reconciliation of revenues with Treasury.
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Technical Assistance Support USAID has an assistance program in place in TAK, which includes two tax administration experts and one IT expert. The two tax administration experts are expected to remain until the end of the current USAID contract (30 June 2010) and the IT expert is expected to remain until 31 December 2009. Description and Timetable: The current USAID project began on 1 July 2007 and is a three-year commitment, scheduled to end 30 June 2010. The primary goal of the project is to assist the tax administration achieve its strategic plan goals, with specific expectations of finalizing and implementing an audit risk selection system and increasing the effectiveness of the tax administration. For Customs EC TA to 1. Establish the legal framework for the implementation of simplified procedure and customs warehouse procedures. 2. Define specific additional Customs Laboratory equipment Draft manuals and guidelines on safety for customs laboratory Train Customs Laboratory Chemist on use of customs laboratory equipment 3. Improve quality of intelligence produced by the Sector Establish and develop sustainable cooperation with other law enforcement agencies Produce guidelines for Intelligence Sector IMF Fiscal Affairs Department will field a technical assistance mission to review progress in implementation of our Strategic Reform Plan and to outline for us an IT reform strategy

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2.3

DECENTRALISATION

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

8. Intergovernmental transfers accounted for in the medium term macro-fiscal framework and MTEF processes (i.e. Government to refrain from ad hoc policy decisions affecting distribution or allocation of transfers)

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

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2.4

FISCALRISK

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

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

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2.5 BUDGET EXECUTION, ACCOUNTING AND RECORDKEEPING ANDPUBLICINTERNALFINANCIALCONTROL

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

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Lack of managerial reports for higher management which contain budget comparison analysis with previous years and between different categories. Ideal Situation The ideal situation at the end of the reform program would be the achievement of: Public Internal Financial Control (PIFC) policy and practice in accordance with European standards, including a fully functioning Central Harmonisation Unit for Financial Management Control (CHU/FMC). Fully functioning debt and cash management function, supported by modern debt management computer software and cash forecasting tools. Comprehensive financial reporting system and procedures to support transparency and accountability in budget execution. Complete implementation of modules for Kosovo Financial Management Information System, including comprehensive information on arrears. Gradual extension of accrual information in fiscal reports. Fully-integrated electronic revenue and expenditures systems which supports electronic reconciliation. Reform Goals Our efforts in reform of budget execution and accounted are directed at achieving the following goals: Improve the compliance by BOs with financial rule number two for spending public money. (All claims that are received by the Budget Organization should be paid within the period of time as specified in the contract which is no later than 30 days after being received.) Strengthen the framework for recording transactions, and accounting events, including some "accrual" information (such as obligations, change in assets and liabilities etc) to enhance the cash based accounts. This strengthening will improve the linkages between the cash-flow statement and balance sheet as envisaged under GFS 2001. Strengthen financial planning to include daily cash flow forecasts (which are consolidated into weekly forecasts). Develop transparent and predictable system and processes for the management of government debt. Introduce daily reconciliation of bank accounts which allows the generation of daily managerial reports. Strengthen the efficiency of public finance internal control system by making it more relevant (in terms of controls required for risk management), meaningful to the finance officers, and comprehensive in the public finance internal control area. Reform Actions In seeking to attain these reform goals we will undertake the following actions, set out by platform: Platform 1 1. Amendment of Article 44 of Treasury Financial Rule 02-Spending of Public Money. 2. Development of Central Unit for Internal Financial Control within Treasury. 3. Increase the KFMIS capacity for keeping track on timeframe of payments. 4. Include in the payroll system (Ministry of Public Administration) all payments to individuals

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

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2.6

PUBLICSECTORPERSONNELANDPAYROLL

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

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2.7

INTERNALAUDIT

Existing Situation The recent 2009 PEFA assessment found certain strengths in our existing approach to Internal Audit in Kosovo, including: 1. Internal Audit decentralized - 50 BO have established Internal Audit Units (IAU) staffed by 84 Internal Auditors. 2. Internal Audit Manual ensuring harmonization with International Standards and Professional Practices of Internal Audit 3. Audit Committees in 24 BOs to ensure the independence and protection of IAU auditors and promote the implementation of recommendations to senior management. 4. International standards and professional practices underpin internal audits and follow ISPPIA standards and the Code of Ethics of Institute of Internal Auditors. 5. System audits performed are comprehensive based on compliance, performance and finance 6. System audits linked to the Internal Control assessment process to be evaluated if these are functioning effectively. 7. Financial audits include examination and reporting on financial statements. 8. Audit Plans implemented to include continuing professional education of internal audit staff 9. Regular submission of Internal Audit reports to senior management in line with the Law 10. Quarterly and Annual reports on BOs` internal audit activities are received by the Central Harmonization Unit 11. Implementation of recommendations undertaken by the Chief Administrative Officer of a BO. Nevertheless, certain weaknesses were also noted in our existing approach, including. No Internal Audit in 10 BO Only one auditor in 33 BOs insufficient for efficient functioning of internal audit in terms of capability and capacity for planning and managing of effective Internal Audit. Lack of certification training - training courses on internal audit provided by international companies did not provide the certification required by the Internal Audit Law Lack of comprehensive effective implementation Internal Audit Law and Internal Audit manual Low quality of implementation of recommendations issued by internal auditors. Ineffective operating of IAU in some public entities No continuous professional development to increase the knowledge and skills of internal auditors. Lack of understanding by senior management of the importance of the role of Public Internal Financial Control and Internal Audit. Reform Goal Our overall goal is to ensure that internal audit is implemented effectively in line with the Internal Audit Law in accordance with internationally accepted standards. Reform Actions To achieve this goal we will undertake the following actions: 1. Application of Law to be full. 2. Improved implementation of IA manual (ISPPIA, code of ethics) 3. Full management understanding of the audit role meetings, contacts, trainings (short term) and Management support for audit (independence and work conditions, payment and other technical conditions) 4. Operationalization of effective internal audit units in public entities 5. Certification and licensing of internal auditors (long term) and Post-certification/-licensing and continuous professional education (long term)
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Platform 1 1. Increase number and quality of actions undertaken by BO Senior Management on implementation of Internal Audit recommendations 2. Continuous contact and cooperation with sector management and other relevant parties in order to further operationalize IAUs. 3. Certification of IA from an internationally licensed organisation (within two years) 4. Capacity building, recruitment of more than 60 IAs (within two years) 5. Training for senior management to increase their awareness on the importance of Public Finance Management and Internal Control, including IAs role. 6. To full meet ISPPIA standards 7. Implementation of annual plan based on IA strategic plan 8. Comprehensive establishment of IA Committees - increasing auditors independence and measures for implementation of audit recommendations from management 9. Drafting Administrative Instructions for implementation of IA Law, by CHU. 10. Increase further the rate implementation of recommendations (above 55%) Platform 2 Establishment of IAUs in BOs where they are not present Continuous training for IA to increase their knowledge, skills and competencies (continuous professional development Post-certification/-licensing ) Coverage of more than 80% BOs with regards to IA system issues Technical Assistance Support Our current endeavours to improve internal audit are assisted by support from donors, including: Support for further improvement of IA and Public Governance project supported by European Commission ECLO June 2009 to June 2011. Main components for IA are: Support to IACHU on performing the responsibilities set out in Law on Internal Audit. Design and introduction of training program for internal audit that leads to certification. Design and implementation of first cycle of an Introduction to Financial Administration program to politicians and senior civil servants.

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2.8

PROCUREMENT

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

secondary legislation forms and templates are often cumbersome and clumsy. Their construct will be reviewed and simplified. In addition to these initial actions, we intend to undertake the following activities in support of this programme: 1. Monitoring the implementation of Law on Public Procurement and providing for its update to reflect emerging developments. 2. Review of secondary legislation associated with procurement. 3. Managerial and organisational review of PPRC and PRB. 4. Review of IT capacities in PPRC and PRB, recommendations for improvement and assessing the feasibility for introduction of e-procurement. 5. On-the-job training and coaching for all involved in the procurement process. 6. Increasing the awareness for public procurement reforms in government, business and civil society 7. Comprehensive development of the public procurement training program 8. Development of certification system for public procurement officers. The activities are foreseen to be undertaken during 2009 and 2010. A detailed plan of action with expected results has been developed by PPRC, PPA, PPR, European Commission Liaison Office to Kosovo and Kosovo Institute for Public Administration. See the Inception Report Support to Public Procurement Reform Service Contract No 2008/169-890 Project period: January 19, 2009 January 18, 2011 for a comprehensive presentation of the actions to be undertaken.

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2.9

EXTERNALAUDIT

Existing Situation The recent 2009 PEFA assessment found certain strengths in our existing approach to external audit in Kosovo, including: Increasing coverage of organizations audited Internet dissemination of audit reports Detailed recommendations included in the reports Responses to audit included in Office of the Auditor General report. Nevertheless, we can enhance external audit by addressing the following issues that were also identified in the report: Delays in publishing the audit reports Limited response to recommendations in terms of timely implementation Reform Goals The Office of the Auditor General has developed a Corporate Development Strategy guiding the development of the external audit function in an accountability context. In the short term, the goals have been to ensure that reports are produced in time to fit into the budget cycle and the accountability cycle; reports are of sufficient quality and presented in a more reader friendly way; and have greater relevance for decision makers. A new audit process is currently being introduced to include interim audits. This approach is being developed through dialogue between the auditors and the audited bodies and is introducing a preventive concept to pave the way for a more direct impact. This will improve coverage based on a more risk oriented approach based on the total KCB budget and other parts of the OAG scope. The OAG has been re-organised to reflect this new focus linked to specific Financial Management and Control and related policy areas. Other audit objectives are to clarify and ensure the understanding of the role of a Supreme Audit Institution in a democratic society; to strengthening good governance and accountability through good cooperation with the Assembly Committee for oversight of the public finances under its purview and to develop working relation between the OAG and its main stakeholders. An important prerequisite to accomplish these objectives is to ensure financial independence and sufficient funding in accordance with the OAG legal framework and with the agreement between Kosovo and EU allowing the OAG to deliver in accordance with expectations of the national and international community. In the longer term the goals are to ensure sustainable national ownership of internationally recognized auditing standards and good European practices; to ensure implementation of the Corporate Development Strategy, new standards and efficiency in core and support processes, to ensure maturity in managing the organisation on all levels; to ensure a continued improved audit coverage; to build up a firm accountability relationship between the Assembly and the Auditor General, to ensure the independence of the Auditor General in practice, and

24

to secure adequate resources over time to ensure the OAG can carry out its mandate effectively and efficiently. Reform Actions Platform 1 (audit season 2009/10) 1. Corporate Development Strategy and fundamental standards are adopted, owned and implemented by staff 2. Ensure timeliness of reports in the context of a revised audit cycle starting with interim audits during the budget year making follow up of earlier recommendations and examination of financial management and internal control systems before the Annual Financial statements are finalized. 3. Ensure that the Twinning arrangement started in September 2009 a. builds on experiences gained so far and the approaches developed and outlined in the Corporate Development Strategy and the fundamental standards. b. focuses on sustainable interventions in form of coaching and mentoring to facilitate ownership of the overall strategies and standards; c. will be flexible and linked to operational needs and eventual changes in these needs Platform 2 (audit season 2010/11) 1. Introduce amendments to the Law on the OAG to guarantee the financial independence of the OAG as well as ensuring consistency in relation to other laws within the PFM field. 2. On-going strengthening of coverage, quality and relevance (more focus on performance indicators and performance audit) Technical Assistance External audit has benefitted from the EC funded Technical Assistance project Further Support to the OAG (06/KOSO1/06/05001), covering the period October 2007 July 2009. This project has in its final stage been focused towards assisting in building an external audit platform covering the following: Operations: 1. An Annual Performance Report produced in time and with sufficient quality aimed at strengthening the accountability process between the Assembly and the Auditor General and pave the way for a better budget dialogue (submitted in April 2009); 2. Annual Reports and opinions on budget spenders, quality monitored, clearer and more reader friendly (June-July 2009); with the first two Performance Audit Reports in June 2009. 3. An Annual Audit Report on the KCB Financial Statement in time (synchronized with the overall budget process and the accountability process for the first time) and with sufficient quality and another focus than earlier (late August 2009). Support documents: 4. Basic Standards (all introduced in July 2009): 5. An amended Regularity Audit Manual 6. A Performance Audit Guideline 7. A Quality Management Framework 8. An up graded Code of Conduct. 9. Corporate Development Strategy 10. Communication Policy 11. Leaflets on the role and mandate of public external audit At the moment no new TA is in the pipeline. Further financial support will be addressed linked to the introduction of a properly designed and locally owned facility for basic training of auditors and for
25

financing an Advisory Board (national and international) for the Auditor General. Other more specific interventions will be designed as needs arises. It is still too early to speculate in the forms this might take.

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2.10 LEGISLATIVESCRUTINY
Existing Situation Legislative scrutiny focuses on two areas: the annual budget law and the external audit reports. The 2009 PEFA assessments found both strengths and weaknesses in the way the Assembly organises itself to carry out these functions. Well-established procedures for the deliberations on the budget by the Budget and Finance Committee. Clear rules exist for in-year budget amendments. Timely review of the OAGs reports by the Assembly and the Budget and Finance Committee within 2 months of receiving them, Nevertheless, there are weaknesses in the implementation of the scrutiny function in part due to a lack of technical capacity and these weaknesses include: Focus limited to revenue and expenditure information in the Annual Budget Law Extensive reallocations occurred outside of the planned reallocations as provided for by the Mid-Year Review process Limited and not close scrutiny of OAGs reports Occasional in-depth hearings on key findings which cover only a few audited entities. Limited recommended actions from reports regarding critical issues to areas of the most interest to the Committee, Rare actions on recommendations by the BO Follow-up limited or nonexistent Reform Goals. Our goal is to improve the analytical capacity of the Budget and Finance Committee of the Assembly, to ensure adequate consideration of the fiscal impact of new laws and to enhance accountability in public financial management. The overall strategy for the Assembly and an Action Plan are outlined in the Strategic Action Plan of the Assembly of the Republic of Kosovo, November 2008. Reform Actions The Parliamentary Committee for Oversight of Public Finance has been established as a new committee which will have the mandate for the oversight of expenditure of public money by all public institutions which are financed from the Kosovo budget. This Committee is in the process of being made functional . This Committee will deal with the report on the budget execution from the Government such as KCB, CHU/FMC, the Annual Procurement report etc) and the Annual Audit Report from the AG. It will also handle budget and accountability issues (appointing auditors and take standpoints on the budget) related to the AG and the OAG. Technical Assistance GTZ has a long term project to support the Budget and Finance Committee of the Assembly through to 2018. This project has just started and its components are being determined. It will include training for members, and the development of administrative and analytical support. The British Embassy is supporting the project "Oversight of Public Finances in Kosovo" in cooperation with Kosovo Institute for Policy and Research Development. On 2nd June, 2009 a letter of understanding was signed between the Assembly of the Republic of Kosovo, the Government of the United Kingdom, and the Kosovar Institute for Policy Research and Development (KIPRED) in order
27

to upgrade capacities of the Parliamentary Committee for Oversight of Public Finances. KIPRED will provide technical assistance in building the capacities of the Committee.

28

2.11 DONORCOORDINATION
Existing Situation The recent 2009 PEFA assessment found certain weaknesses in the existing approach to donor coordination in Kosovo, including: Insufficient information on donor aid. Budget estimates for disbursing project aid is not all provided by major donors provide at lead for the governments coming FY and at least 3 months prior to the years start. Out of date reports on actual expenditures by donors in RIMS database. Since he PEFA was produced the Agency for Coordination of Development and European Integration (ACDEI) has been established and it has started to coordinate with donors on a sectoral basis, with health, education, water, decentralization and public administration reform as the initial sectors. As well, work on a donor data base platform has started. Reform Goals Develop the ACDEI into a donor coordination unit that facilitates donors to identify sectoral priorities and financing maintains a data base that facilitates the management and the reporting of foreign assistance by Government. increase donor confidence in government systems, and to support the donor coordination by Government by increasing transparency Reform Actions Platform 1 - Experts forn Development Gateway Foundation during September have finished the assesment of needs that this data base platform should address for an efficient coordination. - During October implementation of this system will commence, after hosting the system will be tested to be started afterwards with trainings fot its use and administration. - Once the implementation starts, an agreement will be signed relating to reports and their timing.. - In the first year, the report will be more general, giving sufficient details over activites of donors, the link between the foreign assistence with MTEF and EPAP, which will also enable planning for years to come. Platform 2 - After the first year, the system will be adjusted to meet requirements of the Government to offer information that will be needed for planning and adjustment in linewith the developement priorities. Platform 3 - Incorporate estimates of all direct and indirect donor supported programs and projects in Budget documentation. Technical Assistance The Aid Management Program (AMP) for the Agency for Coordination of Development and European Integration (ACDEI) is to strengthen the Governments management and reporting on donor assistance and to improve coordination among donors. AMP seeks to further increase donor confidence in government systems, and support government-led coordination. The program will increase transparency and accountability by introducing a web-based repository of aid data and aid funded programs for development partners and government ministries. This is supported by USAID and the EC

29

3. RESPONSIBLEIMPLEMENTINGAGENTSANDREPORTING
This PFM Action Plan has been put together from discussions with and information from all relevant stakeholders. The Action Plan is their, the stakeholders, activities relevant to their respective themes. Each theme is under the responsibility of a specific Department/Agency or Division within the Government and the Heads of these Departments are responsible for implementation and reporting of reform progress. The table below sets out the agencies that are tasked with implementing the PFM Action Plan. It is divided into primary and secondary responsibility. The primary responsible agents are the drivers of and managers of change within a thematic area (MFE Budget Department in Credible Policy Based Budget) while the secondary responsible agents are facilitating the changes either by implementing (e.g. Line Ministries) or facilitating (e.g. PM Cabinet, MFE legal changes, promoting changes from the centre A report on progress against actions would be submitted to the Deputy Minister of Finance, the overall coordinator of the PFM Action Plan) by each of the primary implementing agents on a six monthly basis, save for the OAG and Assembly. The role of the Deputy Minister is a coordinating/supervisory one rather than an implementing role. However, we envisage the management and implementation of the Action Plan to be organic in the sense that it will be a living document that will change over time as implementation takes place and responsibilities evolve.

Reform Themes
CREDIBLE POLICY BASED BUDGET TAX ADMINISTRATION

Primary responsibility
Budget Departments

Secondary responsibility
MFE , PM Cabinet ,Line Ministries

DECENTRALISATION

Tax Administration of Kosovo and Customs, Department of Policy and Municipality Budgets ( DPMB ) POE Policy and Monitoring Unit, DPMB ,Kosovo Privatization Unit Treasury Department, Central Unit for Internal Financial Control

MFE, PM Cabinet MFE, MLGA, PM Cabinet. Grants Commission MFE

FISCAL RISK

BUDGET EXECUTION, ACCOUNTING AND RECORD-KEEPING AND PUBLIC INTERNAL FINANCIAL CONTROL PUBLIC SECTOR PERSONNEL AND PAYROLL INTERNAL AUDIT PROCUREMENT-

Line Ministries

Department of Civil Service Administration, Ministry of Public Administration Central Harmonization Unit of IA Independent Public Procurement Commission, ,

Treasury Department

Budget Organizations, MFE, Procurement Review Body, Public Procurement Agency

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EXTERNAL AUDIT LEGISLATIVE SCRUTINY DONOR COORDINATION

Office of Auditor General Assembly of Kosovo Agency for Coordination for Development and European Integration

Assembly of Kosovo PM Cabinet MFE, PM Cabinet

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Annex1PFMACTIONPLANPlatformsandMatrix
SUMMARY OF THE PLATFORM APPROACH Introduction This Public Financial Management Reform Action Plan (PFMRAP) addresses the current issues of Public Financial Management reform in Kosovo, and it provides information regarding the purposes, indicative Government-wide, ministry-specific, and municipality activities of the potential next phases of reform (or Platforms). This Plan has been developed by and for the Government and is to be implemented through Government functions and donor-provided technical assistance, which will ensure integration and reduce overlapping activities within technical assistance. The forthcoming World Bank supported Public Sector Modernization Plan is a clear example of support consistent with the Action Plan covering various related activities.4 Through the Action Plan, Kosovo is about to engage in a series of reforms and new initiatives which are intended to lead to strengthened financial and program management practices and activities. This document describes a process for planning and implementing those reforms and new initiatives. The Plan has been developed in the basis of these main sources of input: Cumulative and ongoing discussions within the MFE, the Government, and ministries and municipalities, and with donors, which have identified the policy- and technical-level PFM issues which must be addressed. The results of 2007 and 2009 Public Expenditure and Financial Accountability (PEFA) assessments. The 2009 PEFA process resulted in a report which contained specific recommendations, and they are found throughout this PFMRAP document. The results of focused discussions with ministries concerning their own perspectives of PFM, especially regarding the ways in which Kosovos PFM processes impact on their activities. Especially important to the development of this PFMRAP was each ministrys identification of, and commitment to addressing, combined PFM issues. The Action Plan has been constructed in 2 dimensions: the Horizontal government-wide dimension which is based on implementing PEFA recommendations which cut across all of Kosovos Budget Organizations, and the Vertical dimension which is based on priority ministry-specific actions. Actions on these dimensions will occur in parallel with each other and in phased-in platforms, in order to have the maximum positive effect. The Government passed in 2008 two Government Resolutions which: endorse the concept of PFM reform require the Governments budget organizations (including ministries and municipalities) to participate actively in the process of public financial management reform, and give specific direction to the MFE regarding the development and implementation of a PFM reform action planning process. In 2009 these Government Resolutions were advanced by the endorsement of the PEFA process and of the Plan developed by the MFE. In addition, international financial institutions and bilateral donors have been addressing the provision of joint budget support to the Kosovo Consolidated Budget (KCB).
4

Component 1: Improving public financial management performance in selected budget organizations, including e-procurement. Component 2 - Improving payroll administration and laying the foundations for a professional civil service. Component 3 Increasing the security and efficiency of government information systems

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Following an approach Platform Approach - that has been developed and used to focus and implement necessary and phased-in PFM and public administration reforms and new initiatives in other transitioning countries, this same concept has been used in Kosovo, as a framework for identifying, assembling and coordinating, and then monitoring the phasing-in and progress of such reforms and new initiatives. The Platforms serve as both a collection of inter-related activities and when significant recognized progress has been made as levels of achievement for Kosovo to attain along its path toward reaching national goals (such as European integration and other key accomplishments). Although the full accomplishment of each Platform is not necessary in order for the next one to begin the Platforms are inter-related it is clear that the increasing capacity which is attained through successful performance of each Platform will strengthen the Kosovos ability to take on the next Platforms set of challenges. Collectively, the Platforms seek to provide for: A credible budget delivering reliable and predictable levels of resources Improved linkages between policies, program planning/implementation/results, and budgets Improved controls and accountability Integration of accountability and financial/performance information Further, the PFM activities which are conducted within the Platforms should focus on areas which: Are focused on programs and functions which are priority to the Government, ministry, and municipality Are conducted on a Vertical basis (within specific ministries and municipalities) or on a Horizontal basis (Government-wide) Are attainable in view of resource constraints Are appropriate to Kosovos needs Are sustainable in the future Support Kosovos moves toward European integration Support the concepts of Budget Support Are linked to agreed-upon and recognized tools (PEFA, Statement of Government Priorities, MTEF, etc) Plan Components and Strategies Basis of the PFM Environment in Kosovo The PFM environment within which the Plan is being designed and implemented is based in Kosovo law as well as on several years of PFM activities within the MFE, line ministries, and municipalities. This environment consists of: The Law on Public Financial Management and Accountability (LPFMA) The Annual Budget Laws and the Annual Budget publication provide for the years appropriations and operational framework for the budget. The Medium Term Expenditure Framework (MTEF), which is intended to provide for a rolling 3year budget planning process. The 2007 and the new 2009 PEFA process and report (and recommendations) provide for a comprehensive and objective assessment of the PFM strengths and weaknesses. The ongoing budget process is such a basic part of the PFM fabric that it permeates every part of this Action Plan. The MFE Guide to Kosovos Planning and Budget Process, the first such document that has been produced in Kosovo, and which provides for a comprehensive view of the entire PFM system. The Treasury system in Kosovo is consistently described in highly positive terms by donors and other observers, and it is sustained through the Treasury manual.

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Audit policies and procedures (both internal and external) and their results are key parts of PFM and are a day-to-day management responsibility, which are shared by the Executive and Legislative branches of government.

Indicative Platforms for Action Plan Implementation

PLATFORM 1: A CREDIBLE AND SUSTAINABLE PFM POLICY-SETTING PROCESS Proposed Purposes and Objectives of this Platform To produce an agreed-upon and consensus conceptual framework and then the functional framework for the overall PFMRAP initiative To re-affirm the Governments focus/determination of what it sees for itself and for the future of Kosovo, regarding PFM and program management, and the linkage between PFM and the pursuit of national/ministry/municipality goals To begin the implementation of PFM and program management activities Strategies Establish and reinforce, throughout the PFMRAP initiative, the concepts that PFM and the attainment of national, ministry, and municipal goals are mutually dependent Actively engage the Cabinet in the work of this Platform and subsequent Platforms, and retain a consistent focus on Government priorities, and on feasibility and sustainability Actively keep donors aware of PFMRAP activities and to use this awareness to facilitate donor coordination Plan and begin implementation of Vertical activities (i.e., within specific ministries and municipalities) and Horizontal activities (i.e., Government-wide) PLATFORM 2: A CREDIBLE BUDGET DEVELOPMENT PROCESS WHICH DELIVERS RELIABLE AND PREDICTABLE RESOURCES Proposed Purposes and Objectives of this Platform To solidify and extend the improvements made to date, in formulating Kosovos annual and operating budgets To focus specifically on the results of budget diagnostic assessments and to both address the shortcomings and ensure continued effectiveness of successful activities To ensure that the budget process is used effectively and with discipline in supporting Kosovos policy and priority setting processes and for the attainment of goals Strategies Developing clear and valid expectations of the planning and budget process among executives, managers, and staff Conduct a realistic assessment of the shortcomings of the policy-setting and budget processes regarding the goal of delivering reliable and predictable resources Establish a balance between expectations and the systems capacities (following a series of feasible enhancements)

PLATFORM 3: IMPROVED BUDGET EXECUTION AND CONTROLS, INCLUDING INTERNAL CONTROLS AND ACCOUNTABILITY Proposed Purposes and Objectives of this Platform To clearly establish the importance of effective budget control as an extension of policy and as a method of emphasizing effective PFM and program management To clearly establish the linkages between effective internal control and accountability, and effective program policy setting and decision-making To provide for permanent implementation of the results-oriented management policies and procedures cutting across all Platforms Strategies
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Reinforce budget management, and internal control and accountability concepts as routine aspects of the ministry, program, and municipality management process Clarify the linkages between one years program monitoring and evaluation, budget control, and the next years processes of program planning and development Build the capacities of KIPA and related organizations to support the concepts and integration of internal controls and accountability

PLATFORM 4: IMPROVED LINKAGES BETWEEN POLICY AND PRIORITY SETTING, MANAGING FOR PROGRAM RESULTS, AND BUDGET PLANNING AND IMPLEMENTATION Proposed Purposes and Objectives of this Platform To focus Government-level and government-wide executive attention and support Governmentled actions on the critical linkages between: establishing policy and priority-setting processes; measuring, monitoring, and evaluating program results, and using them in program planning processes; and determining and allocating resources in rational and transparent ways, for attaining those results To provide an opportunity for the technical re-design of the fundamental policy/ financial management functions necessary for any modern government Strategies Ensure integration with related Public Administration reforms (especially related to organizational reform, pay systems, etc) Ensure that reforms and the capacities to implement them are developed consistently Ensure support for development/utilization of program-related information systems Focusing on current processes for conducting and linking policy-setting, priority-setting, and program management, and identify areas of strength as well as areas to be reformed through PFMRAP PLATFORM 5: INTEGRATION OF ACCOUNTABILITY, REVIEW, AND POLICYSETTING PROCESSES, REGARDING BOTH FINANCIAL AND PROGRAM PERFORMANCE MANAGEMENT Proposed Purposes and Objectives of this Platform To provide for a coalescing of the work and results of the previous Platforms, other public administration reform initiatives, and relevant Technical Assistance projects To provide for the feasible and sustainable integration of separate elements of government-wide capacity-building To construct a consensus view for Government and donor aspirations regarding Kosovos government-wide functioning in the PFMRAP areas Strategies Engage the Government (including ministries and municipalities), outside organizations, and donors in realistic appraisal of progress to date Emphasize the usefulness of interim/periodic adjustments of overall expectations of the PFMRAP initiative over time Strongly emphasize realistic expectations and measurements of progress at the Government, ministry, and municipal levels, and design corrective actions accordingly Establish and reinforce the fact that the coalescing process which is addressed in this Platform is necessary in order to implement internationally-recognized methods of effective organizational (and government-wide) management The details and components of each Platform are outlined in the Action Plan matrix that follows.

35

2009 SCORE CAUSE OF WEAKNESS Score REASON & Link to other PIs SECTION A: CREDIBILITY OF THE BUDGET PI-1 Deviation of actual over budget ranged from -10.2% to 17.2% Over budgeting Lack of multi-year approach to planning

REALISTIC LEVEL

ACTIONS & RESPONSIBILITIES

PRIORITY

Budgets that reflect capability and capacity to be implemented linked to achievable service delivery.

Two part approach: develop closer link between budget and planning, and strengthen the capacity for project planning and management. During last quarter of 2009 agreement on actions to be implemented in 2010 and onwards. Such actions to be considered to include, inter alia: The MYBR should have no impact on the overall balance, except under well-specified exceptional circumstances, such as earthquakes and financial crisis. Further limitations could be put on cash advances for capital projects, with Ministry of Finances authorization.

High. Effective use of KCB funds is essential to economic development and greater credibility by donors and investors.

Poor procurement (capital)

PI-1112 PI-16

PI-19

Strengthen and make effective the monitoring mechanism in the capital spending program and lower capital expenditure allocations in case of significant under execution. MFE., PM, Cabinet

PI-2

Compositio n of

Score maybe result of good luck rather than

Within 1 to 2 years and at the same time the expenditure deviation variances to not exceed

2 part approach: develop closer link between budget and planning, and strengthen the

High. Effective use of KCB funds is essential to economic 36

expenditures deviation less than 5%

judgement (see PI-1)

the overall primary expenditure deviation (defined in PI-2), by more than 3%.

capacity for management.

project

planning

and

development and greater credibility by donors and investors.

MFE , PM, Cabinet,. PI-1 and associate d links PI-3 Aggregate revenue outturn greater than budget between 5 and 33% The challenge will be to better forecast revenue while still maintaining the more cautious stance which is necessary given the nature of revenue sources. This will allow a better allocation of resources at the planning stage rather than increasing allocations during the budget execution stage. Reflecting better revenue forecasts at the budget planning stage will allow better planning of inputs needed to achieve better and more efficient service delivery. The target should be to forecast revenue as accurately as possible while erring slightly on the downside so as dampen expenditure expectations. However, it will not be easy to achieve such forecast level taking into account different macroeconomic factors in Kosovo that affect these issues and the current volatile economic environment. Maintain or increase surveillance of world and Kosovos economy, in order to prepare for/minimize impacts on Kosovos resources and thus its capacity to provide public programs. MFE Medium. Impact of the weak world economy upon Kosovo over the next 1-5 years can be severe, if not prepared for.

PI-1 and associate d links

PI-4(i)

Stock of arrears low

Treasury objective is to establish control points in BOs for more effective and efficient execution of KCB. The desired level of performance is that all BOs to pay their obligations according to the contract terms. This will increase the financial discipline and the internal control efficiency in BOs.

37

PI-16-17 PI-4(ii) Reliable and complete data on the stock of arrears is generated through routine procedures at least at the end of each fiscal year. Instances of inconsistencies between what is reported by BOs and the KFMIS. Not all BOs enter invoice dates in KFMIS when the invoice is received but are rather waiting until the payment is processed. This undermines the effectiveness of the KFMIS as a tool for monitoring and measuring arrears. A part of these arrears is for long term projects (capital projects) for which the payments are made in instalments during stages of project implementation and appear as arrears at the end of the year. The other part is related to goods & services and utilities, which based on the KFMIS report, the process between the submission of the invoice by the supplier and execution of the payment by KCB is longer than 30 days as foreseen in the regulation. Request KFMIS company (FreeBalance) to make the invoice date as a mandatory field in the system in order to keep track in the timeframe of each payment.

PI-16-17

Treasury Department -MFE

ACTION Platform 1: Action by 31.12.2009 Amendment of Article 44 of Treasury Financial Rule 02 Spending of Public Money, such as: BOs CFO is responsible to create mechanisms that enable recording of invoices upon receipt and to follow the payments for these invoices (Section 44 of Financial Rule 02 Spending of Public Money). With decentralisation of expenditures, budget organisations will be required to enter the date of invoice in the system. Treasury has requested from KFMIS company (FreeBalance) to make the invoice date as a mandatory field in the system. Implementation of this is expected by the end of this year. Agreement on actions required to improve capital budgeting. Organise quarterly capital spending program monitoring meetings in BOs to review progress on capital projects and identify necessary follow up actions to ensure timely implementation. MFE should be represented at these review meetings. Re-design the fiscal rule in consultation with the IMF to act a benchmark in establishing a credible budget. Activate the Fiscal and Budget Committee of the Government according to previous Government decision to track MTEF and Budget development and advise government on strategic resource allocation. This is not to take away responsibility from the Minister of Finance for budgeting, but to ensure sectoral priorities are addressed in the context of overall budget formulation. Undertake measures to enforce legal and procedural requirements for the costing of draft laws and new policy prior to consideration by Government. Re-structure the Budget Department in accordance with the LPFMA and MFE plan and formalise executive appointments. Enforce the Budget Process (circulars etc) requiring detailed analysis and submissions (PIP) for every proposed new capital project in Line with PI-12 (iv) below. Finalise design requirements for Budget Development Management System that improves this tool for managing aggregate fiscal discipline including multi-year estimates and features for enforcing multi-year ceilings. Develop and commence implementation of a mechanism for linking strategic planning activities in line ministries to the MTEF with aim of having properly costed and realistic sector strategies that reflect considered policy choices in Line with PI-12 (iii) below. MFE prepares and published a capital execution report, identifying progress in capital execution (comparing actual expenditure and obligations compared to appropriations and cash plans). MFE prepares for Minister and Government an internal report, identifying actual progress (financial and practical) on all major projects (above a 50,000 euro threshold). Review 38

threshold in light of experience. Laws on Civil Service and civil service pay and passed and appropriate subordinate legislation developed having regard to fiscal impact. Platform 2: Revise the current set of Government priorities prior to the MTEF to facilitate allocation of scarce additional resources. Implement a mechanism for improving cooperation between ministries within a sector in developing MTEF sector strategies. Fully integrate PIP processes with MTEF. In the context of the 2011 Budget, identify several programs for pilot implementation of a monitoring and evaluation framework. Identify performance targets for these programs. MTEF includes aggregate fiscal target consistent with the revised fiscal rule Pay and Grading review is conducted have fiscal resources as a key constraint in its design and implementation. Payroll is moved to the Treasury. Capacity building program for line ministries for capital project analysis, planning and implementation. Functional changes are implemented in line ministries to link and improve strategic planning and budgeting. Monitoring and Evaluation Unit is established within Budget Department. Platform 3: In the context of the Budget, identify several programs for pilot implementation of a monitoring and evaluation framework. Identify output based performance targets for these programs. Broader identification of performance targets is implemented for 2011-13 Budget. Revise the current set of Government priorities prior to the MTEF to facilitate allocation of scarce additional resources. Implement a mechanism for improving cooperation between ministries within a sector in developing MTEF sector strategies. Functional changes are implemented in line ministries to link and improve strategic planning and budgeting (Functional Review). Platform 4 Conduct comprehensive Public Expenditure Review, being a one-off zero-based assessment of public expenditure allocation. Continue the PER process in annual ministerial reviews as part of the MTEF and budget process.

SECTION B. KEY CROSS-CUTTING ISSUES: COMPREHENSIVENESS AND TRANSPARENCY

PI-5 Chart of Accounts and budget classificatio n compliant with COFOG and GFS2001 has been introduced and implemente d in all dimensions economic Functional classification for budget formulation can only be produced manually, as the coding for administration within a ministry is the same as if administration was a function at the budget formulation stage. All central and local BOs are aware of their resources but not at the lowest primary service levels. Budget planning in BDMS is carried out only at programme level. Changes to the chart of Budget and expenditure reports to be generated/produced from KFMIS by functional, program and organisational classification. Resolution of coding issue can be carried out through changing the Codes High. Addressing the problem now will simplify and facilitate later technical reforms

Treasury and Budget Department- MFE

PI-1112

PI-1618 PI-22 PI-24-

39

25 PI-23

categories, administrati ve, and function (10) and subfunctions.

accounts in KFMIS were made in 2008 to facilitate budget planning at primary service units, but are as yet to be used.

ACTION by the end of 4th quarter of 2009 Measures should be undertaken to improve the coding quality of functional and economic codes to fully comply with COFOG and GFS. The Working Group to review the Chart of Accounts structure, and in particular the structure of economic codes, and to present the schedule of chart of accounts review by 30 November 2009. 6 of the 9 Missing documents Some of the elements of PI-6 may be improved Develop PI-6 Medium. Addressing the problem now will simplify and benchmark particularly related to prior within 1 to 3 years in order to upgrade this additional facilitate later technical reforms documentati years outturns and indicator to a higher quality level of capacity to on is financial assets presentation of budget documentation. generate/gather provided However, the actual budget may be presented in and provide basic a same format as with the proposed budget, macroeconomic B whereas the Statement of Financial Assets could and budget data. be extracted from the Annual Financial Meeting this Statement and attached to MTEF and Budget dimension is one PI-12Documents. Explanation of new initiatives or of organising data 13 programs may be enriched with throughout that exists in the analysis of the budget implications. required format. PI-22-24 The budget document should have a summary table outlining expenditures comparing the approved budget, mid-year budget and the outcome for the past year. For next years budget, it should distinguish between budget projections based on i) keeping the existing policies ii) adopting new policies, and iii) showing consolidated projections. Budget tables should reflect greater transparency MFE and BOs

Platform 1: Prepare and publish a full set of budget documents for the 2011-13 budget in accordance with the LPFMA. This should be presented to the Government and Assembly and published as soon as possible afterwards. Bring all central level own-source revenues into the budget planning process and tables. 40

 Include COFOG classification in budget documents and KFMIS. Include estimates of POE financial outcomes as an information item in Treasury financial statements. Ensure all Treasury reports, including monthly reports and capital expenditure reports are published. Review the list of information provided in the LPFMA for the budget book to take account of the inclusion of the MTEF in the budget planning process and implement accordingly. Platform 2: Include estimates of donor funding in budget documentation. Include POE financial outcomes in KCB financial statements as a note. Platform 3: Prepare comprehensive budget documentation and financial statements that include the full POE and donor sector data in addition to the General Government sector. Provide to Government and Assembly the results of pilot monitoring and evaluation reports. Platform 4 Publish an annual performance document outlining the performance of government programs on an output/outcomes basis. There are no No extra budgetary funds Avoiding the use of extra-budgetary Low. Problem is not present, so PI-7(i) extra budgetary funds will prevent this from becoming a just maintain current policy. funds problem. A MFE and BOs PI-17 PI-7(ii) A PI-17 D1 PI-8(i) All donor funds channelled through Government are recorded in fiscal reports The LLGF introduced transparent rules and secured funding for the delivery of minimum standard services by local governments and have been Continue the successful implementation of Treasury Single Account in collection and spending of public money. In this regard, any new legislation should be reviewed carefully to ensure compliance. Low. Problem is not present, so just maintain current policy. MFE and BOs

PI8 (i) and (iii): Current level of performance continues. Both dimensions relate to the legislative framework governing municipal finances. MFE should aim at ensuring full implementation of legal provisions throughout the budget process starting from the allocation of intergovernmental grants to reporting on local government fiscal position.

The Grants Commission to assume responsibility for ensuring objective and transparent application of the LLGF principles. The Grants Commission Secretariat to be hold accountable for professional, technical, and analytical support in the implementation of grants system. Government to ensure availability and

Medium. persistent.

Problem

remains

41

applied in the 2009 Municipal Budget.

reliability of necessary Information Management Systems, which underpin or secure input for the determination of grants. A certification process of municipalities financial management capacity needs to be introduced before the devolution of some additional responsibilities.

MFE, MLGA, and municipalities PI-8(ii) The 2009 Municipal Budget process demonstrated weakness in the central budget authorities dissemination of reliable and timely information on municipal financing which impacted on the municipal budget process. Municipal fiscal information is consolidated into quarterly budget execution reports and annual financial Determination of final transfers was affected by ad hoc last minute policy decisions. PI-8(ii): As a minimum, desirable level of performance should ensure that municipalities are provided with reliable information on the allocation from government transfers before the start of their detailed budgeting process. Such practice would ensure compliance with the score B requirements. Long term achievement of score A is advisable and feasible. Government must make decisions regarding ceilings and other MTEF issues more promptly, so that follow-on actions and decisions by municipal authorities can be made with sufficient time for implementation. High. Municipalities capacities cannot grow without supportive decisions of this type.

MFE, Cabinet, municipalities High level of MFE performance in the management of municipal finances, including grants system and municipal budget processes, is deemed feasible.

MLGA,

and

PI-8(iii)

Maintain current policies and procedures.

Low. Problem is under control, through the use of current policies and procedures.

MFE, MLGA, and municipalities

42

PI-23-25

statements.

Recommended action steps (short-term and long-term) PI-8 (i) - ongoing: - Grants Commission Secretariat to assume its role in technical and analytical support to the Grants Commission, including provision to the Grants Commission of assessment of grants allocation compliance with rules based system established in the LLGF before municipal budget development cycle if finalized - Grants Commission to ensure that the LLGF rules apply in their entirety and with full transparency, - Grants Commission Secretariat to maintain regular publication of decisions made by the Grants Commission - Strengthen the role, capacity, and accountability of the Grants Commission Secretariat to the Minister of Finance and Grants Commission (e.g. introduce mandatory quarterly reporting for the Secretariat to the Minister). - Before the authority to borrow is granted to municipalities, the Auditor General should issue unqualified audits of municipalities financial reports for two consecutive years. - Looking forward, a certification mechanism of municipalities financial management capacity should be developed. PI-8(ii) ongoing: - Intergovernmental transfers accounted for in the medium term macro-fiscal framework, with potential revisions or adjustments occurring during and incorporated within the MTEF process (i.e. Government to refrain from ad hoc policy decisions affecting distribution or allocation of transfers) - Introduce in the applicable legislation, such as LPFMA, provisions specifying timetable for dissemination of reliable and binding information on allocation of intergovernmental transfers to the units of local government. - MFE, in its internal activities and processes, to adhere to and respect all aspects of the municipal budget calendar to ensure that municipal officials are able to start the budget process in time and will have sufficient time and information to perform all necessary internal procedures throughout budget development process. It is also essential for Municipal Assemblies to be able to review and approve the proposed municipal budgets, within the timeframe defined by law (including citizen participation) PI-8(iii) ongoing: - Maintain application of rules and procedures governing Kosovo Financial Information Management System to municipalities - Ensure that periodical financial and budget reports issued by the Treasury Department account for consolidated municipal fiscal data. POE Support the Medium. Problem is currently contained, but it should be SOEs report The PI-9(i) There are two categories of Public Enterprises 1. to the KPA Monitoring Unit is further monitored to prevent deterioration Central Public Enterprises (CEPs) whose stakeholder is quarterly only newly the Kosovo Government and 2 Local Publicly-Owned development and those established and new Enterprises whose stakeholders are the Municipalities of actions SOEs under C (LPOEs). corporate underway, and direct KPA administrati governance CEPs report to the newly created POE Policy and of the OAG. on are arrangements are in Monitoring Unit (POEPMU), within the Ministry of audited, a the process of being Finance and Economy. POEs include utility-like consolidated implemented for enterprises - Airport, Post and Telecommunications, MFE, KPA, report is not POEs. Water, Central Heating and Water and Irrigation, etc. and produced and there is POEs/SOEs no report on overall fiscal risk. POEs are not currently in the practice 43

of reporting to the MFE. Platform 1: Collect, collate and publish information regarding the financial position of the POE sector. Identify risks associated with POEs in the next MTEF. The new Unit will start with training as well as issuing sub-legal acts. (It is very important to have the best possible cooperation with all POEs and ensuring that POE Boards are functional). Platform2: Include POE financial outcomes in KCB financial statements as a note. Implement risk management approach top POEs a comprehensive system for identifying and managing POE financial risks. Reporting regularly to the inter-ministerial committee on POEs. High. Debt Law will regulate responsibilities, criteria, and The current legal framework prohibits local Development Legal PI-9(ii) governments to enter into any borrowing arrangement, of the Debt limits for municipal debt framework thus creating fiscal obligations for the central Law does not and government. allow Local implementing Government A The (draft) Debt Law will regulate responsibilities, regulations. s to enter criteria, and limits for municipal debt. It is foreseen into any that municipal debt shall be subject to a prior written debt approval of the MFE, while such approval shall not obligations. constitute a guarantee, or in any way establish any liability of the Government for the payment of the debt. Municipal debt will not represent a direct or indirect MFE, obligation of the Government unless the MFE Minister MLGA, and issued a written guarantee. municipalities Platform 1 Discuss and clarify that a pre-condition to allowing municipalities to borrow is the issuance of unqualified financial audits by the Auditor General for two consecutive years. (However, draft of a debt law has been approved by the government and is currently in the Assembly for discussion and approval. Looking forward, a certification mechanism of municipalities financial management capacity should be developed. Four of the Two PI-10 sets of Changes in information policies and High. A relatively simple six pieces of documents are not procedures can be done without great change in information B information supplied in 2009 problems, and when additional information availability will increase public supplied to annual budget law is available, public confidence can increase. confidence in the Government. PI-11public. and information to 12 primary units PI-23 MFE, General Audit Office, Public Procurement Regulatory Commission

ACTION 44

Some elements improved within 1 year, such as: preparation and presentation of annual budget documentation within the deadlines certain budget categories to contain more detailed information whereas bulletins containing such information to be produced to inform relevant stakeholders. Long term capacity building efforts are needed to create special purpose complex information and dedicated to different research groups. Platform 1: Publish for following during the course of 2009-2010: - annual budget documentation (2010 Budget), - in-year budget execution reports. - Year-end statements, - External Audit reports, and - Contract awards. Platform 2: Make available information of funding provided to primary service unit.

SECTION C. BUDGET CYCLE C(i): POLICY-BASED BUDGETING

PI-11(i) BOs had 4 rather than the ideal 6 weeks for budget preparation. There were further problems with time for municipaliti es. There were 3 budget circulars for central government and 2 for municipaliti es, but cabinet involvement While budget calendar is established which provides for timely budget formulation, the issuance of budget circulars did not conform to calendar. High. Credibility of the budget process by the public, BOs, and donors is essential.

B PI-8(ii)

PI-12

PI-11(ii)

The guidelines were not followed and cabinet involvement was suboptimal.

PI-8(ii)

A budget calendar that would provide at least 4 week time to BOs for submission of their budget proposals/request to MEF to become a rule. However, considering that the budget process requires from BO to submit other documents (such as MTEF, review) it is necessary for the process to start as early as possible in the year in order to provide information regarding priority directions and macroeconomic data. A detailed and timely

Emphasize the need to increase timeliness of decisions regarding the MTEF, ceilings, etc. and to adhere to concepts of budget discipline.

High. Credibility of the budget process by the public, BOs, and donors is essential.

PM, Cabinet, MFE and BOs

45

was timely. PI-12 PI-11(iii)

not

deliberation of the Cabinet is a key factor in complying with agreed budget calendar. Late approval of budget in 2008. The Legislative approves the budget before the beginning of fiscal year as in 2009, which has not always been the case as in 2008. High. Credibility of the budget process by the public, BOs, and donors is essential.

B PI-12 and PI27 PI-12(i)

The 2008 budget was approved 2 months late due the request from new government for review. The 2009 2011 MTEF document presents a 3 year (on an annual basis) forecast of domestic revenue and expenditures , but not as yet on a rolling basis. It provides an overview of expenditures by function but does not project this into the future. It presents projected

PI-11 PI-23 PI-27

The MTEF document (June) is an input to the setting of the ministerial ceilings and differs from budget figures in December which are not explained. The ceilings presented in the second budget circular were multi-year in nature and the PIP system was set-up to accept multi-year projects and multi-year ceilings. The budget document submitted to the Assembly contained forward estimates of the capital projects funded in 2009. However, the forward estimates of recurrent programmes and funding of new capital projects planned for future years were not presented

Include forward estimates for recurrent expenditures in budget documents

High. Credibility of the budget process by the public, BOs, and donors is essential.

PM, Cabinet, and Minister of MFE

46

annual sectoral expenditure by operational and capital with the latter further broken down by projects that need to be funded by donors as either priority or other. PI-12(ii) Kosovo does not contract debt but does however make a forecast of potential debt liability under the settlement with Serbia. Work has been carried out in the MFE to develop the capacity for a debt

in the Budget documents.

Development of the Law and implementing regulations.

High. The situation must be observed from the starting date of the Law, in order to prevent subsequent problems.

MFE

47

strategy and debt sustainabilit y analysis. A debt analysis was carried out in 2008 and debt analysis software has been installed and is operated by the Cash Flow and Debt Managemen t Department. PI-12(iii) The MTEF document presents a mission statement and description of the existing situation, and goals for the sector, but these are not uniform in quality or Sector strategies are driven by the technical unit supporting the EC contract for the KDS with sector ministry input, and reflect the much stronger analytical capability in the KDS unit which has consultancy support. The sector ministries would not be able to produce such a sector strategy independently which reflects a weakness in the sector ministries in planning and budget The major part of sectors to have strategies that contain multiyear cost of recurrent and capital expenditure. These strategies are followed by concrete action plans within each budget unit, ministry/agency, and within strategic planning unit, in a timeframe of 3 to 5 years. Emphasize the need to increase timeliness of decisions regarding the MTEF, ceilings, etc. and to adhere to concepts of budget discipline. Need to emphasize the link between the MTEF, the sector strategies at ministerial level and the budget process MFE, PM, Cabinet High. Credibility of the budget process by the public, BOs, and donors is essential.

48

clarity. PI-12(iv) The PIP assesses projects as to potential viability. In practise, the recurrent cost implications are not factored into subsequent budgets and the lack of a coherent sector strategy means that projects are developed in isolation.

preparation. There are cases of projects in health that have been implemented being closed down because the budget was unable to support the subsequent operating costs. The PIP is not integrated into the MTEF and is in effect a centrally driven list of project. Article 22.i of the LPFMA should be modified to request supporting documentation for capital spending in the annual budget [to be reported in Schedule IV on capital projects]. The following language could be introduced: a) the capital program should consist of proposed capital projects for the upcoming year and the two succeeding fiscal years. Insomuch as it is practicable, and recognising 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 longrange planning mechanism for the Assembly and budget organisations. Deviations from such priorities should be identified and explained; b) a statement of the purpose of each project; c) a statement about the proposed site, size and estimated life of the project; d) estimated total project cost and the cost for each year during which the project is implemented; e) the source and type of funds proposed; and g) estimated on-going operating budget costs and/or savings resulting from the project, including Emphasize the need to increase timeliness of decisions regarding the MTEF, ceilings, etc. and to adhere to concepts of budget discipline. High. Credibility of the budget process by the public, BOs, and donors is essential.

PI-11 PI-23 PI-27

Need to separate planning and execution phases of capital budget approval process to prevent capital projects being commenced without proper costing or funding in place

Annual budgets need to specify both the current and capital spending related to individual projects.

MFE, PM, Cabinet

ACTION Further intensification of capacity building for planning is required, especially in development of Public Investment project proposals. It is necessary to have a better link between strategic, medium-term and annual planning. The function of coordinating the activities with budget process should be undertaken by the MEF budget department. Separate the planning and execution phases of public investment proposals to prevent the commencement of implementation of un-executable, unfunded, under-funded or improperly costed projects. Only grant allocation for project execution after project planning and preparation is completed. Budgeting should gradually (as capacity and capability is developed) move from input based budgeting to output based budgeting to be achieved over a realistic time period by incorporating initially mission statements, objectives and goals and linking policy statements to plans and budgets. Planning/budget/execution units within ministries or agencies should establish active communication/cooperation means in internal budget process and then with MEF/Government and other parties. As a result, the procedures and systems should become stable to enforce formal processes and the follow the budget planning and preparation timetable. The Budget Department/MEF immediately streamlines its departmental structure, roles and responsibilities. The budget preparation information system to be reviewed and further development of BDMS to be undertaken to meet emerging needs (such as the development of the budget system). A strong information technology and systems development unit could significantly contribute in the budget process and in linking with other systems in MEF/MPS, etc. There is a need to strengthen capacities to estimate budgetary implications of proposed initiatives, laws or programmes particularly if there is increasing need for harmonisation of laws. 49

Government Cabinet should seek and support the enforcement of formal budget processes. MTEF preparation process to be linked with budget process as a routine annual process. Human capacities should be developed in ministries/budget agencies. Strategic planning functions should be established within budget units, rather than creating new units for this purpose. With regards to decision-making and recommendation process for public investment, the establishment of Public Investment Committee should take place as soon as possible More specific recommendations regarding this issue were provided during the second phase of Public Investment Program The Cabinet, Ministry of Economy and Finance and Budget Organisations are main responsible organisations for implementation of these recommendations. The Assembly and relevant committees should enforce the application of actions agreed with Government and contained in the Public Management Reform Action Plan, but they should also develop technical capacities to review the proposed legislation with budget implications, detailed review of annual budget law from relevant committee. Scrutiny by legislative should cover in more meaningful way the fiscal policies, MTEF, medium-term priorities, and revenue and expenditure details Platform 1: Policy Based Budgeting: (in addition to action items listed above for credibility of the Budget) Activate the Fiscal and Budget Committee of the Government according to previous Government decision to track MTEF and Budget development and advise government on strategic resource allocation. Implement a system of rolling forward estimates. Require submission of data regarding the ongoing recurrent costs of new capital projects funded in the 2010 Budget. Review KFMIS facilities for multi-year commitments and obligations and undertake training of line ministries to enhance transparency and facilitate project planning. Publish circular outlining steps for line ministries linking government-wide strategic planning exercises with the MTEF due April 2010. Platform 2: Policy Based Budgeting: (in addition to action items listed above for credibility of the Budget) Collect, analyse and publish data regarding the ongoing recurrent costs of capital projects. Modify BDMS as the tool for managing multi-year rolling forward estimates including enforceable ceilings. Undertake training and on-the-job coaching of key line ministries regarding multi-year budget planning and execution.

SECTION C. BUDGET CYCLE C(ii): PREDICTABILITY AND CONTROL IN BUDGET EXECUTION

PI-13(i) The various tax laws are published and can be downloaded from the Government website. There is no provision for discretionary Over time, TAK would like to achieve a score of A in all areas. In the short term, it is feasible to maintain the A in 13(i). Tax Administration - MFE Implementation of key actions in the Tax Administrations Strategic Plan requires training. High. This will also increase revenues, and donor and taxpayer confidence.

PI-14-15

50

exemptions. PI-13(ii) Both tax agencies have a tax payer education programme which produces documentation of rights and obligations. (a) there is no dedicated unit in headquarters for the provision of public and binding rulings and advanced interpretations of the law; (b) taxpayers advise that staff are reluctant to provide written rulings; and (c) staff are said to lack the skills to interpret the law Concern that the TAK internal appeals process lacked integrity in that very few decisions were made in the taxpayers favour. Achievement of an A in 13(ii) is not possible in the short term, but a B should be achievable in 1 years and an A achievable in 1 2 additional years. Implementation requires training. Development of a specialized headquarters interpretation unit. Tax Administration, MFE, Customs High. This will also increase revenues, and donor and taxpayer confidence.

PI-13(iii)

Appeals process is three stage internal, independent, and finally to Courts.

For 13(iii), under the scoring system of PEFA, it may be difficult to achieve anything higher than a B as the majority of appeals decisions will continue to be in favour of TAK since many taxpayers submit claims simply to extend the period of time before they have to pay their tax debt. The determination of the validity of TAK Appeals decisions cannot be made simply by examining a rate of sustention without determining whether those were valid, or not. Appeals do act in an independent manner, but TAK staff need better training in order to analyse cases and write better opinions.

Implementation requires training.

High. This will also increase revenues, and donor and taxpayer confidence.

Consideration could be given to requiring the taxpayer to pay a proportion of the tax under dispute. Tax Administration, MFE, Customs

Recommended Actions to Be Taken (Short-term and long-term) Platforms 1 P-13(i) 1) Ensure that all tax laws are further supplemented by sub-legal acts which provide clear explanations of the way in which TAK will implement specific provisions. P-13(ii) 1) Require that all written advisory opinions on matters of interpretation of law or technical issues be approved by Managers and distributed to field components only by 51

managerial staff, to ensure that laws are applied uniformly in all regions and with respect to all taxpayers. P-13(ii) - 4) Revise and update Handbook on Taxes in Kosovo to reflect new laws, sub-legal acts, rulings, and procedures by 30 June 2010. P-13(iii) 2) Conduct a writing workshop for Appeals officials so that their Appeals decisions are in a standard format and provide clear explanations of the appeals decisions and the basis for those decisions. Platform 2 P-13(ii) 2) Provide Team Leader of Rulings function training in all aspects of all tax laws, establish specific expectations for learning and development. P-13(ii) 3) Provide refresher training in tax laws to all taxpayer education personnel and train them in application of new laws as they are published P-13 (iii)-5) Modify the organizational structure of headquarters to introduce an interpretation division P-13(iii) 1) Provide refresher training in tax laws to Appeals officials and train them in application of new laws as they are published. Registration PI-14(i) PEFA 2009 scoring Over time, TAK would like to achieve a score Unique TIN to be established controlled by High. This will also increase process wholly generous. (a) poor of A in all areas. Tax authorities with cross check with MTI revenues, and donor and dependent on integrity of MTI data, and other information such as bank taxpayer confidence. MTI business which was not accounts. D registration. subjected to a Feasible Level of Performance (Short-term and sufficiently rigorous long-term): verification process; (b) lack of systematic Achievement of a B in 14(i) is possible within updating of MTI data a year as registration of taxpayers by TAK is Tax Administration, MFE, Customs at the TAK; (c) lack scheduled to begin on 1 July 2009. If that is of compliance successfully implemented, an A should be measures to ensure achievable by July 2011, when TAK will have businesses actually an effective registration system which allows fulfilled their TAK to have control over its taxpayer base. registration obligations; and (d) allocation of business registration numbers for each business activity, with the result that individual taxpayers often had multiple numbers. PI-14(ii) Within current laws and tax relating to TAK procedures there There are delays from courts in executing decisions on collection. Importers Achievement of a B in 14(ii) in a year is possible as TAK implements the revised penalty structure authorized by the amended Law on Tax Administration and Procedures. That can Court system to be made effective with respect to collection of outstanding liabilities as last resort. High. This will also increase revenues, and donor and taxpayer confidence.

52

PI-13-15

are sanctions for not declaring and not paying taxes on time.

avoid payment of custom liabilities by continuing their business through newly registered companies legitimately registered by other persons that are equipped with new business number (from MTI), new VAT certificates (from TAK) and new export-import certificates. Audit function is not actively managed from Tax Admin headquarters and inadequate attention is given to research and risk analysis.

be upgraded to an A as TAK gains further experience in taxpayer registration and application of the penalty structure.

Tax Administration, MFE, Customs

PI-14(iii)

PI-15

Tax Administration compiles an audit plan with the number of tax audits for the year. Customs uses software with risk analysis for physical inspection and post clearance audit.

Some of the staff lack the skills and training to conduct more advanced audits.

Achievement of a B in 14(iii) is possible in a year as TAK will have an audit risk selection system in place. As they develop expertise in using the system and identifying more risky segments of the taxpayer population and understanding the overall taxpayer population, annual audit plans will ensure adequate coverage of the population (within staffing constraints). An A is achievable in this aspect in three years.

Audit selection needs to better reflect risk analysis and role of headquarters and regional offices needs to better reflect audit plans.

High. This will also increase revenues, and donor and taxpayer confidence.

Training of auditors and the improvement of audit methods

Tax Administration, MFE, Customs

ACTION Platforms 1 P-14(i) 1) Finalize and implement taxpayer registration procedures and sub-legal act. P-14 (i) -2) Establish a taxpayer registration function at TAK which would: a) receive registration applications b) conduct validation and risk assessments c) issue taxpayer identification numbers and registration certificates and d) maintain a proper up-to-date taxpayer register. P-14(ii) 1) Finalize Penalty Handbook and sub-legal act (one document). 53

P-14(ii) 2) Train enforced collection officers and taxpayer education inspectors in new penalty regime. P-14(ii) 3) Train tax inspectors in application of penalties during audit so that penalties are imposed, as appropriate, at the time of audit. P-14(iii) 1) Finalize rollout of audit tool and training staff in its use P-14(iii) - 2) Activate the SIGTAS audit module so that management control over audit cases is improved. Platform 2 P-14(iii) 3) Update audit risk system (audit tool) to include individuals and partnerships. P-14(iii) 4) Update audit tool for use in reviewing VAT refund cases P-14 (iii) 5) Utilize audit tool for centralized case selection for 50% of all cases to be audited in the first half of 2010 and 100% of all cases to be audited by the end of 2010. P-14 (iii) - 6) Modify the organizational structure of headquarters to introduce an audit quality review function and audit risk and analysis unit. Tax arrears are No systematic way of Over time, TAK would like to achieve a score Maintain up-to-date register with age profile High. This will also increase PI-15(i) high addressing arrears. of A in all areas. revenues, and donor and of arrears. taxpayer confidence. Ineffective collection Achievement of a C in 15(i) is possible within Need to write off uncollectible debts and D due to Courts a year as the provisions of the amended Law on resort to firm action where debts could be Tax Administration and procedures and collected but unwillingness to pay exhibited. There is no complementary sub-legal act take effect on the comprehensive collection practices, in addition to the activation PI-14 compliance of the Collection Module in SIGTAS. As Implement a comprehensive arrears enforcement strategy collectors become more experienced and better collection strategy and require regional trained the C can become a B in the offices to comply with headquarters subsequent year. As the data in the TAK instructions system becomes more reliable and further improvements are made in the performance of Tax Administration, MFE, Customs collection officers, it is possible that the rating could become an A in the following year.

PI-15(ii)

Payment transfers timely

The A in 15(ii) can be maintained. are

Maintain up-to-date register with age profile of arrears. Need to write off uncollectible debts and resort to firm action where debts could be collected but unwillingness to pay exhibited.

High. This will also increase revenues, and donor and taxpayer confidence.

54

Tax Administration, MFE, Customs PI-17 PI-22 PI-15(iii) Reconciliation is timely The A in 15(iii) can also be maintained. Maintain up-to-date register with age profile of arrears. Need to write off uncollectible debts and resort to firm action where debts could be collected but unwillingness to pay exhibited. Tax Administration, MFE, Customs High. This will also increase revenues, and donor and taxpayer confidence.

P1-22

ACTIONS Platform 1 P-15(i) 1) Finalize and implement enforced collection sub-legal act. P-15(i) 2) Activate the Enforced Collection module in SIGTAS. P-15(i) 3) Train enforced collection officers in new procedures provided in the sub-legal act related to enforced collection. P-15(ii) 1) Continue monitoring of payments made to commercial banks to ensure that revenue is timely transferred to the Central Bank and errors minimized. P-15 (ii) - 2) Explore capability of electronic transfer of funds to facilitate the use of electronic filing of tax declarations. P-15(iii) 1) Continue timely reconciliation of revenues with Treasury as in PI-14. DCF&DM Currently the cash flow forecast is done on Maintain current policies and procedures. PI-16(i) generates monthly basis. The objective of the Treasury projections of is to improve the predictability of availability revenues and of funds and cash flow in order to prevent any If cash shortages are envisaged--as highly expenditures to liquidity crisis. likely in the future--it is important to further forecast cash A develop capacity in cash flow forecasting flow. Treasury and to update the forecasts more regularly issues an than is currently the case. Administrative PI-11-12 Directive to guide BOs in

in transmitting payment data are

Low. Problem is under control, through the use of current policies and procedures.

55

preparing their cash flow plan, which sets a deadline for the submission of cash plans to the Treasury. PI-16(ii) In accordance with cash flow plans submitted, BOs are able to commit expenditure for at least 6 (and possibly even up to 12 months) in advance within appropriation limits. Current position

Treasury Department -MFE

PI-11-12

Maintain current policies but with the tendency to strengthen procedures to ensure that negotiations between MFE and BOs on cash allocations are more closely tied to revenue forecasts if cash or reduced cash balances become an issue. This has not been a problem to date due to cash surpluses but may require greater fine tuning in cash plans going forward.

Low. Problem is under control, through the use of current policies and procedures.

Regular update of forecasts in a period of high revenue uncertainty.

Treasury Department, MFE PI-16(iii) LPFMA provides clear direction as to approval mechanisms for such adjustments of expenditures as well as their prioritisation. Current position Maintain current policies and procedures. Low. Problem is under control, through the use of current policies and procedures.

Treasury Department, MFE

PI-11-12 ACTIONS 56

Platform 1 1. In the Instruction for Start of New Fiscal Year 2010, include some paragraphs, which would put an obligation to budget organisations for more accurate forecast of large expenditures. (Introduce a period for budget organisation to provide notice to Treasury Department prior to executing expenditure). 2. In 2010, better coordination and exchange of reports with budget organisations, both for revenues and expenditures. Strengthen procedures to ensure that agreement on cash plans between MFE and BOs are more tightly aligned to revenue projections Platform 2 1. Focus on making forecasts of cash flow in daily and weekly basis and update regularly. 2. Review percentage of annual cash appropriations that can be committed on a monthly basis to prevent possible over-commitment in periods of extreme revenue volatility or liquidity constraint. Kosovo Debt management software (CSPI-17(i) High. Issue is under control, authorities DRMS) was purchased in December necessary steps have been taken undertook 2008 and by the end of 2009 will for the implementation of debt necessary steps start the training of staff. law after it is passed by the A Treasury Department -MFE to establish parliament. adequate legal frameworks and needed system PI-12 for debt management PI-17(ii) Government created a STA to manage all Government transactions and these are consolidated daily. Current position Maintain current policies and procedures. Low. Problem is under control, through the use of current policies and procedures.

MFE and Cabinet

PI-16 PI-17(iii) A PI-12 ACTION Start on Platform 1 and continue Platform 2 57 Treasury Department, MFE Procedures place in Current position Maintain current policies and procedures. Low. Problem is under control, through the use of current policies and procedures.

The management of cash balance has started to be carried out on daily basis and surplus funds invested in securities and deposits. Medium term objective is to create a regional market to invest in periods such as overnight, etc. 2. The Government has drafted the law on borrowing, which is expected to be passed by the parliament for debt and guarantee management. Treasury Department will implement the software for debt management and train the staff. Kosovo currently No effective linkage between Personnel and payroll system linked There have been many failed attempts at High. Personnel and payroll PI-18(i) has a payroll personnel data base and payroll together and maintained centrally ambitious integrated personnel and payroll controls are one of Kosovos system but no with software that is manageable software systems that have been overly main Public Administration integrated and effective. ambitious in design and scope. Need to guard weaknesses, and must be D personnel against this in the specification. corrected. database. PI-12 PI-18(ii) BOs update the payroll monthly, prior to the execution of the payroll, the changes are made in a timely basis and retroactive adjustments to the payroll are rare. Treasury has regularly held back payment due to overspending related to the lack of consideration of appropriations and allocations in the internal controls for payroll adjustment. No effective linkage between personnel data base and payroll Personnel and payroll system linked together and maintained centrally with software that is manageable and effective. MFE and MPA, and Cabinet There have been many failed attempts at ambitious integrated personnel and payroll software systems that have been overly ambitious in design and scope. Need to guard against this in the specification High. Personnel and payroll controls are one of Kosovos main Public Administration weaknesses, and must be corrected.

1.

PI-12 PI-16

MFE and MPA, and Cabinet

PI-18(iii)

No effective linkage between personnel data base and payroll

Personnel and payroll system linked together and maintained centrally with software that is manageable and effective.

There have been many failed attempts at ambitious integrated personnel and payroll software systems that have been overly ambitious in design and scope. Need to guard against this in the specification

High. Personnel and payroll controls are one of Kosovos main Public Administration weaknesses, and must be corrected.

MFE and MPA, and Cabinet

PI-16

58

PI-20-21 PI-26

While internal controls exist for changes to the payroll, these do not ensure that budget allocations or staff limits are not exceeded. At the end of 2006 the Payments Division initiated a cleanup of the database to ensure that every person has an ID card number within the database. The OAG conducts yearly audits of the payroll system. The last audit was conducted in 2007. No effective linkage between personnel data base and payroll which can form the basis for audit Systemic audits of payroll and personnel systems. There have been many failed attempts at ambitious integrated personnel and payroll software systems that have been overly ambitious in design and scope. Need to guard against this in the specification High. Personnel and payroll controls are one of Kosovos main Public Administration weaknesses, and must be corrected.

PI-18(iv)

MFE and MPA, Cabinet, and OAG

Actions Platform 1 1.Payroll administration and laying the foundations for a professional civil service a. Human resource management in the civil service, including pay and grading reform; and b Upgrading of ICT systems for human resource management (HRMIS and payroll). 2.Improving human resource management in the core civil service 3.Upgrading human resources management information systems. a. Development of a strategic plan for human resource information management and re-organization of HR-related management processes. b .Modifying the current information systems and implementing the upgraded systems. 59

PI-19(i)

PI-1 PI-21 PI-24

c .Linkage of the HR and payroll systems with the Treasury system (Free Balance). While 80% of Though process and Target of A score, but just maintaining the B in contracts procedures good based the short term seems difficult. Improvements awarded on legal requirement, need intensive investments regarding education though open concern about of procurement officers, monitoring and competition, application expressed. auditing. It is also believed that introducing econcern about auction could improve the situation. quality of Amendments to PPL will include a change in data. responsibilities so that it will be clear that the CEO is responsible for the PP-decision. Staying at B score likely, partly due to lacking qualifications of procurement officers making them unable to implement the PPL as it should be used. Political influence on procurements is also believed to be a widespread problem. There has been no improvement over the recent years. Application of less competitive procedures is considered to be used only in specific cases. Procurement Review Board Established and operating Experience application in B on short term. Possible A on long term, but educational and mental changes take time.

The infrastructure is in place training in application and the creation of procurement specialists to implement law.

Medium. Problem is important to address, but existing and planned reforms should be given time to work.

PPRC, MFE, Cabinet, and OAG

PI-19(ii)

The infrastructure is in place training in application and the creation of procurement specialists to implement law.

Medium. Problem is important to address, but existing and planned reforms should be given time to work.

PPRC, MFE, Cabinet, and OAG

PI-19(iii)

Experience Application

in

The infrastructure is in place training in application and the creation of procurement specialists to implement law.

Medium. Problem is important to address, but existing and planned reforms should be given time to work.

PPRC, MFE, Cabinet, and OAG Platforms 1 and 2 The activities to be carried out under this programme include: Monitoring the implementation of Law on Public Procurement and providing for its update to reflect emerging developments. Review of secondary legislation associated with procurement. 60

 Managerial and organisational review of PPRC and PRB. Review of IT capacities in PPRC and PRB, recommendations for improvement and assessing the feasibility for introduction of e-procurement. On-the-job training and coaching for all involved in the procurement process. Increasing the awareness for public procurement reforms in government, business and civil society Comprehensive development of the public procurement training program Development of certification system for public procurement officers. The activities are foreseen to be undertaken during 2009 and 2010. A detailed plan of action with expected results has been developed by PPRC, PPA, PPR, European Commission Liaison Office to Kosovo and Kosovo Institute for Public Administration. See the INCEPTION REPORT Support to Public Procurement Reform Service Contract No 2008/169-890 Project period: January 19, 2009 January 18, 2011 for a comprehensive presentation of the actions to be undertaken. Commitment PI-20(i) Existing outstanding To underpin the effectiveness of internal System in place. Medium. Problem is important to address, but existing control for obligations at the end financial control system towards making public Further training in and planned reforms should be given time to work. B expenditures of the year, although finances more relevant (in terms of controls application needed. required for managing the risks), meaningful for are in place in small as a percentage financial officials and comprehensive in the PI-4 both indicates not fully field of internal control of public finances. procedural following procedures PI-16 MFE, Cabinet, and and technical and the multi-year OAG aspects. nature of capital projects. PI-20(ii) Process for controlling public finances is comprehensiv e and meaningful. Control is through the various assigned responsibilitie s throughout different phases within BOs themselves with a final control provided by Treasury. There is no written regulation for simplified or emergent procedures regarding the processing of expenditures and financial transactions. System in place. Further training in application needed. Medium. Problem is important to address, but existing and planned reforms should be given time to work.

PI-4 PI-16

MFE, Cabinet, and OAG

61

PI-20(iii) B PI-4 PI-16

Compliance with financial regulation is very high and there were no exception in these regulations in regard to specific cases.

The financial rules not being followed for the recording of invoices in KFMIS when they are received.

System in place. Further training in application needed.

Medium. Problem is important to address, but existing and planned reforms should be given time to work.

MFE,

ACTIONS Platform 1 1. Promotion of internal control in compliance with internationally recognised standards and development of information exchange network between stakeholders, and ensuring continuous professional development of civil servants with regards to MKF.1.1Establishment of Central Harmonisation Unit for Financial Management and Control (CHU/FMC) within Treasury, MEF. 1.1 Preparation of Rules for the Financial Management Control in accordance with international public accounting standards, public procurement law and all other relevant laws, and as well as in accordance with the principles of internal control of public finances by the European Commission. 1.2 These rules will present in detail the required procedures that must be respected by all users of the Kosovo Budget. 1.3 CHU for FMC (Central Harmonization Unit for Financial Management Control) will develop the network for exchange of information between parties always with the tendency of creating a continuous professional collaboration on Public Financial Management and Control. 2.Increase of accountability level in financial management by delegation of tasks and accountability 2.1Administrative Instruction (already issued by the Treasury) no. 02/2009 on Delegation of Expenditure Management to the Budget Organisations. 2.2Providing training to BO officers for KFMIS Expenditure Processing function and certification based on their achievements.2.3.Supplying BOs with hardware to use the KFMIS and maintenance by Central Treasury. 3. As noted in PI-4, the process of delegation of expenditures will include the instruction to record the invoice receipt date in the system, in order to have a more accurate payment processing time. Strengthen procedures to ensure that all commitments entered into KFMIS as they are incurred 4. BOs will be obliged to generate more accurate forecasting for large amounts of expenditures (PI-16). 4.1 Setting the timeframe in Administrative Instruction for 2010 Fiscal Year, which obligates the OBs to inform the Treasure for any execution of any contract with suppliers. 5. To increase the control over the execution of expenditures for travel abroad. 5.1 Supplying government leaders with Credit Cards for spending abroad. 5.2 Issuing an Administrative Instruction setting the procedures on the use of Credit Cards by Credit Card Holders and other responsible persons in BO for this program. 5.3 Signing a compliance form by the Credit Card Holder and BO, which specifies that CC holder should reimburse the BO for any unauthorized use of credit card, and if not, the OB shall reduce the same amount for the salary. . Platform 2: Payroll is moved to the Treasury. All mass-payments transmitted using electronic transfer via Treasury and Inter-bank Clearing System (ICS) including social welfare and payroll. PI-21(i) In 2008 IAUs Some BOs have only Increase of quality level and effectiveness of IA Legal basis in place and being implemented Medium. Problem is important have improvements in HR and response through to address, but preparatory time 62

PI-20 PI-26

compiled strategic and annual plans for year 2009 which were approved by senior management. Audits are performed based on IA international standards and professional practices.

one Internal Auditor

function within IAU at Kosovo level -2 IA within each IAU - Law application - Implementation of IA manual (ISPPIA, code of ethics) long term - Issuance of IAL - Issuing IA implementing IAL - Management understanding of the audit role meetings, contacts, trainings (short term) -Management support for audit (independence and work conditions (payment and other technical conditions) (short term) Operationalisation of effective internal audit units in public entities (long term) - Audit Committees (short term) - Certification and licensing of internal auditors (long term) Post-certification/-licensing continuous professional education (long term) -

training and qualifications. Importance of adopting the proposed Internal Audit law, as well as the importance of underlining managerial understanding of the role of, and support for Internal Audit.

for reforms will require time to work.

The need for the FMC environment to develop concurrently with the development of Internal Audit, to eliminate a risk that audit would not function according to international standards. Attention is being paid to auditor training. CHUIA, MFE, Cabinet

PI-21(ii)

PI-20 PI-26 PI-21(iii)

Internal Audit Reports compiled by the auditor are submitted regularly to senior management in line with the Law. The number of audits held -further increase of recommendation

Legal basis in place and being implemented improvements in HR and response through training and qualifications.

Medium. Problem is important to address, but preparatory time for reforms will require time to work.

CHUIA, MFE, Cabinet

Legal basis in place and being implemented improvements in HR and response through

Medium. Problem is important to address, but preparatory time 63

PI-20 PI-26

so far is 292 and the number of recommendati ons made is 1,937, of which 53.4% have been implemented, with a further 24.8% in the process of being implemented. With respect to the 21.9% recommendati ons that have yet to be implemented, some are in the process of being implemented and others are planned to take place in 2009 in line with the Action Plans.

implementation rate (above 55%) (short term)

training and qualifications. CHUIA, MFE, Cabinet

for reforms will require time to work.

Reform Actions To achieve this goal we will undertake the following actions: 1. Application of Law to be full. 2. Improved implementation of IA manual (ISPPIA, code of ethics) 3. Full management understanding of the audit role meetings, contacts, trainings (short term) and Management support for audit (independence and work conditions, payment and other technical conditions) 64

4. 5.

Operationalization of effective internal audit units in public entities Certification and licensing of internal auditors (long term) and Post-certification/-licensing and continuous professional education (long term)

Platform 1 Increase number and quality of actions undertaken by BO Senior Management on implementation of Internal Audit recommendations Continuous contact and cooperation with sector management and other relevant parties in order to further operationalize IAUs. Certification of IA from an internationally licensed organisation (within two years) Capacity building, recruitment of more than 60 IAs (within two years) Training for senior management to increase their awareness on the importance of Public Finance Management and Internal Control, including IAs role. To full meet ISPPIA standards Implementation of annual plan based on IA strategic plan Comprehensive establishment of IA Committees - increasing auditors independence and measures for implementation of audit recommendations from management Drafting AI for implementation of IA Law, by CHU. Increase further the rate implementation of recommendations (above 55%) Platform 2 Establishment of IAUs in BOs where they are not present Continuous training for IA to increase their knowledge, skills and competencies (continuous professional development Post-certification/-licensing ) Coverage of more than 80% BOs with regards to IA system issues.

SECTION C. BUDGET CYCLE C(iii): ACCOUNTING, RECORDING, AND REPORTING

PI-22(i) Treasury submits all accounts reports electronically on daily basis to the revenue collecting budget organizations (both, central and local level). These bank account reports allow BOs to record daily collected revenues into KFMIS. To increase the speed and efficiency of accounts reconciliation by performing reconciliation on daily basis. Existing system in place and can be improved with training and HR development Low. Problem is under control, through the use of current policies and procedures.

Treasury Department, MFE

PI-15 PI-17

65

PI -22(ii)

PI-15 PI-17

Treasury does not maintain any suspense account. All the payments and outflows from Kosovo Consolidated Budget are made from the STA.

Although not numerous, there are some problems in relation to daily basis STA reconciliation. In some instances there is a lack of data to identify certain amounts such as the return of salaries, social payments, pensions etc.

Existing system applied fully

Existing system in place and can be improved with training and HR development Treasury Department, MFE

Low. Problem is mostly under control, through the use of current policies and procedures.

ACTION Platform 1 The Working Group for automatic reconciliation of accounts has been authorised. The implementation of automatic accounts reconciliation will start with the introduction of new KFMIS version, which will increase the reconciliation speed. No data on System not applied Municipalities are responsible for provision of The KFMIS has the capacity to produce data PI-23 primary services, their financing, budgeting and but there are issues with bulk supplies. expenditure reporting. A joint World Bank, MEST and MEF Need to supplement data from KFMIS with project has started designed to improve the PETS type surveys on information not D No Public implementation of services locally. During covered by KFMIS. Expenditure 2009 this project has focused on the education Tracking sector in three municipalities with the allocation Surveys of the resources to spending units at lower level PI-8 Department of Municipal Budgets, MFE - in schools - where they will also keep records and Cabinet PI-10 on the distribution of the budget for the spending unit and these reports will be provided systematically to the spending units in SIMFK specific programs, where they will be published in accordance with LPFMA. Primary and secondary education is under the jurisdiction of local governments. Since the Accounting Plan and the Treasury Procedures are designed in such a manner to allow the registration and monitoring of budget execution to the lowest level of spending and implementation of the WB supported Education 66

Project, the level of implementation performance is considered achievable. ACTION In the future, it is important to advance the processes of budget planning and registration, in order to fully exploit the facilitations created by the Treasury system. The World Bank with its pilot-project has started to allocate the budget according to the individual schools in three municipalities. In addition, this project will be advanced with ten other municipalities next year pending full implementation and there also some ideas to start with the primary health. The Investigation Survey of Public Expenditures is also being implemented which will provide information that provide a check and assurance. Education Pilot-Project Informing all the finance officials of the Education Program and organizing training for these officials on best possible management of budget at the School level. Reports are by PI-24(i) Low. Problem is under control, More quality reports, as well as more relevant and structure of the through the use of current useful for users. A Treasury Department, MFE budget and policies and procedures. present fund PI-1-3, balance PI-10 commitment for each economic PI-12 category and BO. All reports PI-16-17 are presented in compliance with IPSAS. PI-24(ii) A PI-1-3 PI-10 PI-12 PI-16-17 PI-24(iii) The reports reliable present fiscal are and all Existing system applied Ensure existing Human Resource capability, processes and systems remain in place Treasury Department, MFE 67 Low. Problem is under control, through the use of current policies and procedures. Monthly and quarterly reports are submitted on time. Existing system applied Ensure existing Human Resource capability, processes and systems remain in place Treasury Department, MFE Low. Problem is under control, through the use of current policies and procedures.

financial data.

PI-1-3 PI-10 PI-12 PI-16-17 ACTION 1. The templates of existing monthly, quarterly and annual reports and the explanations will be reviewed. The standardisation of terminology used in reports in order make them more understandable for the users. 2. Treasury Department will start the preparation of management reports by doing budget comparison analysis with previous years and between different categories. Such reports will be produced daily, weekly, and biweekly and as requested. 3. KFMIS Reports Module will be implemented in order to upgrade financial reporting, which allows generation of specific reports based on requests from specific users. A financial PI-25(i) Financial statements of budget organisations to be Ensure existing Human Resource capability, Low. Problem is under control, report on the through the use of current submitted within the deadline set from central processes and systems remain in place KCB is produced policies and procedures. Treasury for the year A ending 31 Treasury Department, MFE December covering (i) all BOs and (ii) PI-24 KTA. The report includes statement of cash receipts and payments, a consolidated statement of cash assets and fund balances, statements of funds with CBAK, funds with commercial 68

banks, privatisation fund, cash in transit, cash in hand (cash box) and designated donor fund. It also includes a statement of non financial assets and an outstanding invoices report by BOs. PI-25(ii) The MFE Minister prepares and submits to the Government, for approval and submission to the Assembly, a final budget reconciliation report on the budget for the previous fiscal year and the two prior fiscal years. The report for 2007 was signed and submitted on 31 March 2008 The financial statements of 2007 have been Existing system in place Ensure existing Human Resource capability, processes and systems remain in place Low. Problem is under control, through the use of current policies and procedures.

Treasury Department, MFE

P1-24

PI-25(iii)

Existing system in place

Ensure existing Human Resource capability, processes and systems remain in place

Low. Problem is under control, through the use of current 69

Pi-24

prepared in accordance with the LPFMA and Cash Basis IPSAS Financial Reporting Under the Cash Basis of Accounting. The statements indicate that these accounting policies have been applied consistently throughout the period.

policies and procedures. Treasury Department, MFE

ACTION by 31.01.2010 1. End of year closure procedures instruction will be review to include some provision to ensure that budget organisations submit their financial statements within the deadlines. Training or information meetings will be organised as needed, with budget organisations regarding financial statements. 2. Treasury continues to submit monthly, quarterly and annual reports as foreseen in LPFMA

SECTION C. BUDGET CYCLE C(iv): EXTERNAL SCRUTINY AND AUDIT

PI-26(i) 2007 audit activities of OAG were focused in 21 BOs, which represent 71% of expenditures and 86% of Revenues. A specific audit report for each BO is published on the website in which the detailed findings Coverage increased to be The Law on PFMA with respect to External Audit should be reviewed and necessary amendments should be made which ensure that the accountability chain will be closed by regulating both what the Assembly should do during the autumn and the requirement on the Government to take actions on what is decided by the Assembly and report back on this. Short term: Reports in time to fit into the budget cycle and the accountability cycle; reports of sufficient quality and more reader friendly presented; better relevance for decision makers; a more materiality and risk 70 Ensure existing Human Resource capability, processes and systems remain in place and planned additional staff are recruited. Medium. Problem is important to address, but preparatory time for reforms will require time to work.

PI-21 PI-27

OAG, MFE, Cabinet and Assembly of Republic of Kosovo

are presented.

oriented approach based on the total KCB budget. To clarify and ensure the understanding of the role of an Supreme Audit Institution in a democratic society; to ensure resources in accordance with the agreement between Kosovo government and EU making the OAG able to tackle the national and international expectations will be crucial Also for PI-28 These measures will make the reports more interesting and relevant for MPs. Better on-going dialogue and clearer accountability arrangements will clarify the respective roles in the accountability process. A coordinated and consistent approach within the projects assisting the development of the assemblys working procedures will facilitate the understanding of roles and responsibilities. To incorporate the support functions in the development process is one of several needed steps; to ensure resources for the OAG Long term: To secure a sustainable and national ownership of the internationally recognized auditing standards and good European practices; to assure the functioning of a new audit cycle and efficiency in the core and support processes, to secure a better audit coverage; to build up a firm accountability praxis between the Assembly and the Auditor General, to assure the independence of the Auditor General in practice, to secure resources over time Also for PI-28 To secure support capacities for MPs; to implement in practice the newly introduced regime gearing the budget not solely through input and to follow up 71

results variables. Secure a good professional base through strengthening university curriculum and further training of external and internal auditors in general. Secure the professional development by supporting that the audit profession as such must be the driving force for its development; to assure the independence of the Auditor General in practice, to secure resources over time PI-26(ii) Audit Report on Financial Statements of the KCB for the Year ended 31 December 2007 was published in November 2008 and is addressed to the Minister of MFE and the Assembly. A formal response by the MFE is included in the OAG report with a follow up comment by the OAG. This is also the case for individual BO audit reports. There is some evidence of follow up. OAG reports that in 2006, the Timeliness to be improved OAG, MFE, Cabinet and Assembly of Republic of Kosovo Medium. Problem is important to address, but preparatory time for reforms will require time to work.

PI-21 PI-27 PI-26(iii)

Follow up OAG, MFE, Cabinet and Assembly of Republic of Kosovo

Medium. Problem is important to address, but preparatory time for reforms will require time to work.

PI-21 PI-27

72

Government underwent some changes, (which it listed) based on the implementation of previous audit recommendation s. However OAG made some 971 recommendation s in 31 BOs in 2006 and 2007. 606 are still waiting implementation by the end of 2008. Platform 1 (audit season 2009/10) 4. Corporate Development Strategy and fundamental standards are adopted, owned and implemented by staff 5. Ensure timeliness of reports in the context of a revised audit cycle starting with interim audits during the budget year making follow up of earlier recommendations and examination of financial management and internal control systems before the Annual Financial statements are finalized. 6. Ensure that the Twinning arrangement started in September 2009 d. builds on experiences gained so far and the approaches developed and outlined in the Corporate Development Strategy and the fundamental standards. e. focuses on sustainable interventions in form of coaching and mentoring to facilitate ownership of the overall strategies and standards; f. will be flexible and linked to operational needs and eventual changes in these needs Platform 2 (audit season 2010/11) 2. Introduce amendments to the Law on the OAG to guarantee the financial independence of the OAG as well as ensuring consistency in relation to other laws within the PFM field. 3. On-going strengthening of coverage, quality and relevance (more focus on performance indicators and performance audit) The Committee Insufficient technical The objective is to ensure that MTEF and the In addition to action related to PI-11 and 12, High. Until the Assembly can PI-27(i) focuses its capacity to carry out annual budget are wholly consistent where the need to train Assembly Budget and Finance fulfil its PFM responsibilities attention largely its work annual budget and the first year of the budget is Committee members and provide sufficient fully, Kosovos overall PFM on revenue and the same in all respects (data, policies, strategies and adequate back up. This former can be system cannot be complete. C expenditure etc.) achieved by focused workshops and study information in tours, the later by creating a support unit The Assembly has the wherewithal to be able to 73

PI-10-12

the Annual Budget Law.

review the budget and MTEF

with appropriate skills. Assembly of Republic of Kosovo, MFE, Cabinet

PI-27(ii)

Procedures for the deliberations on the budget by the Budget and Finance Committee are well established.

Insufficient technical capacity to carry out its work

In addition to action related to PI-11 and 12, need to train Assembly Budget and Finance Committee members and provide sufficient and adequate back up. This former can be achieved by focused workshops and study tours, the latter by creating a support unit with appropriate skills. Assembly of Republic of Kosovo, MFE, Cabinet

High. Until the Assembly can fulfil its PFM responsibilities fully, Kosovos overall PFM system cannot be complete.

PI-10-12

PI-27(iii)

PI-10-12

The budget should be submitted to the Assembly prior to October 31. The 2008 budget was submitted to the Assembly on November 11, 2007 and the 2009 budget was submitted on November 3, 2008. Clear rules exist for in-year budget amendments are usually respected. Nonetheless, in

Poor timing

Budget submitted on time

Emphasize the need to increase timeliness of decisions regarding the MTEF, ceilings, etc. and to adhere to concepts of budget discipline.

High. Until the Government can act more promptly, the Assembly cannot fulfil its PFM responsibilities fully, and thus Kosovos overall PFM system cannot be complete.

MFE, Cabinet, Assembly of Republic of Kosovo

PI-27(iv)

Budget preparation

The objective is to ensure that MTEF and the annual budget are wholly consistent where the annual budget and the first year of the budget is the same in all respects (data, policies, strategies etc.) Sector strategies that reflect ministerial policies are produced and resources are allocated to

Strengthen the capacity for project planning and management in order to reduce the frequency and need for budget amendments and transfers. Assembly of Republic of Kosovo, MFE, Cabinet

High. Until the Government can act more promptly, the Assembly cannot fulfil its PFM responsibilities fully, and thus Kosovos overall PFM system cannot be complete.

74

PI-10-12

both 2007 and 2008 budget cycles, extensive reallocations occurred (outside of the planned reallocations as provided for by the Mid-Year Review process), which has harmed the concept of budget discipline in the BO and the Assembly. The Assembly and the Budget and Finance Committee review the OAGs reports within 2 months of receiving them, but these reports are not scrutinized very closely. In-depth hearings on key findings take place occasionally, and cover only a few audited entities. Reports are not scrutinized very closely because of a lack of capacity.

implement them which reflect relative priorities in line with established ceilings in the MTEF and annual budget.

PI-28(i)

The Assembly has the wherewithal to be able to review audit reports and make recommendations and follow up on them

A PI-26-27

Need to train Assembly Budget and Finance Committee members and provide sufficient and adequate back up. This former can be achieved by focused workshops and study tours. Assembly of Republic of Kosovo, Cabinet, BOs

High. Until the Assembly can fulfil its PFM responsibilities fully, Kosovos overall PFM system cannot be complete, but reforms will take time to work.

PI-28(ii)

Reports are not scrutinized very closely because of a lack of capacity.

The Assembly has the wherewithal to be able to review audit reports and make recommendations and follow up on them

Need to train Assembly Budget and Finance Committee members and provide sufficient and adequate back up. This former can be achieved by focused workshops and study tours Assembly of Republic of Kosovo

High. Until the Assembly can fulfil its PFM responsibilities fully, Kosovos overall PFM system cannot be complete, but reforms will take time to work.

75

PI-26-27 PI-28(iii) C Actions are recommended from reports regarding critical issues which are of the most interest to the Committee, but they are rarely acted upon by the BO and there is little or no follow-up. Reports are not scrutinized very closely because of a lack of capacity. The Assembly has the wherewithal to be able to review audit reports and make recommendations and follow up on them Need to train Assembly Budget and Finance Committee members and provide sufficient and adequate back up. This former can be achieved by focused workshops and study tours High. Until the Assembly can fulfil its PFM responsibilities fully, Kosovos overall PFM system cannot be complete, but reforms will take time to work.

Assembly of Republic of Kosovo

PI-26-27

The goal is to improve the analytical capacity of the Budget and Finance Committee of the Assembly, to ensure adequate consideration of the fiscal impact of new laws and to enhance accountability in public financial management. The overall strategy for the Assembly and an Action Plan are outlined in the Strategic Action Plan of the Assembly of the Republic of Kosovo, November 2008. The Parliamentary Committee for Oversight of Public Finance has been established as a new committee which will have the mandate for the oversight of expenditure of public money by all public institutions which are financed from the Kosovo budget. This Committee is in the process of being made functional This Committee will deal with the report on the budget execution from the Government such as KCB, CHU/FMC, the Annual Procurement report etc) and the Annual Audit Report from the AG. It will also handle budget and accountability issues (appointing auditors and take standpoints on the budget) related to the AG and the OAG. SECTION D. DONOR PRACTICES
D-1(i) Donors did not provide the budget support committed at the 2008 Donors Conference There is insufficient human resource capacity in the donor coordination process for undertaking a complex level of coordination and the many functions that has to be carried out Based on main conclusions from the High Level Forum, held on 31st of March 2009 in Prishtina, the decision was taken to start with the donor coordination in the sectoral level. The Kosovo Government (line ministries and government agencies) and the Development Partners agreed to closely work with ACDEI and cooperate with them in all activities related to donor coordination and involve the ACDEI in all initiatives undertaken in all sectors to ensure better streamlining and flow communication. The main . The coordination, implementation and monitoring of the foreign assistance in the sectoral level should be done by the respective sectors, whereas ACDEI is responsible for overall donor coordination ACDEI, PM, and Cabinet High. Donor relations and the provision of Budget Support will be essential to Kosovos long-term development

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by the ACDEI.

responsibilities for these sectoral working groups have been prepared by ACDEI and distributed to all sectors. It was agreed to start with the sectoral coordination in five sectors: health, education, water, decentralization and public administration reform. The donors have been organised within these five sectors, have prepared the ToRs and appointed the donor leaders, as following: in public administration reform as donor leader are DFID and EC jointly, decentralization is USAID, health is Luxembourg, education is SIDA and in the waters sector is Switzerland. In the health sector, the first coordination meeting has already taken place. The education and water sectors are being prepared for the first meeting at the end of October, while in the PAR and decentralization sectors the donors are still organizing their groups. An administrative instruction will be signed by the Prime Minister before the end of October 2009 for strengthening the line ministries capacities, by establishing offices for Coordination of Development and European Integration. These offices will be directly coordinating with ACDEI. The offices will be made operational by the end of December. Beginning November 2009, the ACDEI will start with the implementation of the Aid Management Platform, to strengthen the Governments management and reporting on donor assistance and to improve coordination among donors. AMP seeks to further increase donor confidence in government systems, and support governmentled coordination. The program will increase transparency and accountability by introducing a web-based repository of aid data and aid funded A plan exists to increase human resources and enhance the level of coordination with donors regarding disbursement estimates of donor budget support. ACDEI, PM and Cabinet High. Donor relations and the provision of Budget Support will be essential to Kosovos long-term development

D-1(ii)

The conditions for score C (or higher) are not met

There is insufficient human resource capacity in the donor coordination process for undertaking a complex level of coordination. Donor reports on actual expenditures in RIMS database are out of date.

D-2(i)

Not all major donors provide budget estimates for disbursing project aid at lead for the governments coming FY and at least 3 months prior to the

Donors must be made aware of the difficulties caused by their lack of timely aid estimates and disbursements, and they must act accordingly. This in turn may be a result of over-pledging as well as a limited absorptive capacity within Government.

High. Donor relations and the provision of Budget Support will be essential to Kosovos long

After the hosting process, the Development 77

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programs for development partners and government ministries. The main goals of AMP are: to strengthen the Agencys ability to serve as a one-stop-shop for basic information on donorfunded activities, including enabling the Agency to produce regular, accurate reports on donor activities, strengthen coordination - across government entities; between the government and donors; and among the donor community (e.g. project-level coordination; priority setting), strengthen the transparency of information on donor-funded activities information, provide a tool that facilitates the planning process for major stakeholders, improve strategic planning by enabling a clearer picture of the relationships between projects and strategies (e.g. MTEF, EPAP) as well as reduce transaction costs Donor reports on actual expenditures in RIMS database are out of date. Based on donor reports, a general overview (in Excel format) on donor's activities has been prepared. This overview contains information on the amount disbursed during 2008, on-going activities during 2009 as well as planned activities for 2010 and 2011. The narrative version was not prepared so far, as complete data has not been received as the World Bank has not report any data and USAID did not report actual disbursements for 2008. RIMS currently contains up to date data over the activities of donors regarding the expenditures of the year 2008, on-going projects in the year 2009, and commitments for years 2010 and 2011. When the implementation of the system starts, all the data on donor activities in the RIMS database, will be transferred into the new platform while the RIMS database will cease to be used. .

Gateway Foundation company will start with intensive training of donors, since donors will report their activities themselves. The Administration and the management of this system will be done by ACDEI. ACDEI, PM and Cabinet

D-2(ii)

Donors do not provide quarterly reports within 2 months of end of quarter on the disbursement of at least 50% of externallyfinanced project estimates in the budget. Information does not provide a breakdown consistent with the governments budget classification.

Donors must be made aware of the difficulties caused by their lack of timely aid estimates and disbursements, and they must act accordingly.

High. Donor relations and the provision of Budget Support will be essential to Kosovos long

ACDEI, PM, and Cabinet

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D-3

Less than 50% of aid funds to central government are managed through national procedures.

Donor grants are received according to procedures which are not consistent with standard government procedures.

Donors must be made aware of the difficulties caused by their lack of timely aid estimates and disbursements, and they must act accordingly. ACDEI, PM, and Cabinet

High. Donor relations and the provision of Budget Support will be essential to Kosovos long-term development

Actions - Experts forn Development Gateway Foundation during September have finished the assesment of needs that this platform should address for an efficient coordination. - During October implementation of this system will commence, after hosting the system will be tested to be started afterwards with trainings fot its use and administration. - Once the implementation starts, an agreemnt will be signed relating to reports an dtheir timing.. - In the first year, the report will be more general, giving sufficient details over activites of donors, the link between the foreign assistence with MTEF and EPAP, which will also enable planning for years to come. - After the first year, the system will be adjusted to meet requirements of the Government to offer information that will be needed for planning and adjustment in linewith the developement priorities.

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