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Achievements and Challenges in the Management of the Public Finances

in Kosovo(Miami, 21-25 May, 2007)

Behxhet Brajshori

Deputy Minister of the Ministry of Economy and Finance

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Agenda Kosovo in context Development of financial institutions Economic Indicators Budget Process Treasury Responsibilities KFMIS Overview Procurement in Kosovo Internal Audit PEFA Indicators Lessons learned Opportunities and Challenges

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Facts:

Capital: Prishtina

Surface are: 10,877 km2

Population: 2,2 milion

Languages: Albanian, Serbian

and English

Currency: Euro

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Background Until 1989, Kosovo enjoyed a high degree of autonomy within

the former Yugoslavia, when Serbia altered the status of the region, removing its autonomy and bringing it under the direct control of Belgrade, the Serbian capital.

During 1989 -1998 period former Serbian regime applied discriminating measures in all the areas in Kosovo, including the economy, by implementing the so called “Economy integration” of the public enterprises in Kosovo with those in Serbia

The Kosovar Albanians strenuously opposed the move. Despite these measures the situation in Kosovo escalated

again with the start of the war in the beginning of the 1998

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Key Events NATO supported and

reinforced the Contact Group efforts by agreeing on 30 January to the use of air strikes if required, and by issuing a warning to both sides in the conflict.

Serbia refused to comply, and on 23 March the order was given to commence air strikes

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Key Events On 10 June the UN Security Council passed the resolution (

UNSCR 1244), installing United Nation Mission in Kosovo The NATO troops entered Kosovo on 12 June, 1999. By 19 June, the Serb troops withdrawal from Kosovo was

complete.

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Key Events Following the elections in November 2001 the Provisional

Institutions of Self-Government were established which include the President, the Assembly, and the Government of Kosovo.

Kosovo has gone through four different elections: - Two for the local government and - Two for the National Parliament

Currently Kosovo has full consolidation of the institutions in both levels local and national

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Kosovo infrastructure and economy was damaged heavily during the war, and there was a need for development of a fiscal management system

UNMIK established Central Fiscal Authority (CFA) to manage public finances (UNMIK/REG/1999/16)

CFA consisted of four divisions (Tax, Customs, Budget and Treasury) and the Internal Audit function.

Development of the Financial Institutions

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Ministry of Economy and Finance Policies

Ministry of Economy and Finance is accountable for coordination and financial management of Kosovo Budget. Main activities of Ministry include:

Development and implementation of fiscal policies and administration systems

Economical analyses and macroeconomic forecasts; Budget planning; Development and implementation of centralized Tax

administration; Development and implementation of a centralized Treasury and

Accounting system.

       

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Economic Indicators

Some macro indicators, euro milion

Description 2004 2005 2006 2007 2008 2009 2010GDP per capita (real terms) 1,280 1,315 1,330 1,333 1,341 1,362 1,395 GDP grwoth 2.1 0.3% 3.1% 2.8% 2.1% 4.5% 3.4%Inflation (CPI) -1.4 -1.4 0.7% -0.2% -0.3% 0.5% 0.3%Unemployment (registered unemployeed 35- 45%)Currency Euro Euro Euro Euro Euro EuroPrimary balance/GDP -6% -3.1% 3.5% 3.8% -1.4% -0.5% 0.0%

Burimi i të dhënave: FMN, Banka Botërore, Ministria e Punës dhe Mirëqenies Sociale

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Selected macro indicators in milion euros

2004 2005 2006 2007 2008 2009 2010

Total investment 572 583 683 730 814 870 936 Private 320 397 508 530 563 613 659 Donor 83 35 41 40 38 38 38 Government 169 151 133 160 213 219 238

Consumption 2,630 2,676 2,617 2,660 2,693 2,730 2,755 Private 1,921 1,998 1,940 1,986 2,081 2,137 2,172 Government 376 338 347 385 410 403 405

wages and salaries 184 195 204 219 228 220 217 goods and services 192 143 143 166 182 183 188

Donor wages 333 340 331 289 202 190 178 Exports 358 320 349 375 389 428 472

Cross-border exports 213 204 175 218 265 308 356 Donor exports (consumption) 145 116 174 157 124 120 116

Imports 1,277 1,340 1,437 1,529 1,630 1,690 1,723

GDP 2,283 2,239 2,212 2,236 2,266 2,338 2,439

2004&2005 IMF figures2006&2010 MEF figures

Economic Indicators

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Budget Process

Government approves the Medium Term Expenditure Framework (MTEF), based on government priorities of different sectors

Government also approves different projects for capital investments

Kosovo Consolidated Budget is based on three year MTEF macroeconomic projection

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Budget ProcessMay – Budget Organization submit their initial

requests for continuing projects and for the new programs

June – Submission of the budgets from the budget organizations

August – Budget hearings September – Government approves draft budgetOctober – 2008 Budget Submission to the

Parliament December – Parliament approves the budget

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Publications

Financial Reports (monthly, quarterly, bi-annually, annual)

Budget Planning Property Tax Policy Monthly bulletins on economic and business activity in

the western Balcans Miscellaneous Information

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Treasury Main Treasury responsibilities are envisaged within the Law on LPFMA. The responsibilities include:

Management of the Kosovo Consolidated Fund, Management of Bank Accounts, Management of Funds Expenditure, Establishment of Processes for Collection of Public

Funds, Set up and Maintenance of Accounting Records, Preparation of Financial Accounts, and Maintenance of Financial Rules

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Revenues Division Payments Division (five regional offices) Reporting and Accounting Division Fund allocation and Cash and Debt Management Financial Management and Control Division Administration and Information Technology Division Grants division

Treasury OrganizationTreasury Organization

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Project Goals Treasury overall vision is to achieve best practice in

management of public funds by the Government of Kosovo.

Financial management system to help control government financial processes

Provide with means to record the entire budget cycle from planning, to execution, to accounting for the actuals, revenues and forecasting for future years

Provide with tools to account and report on the macroeconomic indicators

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Project Goals Transparency and accountability Must comply with multiple accounting and

reporting requirements – World Bank Treasury Reference Module, International Monetary Fund Government Finance Statistics, International Public Sector Accounting Standards, best-practices, donors, creditors, administrative rules, and regulations

Support local capacity building and sustainability

Multi-language capability (Albanian, Serbian and English)

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Early days Late 1999 meeting with WB and IMF about

challenges in transition governments.

Early 2000 – FreeBalance arrives in Kosovo

26 days later FreeBalance Foundation installed – original configuration – six months of data captured - reports to CFA and donors

No custom code – configuration regularly modified

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Treasury System Characteristics

KFMIS is designed specifically for government

Rapid deployment

Flexible configuration

Processes not over engineered (intuitive – easy to learn)

Scaleable

Expandable solution (core system can be extended via modules)

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KFMIS OverviewKosovo Financial Management Information

System (KFMIS) implemented to record, manage and report on all budget, commitment, expenditure and treasury management functions

Multi-language system (English, Albanian, and Serbian) supports budget process and timely processing of government payroll for over 70,000 civil servants

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KFMIS OverviewElectronic processing of transactions Central database with decentralized process

implementation where decentralized institutions (ministries, agencies, municipalities etc) are provide with direct connectivity access for real time transaction processing and reporting

Integrated system forms enable standardization of forms used by all budget spending units thus preventing corruption and data entry mistakes

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Treasury Development CBAK interface – 95% of all payments transmitted

electronically to central bank

15000+ Vendors entered in and stored in system linked to unique bank accounts

Upgrade of key software and hardware –this commenced large rollout of new functions in 2005

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Financial Internal Control within KFMIS

Financial Legal Framework underpinned by KFMIS by integrating key processes and decisions into KFMIS (commitments, approving and spending public monies)

Enhanced internal controls within budget spending units by creating separate roles (functional classes) and groups of users (user groups) with access to the system in accordance with budget spending unit’s position hierarchy

Treasury determines user level of access (reporting, commitment, revenue recording)

High quality certification program for the budget spending units and their staff, to ensure the correctness of data and reduce errors during transaction processing

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KFMIS ResultsKFMIS is a critical component of Kosovo’s

democratic development and economic liberalization program.

Kosovo now has a comprehensive, uniform financial management system.

All budget organizations and all major revenue agencies are now connected to the KFMIS.

Enables comparison of accounting data at all levels of government and between all institutions in real time.

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Procurement On June 9th, 2004 the Assembly approved the

Law on Public Procurement, establishing two central institutions for public procurement:– Public Procurement Regulatory Body – Public Procurement Agency

About 110 contractual authorities are established in the municipalities, ministries and public enterprises

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Public Procurement Regulatory Body   Responsible for the development of the entire public

procurement system in Kosovo Ensures that the public funds are spent in a

transparent, effective and rational manner, in order to encourage competition and respect the equality of bidders in the public procurement process

Has the authority to ensure compliance with the Law on Public Procurement in Kosovo

The Board of Public Procurement Regulatory Body consists of five members, nominated by the government and selected from the Assembly of Kosovo

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Public Procurement Agency Public Procurement Agency is formed by the

Government of Kosovo Director is proposed by the government and nominated

by the Assembly of Kosovo. Acts on behalf of contractual authorities for complex

procurements (based on the requests of the contractual authority)

Manages and leads long term contracts and major procurements used by two or more contractual authorities (only if authorized by the government)

Reviews and approves procedures negotiated without public contract

Reviews and approves Item 30.3 of the Public Procurement Law when there are less than three bidders

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Internal Audit

The Internal Audit function is established by the Law on Public Finance and Accountability in the year 2000

Capacity building is financed by the European Agency for Reconstruction

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Internal Control of Public Finance (ICPF)

The system consists of four core elements: – The system of ICPF and Finance

Management – Internal Audit – Central Office on Financial Management and

Control within Treasury Department – Central Office of Internal Audit within MEF

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Public Expenditure and Financial Accountability (PEFA) Indicators

Main Indicators based on PEFA assesment report

2006

1 Aggregate Expenditure Outturn compared to approved budget (B)

2 Composition of expend. outturn compared to approved budget (D)

3 Aggregate revenue outturn compared to approved budget A

4 Stock and monitoring of expenditure payment arrears D+

INDICATOR

Budget Credibility

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PEFA Indicators

5 Classification of the budget D

6 Comprehensiveness of information in budget documentation D

7 Extent of unreported government operations incl. donor funds C+

8 Transparency of Intergovernmental Fiscal Relations A

9 Oversight of aggregate fiscal risk C+

10 Public access to key fiscal information A

11 Orderliness and participation in the annual budget process B+

12 Multi-year perspective in fiscal policy, planning, & budgeting D+

Transparency and Comprehensiveness

Policy-based Budgeting

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PEFA Indicators

13 Transparency of taxpayer obligations and liabilities B+

14 Effectiveness of taxpayer registration and tax assessment C

15 Effectiveness in collection of tax payments B

16 Effectiveness of cash flow planning, mgt. & monitoring. B+

17 Recording & management of cash balances, debt and guarantees (A)

18 Effectiveness of payroll controls D+

19 Competition, value for money and controls in procurement D+

20 Effectiveness of internal controls. C+

21 Effectiveness of internal audit C

Predictability and Control in Budget execution

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PEFA Indicators

22 Timeliness and regularity of accounts reconciliation B

23 Availability of resource info received by service delivery units D

24 Timeliness, quality and dissemination of in-year exec. reports. B+

25 Timeliness of audited financial statements submitted to the legislature. A

26 The scope, nature and follow up of external audit reports. D+

27 Legislative scrutiny of the annual budget law B+

28 Legislative scrutiny of external audit reports. D

Accounting, Recording and Reporting

External Scrutiny and Audit

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Lessons Learned

Technology is an early building block in creating good governance and must be introduced in a phased implementation to allow absorption of key government reforms.

Technology should be supported by sound governance legislation: rules, regulations, finance administrative instructions etc.

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Lessons Learned The Kosovo environment was unique, the fiscal

management requirements were NOT System implementation can be achieved in a matter of

weeks, financial management reform takes years

Donor cooperation and coordination was essential Donor funding is time sensitive and need driven

Success breeds success – donor funding flows to successful projects – gov is energized by progress

Ongoing buy-in from key stakeholders is critical for long-term success (there are winners and losers in change – external encouragement)

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Lessons Learned Think big, start small, scale up

Phased implementation to allow absorption of key reforms Achieve high-profile wins early to ensure buy-in Ownership within the government Comprehensive Training and Certification Program and

mentoring of local staff - some are still with Treasury after five years

High quality team of international budget planning and execution, procurement, and FMIS experts are necessary to ensure best-practice design and implementation

Long-term sustainability - total cost of ownership

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Challenges & Opportunities

Several fundamental challenges faced by Kosovo:Managing final status resolution. Generating new sources of economic growth.Ensuring macroeconomic stability.Reducing poverty and unemployment.

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Thank you for your attention!