fiscal impact assessment of structural reforms

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Fiscal Impact Assessment ofStructural Reforms

Case Studies on South East Europe

Editors: Mojmir Mrak, Robert Bauchmüller, Paul McClure


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Fiscal Impact

Assessment ofStructural ReformsCase Studies on South East Europe

Ljubljana 2013


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CIP – Kataložni zapis o publikacijiNarodna in univerzitetna knjižnica, Ljubljana

336.22(497)

FISCAL impact assessment of structural reforms : case studies on South East Europe /[texts by Blerta Zilja ... [et al.] ; editors Mojmir Mrak, Robert Bauchmüller, Paul McClure]. -1st ed. - Ljubljana : Center of Excellence in Finance, 2013

ISBN 978-961-92845-1-31. Zilja, Blerta 2. Mrak, Mojmir265373184

© 2013, Center o Excellence in Finance (CEF)All rights reserved.

Published by: Center o Excellence in FinanceCankarjeva 181000 LjubljanaSloveniaInternet: www.cef-see.org E-mail: [email protected]

exts by : Blerta Zilja and Edlira Kalaja, Naida Čaršimamović Vukotić and Ognjen Đukić,Anto Bajo, Bernard Nikaj, atjana Arsova, ijana Stanković, Maja Popov, Helena Kamnar,aşkın Babaoğlan

Fiscal Impact Assessment of Structural Reforms – Case Studies on South East Europe,First Edition

Rights and PermissionsTe material in this publication is copyrighted. Copying and/or transmitting portions or all o this

work without permission may be a violation o applicable law. Te CEF encourages dissemina-tion o its work and will normally grant permission to reproduce portions o the work promptly.Permission to reproduce a portion o this work or non-commercial purposes or classroom use aswell as other applications or permission to reproduce or translate all or part o this book shouldbe obtained through a ormal request with complete inormation sent to the Center o Excellencein Finance, Cankarjeva 18, 1000 Ljubljana, Slovenia, telephone: +386 1 369 6190, website: www.cef-see.org , e-mail: [email protected] .

Tis volume is a product o the staff o the Center o Excellence in Finance (CEF) and has beenproduced in strategic partnership with the Ministry o Finance, Montenegro, and with financialsupport o the World Bank’s rust Fund or Strengthening Accountability and the Fiduciary Envi-ronment (SAFE) in Public Financial Management, which has been established by the European

Union (EU) and the Swiss State Secretariat or Economic Affairs (SECO). Te findings, interpreta-tions, and conclusions expressed in this volume do not necessarily reflect the views o the Center oExcellence in Finance, the SAFE rust Fund at the World Bank (or any o its donors), the Ministryo Finance, Montenegro, or the governments o countries represented. Te Center o Excellencein Finance does not guarantee the accuracy o the data included in this work. Te case studies inthis volume provide a valuable basis or a continued exchange with international experts and ben-eficiaries on the capacity development needs o the South East Europe, which the CEF intends toacilitate.

Editors: Mojmir Mrak, Robert Bauchmüller, Paul McClure

Design: Sonja Eržen u.d.i.a., Ljubljana

Printing: ISKARNA JANUŠ, Januš Miran s.p., Ljubljana


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In strategic partnership with the

Ministry of FinanceMontenegro

Supported by

World Bank Trust Fund,

established by the European Union and theSwiss State Secretariat for Economic Affairs


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Contents | v

CONTENTSABOUT THE EDITORS xi

ABBREVIATIONS xiii

PREFACE xvINTRODUCTION 1

Chapter 1: Case Study on ALBANIA 51. Introduction 72. Main institutional eatures or annual budget

and medium-term fiscal programming 83. Incorporation o structural reorms’ fiscal costs into fiscal

programming documents 134. Conclusions and recommendations 23

5. Literature and sources 276. Appendix 29

Chapter 2: Case Study on BOSNIA & HERZEGOVINA 311. Introduction 332. Main institutional eatures or annual budget

and medium-term fiscal programming 353. Incorporation o structural reorms’ fiscal costs

into fiscal programming documents 474. Conclusions and recommendations 575. Literature and sources 616. Appendixes 62

Chapter 3: Case Study on CROATIA 691. Introduction 702. Main institutional eatures or annual budget

71

and medium-term fiscal programming13. Incorporation o structural reorms’ fiscal costs

into fiscal programming documents 81

4. Conclusions and recommendations 895. Literature and sources 916. Appendix 94


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vi | Contents

Chapter 4: Case Study on KOSOVO 971. Introduction 982. Main institutional eatures or annual budget

and medium-term fiscal programming 983. Incorporation o structural reorms’ fiscal costs into fiscal

programming documents 102

4. Conclusions and recommendations 1065. Literature and sources 107

Chapter 5: Case Study on MACEDONIA 1091. Introduction 1102. Main institutional eatures or annual budget


into fiscal programming documents 1174. Conclusions and recommendations 123

5. Literature and sources 126Chapter 6: Case Study on MONTENEGRO 127

1. Introduction 1282. Main institutional eatures or annual budget


into fiscal programming documents 1334. Conclusions and recommendations 1425. Literature and sources 1446. Appendix 145

Chapter 7: Case Study on SERBIA 1471. Introduction 1482. Main institutional eatures or annual budget


into fiscal programming documents 1554. Conclusions and recommendations 165

5. Literature and sources 1686. Appendixes 169


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Contents | vii

Chapter 8: Case Study on SLOVENIA 1771. Introduction 1782. Main institutional eatures or annual budget



4. Conclusions and recommendations 1985. Literature and sources 2016. Appendixes 202

Chapter 9: Case Study on TURKEY 2051. Introduction 2062. Main institutional eatures or annual budget



4. Conclusion and recommendations 2195. Literature and sources 2216. Appendix 221

Conclusions 2231. Relevance o political support 2242. Fiscal programming and strategic documents 2253. Fiscal impact assessments o structural reorms 2254. Role o budget users 2275. Fiscal policy coordination 2286. Improving procedures and guiding budget users 229

Annex I: Indication of learning events to serve highlighted needs 2311. Fiscal policy coordination 2322. Budget submissions o line ministries 2333. Enabling environment or effective fiscal impact assessments 234

Annex II: Guidelines for preparation of country case studies 237Instructions or preparing country case studies 239Content and structure o country case studies 239

Methodological issues o structural reorms:or use in preparing country case studies 245

Annex III: FIASR Working Group 249About the Center o Excellence in Finance (CEF) 250Recent CEF (co)publications 250


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List of Figures | ix

LIST OF FIGURES

Figure I-1: Te linkage between the NSDI and the MBP cycle 29Figure I-2: Te programme expenditure process within a year

in a budget institution 30Figure II-1: Te budget preparation process o BiH in 10 steps 43Figure II-2: Projected financing o the Strategy o Science

Development in BiH 67Figure III-1: Linkages among strategic planning documents 72Figure IV-1: Planning systems in Kosovo 100Figure VI-1: Budget preparation scheme 141Figure VII-1: Proposed integrated planning ramework 163Figure VIII-1: Normative regulation o fiscal and

development documents 183Figure VIII-2: Schematic illustration o development

and budget planning system 190Figure IX-1: Budgeting process in urkey 208Figure IX-2: Planning documents in urkey 213


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LIST OF TABLES

able II-1: Issues with the fiscal impact assessmento selected structural reorms in BiH 60

able II-2: otal general government expenditure in BiH, 2011 63able II-3: Plan o domestic spending on research

and development in RS, 2012–2016 68able III-1: PEP preparation process or the period 2011–2013 75able III-2: Pre-accession Economic Programme approval and

implementations 75able III-3: Budget planning process in Croatia 80able III-4: Content o Pre-accession Economic Programmes 82able III-5: Structural reorms 83able III-6: An example o effect estimates o structural reorms 83able III-7: Government strategic program objectives

in the period 2010–2012 94able III-8: Linking strategic plans and budgets 96able V-1: Most pressing issues associated with fiscal

impact assessments o structural reorms 123

able VI-1: Fiscal effects o structural policies: summarybased on analysis presented in PEP chapter IV 145able VIII-1: Content o the Budget Memorandum according

to regulation and the PFA 189able VIII-2: Structural reorms in Slovenia’s Exit Strategy and NRP 193able VIII-3: Individual development planning documents

and budget holders 196able IX-1: Matrix o policy commitments: health care

and social security 214

able IX-2: Display o analytical budget classification 216

x | List of Tables


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About the Editors | xi

ABOUT THE EDITORS

Mojmir Mrak is a Jean Monnet Chair proessor o international financeat the University o Ljubljana and a regular visiting proessor at post-gradu-ate programs o the universities o Siena and Vienna. His main research fieldsinclude capital flows, trade and project finance, and EU institutional and publicfinance issues. Proessor Mrak is author o numerous books and articles.

Mr. Mrak has more than 20 years o experience in designing and imple-menting the Slovenian government’s policy in areas o international financeand EU accession. In the first five years ollowing independence in 1991, hewas the chie external debt negotiator o Slovenia. In addition, he was respon-sible or the early credit arrangements o Slovenia with the European Bank orReconstruction and Development and the World Bank. Between 1998 and2002, he was chie advisor o the Slovenian government on financial aspectso the country’s EU accession. Within this ramework, he was responsible ornegotiations about the financial package o Slovenia’s accession. Between 2003and early 2006, he coordinated the Slovene government’s activities with respectto the 2007–2013 financial perspective o the EU, and is currently involved innegotiations about the 2014–2020 financial perspective o the EU.

Mr. Mrak has served as a consultant to numerous international organizationsand several governments in South East Europe. He is a CEF Associate Fellow.

Robert Bauchmüller has been working or the CEF since December 2010as manager o the program on Building Capacities in Policy Design and Imple-mentation (BCPDI), which includes activities that acilitate policy discussionsin South East Europe. Among the current activities he manages are the Fiscal

Impact Assessment o Structural Reorms (FIASR) project and the StrategicPlanning and Budgeting (SPB) project.Mr. Bauchmüller holds an MSc degree in Economics rom Maastricht

University. He has been abroad or several exchange and research visits, orexample, to the Warsaw School o Economics, the University o Essex, and theGovernmental Research Institute AKF in Copenhagen.


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Beore moving to Slovenia, Mr. Bauchmüller was a research ellow at theGraduate School o Governance at Maastricht University, while undertak-ing Ph.D. research in public policy analysis. Tere he also gained experiencein teaching at the graduate and undergraduate levels, and managed capacitybuilding programs in cooperation with UNICEF and the ILO.

Paul McClure joined the CEF in April 2012 on an appointment partiallyunded by the Bank o Slovenia to help scale up support on written communi-cations to finance ministries and central banks across South East Europe.

He is on an external service assignment rom the World Bank, where mostrecently he worked in the Web Program Office to revamp online content deal-ing with the Bank’s research, analytical, and learning activities. He has alsoserved as Chie o Editorial Services at IFC, the World Bank Group arm ocus-

ing on private sector development, where he managed the annual report andserved as lead editor on news releases, Internet content, and other corporatecommunications.

His writing, editing, and publishing experience includes positions at theWorld Bank Office o the Publisher and Congressional Quarterly in Washing-ton, D.C. He also has several years’ experience in the teaching o writing at Cor-nell University, where he earned his Ph.D.

xii | About the Editors


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ABBREVIATIONS

ABC Analytical Budget ClassificationBCPDI Building Capacities in Policy Design and Implementation

(CEF program)BD Brčko District (neutral, sel-governing administrative unit

under sovereignty o BiH)BiH Bosnia and HerzegovinaCoG Center o Government (o Serbia)DEP Directorate or Economic Planning (within Council o

Ministers o BiH)DFID Department or International Development (o the UK)DSDC Department o Strategy and Donor CoordinationEDVAP Economic Development Vision Action PlanEFP Economic and Fiscal ProgrammeEMU Economic and Monetary Union o the EUEPAP European Partnership Action PlanFBiH Federation o Bosnia and HerzegovinaFC Fiscal Council (o BiH)

FDI Foreign Direct InvestmentFIASR Fiscal Impact Assessment o Structural Reorms (CEF project)FMF Federal Ministry o Finance (Ministry o Finance o FBiH)FSR Fiscal Strategy Report (o Serbia)GERD Gross Domestic Expenditure on Research and DevelopmentGFFBP Global Framework or the Fiscal Balance and Policy (in BiH)GFS Government Finance StatisticsGFSM Government Finance Statistics Manual (IMF, 2001)GS General Secretariat (o the government o Serbia)

HPC High Planning Council (o urkey)IFIs International Financial InstitutionsIMAD Institute or Macroeconomic Analysis and Development

(o Slovenia)IPA Instrument or Pre-AccessionLM Line Ministry

Abbrevations | xiii


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LPFMA Law on ‘Public Finance Management and Accountability’(o Kosovo)

MAU Macroeconomic Analysis Unit (o the Indirect axationAuthority Governing Board o BiH)

MF Ministry o Finance and reasury (o BiH)MM In units o a millionMoD Ministry o Development (o urkey)MoF Ministry o FinanceMBP Medium-erm Budget ProgrammeMEF Medium-erm Expenditure Framework MFP Medium-erm Fiscal Plan (o urkey)

MP Medium-erm Programme (o urkey)NPAA National Programme or Adoption o the AcquisNRP National Reorm ProgrammeNSDI National Strategy or Development and Integration (o BiH)OECD/SIGMA Organisation or Economic Co-operation and Development /

Support or Improvement in Governance and ManagementOSPC Office or Strategic Planning and Coordination (o Kosovo)PEP Pre-accession Economic ProgrammePFA Public Finance Act (o Slovenia)

PFM Public Financial ManagementPFMC Public Financial Management and Control (o urkey)PSDPI State Development Priorities and Investments (o Slovenia)RS Republika SrpskaRSMF Republika Srpska Ministry o FinanceSEE South East EuropeSMEs Small and Medium EnterprisesSPB Strategic Planning and Budgeting (CEF project)CA urkish Court o Accounts

GNA urkish Grand National Assembly UNCAD United Nations Conerence on rade and DevelopmentUNDP United Nations Development Programme

xiv | Abbrevations


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PREFACE

Te Center o Excellence in Finance believes that capacity development isan endogenous process: that capacity can only be developed when the effort hasstrong country ownership. But while our member countries across South EastEurope hold the responsibility and decision-making power or strengtheningcapacity in their public sector, the CEF provides crucial support by acilitatinglearning.

Developing individuals’ capacity can increase the capacity o institutions,which in turn can benefit society as a whole. But people learn most when theyare actively involved in the process o learning. Tis is why the CEF stronglyocuses on a participatory approach, one that emphasizes understanding andresponding to the learning needs o individuals and institutions.

Te country case studies in this volume represent just such an in-depthneeds assessment or countries in the region, on an issue that is both criticaland insufficiently addressed: how the fiscal impacts o structural reorms areintegrated within the budget process. Working closely with Montenegro’s Min-istry o Finance and with support rom the World Bank’s SAFE trust und, theCEF identified authors with the right knowledge to assess the situation and

offer recommendations or improvement. Te Fiscal Impact Assessment oStructural Reorms (FIASR) project is part o a long-term CEF program, Build-ing Capacities or Policy Design and Implementation. Te capacity develop-ment needs that the case studies have identified will be addressed through aseries o CEF learning events entitled Strategic Planning and Budgeting rom2013 to 2015.

Te case studies were prepared by local experts rom seven countries oSouth East Europe that are beneficiaries o the SAFE trust und, as well as Slove-nia and urkey, in the second hal o 2012. Each author describes the country’s

main institutional eatures or the annual budget preparation and medium-termfiscal programming, and how ully the costs o structural reorms are incorpo-rated into fiscal programming documents. Each case study concludes by iden-tiying the main problem areas and offers recommendations or addressingthem. In examining budget processes as a whole, the studies place a particularocus on the role and capacity needs o line ministries.

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Authors or their representatives presented the case studies at a two-dayseminar that the CEF convened in October 2012 at the Regional School o Pub-lic Administration in Danilovgrad, Montenegro. By bringing together counter-parts across the region, the event also played an important role in developingthe regional capacity o experts who are involved in strategic planning andbudgeting processes. Te case studies have been revised and updated to incor-

porate comments that authors received rom their regional counterparts androm international experts who represented European Union member coun-tries, the International Monetary Fund, OECD/SIGMA, and the World Bankat the Danilovgrad event.

Te case studies give the CEF’s capacity development experts an excellentbasis or even deeper needs assessment on the capacity development issues ac-ing institutions involved in strategic planning and budgeting processes acrossSouth East Europe. As noted, learning events to address these needs will beginduring 2013; beyond the first three proposed in this volume, a more exten-

sive agenda will be defined based on urther discussion with beneficiaries. Telist o key issues that need attention includes, or example, developing tech-nical capacities or fiscal impact assessment, addressing policy coordinationprocesses, creating an enabling environment or policy making and imple-mentation, and building an understanding o change management processes.Tese issues are complex and require urther involvement o the CEF’s BuildingCapacities or Policy Design and Implementation program. Te program is nowready to move rom needs assessment to implementation, which will requireocus at the highest level and an investment o substantial human and financial

resources. Success will demand wide donor involvement and harmonization.We extend our thanks to all local and international experts who have con-

tributed to the FIASR project. Our particular recognition goes to the authorso the country case studies. Teir contribution reconfirms our strong beliethat substantial capacity or strategic planning and budgeting already existsin the region. Te CEF, in cooperation and coordination with other regionaland international institutions, stands ready to urther develop this capacity. Itis part o our commitment to supporting reorm in public financial manage-ment and to helping build a stronger, more accountable fiduciary environmentthroughout the region.

Jana Repanšek Deputy Director

Center o Excellence in Finance

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INTRODUCTION

Tis publication presents case studies rom nine countries o South EastEurope, which were prepared by local experts, to examine how the fiscal impacto structural reorms and other sectoral policies is incorporated into annualbudgets and strategic macro-fiscal documents. Te studies describe the pro-cesses that are currently in place and identiy areas that can be strengthenedthrough capacity development activities, as outlined in the final chapter. Eacho the authors points to the need or better fiscal policy coordination amongbudget institutions.

Countries o the Western Balkans are on a long, ofen complex path to EUmembership. Tis process requires substantial adjustments to candidate coun-tries’ economic systems, including two important ones that are required bythe so-called Copenhagen criteria. Te first o these requires that a candidatecountry be ull-fledged market economy, and this has been largely met by thecountries in the region. On the other Copenhagen criterion—that a candidatecountry should be able to sustain its economy amid competitive pressures onthe single European market—countries o the region still have a long way to go.

Becoming a competitive market economy is a complex task, not only or

(potential) candidate countries but also or many existing EU members. Anecessary but not a sufficient condition or a country to become internation-ally competitive is its macro-economic and fiscal stability. Tis stability needs,however, to be complemented with appropriate and timely structural reorms.While there is no single, generally accepted definition o structural reorms, itcould be said that structural reorms are not an end in themselves but rathera means or boosting sustainable economic growth. Some areas o structuralreorms involve significant policy efforts and institutional changes, but arenot very demanding rom the fiscal point o view, whereas other segments o

structural reorms—such as investments in physical inrastructure, humanresources, research and development, and social saety net reorm—typicallypose a significant financial burden or countries’ public finances.

Within the context o the EU accession process and to establish a strong andcontinuous policy dialogue on macroeconomic and fiscal issues, the EuropeanCommission requires that candidate countries annually prepare a document—called the Economic and Fiscal Programme or potential candidates and the

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Pre-accession Economic Programme or official candidate countries—that out-lines consistent macroeconomic and fiscal orecasts over the next three yearsand estimates the fiscal costs associated with the structural reorms, whichare conducive to ull compliance with the two Copenhagen economic crite-ria. Tese documents reflect preparatory steps or the National Reorm Pro-gramme and Convergence Programme Reports that EU member states needto prepare.

Te CEF is committed to helping its beneficiary countries in respondingto such macro-fiscal surveillance requests through a program entitled BuildingCapacities in Policy Design and Implementation (BCPDI). At the initiative obeneficiaries, the CEF has developed this program, with input rom the Euro-

pean Commission and the international financial institutions (IFIs). Te aimis to build countries’ capacities or medium-term macroeconomic and fiscalpolicy analysis, design, and implementation and to oster stronger internal andexternal policy coordination or the medium term. Te BCPDI program entailsthree delivery components: 1) training, 2) community o practice, and 3) tech-nical assistance.1

In 2013, the Center o Excellence in Finance (CEF) will begin implement-ing Strategic Planning and Budgeting (SPB), a Multi-Beneficiary Instrumentor Pre-Accession (MB-IPA) project financed by the European Commission.

Te SPB project aims to address capacity needs in policy design, implemen-tation, and coordination o three key areas: (i) the medium-term macroeco-nomic ramework, (ii) the medium-term fiscal and budgetary ramework, and(iii) the integration o structural reorms’ fiscal costs into the annual budgetsand medium-term fiscal documents o beneficiary countries. Te case studiesin this book ocus on the third area, the quantification o fiscal costs o struc-tural reorms and into their integration into medium-term fiscal programmingdocuments. Tey help identiy the content o activities or this area o the SPBproject, which has been more challenging than or the other two areas.

A number o deficiencies have been observed in the integration o structuralreorms’ fiscal costs into fiscal programming documents, and the case studiesprovide a means to gauge these across the region and explore how they can beaddressed. Tere is a lack o consistent inputs by line ministries into annual andmedium-term fiscal documents as well as weak linkages among various sec-tions o these strategic documents. Reasons include inadequate guidelines orministries on how to prepare inputs to strategic documents, a lack o capacityto assess the impact o structural reorms on national budgets, and weaknessesin organizational structures. In addition, challenges in policy coordination

include inconsistent procedures, unclear responsibilities or lines o authority,inadequate coordination mechanisms, communication problems, and incon-sistencies between central and local government levels. Overcoming such defi-ciencies should help promote the success o structural reorms through bettertransparency, accountability, and prioritization o efforts.

1 For more details on BCPDI, please visit www.cef-see.org/bcpdi.

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o address all these deficiencies, the CEF in partnership with the Minis-try o Finance o Montenegro initiated a special project—Fiscal Impact Assess-ment of Structural Reforms (FIASR)—or which a financial grant rom the SAFErust Fund was approved in March 2012. Te FIASR project has three mainobjectives: (i) assessing—via country case-studies—how countries o the SEEregion incorporate structural reorms into their national budgets and medium-term fiscal documents, (ii) identiying gaps and policy coordination issues inthis process, and (iii) generating a list o issues that can be addressed throughlearning events within the ramework o the SPB project.

For the overall guidance o the FIASR project, a special Working Group wascreated by the CEF.2 Te group had its kick-off meeting in Ljubljana in April

2012. At the meeting draf, Guidelines for preparation of country case studies were adopted as a key component or the project’s success.3 Between May andSeptember 2012, case studies were drafed by national experts rom project’sbeneficiary countries; two other CEF member countries, Slovenia and urkey,also chose to participate. Te national experts received comments on their earlydrafs rom the members o the FIASR Working Group. Country case studieswere prepared or nine countries: Albania, Bosnia and Herzegovina, Croatia,Kosovo,4 Macedonia, Montenegro, Serbia, Slovenia, and urkey.

Te main event within the FIASR project was a two-day seminar (October,

23 and 24, 2012) at the campus o the Regional School o Public Administrationin Danilovgrad, Montenegro, co-hosted by Montenegro’s Ministry o Finance.Te CEF and its partners brought together representatives rom the nine coun-tries who wrote case studies to discuss the fiscal impact assessment o struc-tural reorms. Te authors or their representatives presented their countries’budget processes and the extent to which these integrate the structural reormsthat are championed by line ministries and elected officials. Authors pinpointedchallenges and offered recommendations or a more integrated approach; theyreceived eedback rom counterparts across the region as well as international

experts. Te 52 participants brainstormed about the ways capacity develop-ment can help, generating ideas that the CEF will take on board or the SPBactivities beginning in 2013.

A number o key themes emerged rom the discussions in Danilovgrad.Participants agreed that a shared definition o structural reorms is urgentlyneeded throughout the region, and that a close involvement o the EuropeanCommission in this process would be beneficial. Line ministries also need morepolicy capacity as well as guidance, and, in many cases, better skills or assess-ing the costs o current and envisaged policies, so as to move rom preparing

mere wish lists to unctioning as a ully inormed, responsible actor in the deci-sion-making on the fiscal implications o policies. Much more comprehensive

2 For a list o members o this group, see ANNEX III.3 Te final version o the Guidelines is presented in ANNEX II.4 Tis designation is without prejudice to positions on status, and is in line with United Nations

Security Council Resolution 1244 and the International Court o Justice opinion on the Kos-ovo Declaration o Independence.

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coordination is needed across the government entities involved in annual andmultiyear budgeting, with a ocus on ensuring that structural reorms have theunderstanding and support o high-level officials, including politicians. Tis isparticularly relevant at the start o the preparation o fiscal documents, whenreorms affect several sectors, as well as in cases where a large number o rel-evant strategies might lead to policy inconsistencies.

Many participants also highlighted that the coordination o processes asso-ciated with preparation o various fiscal programming documents could be sig-nificantly improved. Other weaknesses o fiscal documents are linked to a lacko oresight in estimating the fiscal costs o structural reorm efforts, poor eco-nomic analysis, and inadequate articulation o policy measures. While the case

studies identified similar issues in most countries, government sectors varyconsiderably; hence not all line ministries have the same capacity needs orassessing and measuring the budget impacts o reorms.

When discussing uture learning events, participants outlined the mainactors and areas that need capacity development and highlighted possibleobstacles in the institutional environment. Learning events should develop thecapacities o the relevant actors at the political, coordinating, and operationallevels o the process; activate trainers within beneficiary institutions to extendand sustain the impact o any training; support the preparation o better guide-

lines and templates; and acilitate the exchange o good practices. When train-ing public administration officials, it is important to take note o the absorptioncapacities, staff turnover and motivation, and human resource management attheir institution. echnical obstacles might result rom a need or translations,limited access to methodology and manuals, weak links with civil society, anda lack o resources.

Following the seminar, authors have been asked to make a final review otheir respective country case studies or inclusion in this publication.

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Chapter 1

Case Study on ALBANIAprepared byBlerta Zilja & Edlira Kalaja

Blerta Zilja is a lecturer in cost and management accounting at the Uni- versity o irana. She graduated rom the university’s Faculty o Economicsin finance and accounting, finished her master’s in accounting and auditing,and is pursuing her Ph.D. in public investments appraisal and evaluation. Herresearch fields include public finance management, cost benefit analyses, deci-sion-making on public investments, and public auditing. She is the author o

many scientific articles and participates in international scientific conerences.She has worked or three years as a budget specialist or public investment

management at the Ministry o Finance. Since 2011, she has been an ExpertAssociate at the Albanian Institute o Science (AIS), engaged in projects onpublic finance and data transparency. Her articles and studies on the country’sbudget indicators, economic perormance, education sector, and other topicshave been published on the Albanian open data website, a project o AIS. She isalso a Finance Expert in the Monitoring o Public Finance project o the OpenSociety Foundation Albania, where she prepared reports on the state’s budget

preparation and execution, the perormance o the Supreme Audit Institutionand the Public Procurement Agency, and the reflection o European integrationpriorities in the state budget.

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Edlira Kalaja has extensive experience in public finance, especially budget-ary programming and policy analysis. For the last seven years she has worked

in budget policy analysis at the Ministry o Finance o Albania, also participat-ing in several working groups ocusing on budget issues. In the past year shehas also contributed as an Associate Expert on public finance projects at theAlbanian Institute o Science.

She graduated as an honor student rom the University o irana, whereshe received her BSc and MBA degrees, majoring in finance. She is finishingthe Ph.D. program at the university, ocusing on sustainability o public debtin Albania.

For several years she has been a member o the University o irana aculty,

teaching finance courses to students o all levels. Since August 2012, she hasbeen a consultant to the World Bank and also holds the position o CountryCoordinator or Albania or Europa Re, a company that deals with catastropheand weather risk insurance or South East Europe.

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1. Introduction

Te budgeting process is vital to getting the ull advantage o benefits rompublic spending given available resources. For this reason Albania has madeenormous steps in strengthening budget procedures and reorms, which arenowadays oriented beyond a one-year process, reflecting objectives and poli-cies undertaken by the government. Tis case study gives a clear picture o thestructural reorms undertaken in Albania and how effectively their costs areincluded in the state budget.

It also tries to identiy the bottlenecks o the process and the institutionsinvolved, emphasizing at the same time the progress Albania has made in this

area. An important part is dedicated to the problems and issues which shouldbe the uture ocus or budget institutions responsible or the process and theimplementation o reorms.

For this study, the working group ocused on the most important structuralreorms undertaken over the last 10 years in five sectors: Enterprise, Financial,Human Resource Development and Labor Market, Administrative Services,and Network Industry.

For each case o reorm, the group verified whether its cost was integrated inthe state budget, analyzing the budgets o relevant ministries, their programs,

the Medium-erm Budget Programme documents in relevant years and theiraccompanying reports, the consolidated fiscal table budget, annual reports othe line ministries and all other budgetary institutions, monitoring reports,reports audit, the Economic and Fiscal Programme documents, and others.ime series were analyzed mainly by program classification, but in some casesunctional classification was used.

Te main sources o data were taken rom the Ministry o Finance, theInstitute o Statistics, the Bank o Albania, line ministries and other responsibleinstitutions, sector strategies, and the related legal ramework in the five sectors

examined, as well as signed agreements with other countries or internationalorganizations. Te European Commission’s progress reports on Albania andthe reports rom international organizations, such as the World Bank and UN,were also taken into consideration.

Tis case study consists o our sections. Te first introduces the method-ology used or this case. Te second introduces the process o budgeting, notonly its importance but reorms made during recent years, the legal ramework,detailed procedures, and the main actors o this process. Te third sectionocuses on the reorms undertaken in key sectors, institutions, and processes toinclude the cost o structural reorms in the state budget. Te last section givessome conclusions and recommendations or all o the issues treated above.



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2. Main institutional features for annual budgetand medium-term fiscal programming

2.1. Legal and other relevant framework

One o the main eatures in Albania’s budgeting process is that the wholesystem is top-down, meaning that the government firstly determines the levelo total expenditures to be allocated among the main policies. Te setting othese ceilings is a critical step in ensuring that the process o program expendi-ture planning is consistent with macro-fiscal stability and the strategic priori-ties o the government. In this context ceilings are an upper limit o the total

amount o money that can be spent, or planned to be spent, or a particularpurpose. However, the budgeting process has at the same time some elementsthat are bottom-up, as the Ministry o Finance (MoF) afer analyzing a budg-etary request can be flexible in adjusting ceilings o the respective institution.

Te perception o the budgeting process changed during 2008, on approvalo the new organic law on the budget system.5 Tis law specifies in detail thebudgetary system in Albania: its structure, principles, the oundations o thebudgetary process, intergovernmental financial relations, and responsibilitiesor execution o the entire budgetary legislation.

Tis law was the afermath o the Medium-erm Budgeting Process, whichstarted in 2000 in some pilot institutions and brought several innovations suchas: (i) orienting the budgetary process beyond an annual thinking process,(ii) shifing to Programme and Perormance Budgeting outputs, (iii) defin-ing clear roles and responsibilities, and (iv) making explicit the linkages o thebudget process and policies set by the government. Te need or a new lawderived rom the modernization o the treasury system that started in 2004,establishing a real-time operational treasury system.

A key component o the budgeting process is the Integrated Planning Sys-tem (IPS), which provides a broad planning ramework within which the gov-ernment’s policies and financial planning processes unction in a consistentway. Te IPS helps the government in harmonizing core processes such as theNational Strategy or Development and Integration (NSDI), the Medium-ermBudget Programme (MBP), European integration and NAO membership,and external assistance. Te quality and coherence o these technical processessignificantly affect the government’s ability to achieve its policy goals and objec-tives and thus keep its promises to the public.

As part o IPS, an important document in the budgeting process is theNational Strategy or Development and Integration (NSDI), which presents themedium- to longer-term policy direction or the government over a seven-yearperiod. Te linkages between the NSDI and the MBP are shown in Figure I-1

5 Law on the “Management o the Budgetary System in the Republic o Albania” (No. 9936),enacted on June 26, 2008.



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in the Appendix. Te NSDI is ounded on a national vision and a comprehen-sive set o sectoral and cross-cutting strategies. Sector strategies consider stra-tegic policy commitments rom the Government Programme, European andNAO integration requirements, and any major public investment or externalassistance priorities.

On the other hand, the law on the ‘Management o the Budgetary Systemin the Republic o Albania’ explains in detail the procedure that all governmentunits and special unds should ollow during the year. Te annual budget pro-cedure itsel ollows the specific dates set in the organic budget law, ollowedby the Permanent and Annual Instructions o the Ministry o Finance, whichspecifies the rules o Budget Preparation and Budget Execution during the year.

Tose documents are issued by the MoF at the end o February on behal othe Council o Ministers. Te Budget Preparation Instructions is the documentwhich officially begins the first o three rounds o the Medium-erm BudgetPlanning process, advising budgetary institutions in preparing spending plans.

Additional guidance or preparing the budget is issued in July, startingthe second round and requiring appropriate review o plans prepared dur-ing the first round. In cases where the ceilings are higher than those o thefirst round, instructions can speciy the products or which these additionalresources are given. Other guidelines are prepared to explain the monitoring

and execution part o the budgetary process. Te third round is a process whichmust be accomplished by all budgetary institutions at the end o the year, theperiod in which the ceilings o the first year o the MBP—the uture annualbudget—are already set and cannot be changed. Tis round can be somethingo a paper exercise, as a result o the short time remaining or problems in theprogramming.

Guidelines o the Policy Priorities, prepared by the Department or Strat-egy and Donor Coordination o the Council o Ministers, is another documentthat helps the budgetary institutions identiy new policy priorities that have

not been previously unded and that are now a major possibility, so that theycan take advantage o resources that may remain available afer calculating thecosts o existing policies.

Another important step in improving the effectiveness o government’sexpenditures plans is the process o monitoring, which provides eedback onthe implementation o policies. o achieve a successul evaluation o commit-ments undertaken by ministries, each o them prepares an integrated plan,an annual document that highlights the key MBP commitments, includingEuropean integration commitments, planned legislation, major public invest-

ments, anti-corruption measures, and external assistance projects.Another significant document drafed by the government is the Economic

and Fiscal Programme (EFP). As a potential candidate country aspiring to jointhe European Union, since 2006 Albania has annually submitted this documentto the European Commission. It presents Albania’s economic and fiscal poli-cies and the main structural reorms with a medium-term perspective. Te pro-gram outlines also the preparation o institutional capacities to participate in the



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economic and monetary surveillance procedures o the European Union by giv-ing a detailed assessment o the current year’s economic and financial situationin Albania and articulating the medium-term economic policies and structuralreorms to be implemented during the three years’s or which the document isdrafed. Te EFP is based on the Budget Law o that year, the Macroeconomicand Fiscal Framework or the next three years, the Medium-erm Budget Pro-gramme, the latest Monetary Policy Report, and the Public Finances Strategy. Atthe same time it is ully in line with the National Strategy or Development andIntegration (NSDI). Te EFP is approved by the Council o Ministers.

One o the most important principles or the budget process in Albaniais transparency, which implies that everyone can read, see, and examine not

only the procedures but also the unds allocated to each public institution byusing the section or budget documents on the official website o the Ministryo Finance.

2.2. Procedures

Te ollowing section lists the procedures or preparing the Annual Budget,which is the first year o the Medium-erm Budgeting Programme. All budgetinstitutions strictly ollow procedures as set in the organic budget law. In cases

where these procedures are not ollowed, clear sanctions apply. As part o theIntegrated Planning System calendar, it is the task o the Minister o Finance—as the main actor in the budget process—to prepare each December the PublicExpenditure Management calendar (including detailed deadlines) and to pro-pose it to the Council o Ministers. Te calendar is approved as an importantelement o strategic planning by the Council o Ministers and comes into effecton the first day o each year.

In January, the Minister o Finance prepares a report on macroeconomicassessment and orecast. Afer approval by a decision o the Council o Min-

isters in February, the report is sent or inormation to the National Assem-bly by March 10. Upon approval by the Council o Ministers, the Minister oFinance approves and issues instructions or budget preparation to authorizingofficers o budgetary institutions.6 All budgetary institutions should providetheir budgetary request in line with the proposed ormat and budget ceilings(comprising the level o wages, other current expenditures, capital expendi-tures financed rom the state budget, and oreign capital expenditures or thenext three years). Budgetary institutions are responsible or allocating unds totheir program and detailing them according to their needs, ollowing the pro-

cedures set by the law and other legal documents.Under the guidance o the principal authorizing officer, the MoF’s Budget

Department reviews and assesses medium-term budget requests and addi-tional requests, and prepares a report with conclusions and recommendationsor each government unit. Tis report is presented in hearings held in the MoF

6 Figure I-2 in the Appendix provides details o the required steps.



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with each government unit according to a pre-established calendar. Te con-clusions o hearings are consolidated into a draf o the Medium-erm BudgetProgramme, which is later subject to a Council o Ministers decision.

Te Council o Ministers revises and approves the draf Medium-ermBudget Programme and its expenditure ceilings in July (the second round othe process). In this round, the MoF prepares another macroeconomic assess-ment and orecast, rom which ceilings are prepared that are then sent to allbudgetary institutions. Tese ceilings might be unchanged rom those set inthe first round, or might be higher or lower depending on the macroeconomicorecast approved. However, i the overall ceilings remain unchanged, alloca-tion o unds between institutions must be applied according to the budgetary

requests prepared by the institutions in the first round o the MBP, empha-sizing the significance that complete budgetary requests have in arguing theimportance o reorm projects that might be initiated in the near uture. In thissecond round o the process, the budgetary requests ulfilled by all budgetaryinstitutions are mainly ocused on the first year o the MBP, which is nothingless than the annual budget o the ollowing year.

By October 25, the Council o Ministers revises and approves the DrafAnnual Budget and the revised Medium-erm Budget Programme. By Novem-ber 1, the Prime Minister, on behal o the Council o Ministers, submits the

proposed annual budget to the Assembly.Te annual state budget must be approved by December 31 at the budgetprogram level or each general government unit. Te Council o Ministers maypropose annual state budget approval at a level more detailed than at the programlevel, in compliance with the principles stated in the budget organic law. Teannual budget law and all its components are published in the Official Gazette.

In January, afer approval o the annual budget law by the National Assem-bly, the principal authorizing officer consolidates any changes in the finalMedium-erm Budget Programme document. In February, the MoF publishes

the final document.

2.3. Institutions

Te budget process allows all budgetary institutions to be part o the pro-cess. Main actors in these procedures are as ollows.• he National Assembly: his institution has the right to enact the annual

law on ‘Budget’, ater it has ollowed the necessary enactment procedures.• he Council of Ministers: he Council is one o the main institutions that

approve the Macroeconomic and Fiscal Framework and the ceiling or eachbudget institution ater all documents are revised irst by the Strategic Plan-ning Committee. he Council is responsible also or approving and coordi-nating policies as well deining the main policies to be inanced.

• he Ministry of Finance: he Ministry makes proposals to the Council oMinisters or total expenditure ceilings and MBP preparation ceilings; car-ries out the tasks that are necessary or launching the program expenditure



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planning process; revises the entire budgetary request submitted; and pre-pares the MBP document and the annual budget.

• he Ministry of European Integration: In revising procedures and conduct-ing hearings, the Ministry has a speciic role in assessing whether policiesthat are going to be inanced are part o the policies approved by the gov-ernment in support o EU integration.

• he Department of Strategy and Donor Coordination (DSDC): he DSDCensures that government expenditures are planned in a way that is consist-ent with its desired strategic allocation o resources. he DSDC is one o theinstitutions that participate in the MBP hearing.

• Budgetary institutions: All budgetary institutions prepare MBP requests.

At the beginning o the MBP preparation process, each budget institutionis asked to prepare (or each program) the respective Programme Policy State-ment, which should include:• he mission or goals o the central government units• A description o programs and activities o this unit• A presentation o program policies (including their goals and objectives)• Policy standards that shall be achieved by each unit and program• An explanation o how each program’s outputs contribute to achieving rel-

evant policy goals and objectives• he actual indicators

– or the two previous budget years – budgetary unds planned or the current budget year – adjustments made by reallocations

– approved requests or additional unds – the distribution o the total MBP expenditure ceilings across programs

(or the next three budget years)• he capital expenditures (listed by capital project and program)

In this process, it is important that the policies expressed in the above men-tioned Statement are clear, understandable, and periodically revised (on anannual basis) through a process called the Programme Policy Review, whichshould be ully integrated with the other processes.

Designing a reorm is a process that takes time and must be in compli-ance with the NSDI, the Government Programme, European integration, andNAO membership. Each reorm must be translated into an Action Plan, costso which should be reflected in the MBP o the respective budget institution

within the ceilings approved.



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3. Incorporation of structural reforms’ fiscal costsinto fiscal programming documents

Te rapid developments in Albania necessarily brought about a series ostructural reorms to support the vision o the country’s development as anopen economy. All main sectors were subject to the drafing o regulations,laws, or procedures which aimed to improve the country’s economic situa-tion. Most o these reorms were supported rom the state budget, while othersremained ormulated on paper, waiting or unds to be implemented.

3.1. Assessment of the overall framework

3.1.1. Enterprise sector reforms

Te most important challenge or Albania was the transition rom a closed,completely centralized economy to a market economy under the conditions oree competition. Te country implemented many structural reorms towardrealization o these objectives, such as privatization, land reorm, price liber-alization, etc. Albania is nowadays an open economy, with liberal trade and

investment, and tries to support the development o local private business andincrease oreign investment. Since 1993, Albania has a ramework to encour-age Foreign Direct Investment (FDI); however, it does not provide specificincentives or oreign investors. Tanks to a avorable business environment,legal conditions, and opportunities opened up by the privatization o state-owned enterprises, Albania has managed to increase the inflow o oreign capi-tal. Many oreign investors have taken part in the privatization o small andmedium enterprises (SMEs) and large enterprises in strategic industries, suchas banking, telecommunication, and energy. On the other hand, revenues rom

privatization have served as a good support to reduce the budget deficit and tound capital expenditures. Further growth o FDI has been achieved throughconcessions and the establishment o industrial parks and ree zones. Te statebudget has unded research projects in these areas, but the lack o local invest-ments has meant a low standard o services so ar. Consequently, interest inthese areas has been low.

Despite the evolution in FDI growth,7 overall this inflow is modest due tothe small size o the economy. Problems have come mainly rom delays in thecompletion o reorms in areas such as corruption, tax regulation, inrastruc-

ture, energy supply, labor market and human resources, land reorm, and con-struction permits.

7 According to UNCAD and UNDP’s Report on Foreign Investments in Albania, 2011, page 16,Albania’s ranking in Inward FDI Perormance Index was 18 th o 141 countries in 2010, whilein 2005 it was 68th.



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Among these, the land reorm has not had adequate support rom the statebudget. Ongoing changes in the responding institutions or procedures anddelays in compensation o ormer owners have made this issue one o the mostproblematic concerns or the Albanian society and a major obstacle to develop-ment o various economic sectors.8

o support economic growth and the business climate, Albania has under-taken many reorms in the tax system by reducing tax norms several times orby enlarging the taxable bases. Tese measures have served not only to easedoing business in Albania, but have helped also decrease inormality and boosttax revenues, which are the main source o budget revenues. For instance, theprofit tax rate declined rom 23 % in 2005 to 20 % in 2006, and urther to 10 %

in 2008. Te social insurance rate ell rom 42.5 % beore 2000 to 38.5 % in 2002,to 29.5 % in 2006, to 26.5 % in 2009, and urther downward since. All thesereorms were reflected in the projections o budget revenues o the upcomingyear and in the MBP or the EFP as well.

3.1.2. Financial sector reforms

Te financial system in Albania has two main actors that accomplish thesupervisory process: the Bank o Albania (BoA) and the Financial Supervisory

Authority (FSA). Both seek to guarantee that the operators in the financial sec-tor carry out their financial activity firmly and in accordance with the legal,regulatory and supervisory ramework. Te BoA supervises the banking sectorand other financial institutions, while the FSA ocuses on the insurance, securi-ties, and private pensions markets.

Te BoA is the central bank o Albania, with the attributes o a moderncentral bank only since 1992 and the transition o the political system. It hasplayed a key role in maintaining the banking system’s soundness by introducingand adopting necessary supervisory, legal, and regulatory measures in response

to identified risks. Generally, the entire supervisory process has emphasizedmeasures or enhancing responsibility, rigorously managing banking systemrisks, and observing prudential norms set by the Bank o Albania. A stablebank system helps the business climate in the country and increases the pos-sibility o unding.

Te FSA was established in 2006, as a regulatory and consolidated entityto supervise financial non-bank markets in Albania. It supervises three fields:insurance, securities, and the supplementary private pension scheme. Teseunctions were previously carried out by three different institutions, which led

to ragmentation o authority and responsibilities, sharp differences in stand-ards, and inefficient use o regulatory and supervisory skills. Te ast devel-opment o the overall non-banking financial sector caused an overlapping o

8 Access to land in Albania poses a major problem or oreign investors due to various ac-tors, including lack o ownership documents, overlapping claims, and unpredictable courtdecisions.



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these markets’ supervisory coverage. Tat is why a ully integrated supervi-sory structure is better than a ragmented one. Its main concerns are to protectconsumers’ interests; to promote sustainability, transparency, and reliabilityo non-banking financial institutions; and to ensure law enorcement. Mean-while, the change in the non-banking financial market regulatory and supervi-sory structure made it necessary also to amend the entire legal and regulatoryramework related to different areas o this sector.9 Among the non-bankingfinancial sectors, the insurance market is the most developed one, while theother two, private pensions and the securities market, are in their early stages.

Another very important institution in the financial market is the iranaStock Exchange (SE). Its mission is to organize and develop the Albanian secu-

rities market by creating the most avorable conditions or issuers, investors, andfinancial intermediaries to exploit the capital market; but until now, no companyhas registered itsel at the SE to sell its shares publicly. Reorms to make theSE unctional have been put off, making the SE simply a budgetary institu-tion spending tax-payers’ money. Tis means that the only sources or providingunding or companies in Albania are banks, or stock exchanges abroad.

3.1.3. Human resource development and labor market reforms

Albania is a country with a young population, with about 68 % aged 15–64years, the allowed age range or working. A younger population providesa competitive advantage or Albania in domestic and international markets.However, despite broader labor market opportunities, Albania suffers rom ahigh rate o unemployment. Te private sector employs most o the labor orce,and economic development is considered a way to improve the perormance othis indicator. Analyses o unemployment in Albania show there is a direct linkbetween employment and education. In 2009, 53.6 % o the registered unem-ployed had only elementary education, 43.8 % had attained a secondary educa-

tion diploma, and only 2.6 % had higher education.10 a) Education reforms: Generally, all Albanian governments have declared edu-

cation one o their priorities. However, i we analyze the unds allocatedover the years, Albania ranks among the last countries in the region or edu-cation expenditures as a percentage o GDP (around 2.8 % in 2011).

o improve the quality o the labor orce and increase the chances obetter careers, the Albanian society is strongly oriented toward education,especially higher education. he development o this sector has had twophases. During the period 1991–2003, the main concern was to reorganize

the education system in line with new developments in the market. Mostunds went to the drating o texts and curricula. Meanwhile, as a result o

9 One o the most important change was the amendment made in 2004 to the law on the ‘Activityo Insurance, Reinsurance and Intermediation in Insurance and Reinsurance’, which reflectedan EU directive about the insurance companies guarantee und. Te directive increased theund to 3 MM EUR.

10 Tis data does not include undeclared private work. Source: INSA.



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high demand or education, many universities were opened throughout thecountry, supported by the state budget. he most important reorm duringthe second period (2003–2011) proceeded on demand or higher educa-tion; while the quotes approved or the public universities were increasingrapidly, this initiative was not supported suiciently rom the state budgetor inrastructure and sta. An important reorm in higher education wasits inancing scheme. Since 2007, public universities are autonomous insti-tutions; hence the entire unding or them (other than investments) is allo-cated in the orm o a grant; this is in order to enhance their institutionaland inancial autonomy. Particular emphasis was given to proessional edu-cation. he relevant program within the Ministry o Education and Science

has received continuous support rom the state budget; however, the eortsmade to turn it into a successul and eective sector have ailed.b) Strengthening social safety nets: Albania is attempting to implement reorms

or strengthening social saety, but not all o them have been success-ul. Albania has a pay-as-you-go pension scheme, which has an absolutedependence o the state budget. Its deicit is becoming a black hole or thebudget, mainly due to the high degree o inormality and the low number ocontributors. In the early years (1993–1996), revenues were rising at a astpace, averaging 45 %. his relected economic stability ollowing the devel-

opments in 1990–1993, when many actories were closed, unemploymentrose to alarming igures, and GDP ell drastically. However, contributionigures were low, and the high degree o inormality in the years that ol-lowed prevented the scheme revenues rom maintaining high growth.

Ater 2000, the need or a radical reorm o the scheme became vital. Atthat time, the market lacked inormation on the eectiveness o economicactivity, private entities, and their employees. he construction industryespecially showed a high degree o inormality. Markets also saw a discrep-ancy in the number o licensed irms and the number o those who shed

social contributions, and a lower participation in the scheme by workers inthe agricultural sector.Unsatisactory perormance required a change in the contribution rate,

which had been at 42.5 % since 1993. Considered too high, this led to a dis-tortion o the market, increasingly high evasion, and hiding o actual salary.In 2002, the rate dropped to 38.5 %. he negative eect o lower rates wasoset by an increase in the number o people involved in the scheme. In2003, revenues grew by 11 % compared with 2002, while in 2004, the nega-tive eects aded away completely, as revenues increased by 16 %. In 2006,

the contribution rate decreased to 29.5 %, accompanied by an even greaterrise in the number o people involved in the scheme. However, despite themeasures taken, revenues rom contributions continue to be low comparedto the cost o social insurance, making the scheme very dependent on thestate budget. Over the years the growth pace o expenditures has been sig-niicantly higher than the growth o revenues. In addition, the pensionincreases have been ully unded rom the state budget. Another important



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aspect o the pension reorm is the rate’s growth over time. Albania hasbeen characterized by a large dierence in pension levels between urbanand rural areas. o reduce this gap and equalize the areas, in 2012 the gov-ernment applied a higher growth rate or the countryside’s pensions thanor the city’s. In 2009, or instance, the pensions o urban areas increasedby 10 % and those o rural areas by 20 %. hese unds were included in thebudget, at the beginning as a contingency und, administered by the Coun-cil o Ministers and relected in the EFP 2008–2012 document.

However, according to the EFP 2010–2012, one o the strategic priori-ties is restructuring and reorming the pay-as-you-go system to establish adirect connection between the contributions and the pensions. But there

are no cost estimations about this policy in the document, and no budgetimplications.In the health insurance sector, a key role is played by the Health Insur-

ance Institute (HII). In past years this institution was responsible or pro- viding health services in the country. As contributions collected by theHII are very low compared to its expenditures, also this scheme is steadilyinanced by the state budget. In 2007 HII began to support primary healthcare, and in 2009 hospital services as well. hese initiatives were associatedwith an increase o HII unds rom the state budget; unds grew rom 2.7

billion Albanian Lek in 2006 to 4.6 billion in 2007, and to 20.7 billion in2011. his means that in the 2007 budget support or the HII grew by 73 %compared to 2006, whereas in 2011 it was 7.7 times higher than in 2006.

Another institution that plays an important role in active employmentpolicies is the Ministry o Work, Social Aairs and Equal Opportunities.It carries out its policies through the Labor Market program and aims tostrengthen the stability o the labor orce, increase workers’ productiv-ity, and develop national human resources by strengthening training toincrease the skills o the general labor orce. Support or this program has

been growing steadily, as relected in the EFP document each year. Further-more, the Albanian state budget supports also the disabled.

3.1.4. Utilities and network industry reform

Scarce inrastructure has long been a serious obstacle to developing Alba-nia’s economy. Hence investments in telecommunications inrastructure havebecome a priority, especially since 2000. Tis initiative gets ull support romthe state budget and other international financial sources. At the same time,

increasing investments in road projects has become one o the priorities o thegovernment, absorbing high levels o capital budget expenditures. Regardlesso the higher investments in road construction, the government has problemsin planning unds or road maintenance, turning billions o Albanian lek ininvestments ineffective afer a short period. Reorms have also been made inthe urban water supply and sewerage sector, increasing the level o decentrali-zation and private sector participation. However, the state budget still finances



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investments in the sector, mainly in cost recoveries because o the high level odepreciation o the water and sewerage systems, but also through subsidies oroperating activities. While the level o investments remains high, the level osubsidies is decreasing each year.

Meanwhile, Albania is trying to develop port and air inrastructure to ben-efit rom its avorable geography. Te country has substantially upgraded itsInormation and Communication echnology (IC) inrastructure, throughthe Cross-cutting Strategy o Inormation Society. Legislation has liberalizedthe telecoms industry, bringing it into line with the EU regulatory rameworkor communications, which encourages competition. For this purpose, in 2007the National Agency or Inormation Society was set up to accelerate the devel-

opment o an inormation society and e-government services.11

Despite theIC sector’s development in the last ew years, there are still important objec-tives to be achieved, such as country-wide internet coverage and a aster andmore reliable network inrastructure. Significant improvements have beenmade in access to mobile devices as well. A reduction o tariffs, as a result o theregulatory ramework implemented by the Authority o Electronic and PostalCommunications and thus increased competitiveness, has led the industry toexpand rapidly.

Another important development in utilities involves electricity. Albania has

numerous problems in this sector, not only in financial terms but mainly inmanagement. Only afer 2006 has it been possible to provide uninterruptedpower or most o the country; however, net technical losses continue at highlevels (about 32 % in 2010), and so do the indicators regarding unpaid bills.A continuous power supply improves the business climate, but it has beenachieved at a high cost, deteriorating the state budget. Positive developmentshave been observed mainly afer the privatization o the Electricity Distribu-tion Company, but the high level o unpaid bills has made recovery difficult,requiring continuous budget support. On the other hand, the government is

giving priority to concessions or hydro-power plants to help develop privatesector power production, which is not yet significant or the sector (at only2–3 % o total energy production in the country).

3.1.5. Administrative sector reforms

Albania has undertaken many structural reorms to mitigate procedures andshorten the time to register and license a business. Numerous reorms in thefiscal sector promote economic development as well as acilitate business pro-

cedures in payment terms. In 2006 an action plan or regulatory reorm wasapproved by the Council o Ministers, with our pillars: (i) development o a

11 As a result o technological development, Albania has substantially increased the availability oe-services across most basic government services. Almost 80 % o such basic services at the cen-tral government level are now accessible as e-services at the first or second level o sophistica-tion (UNCAD and UNDP’s Report on Foreign Investment in Albania, 2011, page 36).



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regulatory management system (institutions and procedures); (ii) improvedquality o existing regulations (reduction o administrative and regulatory barri-ers); (iii) improved quality o new regulations (through impact assessment o theregulatory ramework); and (iv) set-up o a ramework or periodic monitoringand assessment o reorms. A loan o 9.3 MM USD to support parts o the actionplan was approved by the World Bank.12 Meanwhile reorms in increasing tradeopenness and reducing obstacles to the trade o goods and services have beenapplied thanks to ree trade agreements that Albania has signed.a) Strengthening the legal and administrative framework: International

organizations and institutions have criticized Albania’s hurdles to openinga business. o improve this aspect, the government created two importantinstitutions, the National Registration Center (in 2007) and the NationalLicense Center13 (in 2009). Both are central public institutions reportingto the minister responsible or the economy and unctioning as a one-stopshop. his has made it easier to start a business by streamlining procedures,making them simpler or aster by introducing technology, and reducing oreliminating minimum capital requirements. As a result, there have beenmore registered businesses, inancial resources, and job opportunities. henumber o days required to open a business in Albania decreased rom 41in 2004 to only ive in 2012. Another area that has experienced numerous

reorms is tax legislation: among the changes here, the online tax declara-tion system remains one o the most important steps to acilitate adminis-trative procedures.

b) Trade openness: Albania applies a liberal trade regime. Foreign trade wasliberalized in 1990 and ollows guidelines set by the European Union andWorld rade Organization (WO). Since becoming a WO member in2000, Albania has implemented ull liberalization o its import-exportregime or goods. Imports and exports o commodities are not generallysubject to special authorization requirements. Exceptions apply to quotas or

control requirements imposed through bilateral or multilateral agreements.At the same time, exports are not subject to any taxes, ees, or other barriers.he Stabilization and Association Agreement (SAA) signed in 2006 con-tains an interim ree trade agreement with the EU, which was implementedin 2009. his is expected to open new opportunities or development o thecountry. Since 2004 Albania has completed and started to implement a ullnetwork o ree trade agreements in South East Europe, ollowed by the lib-eralization process and the adoption o a joint agreement on ree trade. In2006, the Central European Free rade Agreement was signed by all parties

listed above, and it has been ully operational since November 2007. heliberalization policy has continued with a ree trade agreement with urkey,and another one with the European Free rade Association states.

12 Fiscal Economic Report 2006–2008, page 34.13 Te NLC aims at improving the business climate, through reduction o administrative barriers

regarding ree initiatives to conduct economic, commercial, or proessional activities, or regard-ing the use o public goods, guaranteeing at the same time the saeguard o public interests.



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All o these measures have been accompanied by assessments o theirimpact on budget revenues, and the level o revenues rom customs dutieshas decreased. During 1993–2003, revenues rom tax oices and customsrepresented on average 20 % o the revenues in the state budget, whereasater the implementation o several ree trade agreements, they are only amodest source o state revenues.

3.2. Assessment of the institutions

Albania has a top-down, flexible budgeting system, which starts rom theCouncil o Ministers, ollowed by the MoF (which plays a key role in the entire

process), and then by all budgetary institutions. Approval o the NationalStrategy or Development and Integration has also helped to reflect the costo structural reorms in the state budget. Tis document defines the goals andobjectives that every sector must ollow, serving as a starting point or line min-istries to break down and realize their missions. Within the ceiling set by theMoF, the line ministries are ree to allocate unds between programs, whichhelps them in distributing the money according to their needs to achieve struc-tural reorms. However, LMs ofen encounter difficulties to include all the costo structural reorms needed in the budget process and their MBP requests.

Te MBP is the key component or a successul budget, which reflectsall the policies o a sector and o LMs. A correct MBP starts by assessing themission, the programs needed to ulfill it, and their broad description. Gen-erally, all the budgetary institutions meet these requirements. Te problemsbegin when the institution is asked to define the aim o the program, its objec-tives, and urthermore the standard o the program policy. Tese problemsstem rom the inability o LMs to define policies in cases where there is nota directly responsible person in doing it. A vague definition, especially o theobjectives, brings out difficulties in assessing a program’s products. Tat is why

many budgetary institutions ail to complete all the fields o the MBP. TeMBP orm proposed by the MoF requires a clear assessment o the policy,objectives, and outputs that will be accomplished in the next three years. Telast element (products) is very important, because the LM can provide a prod-uct’s quantification only i they have made prior estimates o their plans and ostructural reorms as well.

Determining the standard program’s policy (which is also required to befilled in by the LMs) allows the MoF to judge i the proposed products andtheir costs meet the standards in comparison with those o other countries.

Differences between standards and drafed documents are detected even orthe MoF’s own MBP document, which underscores that the quality o sub-missions is still not at the desired level.14 Reaching those quality standards willremain a challenge or the MBP process in coming years. However, despitethe difficulties that some budgetary institutions encounter in achieving the

14 Ministry o Finance, Project document of MBP 2012–2014, Phase II , page 1.



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quality requested, some LMs have made considerable progress in drafing acorrect MBP that reflects the costs o the structural reorms. Tis is mainly thecase or ministries with a high level o budget allocated, which at the same timehave more human resources, such as the ministries o Public Affairs, ransportand elecommunication, Interior, and Education and Science.

Although the law or guidelines have clearly defined the responsibilities oreach directorate in preparing MBP requests, this process is mostly handledby the economic directorates o the institutions. Directorates that do not knowin detail the entire policies, strategies, or reorms to take place in their institu-tions ail to comply with the requests o the MBP as required by the MoF. Forexample, in defining the costs o products within a program, LMs ofen ocus

more on assessment o the costs in the first year without paying the necessaryattention to the two years ollowing.In most cases, even though the LMs may have drafed a reorm, the imple-

mentation o which requires several years, they ail to deliver accurate finan-cial costs or all years in which the reorm is going to take place, even wherecosts and products are determined in relevant action plans. Tis makes it diffi-cult or the MoF to evaluate the requests prepared rom budgetary institutions.Another problem or the MoF’s review is to assess additional requests on thepolicies and objectives o the institutions that were presented as less important

when ceilings were set.In 2006, the MoF began to implement new procedures or preparing MBPrequests in terms o objectives, outputs, activities, and evaluation o publicinvestments, which was an entirely new methodology or budgetary institu-tions. Tese new procedures were necessary to ensure the efficient use o publicunds. However, this reorm was not accompanied by training o all employeeson their role in the process. Since the MoF has continued to help budgetaryinstitutions in preparing the requests, it seems that trainings have been insuffi-cient. On the other hand, LMs have turned this into a routine process, and their

commitment to this process could be better.Another serious problem or the Albanian administration is the requentchange o staff, especially afer the change o political direction o the govern-ment, hampering effective administration or all budgetary institutions. Tishas demotivated staff to be committed to a particular duty and perorm it withresponsibility, because staying in the institution and developing their careerare not necessarily related to merit. Another problem remains the recruitmentprocess or public administration, which is mainly accompanied by ormalprocedures.

Another important issue is the process o preparing the structural reormsthemselves. Tey are ofen ormulated without detailed elements o their imple-mentation and without determining the respective costs or each stage. Conse-quently, their integration with the budget becomes very difficult.



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3.3. Assessment of the processes

Despite the budget drafing process being top-down, LMs have the oppor-tunity—within the limit set by the MoF—to reflect the costs o their budgetaryreorms in the distribution o budget unds. Te MoF does not interere in theway unds are allocated by LMs, as long as the set limit is applied or capital andrecurrent expenditures. However, the MoF remains one o the key links or helpthroughout the budgeting process.

By determining the number o employees or each central governmentinstitution (which since 2011 is defined in the annual budget law) and the accu-rate assessment o unds or personnel expenditures, the MoF influences both

directly and indirectly the implementation o reorms. Based on the legislationin orce,15 it is the MoF and the Public Administration Department (part o theMinistry o Interior) which evaluate and approve requests on establishing neworganizational structures, which in most cases coincide with implementationo the reorms to be undertaken.

Overall, Albania has had a persistent lack o coherence between reormsand their translation into budgetary costs, and ofen the MoF has been blamedor this; despite its role in the whole process o budgeting, the MoF remainsan institution that implements laws drafed by legislative bodies. It is the task

o each budget institution to analyze the reorms developed in their respectiveareas to achieve the desired outputs in a cost-effective and efficient way, andwithin the determined limits.

Another important part o the budget process is the proper definition ocapital expenditures. Albania has established new procedures or such expen-ditures. However, the selection process or investment projects is still not veryclear. Despite a clear determination o the priority sectors where the govern-ment intends to invest in the next ew years, the selection o specific invest-ments is not clearly defined yet. It reflects the political will rather than the result

o analysis o the reorms undertaken. Concurrently, the implementation andthe deduction in cost o cross-cutting reorms remains a problem, with a con-sistently low cooperation between responsible institutions. Tis brings evengreater financial implications, because any cooperation that is wrongly timedcontributes to unds not accomplishing the mission they were approved or.

o reflect the costs o structural reorms in their budget, all budgetary insti-tutions should start with correct and accurate budgetary requirements. In abudget hearing session with the MoF, they explain the importance o additionalrequirements in terms o priorities or the uture. Te MoF considers the budget

request o the institution and, along with all the other requirements, submitsit to the Council o Ministers. Te decisions on additional budget requestspresented by budgetary institutions are taken based on macroeconomic ore-casts or the ollowing period. However, or the LMs and other independentbudgetary institutions, trying to reflect their requests in the annual budgets

15 Law on ‘Competencies o defining wages and bonuses’ (No. 10405), enacted on March 24, 2011.



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remains the option o parliamentary commissions. Being one o the links thatthe budget passes through to its final approval, these commissions ultimatelydecide whether or not to consider the requests.

As mentioned, an MBP document completed according to all the require-ments increases the probability that the budget will reflect the costs o structuralreorms. Te MoF has noticed a progressive growth in attention to the MBPprocess, suggesting that the capacity or managing the process is improvingover time.16

Another document which is important in summarizing and reflectingthe cost o structural reorms is the Economic and Fiscal Programme, whichreviews economic and fiscal policies and the main structural reorms to be

implemented. More specifically the EFP (i) describes the policy rameworkor the medium term and spells out the main policy objectives imbedded inthe program; (ii) describes the economic developments o the real and mon-etary sector during the past year as well as presents the medium-term per-spective o the economy and articulates the project macroeconomic policymix; (iii) describes in detail the ramework o public finances, paying atten-tion to the income and budget expenses or the medium-term period as wellas a treatment o the public debt strategy; and (iv) presents the most importantstructural reorms which have been or will be undertaken in the fields o entre-

preneurship, competition, climate or oreign investment, the labor market,the financial sector, and public administration. Te EFP tries to link the budg-eting process (starting rom the macroeconomic ramework) with the struc-tural reorms to be implemented during the budgeting period. Generally, thedocument ocuses on describing reorms without giving details on their impli-cations in the budget. Starting with the EFP 2008–2010, the document has asub-chapter called Budgetary implication of the main structural reforms, thoughthis has very poor inormation about the reorms addressed (not more than2–3 reorms) and their costs, whereas the whole document typically mentions

only 30 structural reorms.

4. Conclusions and recommendations

4.1. Conclusions

Albania has significantly improved its budgeting process. It has strength-ened budget procedures and the legal ramework, setting out clearly theroles and responsibilities o all the stakeholders. Moving to three-year plan-ning, through drafing o the Medium-erm Budget Programme (MBP), haschanged budgeting rom an annual thinking process, as well as ensured the linkbetween the budget process and policies set by the government. Achievementsrom medium-term planning were reinorced even more by the enactment o

16 Ministry o Finance, Project document of MBP 2012–2014, Phase II , page 1.



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the law on the ‘Management o the Budgetary System in the Republic o Alba-nia’, which specifies in detail the budgetary system, its s

fiscal impact assessment of structural reforms

Documents