Georgia Tbilisi 2018

Executive Summary

1. The purpose of this PEFA assessment is to provide an objective analysis of the present performance of the PFM system in the City of Tbilisi against the PEFA indicators. This PEFA provides an update of progress in PFM in the municipality since the last PEFA in 2014 and establishes a new PEFA baseline using the 2016 PEFA methodology.  

2. The assessment covered expenditures by subnational government budgetary units.  Revenues are collected by the Georgia Revenue Services on behalf of the municipality; therefore, this was considered not applicable.  There are no extra-budgetary units and no local government below the municipality level.  The assessment team visited the municipality from May 17 to 26, 2018.  Follow up was conducted 28 May to 1 June, and 18 June 2018 (fieldwork for the assessment).  The financial years covered for indicators that required assessing over three years were 2015 to 2017.  

3. Overall, the results of the PEFA show that public financial management systems in the City of Tbilisi are strong and improved as the PFM Reform Action Plan has been implemented.  The aggregate expenditure side of the budget performs largely according to plan.  There is an impressive array of information regarding the finances of the municipality.  As a result, the budget documents include most of the basic, and much of the supplementary information, required to support a transparent budget process.  Information on performance plans and achievements in service delivery outputs and outcomes across the sectors under the municipality is very good.  However, a strategic selection process is lacking in managing the public investment program although monitoring and reporting of implementation is sound.  Good progress has been made towards a comprehensive medium-term expenditure framework based on a program budgeting for results approach.  There is an effective budget calendar although the issuance of ceilings could be made timelier. The legislature has sufficient time to carry out its scrutiny function.  

4. The Georgian Treasury consolidates central and local government cash balances in the Treasury Single Account on a daily basis.  A cash flow forecast is prepared annually for the year to come and is updated quarterly on the basis of actual inflows and outflows often due to relatively frequent supplementary budgets.  Budgetary units are able to plan and commit expenditure for one year in advance on the basis of quarterly ceilings, in accordance with the budgeted appropriations and commitment releases.

5. The payroll and personnel systems are strong.  Procurement databases include data on what has been procured, value of procurement, and who has been awarded contracts.  However, the appeals process is not wholly independent as 3 members of the appeals board are from State Procurement Agency whose chair is at the same time chair of the dispute review board, with a prevailing vote.  Internal controls on non-salary expenditure have strong segregation of duties, effective commitment controls and compliance with payment rules and procedures.  The internal audit function is operating well under the guidance of the Ministry of Finance’s Central Harmonization Unit.  Internal audit activities are focused on evaluations of the adequacy and effectiveness of internal controls, and they focus on high risk areas.  This is supported by the activity of the Sakrebulo Audit Commission which carries out control inspection on spending units.  Accounts reconciliation and financial data integrity are areas of strengths.  The situation with respect to the annual financial annual reports is mixed. The financial reports for the municipality budgetary units are prepared annually and are comparable with the approved budget, but they are not consolidated for the whole of the operations of the municipality.  Moreover, the financial statements are not submitted for external audit.  The municipality follows the national accounting standards which are still evolving.  External audit is an area of significant strength in terms of standards, but the frequency of audit means that there is often a significant time gap between audits.  Legislative scrutiny does not meet PEFA standards as it is not carried out by the Sakrebulo but is delegated to the State Parliament and none of the audits of Tbilisi was addressed.

6. An overriding feature of PFM in Georgia, both at the Central and Subnational levels of government, has been the development and good use of Information Technology in budget preparation, budget execution (accounts, commitment control, and cash management), personnel and payroll, revenue services, and procurement.  The application of IT has been developed in-country based on business processes in each of the subject areas (redefined as necessary) and not on the reconfiguration of business practices to suit particular software.  This adoption of IT solutions combined with the internet as a vehicle for its implementation by competent and trained personnel (with appropriate control) has been fundamental to the development of strengths in PFM.  The integration of IT, internet and personnel has resulted in PFM’s positive effectiveness and efficiency.

Aggregate Fiscal Discipline

7. Aggregate fiscal discipline is achieved through control over spending during budget execution, as well as realistic revenue forecasts.  Strong revenue administration ensures that revenues are efficiently collected.  The planned budget on an aggregate basis is not circumvented by the use of virement and although there are frequent supplementary budgets the resultant increase in expenditure has been less than 3% of the original budget.  Treasury operations and cash management enable expenditures to be managed within the available resources.  Control of contractual commitments is effective which has limited expenditure arrears.  The strong external audit function can enhance fiscal discipline, but it is limited in coverage.  The activities of the Sakrebulo’s Audit Commission counterbalance the infrequent audit reports and the absence of their external scrutiny.

Strategic Allocation of Resources

8. The Chart of Accounts caters for a multi-dimensional analysis of expenditure.  There is a strong link between the medium-term perspective in expenditure budgeting and strategic plans in the program budget approach to achieving results that are consistent with a strategic allocation of resources.   The management of investment can also be improved which would make better the strategic allocation of resources.

Efficient Use of Resources for Service Delivery

9. The current weaknesses in competitive bidding in the procurement system with respect to the appeals and dispute process could have adverse implications for the efficiency in service delivery.  Nevertheless, the involvement of the State Procurement Agency in the “no objection” process is valuable for municipalities who may not have the internal expertise or independence.  The strengths in the accountability mechanisms from the Sakrebulo’s Audit Commission and external audits (when conducted) are effective as counter checks on inefficient use of resources.  However, weaknesses in the production of consolidated annual financial statements limit the impact of audits.  These are offset, however, by the strength of the annual budget execution reports which inform on the realization of annual targets for outputs and objectives.  Publishing of performance targets and outcomes also assists the efficient use of resources at service delivery units. 

Performance Changes Since Previous Assessment

10.  While the PEFA has been carried out using the 2016 methodology, it has also been possible to score against the 2011 PEFA methodology, which was used in the previous PEFA assessment of Tbilisi in 2014 (presented in Annex 4). The comparison of the 28 indicators shows that there has been an improvement in 11 indicators, deterioration in 2, no change (same scores) in 12 and not applicable in 3 indicators. The indicator on transfers from a higher level of government declined from A to D+, mainly because of a decline in the dimension on earmarked grants outturn.

11. The comparison of the assessments indicates that between the two PEFAs the following indicators (dimensions) have improved in fiscal and budgetary outcomes.

Fiscal Discipline

• Aggregate actual expenditure compared to budget

• Composition of expenditure outturns compared to original approved budget (variance in composition).

• Aggregate actual revenue compared to budget Strategic Allocation of Resources

• Comprehensiveness of information included in budget documentation

• Public access to key fiscal information

• Multi-year perspective in fiscal planning, expenditure policy and budgeting (costed sector strategies and investment linked to strategies) mainly due to implementing program based budgeting. 

Efficient Use of Resources for Service Delivery
• Predictability in the availability of funds for commitment of expenditures (cash flow forecasting and monitoring)

• Effectiveness of payroll controls (integration of personnel and payroll databases and payroll audits)

• Effectiveness of internal audit (frequency of reports)

• Timeliness of and regularity of accounts reconciliation (commitment controls)

• Scope, nature and follow-up of external audit (scope/nature/standards).

12. The main area of backsliding relates to earmarked grants and submission of financial accounts for audit, but these may have been scored too high in 2014 so there could have been no change in reality. 

13. These improvements can be attributed to strong management of the PFM reform program at both the central and municipality government levels (summarized in section 5).  Since 2007 impressive progress has been made at the Revenue Service; important reforms were implemented at the Treasury Service; and the Treasury Single Account was extended to include local governments and all public entities.  Also, the web-based Public Finance Management Information System (PFMIS) was launched.  The State Audit Office has transformed from the traditional control-inspection function to the new function of modern financial and compliance audit in line with international best practice. The legal and methodological basis for internal audit and control has been established and is being rolled out throughout the Government. Since its establishment, the Academy of the Ministry of Finance has been developed into the key provider of training related to the PFM reforms and initiatives.  Ongoing reforms include new approaches in the instruments and practices of Parliamentary Scrutiny of the PFM system.  The importance of independent fiscal institutions and the role of the Budget Office of the Parliament are