Executive Summary

Background

1. Sremska Mitrovica is the administrative, economic, and cultural centre of the Srem district of the Province of Vojvodina, with about 80,000 inhabitants across its territory. It is one of the most economically developed cities in Serbia, based on agricultural production and food processing and located on the main transport arteries 60km North-West of Belgrade. About two-thirds of city revenues accrue from its share of nationally-collected taxes and from central government budget transfers, with the remainder coming from property and other local taxes, charges for goods and services, revenue from exploiting city property, and sales of assets. This repeat PEFA assessment reflects the situation in 2018; where Indicator scores are based on fiscal statistics for the period 2015-17. Where applicable, the cut-off date is end-December 2018. The assessment uses the revised PEFA criteria issued in 2016, and thus provides a baseline against which future changes in public financial management can be measured. It also gives an indication of changes since the previous 2014 assessment based on 2011-13 data; comparisons are made using the 2011 PEFA criteria in force at the time of the previous assessment. The assessment has been commissioned by the State Secretariat for Economic Affairs (SECO), which has supported efforts to improve public financial management (PFM) in sub-national governments (SNGs) through the “Implementation of the SECO Local Government Finance Reform Program in Serbia” (RELOF). The management of the assessment has been undertaken by RELOF. The assessment has been coordinated by RELOF and was overseen by a team co-chaired by SECO and RELOF. The other members of the Oversight Team were representatives of the Ministry of Finance, the State Audit Institution, the six Subnational Governments, the Standing Conference of Towns and Municipalities and UNDP. The assessment is conducted in six Serbian sub-national governments – Knjaževac, Osečina, Paraćin, Sremska Mitrovica, Vranje and Užice. All Performance Indicators as set out in the 2016 PEFA criteria have been evaluated apart from PI-7, given that Sremska Mitrovica has no subordinate governments.

A. Integrated analysis of PFM performance

2. The findings from the assessment of each Indicator are summarised in terms of each of the seven Pillars of the PFM performance measurement framework.

1. Reliability of the Budget

3. About three-quarters of central government funding for Sremska Mitrovica comes (via the Vojvodina Province) through the city’s share of income and other CG taxes, where the yield was overestimated by 8-12 per cent when budgets were prepared (HLG-1.1). CG transfers were overestimated by about 30 per cent in 2015 and 5 per cent in 2017, and underestimated by 22 per cent in 2016; this situation reflects the absence of reliable information about targeted transfers at the time budgets were prepared. The city’s own revenues were also substantially overestimated in all three years, leading overall to actual expenditure falling far short of budget in each of the years 2015-17 (PI-1 and PI-3.1). The functional breakdown of expenditure inevitably showed considerable variance (as measured by the PEFA criteria) because of the wide divergences between budget and out-turn on some but not all functions (PI-2.1), although actual expenditure on housing, recreation and culture, and education was relatively stable across the three years. The measured variance by economic classification very substantially results from the large differences between budget and out-turn in capital investment expenditure (PI-2.2). No expenditure was charged to contingency during 2015-17.

2. Transparency of public finances

4. The Treasury system through which all municipal revenue and expenditure pass contains enough information to enable comparisons between budget and out-turn by reference to administrative, functional and economic classifications (PI-4). (However, the Government does not produce such comparisons for local government spending as a whole.) Information given to the Assembly as part of budget proposals could be improved by giving more of the context with summary comparisons covering the preceding, current and budget years on all three classifications (PI-5). Reporting of performance against targets established for each of the programmes into which SNG expenditure has to be fitted has been initiated, but the formulation of the objectives requires improvement. There have been no independent evaluations of public service performance, although it should be acknowledged that the limited nature of SNG responsibilities makes performance difficult to measure and evaluate (PI-8). Information for the general public is satisfactory (PI-9).

3. Management of assets and liabilities

5. Full financial reports are published for the city’s utility and other service companies, but no consolidated reports, or analyses of the fiscal risks faced by the city, have been published (PI-10). Investment is planned within the framework of the city’s sustainable development strategy 2010-20, and progress is regularly monitored and reported (PI-11). COEs are effectively monitored, as are the city’s holdings of nonfinancial assets, but the asset register is incomplete, and valuations are lacking. Asset disposals are subject to competition, but details of sales are not published (PI-12). Debts are relatively unimportant (interest paid in 2017 was 0.5 per cent of expenditure in 2017) and are fully reconciled and reported, but there is no debt management strategy (PI-13).

4. Policy-based fiscal strategy and budgeting

6. Apart from public investment, which the city seeks to plan over a medium-term horizon, Sremska Mitrovica has not yet produced any medium-term fiscal forecasts or expenditure projections (PI-15 and PI-16). Budget preparation is orderly, although central government guidance on economic assumptions is only provided months after the statutory deadline; as a result, time is very limited for the administration to finalise its proposals and the Assembly to consider them in time for enactment before year-end (PI-17 and PI-18).

5. Predictability and control in budget execution

7. Good progress has been made in expanding the property tax base, and arrangements are in place to encourage compliance and to check the validity of tax declarations. Tax arrears remain a problem, much of it inherited in 2009 when responsibility was transferred from central to local government, with write-offs discouraged by the need to maintain the city’s claims in bankruptcy proceedings (PI-19). Aggregate revenues are reported and reconciled monthly, and individual taxpayer accounts updated as revenue is received (PI-20). New IT software ensures that commitments cannot be undertaken without the assurance of available funds (PI-25.3), while budget users are given quarterly ceilings for expenditure commitment (PI-21). There are no expenditure arrears (PI-22). Payroll controls are effective, and there is an annual external inspection to ensure that all staff positions are authorised, and all employees correctly paid according to their qualifications, responsibilities and length of service (PI-23). The management of procurement by the city administration appears satisfactory, but a good part of expenditure on goods and services is not subject to competition. Information is lacking about procurement by the indirect budget beneficiaries and the city’s utility companies (PI-24). Internal control arrangements work satisfactorily (PI-25), but as yet there is no internal audit (it is hoped that internal audit will be established in 2020) (PI-26). 9

6. Accounting and reporting

8. Bank reconciliations arising from budgetary operations are undertaken daily, but the information is lacking about the practices of the city’s utility companies which also come within the ambit of PI-27.1. No use is made of suspense accounts, and advances are cleared promptly and reconciled at year-end. Arrangements are in place to ensure the integrity of financial records (PI-27). In-year and end-year financial reporting are satisfactory, but annual financial statements do not contain all the information required to comply with cash-based International Public Sector Accounting Standards (IPSAS) (PIs 28 and 29).

7. External scrutiny and audit

9. Serbian SNGs are subject to a thorough audit to international standards by the State Audit Institution (SAI) every three or four years. In other years, a limited financial audit is undertaken by a commercial audit firm. Sremska Mitrovica’s 2017 financial statements were accordingly subject to audit by the SAI. COEs are also within the ambit of the SAI, but coverage of them is more limited. There is clear evidence of follow-up where recommendations are made by the SAI, but other audits have not given rise to significant findings. The resources available to the SAI are controlled and restricted by the Government (PI-30). There has been little substantial involvement of the Assembly in audit follow-up (PI-31).

B. Effectiveness of the internal control framework

10. The internal control system should contribute towards four objectives: (1) the execution of operations in an orderly, ethical, economical, efficient and effective manner; (2) fulfilment of accountability obligations; (3) compliance with applicable laws and regulations; and (4) safeguarding of resources against loss, misuse and damage. The analysis of the performance of the internal control system looks at the five control components: (1) the control environment; (2) risk assessment; (3) control activities; (4) information and communication; and (5) monitoring.

11. The control environment depends on the legal and regulatory framework and the way it is applied in practice. The Budget Systems Law (2009) sets out how internal audit and internal financial control (including inspection) should operate (Articles 80-89). Other relevant legislation is the law on local self-government (2007), the Public Debt law (2005), the Public Procurement law (2013), the law on Determining the Maximum Number of Employees in the Public Sector (2015), and the State Audit Institution law (2005). In the local government context, the performance of the city will depend on the integrity of management and staff, the management styles of the organisation, the organisational structure (including appropriate segregation of duties and reporting arrangements), the management of human resources, and the professional skills of the staff. It is the responsibility of the Mayor to set the tone of the city organisation; he has accordingly adopted a strategy to minimise the risks of damage to the provision of good services.

12. The main risks faced by Sremska Mitrovica are that revenue from the city’s own taxes will not be collected, that revenue producing developments will not take place, and that procurements will not secure the best value. A continued focus on maximising local revenues will be important in sustaining the services, which are the responsibility of the city.

13. Internal controls in the city administration appear to work satisfactorily, but there is no internal audit. External audit by the SAI, most recently for 2017, has not found serious problems in the city’s financial management, which has benefitted from the stability of experienced staff in the finance function. Monitoring the performance of service delivery is still in the process of development, with the first (unpublished) reports of performance against targets having been submitted to central government in September 2018.

C. PFM strengths and weaknesses

Aggregate financial discipline

14. The restraints on borrowing, and the sanctions against local authorities failing to pay invoices within 45 days, mean that the risks of uncontrolled overspending are low. But budget estimates have been poor predictors of actual and own revenue during 2015-17, with capital investment falling far below amounts originally envisaged.

Strategic allocation of resources

15. Sremska Mitrovica has so far made only limited progress in terms of medium-term budgetary planning. Allocations to the main functions – Education, Housing, Culture – are reasonably stable from one year to the next, although public investment planning is adversely impacted by central government control and the absence of any medium-term planning of targeted transfers on which much SNG investment depends. New arrangements at central government level to improve the planning of public investment have yet to be finalised but will have little impact at SNG level because most SNG projects will fall below the threshold costs above which the new arrangements are to apply. Nevertheless, the city has made progress in the execution of its strategic development plan, and a number of major investment projects have been brought to fruition.

Efficient use of resources for service delivery

16. The presentation of all SNG (and central government) expenditure in terms of 17 programmes represents the first step towards results-oriented budgeting. However, it appears that the definition of the programmes may need to be reconsidered, so that they fit more readily into the responsibilities and circumstances of SNGs. It should be recognised, moreover, that the services for which SNGs are responsible – local infrastructure, urban planning, recreational and cultural facilities - do not very readily lend themselves to the measurement of the standard of services delivered. Analysis of the costs of standard operations (e.g., road maintenance, public lighting) may over time provide indications where greater efficiency could be achieved, although differences in local circumstances are likely to mean that comparisons of cost need to be treated cautiously.

Performance changes since 2015

17. Most Performance Indicators remained unchanged over this period. The more difficult fiscal climate for municipalities is reflected in lower scores for the Indicators of budget reliability, while centrally-imposed staffing restrictions held back progress in medium-term fiscal planning and the establishment of internal audit. Public investment planning has been developed, and the local property tax base extended through the identification of more taxpayers. Commitment control has been strengthened through the provision of new software.

Approach to PFM reform

18. Serbia is engaged in an ambitious and wide-ranging Public Administration Reform (PAR) programme with the objective of meeting the standards required for admission to the European Union. Different elements cover the functioning of the economy and the working of the judicial system, as well as government operations and the provision of public services. Within this framework, the Government is implementing a PFM Reform programme, with technical assistance from OECD/SIGMA, IMF, SECO and others. The specific objectives are (1) to improve the quality of economic and fiscal projections; (2) to improve medium-term fiscal planning and budgeting; (3) improvements in public procurement legislation and practice; (4) the embedding of Public Internal Financial Control (PIFC) arrangements on the EU model (through a development strategy and action plan for the period (2017-20); the further development of TSA business practices and reporting and (5) enhancement of the work of the SAI. The SECO-supported RELOF Programme is contributing to these efforts, which are led by the Ministries of Finance, Economy, and Public Administration and Local Government. Over the period since 2015 these efforts have been largely focused on central government operations, with relatively less attention paid to SNGs.

Institutional considerations

19. RELOF is supporting the corresponding PFM improvements also at local government level, focusing on (1) improvement of Financial Management and Control (FMC); (2) the introduction and development of Internal Audit: (3) improvements in budget planning, execution, and reporting, including the medium-term dimension and (4) improving tax administration and tax yields. RELOF is also supporting the improvement of financial management in utility and other companies owned by local authorities on which much of the delivery of public services depends. Sremska Mitrovica has made progress in tax administration and investment planning, but there remains much scope for improvements in expenditure planning and the further development of programme budgeting. These processes could be substantially enhanced if the central government facilitated public investment planning through the provision of targeted transfers on a rolling three year basis (as has operated for general transfers) instead of demanding fresh bids every year from all SNGs. At the same time, SNGs need greater flexibility in recruiting the staff they need to implement these PFM improvements than they have had during 2015-17.