Georgia Tbilisi 2022
1. The purpose of this PEFA assessment is to provide an objective analysis of the present performance of the Public Financial Management system in the City of Tbilisi against the PEFA indicators. This assessment provides an update of progress in PFM since the last assessment in 2018 which was the first assessment using the 2016 PEFA methodology. It establishes a new baseline of performance.
2. This assessment covered expenditures by subnational government budgetary units. Revenues are collected by the Georgia Revenue Services on behalf of Tbilisi; therefore, this topic was considered not applicable. There are no extrabudgetary units and no local government below the municipality level.
3. The full assessment team visited Tbilisi on its main fact-finding mission 10 to 15 October 2022. Follow up was conducted after the mission with a cut off period of 25 November. The assessment team met with the Vice Mayor, Head of the Finance Department, and Deputy Head of the Finance Department as well as other relevant officials. Prior to the main fact-finding mission there was contact with the Finance Department to discuss the data requirements and ensure that the mission timing was convenient. The financial years covered were 2019 to 2021.
4. Overall, the results of the assessment show that public financial management systems in the City of Tbilisi are strong and improved as the PFM Reform Action Plan was implemented over time.
5. Budget reliability in the municipality context depends on the reliability of information on grants to be received from the national government. The strengths from the distribution of VAT as a grant are offset by weakness on targeted grants, (albeit a small element of the grants total). While the aggregate expenditure side of the budget is good, the expenditure composition both by administrative type and by economic type is problematic. However, these results have been affected by the uncertainties that resulted from COVID-19 but also by the impact of targeted grants and the expenditure they support often not having been included in the original budget. Georgia has impressive information regarding the finances of the budgetary central government, which is replicated in Tbilisi. Information on performance plans and achievements in service delivery outputs and outcomes across the government sectors is good. Public access to fiscal information is good.
6. Good progress has been made towards a comprehensive medium-term expenditure framework based on a program budgeting for results approach. A medium-term approach is taken to expenditure budgeting. The budget is presented for the up-coming year and the following two fiscal years with a focus on determining medium term expenditures aligned to strategic plans and medium-term budgets. The multi-year information on grants from the distribution of VAT assists in this process but this is offset by information on other grants for the budget year only.
7. Revenue administration is carried out by the Georgia Revenue Services. A revenue report is prepared monthly for the municipality management. Tbilisi works in conjunction with the Georgian Treasury. Based on its cash inflow and outflow forecasts, it deposits a part of its cash in commercial banks through daily auctions. 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. Management of budget releases has been successful in controlling arrears.
8. The payroll system is strong. All government contracts are procured through the Georgian EGovernment Procurement System. Ninety-two percent of the value of contracts is procured through competitive procurement methods. Internal controls on non-salary expenditure are very robust with strong segregation of duties, effective commitment controls, and compliance with payment rules and procedures. The internal audit function is strong with a focus on evaluations of the adequacy and effectiveness of internal controls in high risk areas. Account reconciliation and financial data integrity are areas of strength. Consolidated budget execution reports are prepared quarterly and issued to the Sakrebulo (Assembly) and published. The situation with respect to the annual financial reports is positive. Tbilisi applies current national accounting standards to its financial statements.
9. While external audit standards are an area of significant strength, annual audit coverage is not mandatory. In 2021, the SAO conducted the 2020 consolidated statement financial audit and also the audit of the 2019 financial statement in 2020. The Sakrebulo now conducts its own legislative scrutiny of audit reports. In the past this aspect of external scrutiny was left to Parliament.
10. The effectiveness of the internal control framework in the municipality is scrutinized by the Ministry of Finance and State Audit Office. The Central Harmonization Unit in the Ministry of Finance annually collects, consolidates and analyzes the information based on the annual reports. Under financial and compliance audits, the State Audit Office identifies/tests and evaluates the existence/functionality of the internal controls applied for the public expenditures, including salary and non-salary expenses.
11. An overriding feature of PFM during the assessment period (2019 to 2021) was the development and maintenance of processes in Georgia in budget preparation, budget execution (accounts, commitment control, and cash management), personnel and payroll, revenue services, and procurement. Development occurred at the central government and subnational levels. It was achieved even with the impact of COVID-19 on the country. This achievement continued with the application of IT developed in-country based on business processes in each of the subject areas, and not on the reconfiguration of business practices to suit particular software. Adoption of IT solutions, combined with the internet as a vehicle for its implementation by competent and trained personnel, has been fundamental to the development of strengths in PFM. The continued integration and roll out of IT, internet, and enhanced personnel skills through training resulted in effective and efficient PFM.
Aggregate Fiscal Discipline
12. Aggregate fiscal discipline has been affected by the pandemic. It has had an impact on the municipality’s main source of income -- grant revenue from the distribution of VAT based on population characteristics. However, the built-in procedures for other grants from the center have impeded fiscal discipline as they are often outside the budget preparatory process. Nevertheless, control of spending during budget execution was maintained. Strong revenue administration ensured that revenues were efficiently collected. Given the need of flexibility in budget execution and that both virement and supplementary budgets were used, the rules and procedures relating to these processes were not circumvented. Treasury operations and cash management enabled expenditures to be managed within the available resources. Control of contractual commitments was effective and limited expenditure arrears. The strong internal and external audit function enhanced fiscal discipline.
13. The Georgian public financial management system includes clear rules and procedures for budget modification and flexibility in execution to meet national needs, and these proved their worth during the COVID pandemic and economic downturn. Tbilisi used its formal processes to amend the budget and used formal virement processes to adjust spending to address the pandemic and economic priorities while still maintaining fiscal control. Policy officials had in-year data to manage spending, and the municipality management had the necessary instruments to assure fiscal discipline within government-approved spending parameters.
Strategic Allocation of Resources
14. The Chart of Accounts caters to 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 is consistent with a strategic allocation of resources. The Priorities Document, the medium-term action plan of the municipality, guides the allocation of resources over the next 4 years in terms of revenues and expenditures. The management of investment that has been implemented has affected the strategic allocation of resources. Recurrent cost implication of investment is factored into the budget process and investments are based on strategic priorities. Monitoring of project implementation has ensured that planned activities are being delivered.
15. Overall, Georgia, including both the central and local governments, has developed the key tools for strategic allocation of resources by elected officials (fiscal strategy, functional and programmatic budget classification, regular in-year reports on expenditure according to policy priorities, regularized budget amendments and virement procedures), covering tools for planning and tools for monitoring implementation and controlling to plan. Budget performance has been in alignment with plans, even considering the disruption of COVID. The past three years have been a challenge to fiscal management which tested the Georgian PFM system. The system performed as intended.
Efficient Use of Resources for Service Delivery
16. The previous weaknesses in competitive bidding in the procurement system with respect to the appeals and dispute process have been addressed which has positive implications for efficiency in service delivery. Tbilisi’s level of competitive bidding is very high at 92% of total. The strengths in the accountability mechanisms make internal and external audits effective as counter checks on inefficient use of resources. The development of and timely consolidation of annual financial statements for the municipality enhances the impact of external audits. While external audits are not conducted annually (which in turn limits the effectiveness of oversight), audits have been performed in two of the three assessment years. Publishing of performance targets and outcomes also supports the efficient use of resources in municipal service delivery units.
Performance Changes since Previous Assessment
17. The 2018 and the current PEFA assessment were performed using the 2016 methodology. However, the guidance contains some changes to the application of the 2016 methodology with respect to subnational government. Annex 1 provides a summary of both 2018 and 2022 scores and changes in scores based on the May 2022 Guidance for Subnational Government PEFA Assessments, adjusting the 2018 scores where possible. Across the 87 individual subnational-related dimensions compared, there has been an improvement in 12 dimensions, deterioration in 6, and no change in the score in 69 dimensions. This overall improvement in scoring has been from a relatively high baseline achieved in 2018.
18. The comparison of the assessments indicates that the following dimensions have changed:
Strategic Allocation of Resources
• Improved use of economic analysis in investment PI-11.1
• Improved budget calendar PI -17.1
• Improved system for monitoring arrears PI-22.2 • Improved use of competitive bidding PI-24.2
• Improved procurement complaints procedures PI-24.4 • Improved nature of audits applied PI-26.2
• Improved coverage of financial reports PIs-29.1 and 29.3.
• Improved process relating to audit of financial statements PIs 30.1, 30.2 and 30.3.
• Improved scrutiny of audit reports PI-31.1.
• Deterioration in aggregate and composition of expenditure PI-1, PIs-2.1, and 2.2 due to the impact of COVID.
• Deterioration in aggregate and composition of revenue PIs-3.1 and 3.2 due to the impact of COVID. Strategic Allocation of Resources
• Deterioration in payroll audits PI-23.4 as no relevant audits were conducted in the assessment period.
19. In addition, there is a likely deterioration in medium-term expenditure and revenue estimates as targeted grants were not planned in the medium term. This pertains to PI-14.3 but there is no comparable indicator in the previous PEFA methodology as it was included in the old PI-16 which along with PI-14 and PI-15 has been collapsed into one new indicator, PI-14.
20. The improvements listed above can be attributed to continued strong management of the PFM reform program in Georgia. The government plans to update the reform program on the basis of the 2022 assessment. The Public Sector Financial Management Reform Action Plan 2018 - 2021 had set out a costed plan with targeted results. It also reflected the continued nature of the reform agenda, building upon achievements from previous reform activities across the broad PFM agenda. Due to the COVID-19 pandemic, a number of planned reforms were delayed or cancelled. Due to the state of emergency active in the country from 21 March 2020 to 22 May 2020, a number of economic activities were limited, as priority was placed on the expenditures for healthcare and business support. However, there are several reform initiatives that did make progress. For example, as a result of the 2018 PEFA findings, the reform achievements in public procurement have been significant. Although the reform in this sector had been evolving steadily, the law on state procurement recently was modified considerably and made compatible with EU legislation and international good practice. Significant changes have been made with respect to the procurement complaints procedures since the 2018 assessment highlighted a weakness. There have been actions specifically related to municipalities. In 2019, the equalization transfer system in use was replaced by one based on a value-added tax distribution system. This system directs at least 19% of the 5 value-added tax mobilized in the state budget to the municipal budgets. This revenue becomes municipalities’ own revenue, which a municipality uses at its discretion. The requirement that municipality audits be scrutinized by Parliament was discontinued in 2020. This responsibility was transferred to the Sakrebulo of the municipality. The audit reports of municipalities are no longer discussed in the Parliament.