PEFA’s Contribution to Georgia’s PFM Reform at Subnational Government Level Stimulated by Capital Grants
By Patrick Umah Tete, Senior Financial Management Specialist and Mariam Dolidze, Senior Economist, World Bank
Having a strong Public Financial Management (PFM) system is a priority for the government of Georgia and is seen as essential to improving service delivery, transparency and accountability. For about 15 years, Georgia has been implementing comprehensive reforms to improve its fiscal discipline; program-based budgeting system; inter-governmental fiscal relations; tools for macroeconomic and fiscal analysis; and tax policy and administration. It has also developed its own well-structured, integrated financial management information system, known as e-Treasury.
Georgia’s first PEFA assessment was published in 2008. In 2012 and in 2017 the Ministry of Finance (MOF) carried out self-assessments at the central government level that were validated by the World Bank. The findings of the assessments showed significant improvements in many PFM areas but also indicated that the performance gap with the PFM systems at municipalities was widening. This prompted the MOF to think of a way to stimulate PFM reforms at subnational level. PEFA was seen as a tool to determine areas of improvement for the municipalities.
The MOF of Georgia decided in 2017 to conduct PEFA assessments at subnational level (municipalities) in order to know the weaknesses and strengths to reform the PFM systems. Out of a total of 67 municipalities, 27 municipalities were assessed using the 2016 PEFA methodology. The 2018 PEFA Municipality Synthesis Report that summarized the assessments of 15 municipalities, was prepared by the World Bank to identify systemic areas of weaknesses and strengths in the PFM systems. This information was used to prepare Georgia’s PFM Strategy for 2018-2021. This PFM strategy is supporting the 2019-2025 Decentralization Strategy, which aims to introduce reliable, accountable, transparent and result-oriented local governments as one of its objectives.
Subsequently, MOF and the Ministry of Regional Development and Infrastructure decided to use top-ups to capital grants for public investments as an incentive to stimulate PFM reforms amongst municipalities. The transfer of these grants was conditional on the municipalities making improvements over the medium-term (2020-2022) in critical PFM areas of weakness identified in PEFA assessments.
Common areas of weakness, as identified in the 2018 PEFA Municipality Synthesis Report, included: i) failure to submit timely annual financial statements for audit to the State Audit Office; and ii) limited scrutiny by Sakrebulos (local councils) over the implementation of the recommendations in the internal audit and external audit reports. Beyond these, additional areas that were reviewed in the PEFA assessments have also been included in the reform program, covering areas such as budget planning and preparation (through stronger compliance with program budgeting methodology), reporting, controls and transparency. The objective of the reform is to ensure that municipalities: i) can plan and prepare more realistic budgets in accordance with the program budget methodology; ii) are subjected to stronger internal and external scrutiny and iii) are more transparent and engage more with their citizens.
In order to implement these reforms, the Government, through Decree No. 2735, dated December 30, 2019, introduced a mechanism to support PFM improvements by municipalities, by providing additional financing for capital investments for 27 municipalities, conditional upon the municipalities improving identified areas of weakness as per PEFA assessment reports. The Municipalities then signed Memorandums of Understanding (MoU) with MOF to comply with the decree. These MoUs have a set of indicators based on areas of weakness identified in the PEFA assessments, that the municipalities should achieve by 2022 in order to get more capital grants for public investments. The World Bank supported these policy changes under the Economic Management and Competitiveness Development Policy Operation. In addition, the Bank will support the implementation of these reforms under the Economic Governance and Fiscal Accountability Trust Fund financed by the European Union. Other Development Partners will also provide implementation support too.
The results for 27 municipalities stipulated in the MoU are to be achieved by 2022. By then, it is expected that more than 50 percent of participating municipalities will have their financial statements submitted for audit. Once audited, the reports will also be scrutinized by local councils (Sakrebulos) who are expected to use the findings to hold local governments accountable for more efficient and transparent operations. Furthermore, improved citizen engagement in PFM processes should help strengthen the quality of services. A growing number of municipalities implementing the program budgeting methodology should also help implement more gender-sensitive budgeting at the local level. According to the program budgeting guidelines, gender sensitive programs should include at least one indicator (at both program and activity level) to assess the results of gender elements in the programs. Progress towards the achievement of these results is underway and the first measurement of progress will be done towards the end of 2020.
One major lesson learnt was that PEFA assessments are very useful in identifying areas of reform, but it can be challenging to use the assessment to conduct reforms in each municipality. In the case of Georgia, the MOF would like all the 67 municipalities to be assessed using the PEFA methodology as this would help them identify areas of weakness and to develop MoUs for each municipality to carry out reforms. Therefore, not all the assessments will go through the PEFA Secretariat’s quality assurance arrangements. However, this is not a major concern for the MOF as their primary objective is to use the methodology to assess each municipality’s PFM performance for internal reforms in the country. In addition, it’s very costly to assess all 67 municipalities. In the case of Georgia, the recommendation could beto undertake light-touch PEFA assessments that would cover the assessment of critical PFM systems at subnational level. The PEFA Secretariat could consider developing suitable assessments for countries thatwould find this useful. Alternatively, the MOF could develop a set of critical PFM areas they would like to assess at subnational level.
Giorgi Kakauridze, Deputy Minister of Finance of the Government of Georgia has said the following: “PEFA has been very useful to the Government of Georgia as a tool for monitoring PFM reforms over time. It’s allowed us to have a systematic approach for assessing progress and identifying shortfalls of the reform. PEFA findings have been guiding the PFM reform agenda for central government of Georgia since the first assessment in 2005 and we continue to actively use the tool for further reform plans for local governments. Since the tool is accepted as one of the most effective assessment mechanisms worldwide, it has also helped us to better communicate our progress and further needs to international institutions and the donor community. This has allowed us to mobilize more tailored Technical Assistance.”
 In 2018, local government spending accounted for 4.6 percent of GDP and revenues totaled 5.6 percent of GDP. By 2025, municipalities revenues should account for at least 7 percent of GDP.
 As of 2019.
 Three assessments where done by World Bank that got PEFA CHECK and 12 by GIZ.
 Over 2020-22, participating municipalities could receive on average 34 percent of the capital grant transfer they received in 2019, which should be sufficient to incentivize improvements. Transfers are pro-rated to the progress of the municipality on the indicators agreed with the MOF.
 Based on the 2018 PEFA Municipality Synthesis Report, only three municipalities submitted their financial statements to the State Audit Office for external audit within three months of the end of the fiscal year.