Serbia Vranje Municipality 2020
1. Vranje is a well-developed industrial centre in Southern Serbia with a total population (including its subordinate municipality Vranjska Banja) of about 82,000. The city is located on the main North-South transport artery and has a broad industrial base. About 40 per cent of its total revenues accrues from its share of nationally-collected taxes, with a further 25 per cent coming from central government budget transfers. This repeat PEFA assessment reflects the situation in 2018; where Indicator scores are based on fiscal statistics the period is 2015-17. Where applicable the cut-off date is end-November 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 provides an indication of changes since the previous (2014) assessment, using the 2011 PEFA criteria then in force.
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.
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 60 per cent of central government funding for Vranje comes through the city’s share of income and other CG taxes, where the yield was overestimated by less than one per cent when budgets for 2016 and 2017 were prepared (the overestimate was more than 10 per cent for 2015). Total actual CG transfers exceeded budgets budget for 2015 and 2016 as funds were released for investment but fell well short of budget in 2017 (HLG-1.1). The city’s own revenues were substantially overestimated in 2016 and 2017, and actual expenditure fell far short of budget in each of the years 2015-17 (PI-1 and PI-3.1). The functional breakdown of expenditure showed variance (as measured by the PEFA criteria) exceeding 15 per cent in two of the three years, while the economic breakdown of expenditure showed even larger variances in all three years 2015-17. (PI-2.1 and 2.2). The most significant element in both variances was the reduction in the relative shares going to investment (particularly affecting economic affairs and housing and utilities). 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 generally meets PEFA standards on all points (Score A for PI-5). All revenue and expenditure of city institutions is fully reflected in budgets and out-turn statements, while revenue and expenditure of utility companies providing services on behalf of the city are fully covered by published reports (PI-6 and 10). Financing of the subordinate municipality of Vranjska Banja is fully transparent, but amounts are only settled around the end of November when the city receives information about its transfers from central government (PI-7). 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). Unlike most other SNGs in Serbia, Vranje has significant debts which constrain its ability to borrow to finance new investments, given the requirement that overall indebtedness must not exceed 50 per cent of annual revenue; these include substantial amounts of payment arrears which are the subject of rescheduling agreements with contractors. Debt records are complete and regularly reconciled, and their sustainability is under constant review in the light of the legal limits, but there is no published debt management strategy with targets for interest rates or the maturity of debt instruments used (PI-13).
4. Policy-based fiscal strategy and budgeting
6. Vranje produces revenue and expenditure estimates for the budget year only, although forecasts of capital expenditure are produced for the following two years as part of its budget documentation (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). As noted in paragraph 3 above, there are significant expenditure arrears which are the subject of rescheduling agreements (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 there are doubts about the completeness of information, while a large part of procurement seems not to be subject to competition (PI-24). Internal control arrangements have been improved following the SAI audit of 2016 (PI-25), but internal audit only began to operate early in 2018 (PI-26). 9
6. Accounting and reporting
8. Bank reconciliations arising from budgetary operations are undertaken daily. 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 and in full compliance with national requirements, but tangible assets are not covered in financial statements (as would be required for an A score for PI-29.1) (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. 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, as happened in 2017 following a very critical report on 2016, 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, and to adopt a strategy to minimise the risks of damage to the provision of good services.
12. The main risks faced by Vranje 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 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 following recent changes, but internal audit only began to operate in early 2018. External audit by the SAI for 2016 has resulted in significant improvements in the city’s financial management. Monitoring the performance of service delivery is still in 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. Vranje has made progress in terms of medium-term budgetary planning, 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.
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 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 treated cautiously.
Performance changes since 2015
17. Vranje was already ahead of other SNGs in 2015 in developing medium-term fiscal planning. Problems (including the existence of substantial expenditure arrears) were encountered in budgetary and financial management in 2016, which resulted initially in a draft adverse audit report by the SAI. Financial statements were corrected, new financial rulebooks adopted, and a start was made in installing budget inspection and internal audit. The deterioration in some of the scores relating to budget reliability seems to be associated with the more difficult fiscal climate resulting from reductions in SNGs’ receipts of central funding through tax shares and transfers. More experience has been gained in results-oriented budgeting based on the planning of expenditure by programmes, and commitment controls have been improved. The property tax base has been substantially enlarged, and more effort devoted to collecting the revenue due to the city. Aggregate financial discipline has been restored after the problems encountered in 2016, and a start has been made on performance reporting which should contribute to the efficiency of service delivery. There are ambitious plans for public investment which embody the city’s approach to the strategic allocation of resources. The further development of medium-term fiscal planning and the consolidation of internal audit work should over time contribute to both the efficiency of service delivery and the strategic allocation of resources. External audit made a substantial impact on improving financial discipline and control during 2016-18 but is not yet fully established on a regular basis. A bare comparison of Indicator and Dimension scores risks being misleading because of inconsistencies in the application of the criteria as between the 2015 and 2019 assessments, as explained in Annex 4.
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 initiative is contributing to these efforts, which are led by the Ministries of Finance, Economy, and Public Administration and Local Government. The focus has been on changes at central government level; relatively little attention seems to have been paid by central government to the needs and interests of subnational governments which have been adversely affected by limits on staffing and a reduction in the share of income tax accruing to them.
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. Vranje has made progress in all four areas targeted by RELOF, 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.