Montenegro 2019

Purpose and management
The purpose of this assessment was to provide the Government of Montenegro with a snapshot of the performance of the public financial management system in line with the standardized methodology as prescribed by the PEFA Framework 2016 (and accompanying tools and instructions), which assesses the public financial management (PFM) system across seven pillars and 31 indicators.1 The purpose of the assessment report is to inform the government about the PFM’s strengths and areas for improvement, in order to inform future reform plans and actions taken to build a reliable and efficient PFM system. Two PEFA assessments have been carried out in Montenegro to date, in 2009 and 2013. This is the third PEFA external assessment and the first to use the 2016 Framework, thereby both setting the baseline scores according to the most recent PEFA methodology and providing an update on performance changes using the 2011 Framework.
The assessment has been conducted by the World Bank, in collaboration with the Government of Montenegro and the Delegation of the European Union to Montenegro (DEU), with financing from the SAFE Trust Fund. The assessment team included World Bank staff, expert consultants, and a representative of the Ministry of Finance (MoF). The oversight team included the MoF, the World Bank, and the DEU. Country institutions participated in trainings on PEFA methodology,2 provided source data and information, and gave constructive feedback to the draft assessment report. Quality assurance arrangements followed the PEFA CHECK requirements. The assessment’s concept note and draft report were peer reviewed by the MoF, the World Bank, the PEFA Secretariat, and the DEU.

Scope, coverage, and timing
The assessment covers the central government (CG) of Montenegro. Central government includes budget users/spending units as defined by the Law on Budget and Fiscal Responsibility (LBFR). Spending units include first tier spending units, which comprise the ministries, state funds (organizations for mandatory social insurance), and independent spending units (government entities financed from the budget which are not part of ministries). First tier spending units can have in their responsibility certain indirect budget users, such as public institutions (schools, hospitals etc.), which are also part of the central government and in the scope of the assessment. The assessment likewise covers extra-budgetary operations of the central government. Extra-budgetary units are Investment and Development Fund and four regulatory agencies3. Local self-governments and public corporations are outside of the scope of the assessment, apart where linked to the performance of the central government, such as in PI-7 and PI-10.
The assessment examines the PFM system performance in fiscal years 2016, 2017, and 2018. This scope applies to all dimensions covering the last three completed fiscal years, with fiscal 2018 the “last completed fiscal year” assessed in number of dimensions. The assessment was carried out from March 2019 until September 2019, with June 30, 2019 the cut-off date for dimensions/indicators assessed “at the time of assessment.”

Summary assessment of PFM performance
The assessment shows mixed performance across different PFM processes and institutions covered by the PEFA’s seven pillars and 31 indicators. Fundamentals of the PFM system are in place and core functions are performing at the higher end of the assessment scores. These fundamentals and core functions relate to budget reliability, transparency of budget and fiscal information, revenue mobilization and budget execution, internal control and internal audit (IA), external audit and parliamentary scrutiny and, to certain extent, accounting and financial reporting. On the other hand, more advanced elements of PFM system demonstrate room for further improvement and continued strengthening. Preserving efficient and reliable fundamentals while developing additional capacity for advanced PFM practices can enhance the management of public finances in the long run and contribute to the country’s broader goals, such as economic growth and efficient public service delivery. Areas for further improvement include the linkage between strategic plans and budget resources; medium-term perspective in planning and budgeting; management of public investments, assets, and fiscal risks; and meaningful performance measurement and evaluation.

Key findings and conclusions from the integrated assessment of PFM performance are:
• The annual budget is largely reliable and credible, with deviations in revenue and expenditures outturn and composition remaining within manageable levels.
• Fiscal information is transparent and accessible to the public. The budget is comprehensive, with low extent of extra-budgetary operations, and is presented informatively, with a full array of relevant budget classifications. Lack of meaningful program budgeting is detrimental to the provision of information on performance of service delivery.
• There is no established functioning system for monitoring and managing fiscal risks that arise from the operations of state-owned enterprises, sub-national governments, public-private sector partnerships (PPPs), natural disasters, and other potential risks.
• Management of public investments is weak in all stages of the cycle. Identification, economic analysis, appraisal, selection, costing and implementation monitoring are all either deficient or not performed. The Montenegrin legislative framework (the Decision on Capital Budget (DCB)) includes provisions that, if implemented, would strengthen the system and the process, but nevertheless enforcement so far has been poor.
• The register of non-financial assets is in early stages of development, therefore there is no complete and accurate data on non-financial assets.
• The Montenegrin debt management framework and practices are adequate in terms of recording, reporting, and approving debt and guarantees.
• Strategies and medium-term plans are developed, but they are not fully operationalized through the budgeted activities, there is a weak link between strategic objectives and budget priorities and allocations.
• Revenue administration effectively focuses on promoting voluntary compliance through dissemination of comprehensive and timely information to taxpayers. Documented compliance improvement plans are in place and an increasing number of planned tax audits are carried out on the basis of structured, risk-based approaches. Despite evident improvements, tax arrears remain an area of concern.
• Performance in terms of predictability and availability of funds scored well, enabling effective and undisrupted budget execution. Spending units are allowed to commit funds up to the value of annual budget allocations and can make payments up to the value of their monthly apportionment limits.
• Compliance with payment rules and procedures is fairly high, but issues related to commitment control and concerns regarding the potential for spending units to enter contractual obligations beyond their annual budget limits persist. Information on expenditure arrears is collected regularly and suggests a low level of arrears, although the lack of a clear definition of arrears and of centralized records to support monitoring and reporting bring the reliability of underlying data into question.
• The centralized payroll system in the MoF is functional, but it would benefit from broader coverage and better integration between personnel and payroll records.
• The Montenegrin framework for and management of procurement are relatively sound with regard to procurement monitoring, methods used, public information, and complaints mechanisms.
• Internal audit is fairly well rated in terms of its coverage, nature of individual engagements, standards applied, conduct of planned audits, and response to internal audit recommendations.
• Financial statements produced on a cash basis, are accurate, timely, and frequent. Completeness of financial reports is an issue, since they are prepared on a cash basis and do not present information on assets and liabilities (apart from the report on unsettled commitments/liabilities).
• The external audit performed by the State Audit Institution (SAI) is an area of strength. The SAI’s independence is protected in the constitution and it works within a legal framework that provides a relevant remit and coverage, with ongoing efforts to ensure alignment with the relevant international standards.
• Legislative scrutiny of both budgets and audit reports, as codified in procedures and implemented in practice, is timely and largely adequate.

Impact of PFM on budgetary and fiscal outcomes
The PEFA assessment measures the extent to which the PFM system supports the achievement of three key outcomes: aggregate fiscal discipline, strategic allocation of resources, and efficient service delivery.
Aggregate fiscal discipline. Annual budgets are generally reliable, transparent, and presented by all relevant classifications, with little use of unreported extra-budgetary operations, which positively impacts aggregate fiscal discipline. Overall revenue administration is improving and the stock of tax arrears is being gradually reduced. The budget execution system is sound, and appropriate budgetary controls ensure that execution remains within the approved budget allocations, with limited use of contingency votes. Debt management practices are generally sound. Payroll controls, albeit highly decentralized, have mitigated the risk of an excessive total wage bill. On the downside, monitoring of expenditure arrears suffers from data reliability issues but overall arrears seem contained below five percent. Beyond the annual perspective, PFM functions
required to maintain aggregate medium-to-long term fiscal discipline—including capital budgeting and medium-term perspective in budget planning, fiscal risk oversight, and management of public assets—scored on the weaker end of performance scale.
Strategic allocation of resources. An acceptable level of annual deviations in revenue and expenditure composition ensured orderly execution for the priorities and policy objectives included in the budget. On the upside, predictability of resource allocation for service delivery and the ability to track resources across a full spectrum of budget classifications contributed to stable funding for in-year priorities. Procurement management is fairly adequate, supporting the budget execution process for strategic allocations. At the same time, the approved annual budget does not necessarily reflect the policy objectives articulated in sectoral strategies, which therefore are only in some cases operationalized through concrete activities funded from the budget. Overall, the link between high level strategic and policy objectives and the annual and multi-annual budgets remains weak. Evidence of weaknesses in planning, monitoring, and reporting of service delivery limit stakeholders’ perspectives on the effectiveness of spending. Better management of investment, including improved factoring into the budget process of the recurrent cost implications of investment, and more stringent economic analysis in order to generate the best return would provide a better perspective on the fiscal space available for strategic priorities.
Efficient service delivery. A reliable budget execution system ensures that budget allocations intended for service delivery are executed in an orderly manner. Overall, efficient revenue administration ensures availability of planned funds for service delivery. Level of deviations in the composition of expenditures is acceptable, hence the risk of reallocation of funds budgeted for service delivery for other purposes is low. Information on resources received by service delivery units is available for both the budget source of financing and, in general, for own source revenue. On the downside, underdeveloped performance management concept and practices, largely influenced by underdeveloped program budgeting, represent a weakness. This leads to failure in the monitoring and evaluation of results and the impact of budget programs, which is a prerequisite for further strengthening of service delivery.

Performance changes
The current assessment provides an analysis of performance changes through a comparison with the 2013 assessment.4 Fifteen out of 28 performance indicators kept the same rating, eleven indicators registered improved scores due to improved performance, and only two indicators showed deteriorated scores. For two indicators with lower score (PI-4 Stock and monitoring of expenditure arrears and PI-18 Effectiveness of payroll controls), judgment and interpretation were applied, which resulted in registering lower scores than the previous assessment, although there was no substantive performance change. On the other hand, PI-9 Oversight of aggregate fiscal risk from other public sector entities, registered the same score due to the method (weakest link) used, but in fact the performance deteriorated.
The performance demonstrated an overall tendency of improvement. Main performance improvements were observed in (i) budget reliability, (ii) extent of unreported government operations, (iii) taxpayer registration and tax assessment, (iv) procedures for contracting and reporting debt and issuing guarantees, (v) improved procurement management, (vi) effective internal controls, and (vii) strengthened IA, external audit, and parliamentary scrutiny.
4 Given that the 2013 assessment was conducted in line with the PEFA 2011 Framework, while the current assessment uses the PEFA 2016 Framework, the analysis of performance change in line with the PEFA Secretariat’s guidance was done by assessing the indicators under the PEFA 2011 Framework with the available data for the current assessment. Details are presented in Annex 4.
Since performance changes had a tendency to show improvement, they impacted the fiscal and budgetary outcomes in a positive way. More reliable budgeting, budget execution, and revenue administration contribute directly to enhanced aggregate fiscal discipline. Those improvements ensure that resources for strategic allocations and service delivery are planned properly, made available, and executed without disruptions. Comprehensive and credible budgeting with a low level of unreported government operations also positively impacts aggregate fiscal discipline. Likewise, enhanced procedures for debt financing and reporting and a sound system for issuing guarantees ensure optimized and safeguarded use of budget funds. Oversight, control, and scrutiny exercised by the external auditors, internal auditors, and the parliament create an accountable environment and contribute to ensuring a disciplined use of public resources that are strategically allocated, thus enabling efficient service delivery. On the downside, lack of appropriate monitoring of the fiscal risks arising from local governments’ operations and other sources of potential concern is detrimental to fiscal discipline, due to the incremental risk of unexpected burdens on the budget needed to respond to materialized fiscal risks.

PFM reform agenda
Montenegro is undertaking an ambitious PFM Reform Program (PFMRP) covering the period 2016–20, with institutionalized structures for implementation, coordination, and monitoring. PFMRP is a sub-set of a broader Public Administration Reform (PAR) Strategy, and represents an overarching strategic framework that aims to ensure sound PFM and fiscal sustainability in line with European Union (EU) accession priorities. MoF is the lead implementing agency, with critical roles assigned to the revenue collecting agencies and external auditors and on the understanding that the implementation is linked with all budget users in the public sector. PFMRP objectives are defined and grouped under the following PFM areas: (i) sustainable fiscal framework, public expenditures planning, and budgeting; (ii) budget execution; (iii) development of public internal financial control; (iv) transparent financial reporting and accounting; and (v) the strengthening of external audit capacities.
Despite delays and moderate implementation rates of the PFMRP overall, 2018 and 2019 progress reports indicate that important results have been accomplished in some areas. In 2017-18, the government reported an implementation rate against performance indicators and an activity level at 50 percent on average. Reported results note progress across a number of areas, including improvements in the legal framework for capital budget planning, the macroeconomic model, efficiency in TA operations and revenue collection, collections by the CA, capacity for public internal financial control, debt management, and the external audit function. Some of the corresponding performance improvements are shown in higher scores at dimension and indicator levels in Section 3, while other reforms are yet to materialize. At the same time, civil society organizations’ and non-public third-parties’ assessments have been critical of the pace and scope of the government’s efforts, in particular the failure to implement the electronic registry of state assets, strengthen the preconditions for meaningful program budgeting, introduce a more accurate overview of capital budgeting projects, and address the delays in the establishment of an electronic public procurement system.
Reform actions address PFM elements that were identified as areas for improvement by the PEFA assessment. Specific measures under the five priority areas listed above aim to address some of the areas of weakness recognized in the PEFA report. The LBFR introduced amendments that prescribe the introduction of a medium-term, three-year budget starting from 2020. The new DCB, which was adopted in 2018, brought an improved framework for capital budgeting and public investment management, expected to be enforced during 2020. Efforts also are underway to strengthen program budgeting by developing clear objectives and performance indicators and by establishing a system for measuring results, but the establishment of a full-fledged system for performance management still appears to be in a distant future. Reform and transition to accrual accounting is also underway, with the law that provides Montenegro a framework for transition expected to be adopted by the end of 2019. Considerable support to implementation of the above reforms is available from externally-financed technical assistance projects. At the time of the assessment, implementation was underway for seven EU-funded PFM projects in the above areas, among others. Development of the register for non-financial assets that is intended to improve management of public assets is planned to start in 2019, but the results of this reform can be expected in the medium-term, at the earliest. Currently, there is no specific plan to develop the function of fiscal risks monitoring and management.