1. The purpose of this PEFA assessment is to provide an objective analysis of the present performance of the Public Finance Management (PFM) system in the Republic of Georgia against the PEFA indicators. This assessment provides an update of progress in PFM in Georgia since the last assessment in 2013 and establishes a new baseline using the 2016 PEFA methodology.
2. The assessment covered expenditures by central government, budgetary units and revenues collected by the Georgia Revenue Services. There are no extrabudgetary units and local governments were included in terms of indicator 7 relating to transfers to local government. The verification assessment team was together in Georgia from February 25 to March 3, 2018 (time of fieldwork for the assessment). An inter-agency working group assessed measures implemented in the field of PFM by PEFA performance indicator and prepared the preliminary version of the self-assessment report by November 1, 2016. The financial years covered for indicators that required assessing three years are 2014 to 2016.
3. Overall, the results of the PEFA assessment show that public financial management systems in Georgia are strong and improved as the PFM reform action plan has been implemented. The aggregate expenditure side of the budget performs according to plan. There is an impressive array of information regarding the finances of the budgetary central government. Information is included in the budget on a timely basis. As a result, the budget documents include most of the basic, and much of the supplementary information, required to support a transparent budget process. Information on performance plans and achievements in service delivery outputs and outcomes across the government sectors is very good. However, a comprehensive and inclusive process is lacking in managing the public investment program which impacts negatively in the strategic allocation of resources and efficiency. Once the debt management strategy, which is not yet finalized, is approved, there will be a strong focus on managing debt. Good progress has been made towards a comprehensive medium-term expenditure framework based on a program budgeting for results approach. There is an effective budget calendar, which provides budgetary units adequate time to prepare their budgets as well as the legislature to carry out its scrutiny function.
4. Fiscal strategy can be improved by preparing estimates of the policy changes on revenue and expenditure. Reporting on fiscal outcomes could be improved by adopting time-based fiscal targets. Revenue administration is strong, but some constraints remain, particularly the stock of arrears. The Georgian Treasury consolidates cash balances in the Treasury single account on a daily basis. A cash flow forecast is prepared annually for the year to come and is updated at least monthly on the basis of actual inflows and outflows. 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.
5. The payroll and personnel systems are strong. Procurement databases include data on what has been procured, value of procurement, and who has been awarded contracts. However, the appeals process is not wholly independent as 3 members of the appeals board are from State Procurement Agency whose chairman is the same chairman of the dispute review board, with a prevailing vote. Internal controls on nonsalary expenditure have strong segregation of duties, effective commitment controls and compliance with payment rules and procedures. The internal audit function is still strengthening as its coverage does not reach all budgetary units. Internal audit activities are focused on evaluations of the adequacy and effectiveness of internal controls, and they focus on high risk areas. Accounts reconciliation and financial data integrity are areas of strengths. The situation with respect to the annual financial annual reports is mixed. The consolidated financial reports for central government budgetary units are prepared annually and are comparable with the approved budget. However, the State’s consolidated annual financial statements are not submitted for external audit, but those of individual budgetary units are. IPSAS are the disclosed accounting standards applied to all budgetary units’ financial reporting. Nevertheless, less than 50% of the total number of IPSAS standards was adopted by fiscal year 2016 and only 9 standards were implemented. During 2017, 16 standards are being implemented out of a total of 40. Continuing the implementation will improve fiscal discipline. External audit is an area of significant strength but legislative scrutiny requires strengthening which would improve the strategic allocation of resources to priority areas.
6. An overriding feature of PFM in Georgia has been the development and good use of information technology (IT) in budget preparation, budget execution (accounts, commitment control, and cash management), personnel and payroll, revenue services, and procurement. The application of IT has been developed in-country based on business processes in each of the subject areas (redefined as necessary) and not on the reconfiguration of business practices to suit particular software. This adoption of IT solutions combined with the internet as a vehicle for its implementation by competent and trained personnel (with appropriate control) has been fundamental to the development of strengths in PFM. The integration of IT, internet and personnel has resulted in PFM’s positive effectiveness and efficiency.
Aggregate fiscal discipline
7. Aggregate fiscal discipline is achieved through control over spending during budget execution, as well as realistic revenue forecasts. Strong revenue administration ensures that revenues are efficiently collected. The planned budget on an aggregate basis is not circumvented by the use of virement and supplementary budgets. Treasury operations and cash management enables expenditures to be managed within the available resources. Control of contractual commitments is effective which has limited expenditure arrears. The strong external audit function enhances fiscal discipline, but only at the individual budgetary units as the consolidated financial statement is not yet audited.
Strategic allocation of resources
8. The Chart of Accounts caters for 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 are consistent with a strategic allocation of resources. The overall fiscal framework could be improved by analysis and reporting of changes in circumstances relating to fiscal strategy and implications of policy changes. The management of investment can also be improved. These additions would better the strategic allocation of resources. Efficient use of resources for service delivery
9. The current weaknesses in competitive bidding in the procurement system with respect to the appeals and dispute process could have adverse implications for the efficiency in service delivery. The strengths in the accountability mechanisms make external audits effective as counter checks on inefficient use of resources. However, weaknesses in the production of consolidated annual financial statements limit the impact of audits. These are offset, however, by the strength of the annual budget execution reports which reports on the realization of annual targets for outputs and objectives. Publishing of performance targets and outcomes also assists the efficient use of resources at service delivery units. On the revenue side, operational efficiency is compromised by the accumulation of tax arrears. Lack of effective tax debt collection undermines credibility of tax assessments and the principle of equal treatment of taxpayers. The continued arrears write-off of uncollectable arrears would afford the opportunity to clean up tax arrears and make them current.
Performance changes since previous assessment
10. While the PEFA assessment has been carried out using the 2016 methodology, it has been possible to score against the 2011 PEFA methodology, which was used in the previous PEFA assessment of the Republic of Georgia in 2013. Across the 28 individual indicators compared, there has been an improvement in 9 indicators, deterioration in 1 and no change in 18 indicators. This overall improvement in scoring has been from a relatively high base achieved in 2013.
11. The comparison of the two PEFA assessments shows that the following indicators have improved: Fiscal Discipline • Composition of expenditure outturn compared to original approved budget (variance in composition); • Aggregate revenue outturn compared to original approved budget; and • Oversight of aggregate fiscal risk from other public sector entities (monitoring of public corporations). Strategic Allocation of Resources • Multi-year perspective in fiscal planning, expenditure policy and budgeting (costed sector strategies). Efficient use of Resources for Service Delivery • Effectiveness of payroll controls (payroll audits); • Effectiveness of internal audit (coverage and quality); • Timeliness and regularity of accounts reconciliation (bank reconciliation); • Scope, nature and follow-up of external audit (scope/nature); and • Legislative scrutiny of external audit reports. The main area of backsliding is the timeliness of submissions of annual financial statements which impacts on all the key fiscal and budgetary outcomes.
12. These improvements can be attributed to strong management of the PFM reform program which Georgia has undertaken and plans to update on the basis of the new assessment. Since 2007 impressive progress has been made at the Revenue Service; important reforms were implemented at the Treasury Service; and the Treasury single account was extended, which now includes local governments and all public entities. In addition, the web-based Public Financial Management Information System (PFMIS) was launched. The State Audit Office has transformed from the traditional control-inspection function to the new function of modern financial, compliance and performance audit in line with international best practice. The legal and methodological basis for internal audit and control has been established and is being rolled out throughout the Government. Since its establishment, the Academy of the Ministry of Finance has been developed into the key provider of training related to the PFM reforms and initiatives. Ongoing reforms include new approaches in the instruments and practices of parliamentary scrutiny of the PFM system. The importance of independent fiscal institutions and the role of the Budget Office of the parliament are also understood and remain in the agenda of PFM reform.1 This assessment of the reform program confirms the breadth and depth of the reforms as well as their holistic and intertwined features. It also reflects the continued nature of the reform agenda, building upon achievements from previous reform activities across the broad spectrum of the PFM agenda. Work has already commenced on improving investment management as a result of the initial draft of this PEFA report.