Executive Summary

Background

1. Paraćin is a relatively well-developed municipality with a long-established industrial base and excellent communications along the main North-South corridor in Serbia. It has about 54,000 inhabitants and is located 150km south of Belgrade. This repeat PEFA assessment reflects the situation in 2018; where it is based on fiscal data the period is 2015-17. Where applicable, the cut-off date is end-October 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; comparisons are made using the 2011 PEFA criteria in force at the time of the previous assessment. The assessment has been commissioned by SECO, which has supported efforts to improve public financial management (PFM) in sub-national governments (SNGs) through the Local Government Reform Programme (RELOF). Management of the assessment has been undertaken by RELOF.

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. The purpose of the repeat assessments now undertaken is to review progress since 2015 in these SNGs, and to facilitate the design of future steps to improve local PFM throughout Serbia. All Performance Indicators set out in the 2016 PEFA criteria have been evaluated apart from PI-7, which is not applicable because there are no government units subordinate to the Paraćin municipality.

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. Approximately 60 per cent of central government funding for Paraćin comes through the municipality’s share of income and other CG taxes. Total actual receipts from CG (tax share and transfers combined) were 5.2 per cent above budget for 2015, 9.6 per cent above budget for 2016 and 18.7 per cent above budget for 2017, HLG-1). Own revenue fell well short of budget, particularly in 2016 and 2017 (PI-3), leading to actual expenditure falling about 12 per cent below budget in each of the years 2015-17 (PI-1). The functional breakdown of expenditure showed relatively low variance (as measured by the PEFA criteria) in 2016 (6.7 per cent) and 2017 (8.3 per cent), indicating that expenditure on most functions fell below budget by similar percentages (PI-2.1). The broadly similar measured variance by economic classification results from the differences between budget and out-turn for capital investment and other expenditure, while actual staff costs were very close to budget despite the overall expenditure shortfall (PI-2.2). 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 needs supplementing to meet PEFA standard (PI-5). All municipal revenue and expenditure are included in financial reports: there are no extra-budgetary units. 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 municipality’s utility and other service companies, but no consolidated reports, or analyses of the fiscal risks faced by the municipality, have been published (PI-10). Investment is planned within the framework of the municipal strategy to promote increases in employment, and progress is regularly monitored and reported (PI-11). MOEs are effectively monitored, as are the municipality’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). Overall debts are small, and debt records are complete and regularly reconciled, 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. Paraćin has been unable to allocate the staff resources necessary to undertake medium-term fiscal and expenditure planning (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 municipality’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 the municipality’s financial reserves enable budget users to make commitments within their budget allocations at any time during the year (PI-21). There are no expenditure arrears (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 municipal administration (including indirect budget beneficiaries) appears satisfactory, but it is not clear that information is complete, and a good part of expenditure on goods and services is not subject to competition (PI-24). Internal control arrangements are stretched because of the fall in staff numbers, while there is as yet no internal audit (PI-26).

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, but annual financial statements do not contain all the information required to comply with cash-based International Public Sector Accounting Standards (IPSAS) (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, which does not result in significant audit findings. MOEs are also within the ambit of the SAI, but coverage of them is more limited. Paraćin was not audited by the SAI for 2015-17, so there are no significant audit findings to take into account in this report. 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 municipality 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 Paraćin are that revenue from the municipality’s own taxes will not be collected, that revenue producing developments will not take place, and that procurements will not secure the best value. A continued focus on maximising local revenues will be important in sustaining the services, which are the responsibility of the municipality.

13. Internal controls in the municipal administration appear to work satisfactorily, but there is still no internal audit. There has been no recent external audit by the SAI. Monitoring the performance of service delivery is still in the process of development, with the first (unpublished) reports of performance against targets having been submitted to the 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 own revenue during 2015-17, with capital investment falling far below amounts originally envisaged.

Strategic allocation of resources

15. Paraćin has yet to introduce medium-term fiscal and expenditure planning, while 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 the 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 be treated cautiously.

Performance changes since 2015

17. Paraćin has been particularly severely constrained by staffing restrictions which prevented any progress in the development of medium-term fiscal planning and the establishment of internal audit. Substantial progress has been made with the assistance of RELOF in expanding the property tax base and enforcing collection. A start has been made towards results-oriented budgeting, and commitment controls have been improved through the provision of new software by the central government. Paraćin improved the credibility of its budget by reducing the difference between the aggregate expenditure out-turn and the original approved budget, and the variance in expenditure composition during the last three years, excluding contingency items. In addition, the frequency of budget revisions was reduced. The comprehensiveness of information included in budget documentation was also improved together with public access to key fiscal information. Paraćin worked on developing consolidated quarterly and annual reports on public enterprises in compliance with the Public Enterprise Law, thus improving oversight of aggregate fiscal risk from other public sector entities.

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. Neither the PAR strategy nor the PFM Reform programme has a specific focus on local level.

19. RELOF is supporting the corresponding PFM improvements also at the 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. Paraćin has made good progress in tax administration, but staff limitations have prevented progress in other areas targeted by RELOF. Thus, there remains much scope for improvements in fiscal and 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.