Moldova Ungheni Municipality 2023
Rationale and purpose
The main purpose of the 2022 PEFA assessment is to provide the Government of Moldova and Ungheni tier I local public authority with an objective, up-to-date diagnostic of the subnational-level public financial management performance based on the latest internationally recognized PEFA methodology. More specifically, the assessment measures which processes and institutions contribute to the achievement of desirable budget outcomes, aggregate fiscal discipline, strategic allocation of resources, and efficient service delivery.
Under the MoF’s coordination, the 2022 PEFA assessment was led by the World Bank with financing provided by the European Union. The assessment covers the last three completed government fiscal years 2018, 2019 and 2020, and was performed from November 2021 – May 2022. Because of the COVID-19 pandemic and the associated restrictions, the assessment was conducted virtually with online collection of the evidence rather than in-person; this fact affected the timeline and progress of the assessment.
The Ministry of Finance is leading implementation of PFM reforms based on the PFM Strategy. The current government’s Strategy for Development of Public Finance Management 2013-2022 has formalized its commitment to sustainably improve the accountability and performance of public financial management systems in all levels of the government. The adoption and enforcement of the law on public finance and budgetary-fiscal accountability no.181 of July 25, 2014, marked an important milestone in the promotion, modernization, and consolidation of the national public finance management system. The 2022 PEFA findings are expected to complement the conclusions of the PEFA assessment for the central government that would inform the preparation of the new strategy and identify further reform areas. This PEFA assessment is also important in the context of the local technical assistance projects implemented by the development partners that use the country’s own systems to channel their resources; the partners would like to be appraised of the PFM performance at the subnational level.
Since its independence Moldova has made a significant effort in the field of decentralization. Among those efforts stand the full ratification of the European Charter of Local Self-Government of July 16, 1997, a comprehensive change of the domestic legal order aimed at the inception of an autonomous local level of government, territorial reforms at different stages, devolution of competencies to local authorities, and a degree of mild fiscal decentralization, etc. The concept and policies of the decentralization policy meet the experiences of the European countries and comply with the aspiration for European integration and the bilateral agreements between Moldova and the European Union, but the implementation does not really meet expectations because public administration reform has only been partially implemented so far.
Although there is legal support for the decentralization reform, it remains a highly political and sensitive topic with many controversies. The challenges facing the decentralization reform in Moldova currently include financial decentralization, patrimonial decentralization, and local administration capacity. Local budgets highly depend on the state budget transfers. Revenues from local sources are lower in Moldova than in other countries in the region, which indicates a reduced fiscal yield of local taxes and fees. Property taxes are considered the potentially largest and most stable source of revenue, however at this stage property tax is not fully exploited by tier 1 local public authorities. Consequently, local public authorities do not have their own important sources of income to fulfill their competencies and provide quality public services to citizens.
Main strengths and weaknesses of the PFM systems
Strengths. The Ungheni municipality has an impressive array of information regarding the finances of budgetary subnational government. The government wide Chart of Accounts, which underpins budget preparation, execution, and reporting, is comprehensive and consistent with Government Finance Statistics (GFS) standards. Citizens are able to access the municipality web page where the finance division publishes PowerPoint presentations with summarized and accessible explanation of the key elements of the budget and announcement for public consultations. In 2020 all municipal council meetings were available to the public, including the budget hearings. Information on performance plans and achievements in service delivery outputs and outcomes across the municipal units is very good reflecting a program budget system in place. All revenues are paid into the Treasury account and allocated to the municipality’s sub-account. Monthly cash forecasts are prepared with daily cash flow updates and consolidated on a monthly basis. Spending units can commit funds up to the value of their annual budget allocations in line with their expenditure plans during the year. There are good internal controls on salary and non-salary expenditure with effective commitment controls and compliance with payment rules and procedures. The municipality reviewed the audit reports and reacted promptly to the audit findings of the Court of Accounts.
Weaknesses. The budget is presented only partially with a medium-term focus. The municipality lacks a basic debt management strategy. The internal audit function is not operational. The standards used in preparing annual financial reports are not disclosed.
Impact of PFM performance on budgetary and fiscal outcomes
Aggregate Fiscal Discipline
Both revenue and expenditure exceeded the original budgets by substantial margins during 2018-2020. The factor that caused such deviations was additional unpredictable allocations provided by the central government throughout the year which led to frequent adjustments in the budget. Transfers from the central government cover half of the municipal expenditure; predictability of the transfers is essential in maintaining fiscal discipline. Treasury operations and cash management enables expenditures to be managed within the available resources. Control of contractual commitments is effective and has removed expenditure arrears. The absence of an internal audit function undermines fiscal discipline, but this is counterbalanced by the controls performed by financial inspection and periodic external audits. The budget classification is good and provides transparency. The existence and adherence to the rules for in-year budget amendments positively contributes to the fiscal discipline.
The recording and reporting of debt is complete, updated, and reconciled on a monthly basis. However, a debt management strategy is not prepared at the level of local governments. The monitoring of the public corporations under ownership of the municipality is weak; thus aggregate fiscal risks are not well managed.
Strategic Allocation of Resources
The significant level of budget reallocations negatively impacts strategic allocation of resources. Frequent budget reallocations override the original policy intentions pursued by the municipality, leading to poor resource allocation which affects efficient service delivery going forward. The continuous budget reallocations also raise questions about budget credibility as well as the delivery of public services based on its original policy intent.
Expenditure budgets are not developed for the medium-term and this affects the scope for the budget scrutiny by the municipal council. A clear budget calendar exists but the municipality has less than four weeks to complete its budget estimates. Budget submission to the municipal council is delayed.
Public investment management does not sufficiently reflect generally accepted good practice in project management. Selection of major investment projects is not based on predetermined economic selection criteria, leading to inefficient allocation of scarce resources.
Efficient Use of Resources for Service Delivery
The municipality scores well on the indicators of performance in the delivery of public services, and reporting on actual delivery, while the information on resources received by frontline service delivery units is collected and recorded for all spending units. However, the independent evaluation of the efficiency and effectiveness of those services is not regularly performed.
Procurement monitoring scores well. The existing mechanisms to reduce possible leakages in the system, such as payroll controls, internal controls on non-salary expenditure, and internal audit received mixed results. Payroll control is strong overall, with some minor deficiencies noted by the external audit and control bodies. Commitment controls and compliances with rules are good but segregation of duties requires some improvement. Internal audit is not currently functioning, and external audit is not performed regularly; further development of these functions would provide increased assurance that resources are being used to their best advantage. Financial data integrity demonstrates good accounting controls as the three dimensions performed well on bank reconciliations, suspense accounts and advance accounts.
External audit and scrutiny of audit reports by the municipal council is satisfactory, but the annual audit of subnational governments is not mandatory, and it is performed on average once in five years.
Performance changes since the previous assessment
This is the baseline assessment for the Ungheni tier I territorial administrative unit.