EXECUTIVE SUMMARY

Purpose of the Assessment

Global objective for subnational PEFA assessment

The SNG PEFA assessment aims to evaluate the PFM performance of an illustrative sample representing the city and LSGs level in Kyrgyz Republic. The main purpose of the 2019 SNG PEFA assessment is to provide the Government of Kyrgyz Republic, subnational governments and their development partners with an objective up-to-date diagnostic of the sub-national public financial management performance based on the latest internationally recognized PEFA methodology. The SNG PEFA assessment will be conducted for the first time in the country. Therefore, the 2019 PEFA assessment is intended to establish a PEFA baseline using the 2016 PEFA methodology for SNG governments.

The national and SNG assessments process seeks to build a shared understanding of PFM performance and those dimensions that require improvement. Both PEFA assessments will aim at: (i) informing the Central and subnational Governments on areas of PFM strengths and weaknesses; (ii) facilitating and updating the dialogue on PFM between Government and donors; (iii) helping donors build budget support programmes; and iv) provide an independent information to civil society on progress in PFM reforms. The results of the assessments are expected to assist the Central and local Governments in monitoring the implementation of Public Financial Management Reform Strategy and Intergovernmental Fiscal Relations Development Concept to achieve a PFM system that meets the requirements of efficiency and effectiveness and long-term sustainability.

Specific objectives

• To conduct national PEFA assessment using the PEFA framework of 2016. The methodology to be used is the official methodology of 2016 provided by the PEFA Secretariat www.pefa.org. The PEFA assessment should be done in full and include all the performance indicators. The 2018 national PEFA assessment should also provide an update of progress in PFM since the last national PEFA in 2014. During the assessment of relevant PIs and in the report the special focus on revenue from mining should be given because of the mining is the most important economic sector contribution to the budget.
• To conduct SNG PEFA assessment for Krupskaya LSG in Sokuluk district using the PEFA framework of 2016. The methodology to be used is the official methodology of 2016 including Supplementary Guidance for Subnational PEFA Assessments (December 2016) provided by the PEFA Secretariat www.pefa.org. The PEFA assessment should be done in full and include all the performance indicators including HLG-1, the additional indicator for transfers from CG.

Main strengths and weaknesses of the PFM systems in LSG Krupskaya

While expenditure is reliable at aggregate level, it is unreliable at composition level, whereas revenue is not reliable at both aggregate and composition level. The classification on the budget classification is good and allows transparency. Policy based strategy pillar scored the lowest. Macro-economic and fiscal forecasting at LSG Krupskaya lack basic elements. Aggregate fiscal risks are not well managed due to poor monitoring the public corporation. Budget preparation process is found to be weak. Public access to fiscal information and transparency of public finances is also found to be very weak. The legislature does not review audit reports during the assessment period. The major strengths and weaknesses are listed below.

Strengths

• Expenditure budgets, at aggregate levels, are reliable with the outturn close to budget.
• Contingency expenditure is very low over the three years.
• The budget preparation, its execution, accounting and reporting of the local budget is undertaken by classification corresponding to the GFS/COFOG standards; and the existence and adherence to the rules for in-year budget amendments by the executive positively contribute for fiscal discipline.
• There is strong control over expenditure arrears where they are kept to the minimum.
• A strong point to note is the public access to procurement information, where all the required public procurement information is accessible to the public online through the website.
• Generally, the internal control over salary and non-salary expenditures is found to good, though data was lacking to assess some of the dimension on payroll control.

Weaknesses

• Revenue budget is not reliable at aggregate level. Both revenue and expenditure are not reliable at the composition level.
• Macro-economic and fiscal forecasting at LSG Krupskaya lack basic elements.
• Policy based fiscal strategy and budgeting is found to be one of the weakest areas in LSG Krupskaya.
• Budget forecasts do not contain a mid-term forecast of socio-economic development indicators.
• LSG Krupskaya does not prepare mid-term strategies.
• Budget preparation process found to be weak.
• The legislature’s review does not cover fiscal policies and aggregates for the coming year as well as details of expenditure.
• The key weak point of process of public investment management is that there are no approved economic selection criteria for capital investment projects and all documentation relevant to the selection and monitoring of investment projects is not published.
• Service delivery performance indicator which can demonstrate the efficiency with which services are delivered, is poor.
• Public access to fiscal information and transparency of public finances is found to be very weak.
• The external audit reports relating to the LSG Krupskaya were not reviewed by the legislature depriving of the parliament from overseeing whether public resources are properly spent as planned.

Figure 1: Summary of PEFA scores by indicator

Impact of PFM performance on budgetary and fiscal outcomes

Aggregate Fiscal Discipline

Expenditure budgets, at aggregate levels, are reliable with the outturn close to budget (PI-1 scored A). However, the revenue budget is not reliable (PI-3 scored D). The actual revenue outturn was inconsistent over the three years period. Collection of revenue was significantly above budget in year 2017 but reduced dramatically in 2018. The performance improved and collection was close to target in 2019. The expenditure composition variance was also very high at both the functional and economic levels (PI-2 scored D+). The continuous budget reallocations also raise questions about budget credibility as well as the delivery of government services based on its original policy intent. Such reallocations are not in line with the original budget and indicate that there are gaps in the budget planning process and /or in the control of the budget execution process. On the positive side, contingency expenditure is very low over the three years (PI-2.3 scored A). The classification on the budget classification is good and allows transparency; and the existence and adherence to the rules for in-year budget amendments by the executive positively contribute for fiscal discipline.

There is no data on revenue arrears of LSG Krupskaya since the information is collected by the regional STS in Sokuluk for the entire region and is not breakable to local governments, LSG Krupskaya effectively lacking control over revenue arrears. However, there is strong control over expenditure arrears where they are kept to the minimum. The balance dropped from 2% in 2017 to nil in 2019. The legislature grants local governments the right to borrow by issuing municipal securities on their behalf, as well as receiving budget loans. However, The LSG Krupskaya have not borrowed, issued debt obligations or loan guarantees in the period 2017-2019. Macro-economic and fiscal forecasting at LSG Krupskaya lack basic elements. Aggregate fiscal risks are not well managed due to poor monitoring the public corporation. xi

Strategic Allocation of Resources

The strategic allocation of resources is negatively affected by the significant level of budget reallocations at both the revenue and expenditure levels (PI-2 and PI-3.1). Frequent budget reallocations override government original policy intentions, 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 government services based on its original policy intent.

Policy based fiscal strategy and budgeting is found to be one of the weakest areas in LSG Krupskaya, where all the indicators, PIs 14 to 18, received low scores. Macroeconomic and fiscal forecasting (PI-14) scored D, the medium-term budgets does not include estimates of GDP growth, inflation and other forecasts for the main macroeconomic indicators and budget forecasts does not contain a mid-term forecast of socio-economic development, which would include forecasts on expenditures, with indication of main changes in expenditures with comparison to the current year and the reasons for their variation. Moreover, no report is prepared by the government on the progress made against its fiscal strategy. The indicator relating to the medium-term perspective in expenditure budgeting (PI-16) performs poorly and is rated D. Aggregate expenditure ceilings for the budget year and the two following fiscal years are not prepared. Subnational governments do not prepare mid-term strategies. Budget preparation process also is weak, PI-17 scored D. There are no budget calendars and guidance on budget preparation. Legislative scrutiny (PI-18) of budget also scored C+. mainly because the legislature’s review does not cover fiscal policies and aggregates for the coming year as well as details of expenditure.

Public Investment Management (PI-11) does not sufficiently reflect generally accepted good practice in project management. Selection of major investment projects (PI-11) is not based on predetermined economic selection criteria, leading to inefficient allocation of scarce resources.

Efficient Use of Resources for Service Delivery

The PFM system with respect to efficient use of resources for service delivery does not perform well in LSG Krupskaya. This is demonstrated by the low score in PI-2 and PI-3.1, where planned service delivery activities will no longer receive the necessary funding, thereby impacting negatively on the quality of primary service delivery. Medium-term budgeting (PI-16) and public investment management (PI-11) also scored low.

The rating related to the specific service delivery performance indicator (PI-8), which can demonstrate the efficiency with which services are delivered, is poor, with all dimensions rated D, except the third dimension, on the performance plans for service delivery, which is rated A, as information on resources received by frontline service delivery units is collected and recorded for all budgetary institutions, disaggregated by source of funds. A report compiling the information is prepared annually. Public assets management performs average, where the dimension related with financial assets monitoring scored B; and both non-financial assets monitoring and transparency of asset disposals score C.

The mechanisms in place to reduce possible leakages in the system, such as payroll controls (PI-23), internal controls on non-salary expenditure (PI-25) and internal audit (PI-26) received mixed results, and rated at C+, A and NA respectively. There is no internal audit function in LSG Krupskaya. Financial data integrity demonstrates good accounting controls as the three dimensions performed well on bank reconciliations, suspense accounts and advance accounts.

There is also no external audit function at the subnational level of the local self-government of Krupskaya (PI-30). The national level Account Chamber performs the external audit of the consolidated budget performance report of Sokuluk region. The external audit reports relating to the LSG Krupskaya were not reviewed by the legislature it has deprived the parliament from overseeing whether public resources are properly spent as planned (PI-31 scored D).