1. The purpose of this PEFA assessment is to provide an objective analysis of the present performance of the Public Financial Management system in the Republic of Georgia against the PEFA indicators. This assessment provides an update of progress in PFM since the last assessment in 2018 which was the first assessment using the 2016 PEFA methodology. It establishes a new baseline of performance.
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 government was included in indicator PI-7 (which pertains to transfers to local government). An inter-agency working group led by the Ministry of Finance organized inputs from relevant ministries and agencies on the 31 indicators. The preliminary version of the self-assessment report was produced in May 2022. It was sent to the World Bank for its initial review. A verification assessment team travelled to Georgia from July 15 to August 3, 2022 and subsequently from September 3 to 12, 2022. The financial years covered were 2019 to 2021.
3. Overall, the results of the assessment show that the public financial management systems in Georgia are strong and have continued to improve as the PFM Reform Action Plan has been implemented. However, due to the impact of the COVID-19 pandemic the aggregate expenditure side of the budget has not performed according to plan in 2020 and 2021 as there was a need for additional in-year expenditure. In 2020 there was under-performance of revenue against the budget but in 2021 there was a rebound in the economy and an over-performance against plan. These situations reflect the uncertainly that the government faced in managing its public finances. Nevertheless, 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 all of the basic, and most 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. A comprehensive and inclusive process has been implemented in managing the public investment program. A debt management strategy has been produced and approved which underpins 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 adequate time for budgetary units to prepare their budgets and for the legislature to carry out its scrutiny function.
4. There is an on-going and updated fiscal strategy. Estimates of the policy changes on revenue and expenditure are prepared. Reporting on fiscal outcomes include time-based fiscal targets. Revenue administration is strong, but some constraints remain, particularly the stock of arrears. The Treasury consolidates cash balances in the Treasury Single Account daily. 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. The appeals process is now completely independent from the procurement implementing agency as a new and separate resolution committee has been created. The percentage of contracts awarded using competitive tendering has declined slightly due to emergency health purchases (occasioned by the pandemic), but also from the relative lowering of already low procurement thresholds due to domestic inflation and lower exchange rates. Internal controls on non-salary expenditure have strong segregation of duties, effective commitment controls, and compliance with payment rules and procedures. The internal audit function continues to be strengthened as its coverage reaches virtually all budgetary units. Internal audit activities are focused on evaluations of the adequacy and effectiveness of internal controls audits and have been expanded to include performance and system audits. The focus is on identified high risk areas. Accounts reconciliation and financial data integrity are areas of strengths. 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 externally audited, but those of individual budgetary units are. IPSAS are the disclosed accounting standards applied to all budgetary units’ financial reporting. The number of IPSAS standards used is now 73 percent of the relevant standards that apply to Georgia. External audit is an area of significant strength as is legislative scrutiny of the audit reports that Parliament receives.
6. An overriding feature of PFM during the assessment period covering 2019 to 2021 has been the maintenance and development of procedures in budget preparation, budget execution (accounts, commitment control, and cash management), personnel and payroll, revenue services, and procurement. This has been achieved with the impact of the COVID-19 pandemic on the country. This achievement has continued the application of the IT that was 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 continued integration and rollout of IT, internet, and enhanced personnel skills through training, has resulted in PFM’s positive effectiveness and efficiency.
Aggregate Fiscal Discipline
7. Aggregate fiscal discipline has been affected by the pandemic. Both revenue and expenditure forecasts have not been realized, downwards in 2020 and upwards in 2021, as the unpredictability of the pandemic on the economy was addressed in public finances. Nevertheless control over spending during budget execution was maintained. Strong revenue administration ensured that revenues were efficiently collected. Despite the need of flexibility in budget execution and that both virement and supplementary budgets were used, the rules and procedures relating to these processes were not circumvented. Treasury operations and cash management enabled expenditures to be managed within the available resources. Control of contractual commitments was effective and the stock of expenditure arrears did not exceed two percent during 2019-2021. The strong internal and external audit function enhanced fiscal discipline.
Strategic Allocation of Resources
8. The Chart of Accounts caters to 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. There is an emphasis on the overall fiscal framework which has been improved by analysis and reporting of changes in circumstances relating to fiscal strategy and implications of policy changes. The management of investment that has been implemented has affected the strategic allocation of resources. Recurrent cost implications of investment is factored into the budget process and investments are also selected to generate the best return. Monitoring of the implementation of projects has ensured that what was planned is being delivered.
Efficient Use of Resources for Service Delivery
9. The previous weaknesses in competitive bidding in the procurement system with respect to the appeals and dispute process have been addressed which has positive implications for efficiency in service delivery. Although there has been a reduction in competitive bidding, this was as a result of health related expenditures and ensuring a response to needs from COVID-19. The strengths in the accountability mechanisms make internal and external audits effective as counter checks on inefficient use of resources. The continued lack of audit of consolidated annual financial statements limit the impact of external audits which in turn limits the effectiveness of oversight. This is offset by the audit of individual ministerial financial statements and by the strength of the audited annual budget execution reports which includes information on the realization of annual targets for outputs and objectives. The publishing of performance targets and outcomes also supports the efficient use of resources in service delivery units. On the revenue side, operational efficiency continues to be 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 Georgia Revenue Services has established a structural debt management unit to address uncollectable arrears which will afford the opportunity to clean up tax arrears and make them current.
Performance changes since previous assessment
10. Both the 2018 and the current PEFA assessments have been carried out using the 2016 methodology. Annex 1 provides a summary of both sets of scores and changes in scores. Across the 94 individual dimensions compared, there has been an improvement in 21 dimensions, deterioration in 7, and no change in 66 dimensions. This overall improvement in scoring has occurred over a relatively high baseline achieved in 2018.
11. The comparison of the two assessments indicates that the following dimensions have deteriorated in relation to fiscal and budgetary outcomes.
• Fiscal Discipline
• Aggregate expenditure outturn
• Expenditure composition outturn by function
• Expenditure composition outturn by economic type
• Aggregate revenue outturn
• Procurement methods
• Strategic Allocation of Resources
• System for allocating transfers
• Monitoring of Public Corporations
12. Apart from the monitoring of public corporations, the deterioration can be explained by the impact of COVID-19 and the government’s response to it. In the case of the monitoring of public corporations, it is likely that the score in the previous assessment should have been the same as in the current PEFA.
13. The results of the current assessment demonstrated improvement in the following areas:
• Fiscal Discipline
• Contingent liabilities and other fiscal risks
• Transparency of assets disposal
• Investment project monitoring
• Debt management strategy
• Fiscal forecasts
• Fiscal strategy adoption
• Reporting on fiscal outcomes
• Consistency of budgets with previous year’s estimates
• Expenditure arrears monitoring
• Strategic Allocation of Resources
• Budget documentation
• Economic analysis of investment proposals
• Investment project selection
• Investment project costing
• Procurement complaints management
• Efficient use of Resources for Service Delivery
• Nature of internal audits and standards applied
• Submission of reports for external audits
• Accounting standards
• External audit follow-up
• Timing of audit report scrutiny
• Hearing of audit findings
• Recommendations on audit by legislature
14. These improvements can be attributed to continued strong management of the PFM reform program which the government has undertaken and plans to update it on the basis of the 2022 assessment. The Public Sector Financial Management Reform Action Plan 2018 to 2021 had set out a costed plan with targeted results. It also reflected the continued nature of the reform agenda building upon achievements from previous reform activities across the broad spectrum of the PFM agenda. Nevertheless due to the COVID-19 pandemic, a number of planned reforms were delayed or cancelled. Due to the state of emergency in the country from March 21 to May 22, 2020, a number of economic activities were limited, as priority was placed on the expenditures for healthcare and business support. However, there are a number of reform initiatives that did make progress. As an example, as a result of the 2018 PEFA findings, the reform achievements in public procurement have been significant. Although the reform in this sector had been evolving steadily, the law on state procurement recently was modified considerably and made compatible with EU legislation and international good practice. Significant changes have been made with respect to the procurement complaints procedures since the 2018 PEFA assessment highlighted a weakness. Other areas include increased finance management support for some municipalities, development of a primary dealers pilot program regulation framework, SOE fiscal risk analysis and database, and the creation of a register of private and public partnerships.