EXECUTIVE SUMMARY

Rationale and purpose

The main purpose of the 2022 PEFA assessment is to provide the Government of Moldova 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 January 2022 – July 2022. Because of the COVID-19 pandemic and the associated restrictions, the assessment was conducted virtually with online rather than in-person collection of the evidence; 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 area 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. 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 state budget transfers. In the past few years, the transfers from the government have been steadily increasing and this increase is linked to the Consumer Price Index adjustment and to the payroll policies. From the analysis of the budget data, it can be observed that the actual execution figures are higher for the transfers which implies that during the year the local authorities must adjust the initially approved amounts of transfers. The reason is that throughout the year the local authorities have additional allocations approved for their projects from the centralized funds administered by some line ministries (such as National Ecologic Fund, Energy Efficiency Fund, National Regional Development Fund, etc.) as well as other allocations approved by the Government for specific objectives (for instance, provision of one-off compensation for health workers infected with COVID-19, roll-out of activities related to the country reintegration, etc.) . At the same time, it should be noted that the value of transfers is not directly proportional to the number of competencies assigned to the local authority by the administrative decentralization law. This could mean that more expenses are necessary to fulfill the competencies assigned for the local authority level II, and that the revenues received in the local budget from their own fees and taxes are not sufficient.

Main strengths and weaknesses of the PFM systems

Strengths. Most of information regarding the finances of Cahul rayon is available to the public. The medium-term budget is prepared. 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 rayon council web page where the rayon general finance division publishes PowerPoint presentations with summarized and accessible explanations of the key elements of the budget. In 2020 all rayon council meetings were available to the public, including the budget hearings. Information on performance plans in service delivery outputs and outcomes across the rayon sectors is very good reflecting a program budget system in place. All revenues are paid into the Treasury account and allocated to the rayon’s sub-account. A revenue report is prepared for management purposes. 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. Monitoring of financial and non-financial assets is effective.

Weaknesses. Although the budget is presented in the medium-term perspective, the focus of the legislative scrutiny is on the up-coming year only. The public consultations, although performed, are not sufficiently institutionalized, and there are no records available to the public. The rayon lacks a basic debt management strategy. The internal audit function in the rayon is staffed with only one internal auditor, but the regulatory framework envisages at least two staff units. The effective coverage of internal audit is low. Internal audit activities are primarily focused on compliance. Financial statements of the public corporations and of lower-tier authorities are not audited annually. In-year budget reports are prepared quarterly (excluding first quarter) and are issued within 8 weeks. The standards used in preparing annual financial reports are not disclosed. There is no mandatory submission of accounts for external audit at the rayon level so financial statements are not routinely presented to the Court of Accounts.

Impact of PFM performance on budgetary and fiscal outcomes

Aggregate Fiscal Discipline. Both revenue and expenditure exceeded the original budgets by significant 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 almost all rayon expenditure and the assured 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. Limited internal audits undermine the fiscal discipline, but this is counterbalanced by the controls performed by financial inspection. 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. Annual audits of the subnational governments are not mandatory under existing legislation and lack of external audits in the last several years is negatively affecting the fiscal discipline.

Strategic Allocation of Resources. The significant level of budget reallocations negatively impacts strategic allocation of resources. The volumes of transfers from the rayon budget to lower-level authorities are determined during the year after the SNG budget is approved. 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 and the delivery of public services based on its original policy intent.

Expenditure budgets are developed for the medium-term, but the scope for the budget scrutiny by the rayon council is directed to the coming year only. A clear budget calendar exists but the rayon spending units have three weeks to complete their budget estimates. Budget submission to the rayon 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 rayon scores well on the indicators of performance in the delivery of public services, however the reporting on actual delivery is the area of weakness. 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 performed regularly.

The procurement process is not efficient. Although high level of contracts is based on competitive bidding, inconsistencies in procurement information indicates that the information might not be sufficiently accurate. The strength of payroll systems, particularly with the integration of payroll and personnel systems, means that staff are effectively used. Commitment controls and compliances with rules are good but segregation of duties requires some improvement. Limited internal audit means that in-year system assessments do not contribute as much as they could. Financial data integrity demonstrates good accounting controls as the three dimensions performed well on bank reconciliations, and advance accounts.

Performance changes since the previous assessment

This is the baseline assessment for the Cahul tier II territorial administrative unit.