Executive Summary

Purpose and management

This assessment has been commissioned to provide information for use in refining the action programme in preparation to take forward the Albanian Government’s recently adopted Public Finance Reform (PFM) Strategy. It has been financed by the European Union and produced jointly by the Ministry of Finance and a team of external experts. The work is overseen by a steering group consisting of representatives of the Ministry of Finance (MoF) and development partners co-chaired by the Ministry and the Delegation of the European Union. It updates the situation reported by the previous assessment undertaken in 2016.

Main strengths and weaknesses of the PFM systems in country

The report presents a mixed picture, with 18 of the 31 Performance Indicators (PIs) receiving good scores in the A-B range, while the remaining 13 are scored C-D.
The strengths are:

• Stability in budget execution, with low variances in expenditure on both economic and functional classifications between original budget and actual out-turn;

• An orderly budget process and a well-developed medium-term fiscal planning framework;

• A strong emphasis on internal financial control and satisfactory arrangements for internal and external audit;

• Effective administration and collection of direct and indirect taxes;

• Well-functioning of debt and cash management;

• Clear objectives for the functioning of public services, with time-bound performance indicators.

The weaknesses are:

• Incompleteness of financial reporting and monitoring: Inconsistencies in published data, no consolidated annual financial statements for Central Government (CG), very limited consolidated in-year expenditure reporting, no consolidated reporting of State-Owned Enterprises (SOEs) or monitoring of risks associated with all PPPs/concessions, no reporting of revenue and expenditure of regulatory and other bodies belonging to CG but not directly included in the budget;

• Limited coverage of IT systems, with many transactions taking place outside the Treasury automatic system, and large cash balances held outside the Treasury Single Account (TSA);

• Little attention paid to non-financial assets, with no information about their value;

• Failure hitherto by the Parliament to make use of audit reports to hold the Executive to account.

Impact of PFM performance on budgetary and fiscal outcomes

Aggregate fiscal discipline requires effective control of the total budget and management of fiscal risks. Maintaining the balance between revenues and expenditures, the debt level and other fiscal aggregates requires setting firm limits, in advance, that drive budget decisions on both the annual and medium-term basis.
The Government has set and met its fiscal targets in terms of an improving primary balance and a declining debt level as a percentage of GDP, with aggregate expenditure kept broadly within the resources available. (PI-1 and PI-15). Financial burdens associated with PPPs and concessions have been contained (PI-10), with annual budget expenditure on them kept far below the limit set by the Organic Budget Law (OBL). Revenue has generally exceeded targets (PI-3), indicative of an improving performance in revenue management and collection (PI-19). A debt management strategy has been set and successfully implemented (PI-13), while there has been no problem in cash management (PI-21), and expenditure arrears have fallen (PI-22).

Strategic allocation of resources involves planning and executing the budget in line with Government priorities aimed at achieving policy objectives. The allocation of resources requires evidence about the importance and effectiveness of government’s activities and programmes.

A well-developed medium-term fiscal framework is in place, with aggregate and programme-specific expenditure ceilings consistent with prospectively available revenue (PIs 15 and 16) and carried forward into the annual budgets (PIs 17 and 18). There has been progress in aligning strategic plans with actual expenditure plans as set out in the Medium-term Budget Plan (MTBP) approved each year alongside the annual budget. Objectives and targets are set for each Government programme, and annual reports are made on progress (PI-8). Decision-making in public investment has been reformed and strengthened (PI-11), although the benefits remain to be felt. Procurement plans are published, and contracts let within a competitive framework (PI-24), although more than 20 per cent of large contracts have been awarded to the sole bidder. While aggregate fiscal discipline has been maintained, the large reallocations of expenditure by both function and economic classification during budget execution is evidence that programmes are not being implemented as originally intended (PI-2). Management of assets remains a relatively weak area; more attention needs to be paid to the performance of State-Owned Enterprises (SOEs) (PI-10.1) and businesses in which the government holds shares (PI-12.1), while much work is needed to identify and value all the government’s non-financial assets.

Efficient use of resources for service delivery requires using available revenues to best effect in achieving the best possible levels of public services. Services are critical points of contact between citizens and Government. While achieving improvements in public services is not simply a matter of PFM, there are aspects of PFM that contribute to it, including public procurement, public investments and the management and use of public assets.
The setting of performance targets and indicators for service delivery (PI-8), and reporting against them, provides a degree of government responsibility and accountability for the delivery of public services, which is of importance to citizens, but improvements are still needed. More generally the availability of information about revenue and expenditure, in aggregate and in detail, is important in building public confidence in the performance of government (PI-9, PI-28, PI-29); there is substantial scope for improving the government’s performance in each of the areas of budget planning and setting, in-year reporting, and the production of annual financial reports. The provision of full information about government activities not wholly covered in the budget (PI-6) also requires improvement. Assessment by the external auditor of the performance of different public services is beginning to contribute to better service delivery (PI-8.4), while internal audit activity hitherto mainly directed towards the performance of internal control systems (PI-26) could also contribute towards the more efficient delivery of services.

Performance changes since the previous PEFA assessment

There are no significant changes in budget reliability or in the transparency of public finances. The development of performance auditing justifies an improvement in the score for PI-8.4. On public asset management there has been a substantial improvement in public investment decision-making (PI-11), but improvements are still needed in relation to SOEs (PI-10.1) and the government’s holdings of financial and non-financial assets (PI-12). On policy-based fiscal strategy and budgeting there is progress in aligning strategic plans and medium-term budget allocations (PI-16.3), and the budget calendar has been better respected (PI-17.1). On predictability and control in budget execution, there has been a substantial improvement in revenue collection and enforcement (PI-19.2), although further changes are still needed. Action has been taken to prevent the further growth of tax arrears, although the overhang of long-standing and uncollectable amounts prevents any improvement in the score (PI-19.4). Expenditure arrears are now closely monitored and at CG level have been largely eliminated (PI-22). Direct placing of contracts with a single supplier outside the competitive framework has been discontinued (PI-24.2), although a substantial volume of contracts still goes to a single bidder. Improvements have been seen in the operation of both internal control (PI-25) and internal audit (PI-26), with vigorous harmonisation efforts by MoF in both areas.
On accounting and reporting, steps have been taken to further ensure the integrity of data through the establishment of a special unit in the Treasury (PI-27.4), but there is insufficient consolidation of in-year budget execution reports (PI-28), and there are still no consolidated overall annual financial statements for central government (PI-29). The exploitation of audit reports by the Parliament is only now just beginning, with the recent establishment of a special Sub-Committee of the Economic and Finance Committee. Overall, where lower scores are given in this report than those recorded in 2016, this generally reflects the strict application of the PEFA criteria as interpreted by the current assessment team rather than an actual decrease in performance.