1. 1 Achievements and Challenges in the Management of the Public Finances in Kosovo (Miami, 21-25 May, 2007) Behxhet Brajshori Deputy Minister of the Ministry of Economy and Finance

2. 2 Agenda  Kosovo in context  Development of financial institutions  Economic Indicators  Budget Process  Treasury Responsibilities  KFMIS Overview  Procurement in Kosovo  Internal Audit  PEFA Indicators  Lessons learned  Opportunities and Challenges

3. 3 Facts:  Capital: Prishtina  Surface are: 10,877 km2  Population: 2,2 milion  Languages: Albanian, Serbian and English  Currency: Euro

4. 4 Background  Until 1989, Kosovo enjoyed a high degree of autonomy within the former Yugoslavia, when Serbia altered the status of the region, removing its autonomy and bringing it under the direct control of Belgrade, the Serbian capital.  During 1989 -1998 period former Serbian regime applied discriminating measures in all the areas in Kosovo, including the economy, by implementing the so called “Economy integration” of the public enterprises in Kosovo with those in Serbia  The Kosovar Albanians strenuously opposed the move.  Despite these measures the situation in Kosovo escalated again with the start of the war in the beginning of the 1998

5. 5 Key Events  NATO supported and reinforced the Contact Group efforts by agreeing on 30 January to the use of air strikes if required, and by issuing a warning to both sides in the conflict.  Serbia refused to comply, and on 23 March the order was given to commence air strikes

6. 6 Key Events  On 10 June the UN Security Council passed the resolution (UNSCR 1244), installing United Nation Mission in KosovoUNSCR 1244  The NATO troops entered Kosovo on 12 June, 1999.  By 19 June, the Serb troops withdrawal from Kosovo was complete.

7. 7 Key Events  Following the elections in November 2001 the Provisional Institutions of Self-Government were established which include the President, the Assembly, and the Government of Kosovo.  Kosovo has gone through four different elections: - Two for the local government and - Two for the National Parliament  Currently Kosovo has full consolidation of the institutions in both levels local and national

8. 8  Kosovo infrastructure and economy was damaged heavily during the war, and there was a need for development of a fiscal management system  UNMIK established Central Fiscal Authority (CFA) to manage public finances (UNMIK/REG/1999/16)  CFA consisted of four divisions (Tax, Customs, Budget and Treasury) and the Internal Audit function. Development of the Financial Institutions

9. 9 Ministry of Economy and Finance Policies  Ministry of Economy and Finance is accountable for coordination and financial management of Kosovo Budget. Main activities of Ministry include:  Development and implementation of fiscal policies and administration systems  Economical analyses and macroeconomic forecasts;  Budget planning;  Development and implementation of centralized Tax administration;  Development and implementation of a centralized Treasury and Accounting system.

10. 10 Economic Indicators

11. 11 Economic Indicators

12. 12 Budget Process  Government approves the Medium Term Expenditure Framework (MTEF), based on government priorities of different sectors  Government also approves different projects for capital investments  Kosovo Consolidated Budget is based on three year MTEF macroeconomic projection

13. 13 Budget Process  May – Budget Organization submit their initial requests for continuing projects and for the new programs  June – Submission of the budgets from the budget organizations  August – Budget hearings  September – Government approves draft budget  October – 2008 Budget Submission to the Parliament  December – Parliament approves the budget

14. 14 Publications  Financial Reports (monthly, quarterly, bi-annually, annual)  Budget Planning  Property Tax Policy  Monthly bulletins on economic and business activity in the western Balcans  Miscellaneous Information

15. 15 Treasury Main Treasury responsibilities are envisaged within the Law on LPFMA. The responsibilities include:  Management of the Kosovo Consolidated Fund,  Management of Bank Accounts,  Management of Funds Expenditure,  Establishment of Processes for Collection of Public Funds,  Set up and Maintenance of Accounting Records,  Preparation of Financial Accounts, and  Maintenance of Financial Rules

16. 16  Revenues Division  Payments Division (five regional offices)  Reporting and Accounting Division  Fund allocation and Cash and Debt Management  Financial Management and Control Division  Administration and Information Technology Division  Grants division Treasury Organization

17. 17 Project Goals  Treasury overall vision is to achieve best practice in management of public funds by the Government of Kosovo.  Financial management system to help control government financial processes  Provide with means to record the entire budget cycle from planning, to execution, to accounting for the actuals, revenues and forecasting for future years  Provide with tools to account and report on the macroeconomic indicators

18. 18 Project Goals  Transparency and accountability  Must comply with multiple accounting and reporting requirements – World Bank Treasury Reference Module, International Monetary Fund Government Finance Statistics, International Public Sector Accounting Standards, best- practices, donors, creditors, administrative rules, and regulations  Support local capacity building and sustainability  Multi-language capability (Albanian, Serbian and English)

19. 19 Early days  Late 1999 meeting with WB and IMF about challenges in transition governments.  Early 2000 – FreeBalance arrives in Kosovo  26 days later FreeBalance Foundation installed – original configuration – six months of data captured - reports to CFA and donors  No custom code – configuration regularly modified

20. 20 Treasury System Characteristics  KFMIS is designed specifically for government  Rapid deployment  Flexible configuration  Processes not over engineered (intuitive – easy to learn)  Scaleable  Expandable solution (core system can be extended via modules)

21. 21 KFMIS Overview  Kosovo Financial Management Information System (KFMIS) implemented to record, manage and report on all budget, commitment, expenditure and treasury management functions  Multi-language system (English, Albanian, and Serbian) supports budget process and timely processing of government payroll for over 70,000 civil servants

22. 22 KFMIS Overview  Electronic processing of transactions  Central database with decentralized process implementation where decentralized institutions (ministries, agencies, municipalities etc) are provide with direct connectivity access for real time transaction processing and reporting  Integrated system forms enable standardization of forms used by all budget spending units thus preventing corruption and data entry mistakes

23. 23 Treasury Development  CBAK interface – 95% of all payments transmitted electronically to central bank  15000+ Vendors entered in and stored in system linked to unique bank accounts  Upgrade of key software and hardware –this commenced large rollout of new functions in 2005

24. 24 Financial Internal Control within KFMIS  Financial Legal Framework underpinned by KFMIS by integrating key processes and decisions into KFMIS (commitments, approving and spending public monies)  Enhanced internal controls within budget spending units by creating separate roles (functional classes) and groups of users (user groups) with access to the system in accordance with budget spending unit’s position hierarchy  Treasury determines user level of access (reporting, commitment, revenue recording)  High quality certification program for the budget spending units and their staff, to ensure the correctness of data and reduce errors during transaction processing

25. 25 KFMIS Results  KFMIS is a critical component of Kosovo’s democratic development and economic liberalization program.  Kosovo now has a comprehensive, uniform financial management system.  All budget organizations and all major revenue agencies are now connected to the KFMIS.  Enables comparison of accounting data at all levels of government and between all institutions in real time.

26. 26 Procurement  On June 9 th, 2004 the Assembly approved the Law on Public Procurement, establishing two central institutions for public procurement: –Public Procurement Regulatory Body –Public Procurement Agency  About 110 contractual authorities are established in the municipalities, ministries and public enterprises

27. 27 Public Procurement Regulatory Body  Responsible for the development of the entire public procurement system in Kosovo  Ensures that the public funds are spent in a transparent, effective and rational manner, in order to encourage competition and respect the equality of bidders in the public procurement process  Has the authority to ensure compliance with the Law on Public Procurement in Kosovo  The Board of Public Procurement Regulatory Body consists of five members, nominated by the government and selected from the Assembly of Kosovo

28. 28 Public Procurement Agency  Public Procurement Agency is formed by the Government of Kosovo  Director is proposed by the government and nominated by the Assembly of Kosovo.  Acts on behalf of contractual authorities for complex procurements (based on the requests of the contractual authority)  Manages and leads long term contracts and major procurements used by two or more contractual authorities (only if authorized by the government)  Reviews and approves procedures negotiated without public contract  Reviews and approves Item 30.3 of the Public Procurement Law when there are less than three bidders

29. 29 Internal Audit  The Internal Audit function is established by the Law on Public Finance and Accountability in the year 2000  Capacity building is financed by the European Agency for Reconstruction

30. 30 Internal Control of Public Finance (ICPF)  The system consists of four core elements: –The system of ICPF and Finance Management –Internal Audit –Central Office on Financial Management and Control within Treasury Department –Central Office of Internal Audit within MEF

31. 31 Public Expenditure and Financial Accountability (PEFA) Indicators Main Indicators based on PEFA assesment report 2006 1Aggregate Expenditure Outturn compared to approved budget(B) 2Composition of expend. outturn compared to approved budget(D) 3Aggregate revenue outturn compared to approved budgetA 4Stock and monitoring of expenditure payment arrearsD+ INDICATOR Budget Credibility

32. 32 PEFA Indicators 5Classification of the budget D 6Comprehensiveness of information in budget documentationD 7Extent of unreported government operations incl. donor fundsC+ 8Transparency of Intergovernmental Fiscal RelationsA 9Oversight of aggregate fiscal riskC+ 10Public access to key fiscal information A 11Orderliness and participation in the annual budget processB+ 12Multi-year perspective in fiscal policy, planning, & budgetingD+ Transparency and Comprehensiveness Policy-based Budgeting

33. 33 PEFA Indicators 13Transparency of taxpayer obligations and liabilitiesB+ 14Effectiveness of taxpayer registration and tax assessmentC 15Effectiveness in collection of tax paymentsB 16Effectiveness of cash flow planning, mgt. & monitoring.B+ 17Recording & management of cash balances, debt and guarantees(A) 18Effectiveness of payroll controlsD+ 19Competition, value for money and controls in procurementD+ 20Effectiveness of internal controls.C+ 21Effectiveness of internal auditC Predictability and Control in Budget execution

34. 34 PEFA Indicators 22Timeliness and regularity of accounts reconciliationB 23Availability of resource info received by service delivery unitsD 24Timeliness, quality and dissemination of in-year exec. reports.B+ 25Timeliness of audited financial statements submitted to the legislature.A 26The scope, nature and follow up of external audit reports.D+ 27Legislative scrutiny of the annual budget lawB+ 28Legislative scrutiny of external audit reports.D Accounting, Recording and Reporting External Scrutiny and Audit

35. 35 Lessons Learned  Technology is an early building block in creating good governance and must be introduced in a phased implementation to allow absorption of key government reforms.  Technology should be supported by sound governance legislation: rules, regulations, finance administrative instructions etc.

36. 36 Lessons Learned  The Kosovo environment was unique, the fiscal management requirements were NOT  System implementation can be achieved in a matter of weeks, financial management reform takes years  Donor cooperation and coordination was essential Donor funding is time sensitive and need driven  Success breeds success – donor funding flows to successful projects – gov is energized by progress  Ongoing buy-in from key stakeholders is critical for long- term success (there are winners and losers in change – external encouragement)

37. 37 Lessons Learned  Think big, start small, scale up  Phased implementation to allow absorption of key reforms  Achieve high-profile wins early to ensure buy-in  Ownership within the government  Comprehensive Training and Certification Program and mentoring of local staff - some are still with Treasury after five years  High quality team of international budget planning and execution, procurement, and FMIS experts are necessary to ensure best-practice design and implementation  Long-term sustainability - total cost of ownership

38. 38 Challenges & Opportunities Several fundamental challenges faced by Kosovo:  Managing final status resolution.  Generating new sources of economic growth.  Ensuring macroeconomic stability.  Reducing poverty and unemployment.

39. 39 Thank you for your attention!