The unstable political situation in Bosnia and Herzegovina (BiH) during the past year has had a huge impact on public expenditure management (PEM), especially for the institutions of Bosnia and Herzegovina (BiH State).
After the October 2010 elections, the Fiscal Council did not agree on the three-year Framework Budget and the Global Fiscal Framework, which together establish the basis for the budget of BiH State. As a result, BiH State did not have a budget for 2011 and remained on temporary financing during the whole fiscal year, including in January 2012 and in the first half of February 2012. This situation meant that expenditures could only be made in proportion to the funds spent on a quarterly average for the previous fiscal year and that no new programmes or investments could be initiated. The BiH State budget for 2011 was approved retrospectively on 14 February 2012. As a consequence of this late action, there was a worrying degree of uncertainty during the first months of 2012 with regard to the financing of BiH State institutions and the servicing of BiH’s foreign debt. This uncertainty was due to the fact that without the 2011 budget having been adopted and without an agreed fiscal framework, the 2012 budget could not be adopted – not even on the basis of temporary financing.
The temporary financing situation has left BiH State struggling with severe financial difficulties, as a carry-forward of surplus revenues from previous years is no longer available. Unless the state is able to agree on consolidation measures, the present revenue-sharing formula will leave the state facing a significant deficit and/or insufficient funding to carry out needed structural reforms and investments. A three-year Standby Agreement (SBA) with the IMF, signed in mid-2009, has been suspended since the election in October 2010 due to the political situation and the absence of a government in BiH State. The Fiscal Council finally resolved the crisis by adopting in March 2012 the Global Fiscal Framework for the period 2012-2014, thus opening up the possibility of drafting the 2012 budget of BiH State and a new SBA with the IMF.
With regard to Public Internal Financial Control (PIFC), the political and budgetary situation of the past year affected all reform efforts in the public sector. As a result, progress since the last assessment has been made primarily at a technical level only, through the introduction of methodology documents and training in internal audit at BiH State level and in the two entities. The actual number of internal audit staff has not changed significantly, as there have been restrictions on recruitment. An exception is in RS, where 20 additional internal auditors were recruited, mainly from within the public administration. Specific financial management and control (FMC) legislation has been drafted at BiH State level, in Republika Srpska (RS) and in the Federation of Bosnia and Herzegovina (FBiH), and this draft legislation is expected to become law in 2012. However, the only real progress in relation to FMC has been some awareness-raising.
In the area of external audit, the four supreme audit institutions (SAIs) have continued to carry out a professional audit job within the limits of their resources. Their impact on public financial management, which has been rather limited in the past, may increase now that parliamentary
committees have restarted the hearing procedures in respect of audit reports, after the halt of parliamentary proceedings following the 2010 elections. The Co-ordination Board did not issue any new guidelines, but it did carry out an analysis of the implementation of the recommendations of a 2004-2005 peer review. The analysis provided input for both a new peer review, which is now ongoing, and for the new Strategic Development Plan (SDP) effective as from 2013.
Main Characteristics
With regard to PEM, the main problem is still the general non-observance of the rule of law. No direct sanctions are applied for non-compliance with the law, which results in budget procedures (including budget preparation calendars) that are fixed in the law but are often not followed. In addition, co-ordination is lacking, and the roles and responsibilities of the various stakeholders in the area of public expenditure management need to be more clearly defined.
BiH State, both entities and Brčko District (BD) all have in place basic budgetary legislation regulating financial management issues. The laws provide most of the main definitions needed for sound fiscal management, but those definitions do not always help very much on substance. The legal framework differs substantially between the state and the entities. Among other issues, each of the three governments has had a different budget calendar and has used different methodologies for budget preparation, accounting and reporting, as well as a different chart of accounts. These differences have resulted in unreliable financial statistics, constituting a serious risk factor, as they have an impact on all future reforms in the area of public finance. The problem has now been partially addressed at the entity level, with the IMF providing technical assistance to improve and to harmonise to some extent the chart of accounts.
On the basis of the Law on the Fiscal Council (FC), the FC started to function in October 2008, with the responsibility of co-ordinating fiscal policy. However, its practical power is restricted, as is shown by the fact that during 2011 it did not agree on the 2012-2014 Global Fiscal Framework, which was only adopted in March 2012.
The current formula for revenue-sharing between the state and the entities does not favour decision-making. It also encourages, at state level, overly optimistic macroeconomic projections since an optimistic prognosis favours BiH State. If the state´s macroeconomic prognoses are too optimistic, and subsequently the indirect tax projection is also too optimistic, a larger amount will be set aside for institutions of BiH State. In the event that the projected revenues are in fact not obtained, the BiH State institutions will not suffer, while the entities will be at a disadvantage, as they will have to cope with the lower revenue levels throughout the year. This incentive may have encouraged the state to prepare too optimistic a prognosis in early 2011 and to then revise the figures in late autumn after the allocation of resources between the state and the entities had already been agreed upon by the Fiscal Council and before the actual annual budget was set. For 2011 BiH State revised its GDP growth figures from 3.4% to 2.4% between March and November, whereas the IMF prognosis remained stable at 2.2%. For the year 2012 the state’s initial prognosis of March 2011 was 5.5% of GDP growth, while the latest assessment from November 2011 is 2.1%.
At state level, in the entities and in BD, deadlines are set for submission of the annual budget proposal by the executive to parliament, but these deadlines differ, with the common feature being the rather limited time allowed for parliamentary discussions. The executive often fails to comply with the deadlines, thereby leaving to parliament insufficient time to review and discuss the budget. As a result the three parliaments have not always been able to approve the budget on time.
The budgets of the state and the entities seem to be reasonably comprehensive with respect to the law and in practice. Budgetary support from donors is incorporated into the budget, but not all types of donations – for example, EU technical assistance is excluded. The debt management function is
centralised for external borrowing, while the management of domestic debt is among the competences of each government.
Three different types of strategic documents related to PEM are prepared:
Global Fiscal Framework, covering a three-year period, prepared by the Fiscal Council in
accordance with the Law on the Fiscal Council;
Framework Budget (three years), prepared separately by the state and the entities according
to their respective budget calendars;
Economic and Fiscal Programme, prepared annually by the Directorate for Economic Planning
for the following three years.
The system foresees the preparation and approval of the annual budget based on the three framework budgets.
The systems for fiscal impact analysis have been partially established in terms of design and practice. Current expenditures and capital expenditures are not fully integrated into the same decision-making process.
The state and the entities use different forms of modified cash accounting. In terms of budget execution, each component of BiH has laws governing the operation of treasuries. The ministries of finance are able to control the flow of expenditure, proper IT systems are in place, and single treasury accounts are used. However, the analytical aspect of the composition of cash-flow plans is lacking, and more work is needed to ensure that budget-users have direct access to treasury systems.
PIFC is still in a very early stage of development. Following the adoption of harmonised internal audit
laws by the state and entity governments in 2008, harmonised PIFC policy papers were adopted in 2009 by BiH State and in 2010 by the entities, and these policies are now being implemented. Central Harmonisation Units (CHUs) are operational in BiH State and in the entities. CHUs are still weak, however especially in FBiH, as the CHU consists of only the head, without any staff. Brčko District plans to establish a CHU in the near future. A CHU Co-ordination Board, comprised of the heads of the CHUs, started work with monthly meetings in 2011, but this co-operation has been on hold since November 2011 due to the disagreements of its members concerning the Board’s procedures. The task of the Co-ordination Board is to harmonise legislation and methodologies for PIFC across BiH. Financial management and control (FMC) currently relies on the existing budget laws. Overall, the legal basis for internal financial control is imprecise, but harmonised specific regulations are being drafted to improve the situation, with adoption foreseen in 2012. Internal audit throughout BiH also remains in a very early stage of development. The internal audit laws are broadly in line with international requirements, but their implementation is slow.
A key problem in the introduction of a modern PIFC system lies in the arrangements that currently exist for the management of public expenditure, in particular the lack of professionalisation of public service management, accompanied by the need to distribute responsibilities and delegate authority within public organisations.
The preparation for decentralised management of EU funds (DIS) is in an embryonic stage. BiH State and the entities have not reached an agreement concerning a government decision on the establishment of the functions and structure for a decentralised implementation system (DIS). To date, only the key functions have been assigned in BiH: the National IPA Co-ordinator (NIPAC), the
Competent Authorising Officer (CAO), and the National Authorising Officer (NAO). No decision has been taken so far with regard to setting up the Audit Authority (AA).
With regard to external audit, Bosnia and Herzegovina has four supreme audit institutions (SAIs). The SAI responsible for auditing BiH institutions is the Auditing Office of the Institutions of Bosnia and Herzegovina (SAI BiH). Both entities have their own audit institutions, SAI Fed and SAI RS. These three SAIs were established in 2000 and started operating in the course of that year. Since 2008 Brčko District also has its own audit institution, SAI BD, covering all public bodies in the district. All SAIs are managed by an auditor general and one or two deputies.
The SAIs have a clear legal authority to audit all public and statutory funds and resources, bodies and entities. The number of potential auditees in the entities, however, makes it impossible to carry out an annual audit of all auditees; many smaller municipalities are therefore not audited at all. SAI BiH also has limited resources, given the large number of mandatory audits. With the exception of the SAI BD, all SAIs have a sufficient level of functional and operational independence to fulfil their tasks. Constitutional anchorage of the SAIs is nevertheless still lacking.
On the basis of the respective SAI laws, the SAI BiH, SAI Fed and SAI RS co-operate by means of the Co-ordination Board (CB). SAI BD participates in the CB on an informal basis. The legal responsibilities of the CB are to establish audit guides and instructions, exchange professional experience, and organise and co-ordinate development activities. The CB has served as an important vehicle for the joint development of audit standards and guidelines through the working groups that it has established.
The SAIs carry out the full range of audit as set out in international auditing standards. Financial audit (attestation and compliance audit) is carried out in a professional manner. However, the inadequate understanding of the role of independent external audit amongst political stakeholders reduces the potential contribution of financial audit towards improving the financial management of public funds throughout BiH.
Reform Capacity
The decentralised and highly complex political and institutional structure of BiH frustrates decision- making. Not only is there a considerable lack of co-ordination, but also shortcomings in defining the roles and responsibilities between the various stakeholders in the area of PEM. The Fiscal Council was created to fulfil the co-ordinating role, but it has not achieved its initial goals.
The major obstacle to reform is the fact that the different levels of government in BiH follow their own political agenda and do not seem to be interested in developing a clear and common, internally-driven agenda for reforming public finance. The main motivations for structural reform seem to be external financial assistance and the road to the EU, combined with a touch of competition between the state and the two entities.
Expert knowledge of civil servants regarding PEM varies significantly from institution to institution, with an uneven understanding of the key aspects of administrative decision-making. More than enough staff are employed in the vast public sector of the country in total, but competent and skilled staff to exercise PEM functions are nevertheless lacking. The large number of administrative levels and the complex administrative system, which is characterised by the lack of a clear assignment of responsibilities and delegation of authority within public organisations, have led to the overlapping and duplication of functions, without assuring that the main tasks are carried out.
In general, the basic elements of PEM are not yet in place, while at the same time a great deal of effort is devoted to much more sophisticated developments, such as programme budgeting. The 15
data, does not respect the rule of law, and is not capable of agreeing on a common fiscal policy or on the annual budget – have not been and cannot be successful. The development of programme budgeting is therefore unlikely to be effective without the implementation of other reforms focused on management structures and on the reorganisation of political/managerial relationships.
All of the major PEM reforms in BiH have been initiated and driven by the international community. Internal recognition of the need to improve processes and procedures is almost non-existent, and the main motivations for change are the possible road to the EU and external financial and non- financial assistance. As a result, the technical assistance provided to the country might not be sustainable in the long-term.
The development of PIFC in Bosnia and Herzegovina has reached a crucial stage, but political will and administrative capacity for reform are still very limited. FMC legislation is about to be enacted, and the implementation of this legislation will be the largest challenge to date. Progress has so far been made mainly in technical areas. The implementation of FMC will require considerable time and effort as well as encouragement from the highest levels, and reforms will have to be achieved in the approach to managerial accountability, starting with recognition of the need to delegate tasks within the public administration in order to increase its efficiency.
This challenge comes at a time when the current TA project to support the CHUs is about to come to an end. It seems that most of the achievements over the past year have been supported by outputs from the TA project. A new EU-funded project, planned for later in 2012, will have PIFC as one of its components. This support will certainly increase the possibility of delivering PIFC developments in Bosnia and Herzegovina. However, there may be a gap between the two TA projects, as the new project will take some time to become established, and it will largely depend on the ability of the CHUs to maintain the momentum during such a gap.
However, the staffing of each CHU is below the systematisation. Without significant additional staff (which may be unlikely given the current economic pressures) or improved synergies resulting from increased co-operative work, it is difficult to see how the increased challenge of FMC implementation can be met.
A different picture can only be seen with regard to external audit. The SAIs in BiH are relatively mature public institutions compared to many of the institutions that they have to audit. Since their establishment, the SAIs have benefited considerably from technical assistance provided by the Swedish National Audit Office (SNAO). During the period 2000-2009 the SNAO supported individual SAIs, the Co-ordination Board (CB), and the working groups established under the umbrella of the CB. Since 2010 the assistance of the SNAO has been provided at a lower level and is restricted mainly to performance audit.
The management of the SAIs are committed to securing further institutional and professional development, which is demonstrated by the regular updating of the Strategic Development Plan (SDP) under the auspices of the Co-ordination Board and by the request for a peer review in 2004 and again in 2011. In view of the departure of the SNAO at the end of 2012, an exit strategy is being prepared that will provide input to the new SDP.
Currently the SAIs are confronted with resource constraints, which hamper further development. However, so far not all of the existing opportunities to save resources by means of greater co- operation through the Co-ordination Board and its working groups have been seized. Quality assurance, for instance, could be organised as a joint function. Exchanges of experience and, for example, the organisation of parallel performance audits have not been fully explored. The peer review exercise will result in concrete proposals as to how these opportunities can be used.
Since its establishment, the Co-ordination Board has demonstrated its capacity to adopt key audit methodologies and strategies for the development of the SAIs. At the end of 2012 the mandates of