MONTENEGRO STATE AUDIT INSTITUTION

SAI no.: 40111/18-011-112/166 Podgorica, 15th October 2018

AUDIT REPORT OF THE PROPOSED LAW ON THE FINAL STATEMENT OF ACCOUNTS OF THE STATE BUDGET OF MONTENEGRO FOR 2017 (final)

Podgorica, October 2018

Audit Report of the Proposed Law on the Final Statement of Accounts of the State Budget of Montenegro for 2017

OPINION AND RECOMMENDATIONS

Based on Article 9 and Article 12 of the Law on State Audit Institution and the Decision of the Auditing Board responsible for the audit, number 40111/18-011-112/2 of 22nd January 2018, the State Audit Institution conducted a financial audit and regularity audit of the Proposed Law on the Final Statement of Accounts of the State Budget of Montenegro for 2017. The financial audit covered the Report on Consolidated Public Spending for 2017, Statement of Cash Flows for 2017 prepared according to the economic classification, Statement of Cash Flows for 2017 prepared according to the functional classification, Statement Arrears as of 31 December 2017, financial records system. The regularity audit was performed to control the compliance of business activities and financial transactions with the laws and secondary legislation.

Responsibility of the Management for Financial Statements

According to Article 39 of the Law on Budget and Fiscal Responsibility, the Minister of Finance shall be responsible for the execution of the state budget. According to Article 40 paragraph 4 of the Law on Budget and Fiscal Responsibility, a budget executor shall be responsible for the legality of use of funds approved to a spending unit. This responsibility shall include designing, implementing and ensuring internal controls relevant for the preparation and presentation of financial statements without material misstatements due to fraud or error.

Responsibility of the State Audit Institution

The responsibility of the State Audit Institution is to express its opinion about the Proposed Law on the Final Statement of Accounts of the State Budget of Montenegro for 2017 on the basis of the audit it performed and to express its opinion on whether the business activities, financial transactions and information given in the financial statements are, in all material aspects, in compliance with the current applicable legislation. The audit was performed according to the Law on State Audit Institution, Rules of Procedure of the State Audit Institution, and Instruction on Methodology for Performing Financial and Regularity Audit. Adhering to the International Standards of Supreme Audit Institutions (ISSAI), the State Audit Institution complied with the requirements of ethics; it planned and conducted the audit in a way which provided reasonable assurance that there were no material misstatements of disclosed data.

The audit included procedures for obtaining audit evidence about the amounts disclosed in the financial statements, including the assessment of risk of material misstatements caused by fraud or error. The risk assessment dealt with internal controls relevant for the preparation and fair presentation of financial statements, with a view to designing audit procedures that are appropriate in the given circumstances, but not with a view to expressing an opinion about the effectiveness of the internal controls. The audit included the assessment of the applied accounting policies and the assessment of the general presentation of financial statements. We believe that the audit evidence obtained in the audit is sufficient and appropriate to provide a basis for the expressed audit opinion.

Based on the conducted audit and established facts, the Auditing Board composed of Milan Dabović, PhD, President of the Senate - Head of the Auditing Board, and Zoran Jelić, member of the Auditing Board - Senator, at its session held on 12th October 2018 adopted the following:

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AUDIT REPORT OF THE PROPOSED LAW ON THE FINAL STATEMENT OF ACCOUNTS OF THE STATE BUDGET OF MONTENEGRO FOR 2017

A) FINANCIAL AUDIT of the Proposed Law on the Final Statement of Accounts of the State Budget of Montenegro for 2017, which ends on 31 December 2017, established that the Proposed Law on the Final Statement of Accounts of the State Budget of Montenegro for 2017 was prepared in compliance with the Law on Budget and Fiscal Responsibility and the Rulebook on the Manner of Compiling and Filing Financial Statements of the Budget, State Funds and Local Self-Government Units.

Revenues, expenditures, cash balance and outstanding liabilities are presented in a true and fair manner in the Proposed Law on the Final Statement of Accounts of the State Budget of Montenegro for 2017 and they do not contain any materially significant errors and deviations. Based on the facts established during the audit, the competent Auditing Board expresses its UNQUALIFIED OPINION WITH EMPHASIS OF MATTER.

BASIS FOR THE EMPHASIS OF MATTER

1. Financial statements and accounting accuracy

According to the data from the Proposed Law on the Final Statement of Accounts of the State Budget of Montenegro for 2017, deficit on cash basis is expressed in the amount of 236.862.400,90€ and an increase in cash in the amount of 23.567.997,86 €, which were financed by net borrowings in the amount of 254.239.283,53 € and by the sale of assets in the amount of 6.191.115,23 €.

The audit established that the cash budget deficit along with inflows from the sale of assets should be increased by 22.612,52 €. After adjustment, the cash deficit was reported in the amount of 236.885.013,42 € and inflows from the sale of assets were reported in the amount of 6.213.727,75 €.

The adjusted cash deficit reported in the Proposed Law on the Final Statement of Accounts of the State Budget of Montenegro for 2017 amounted to 250.855.628,18 €. After the performed audit, outstanding liabilities are reduced by 669.905,40 €, so that the net changes in arrears amounted to 13.323.321,88 € and the adjusted deficit amounted to 250.208.335,30 €.

The Ministry of Defence shall be obliged to adjust the data in the Statement of Arrears reported at the position 4630 - Repayment of arrears from the previous period in the amount of 669.905,40 € and to inform the Ministry of Finance about the performed adjustments.

B) REGULARITY AUDIT of the Proposed Law on the Final Statement of Accounts of the State Budget of Montenegro for 2017 established that the spending units' business activities were not in all material aspects in compliance with the legal and other regulations which govern budget operations in Montenegro. Therefore, the competent Auditing Board expresses its QUALIFIED OPINION.

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BASIS FOR EXPRESSING QUALIFIED OPINION

2. Statement of Outstanding Liabilities

The audit of the Statement of Outstanding Liabilities of 31st December 2017 identified irregularities related to: a) Liabilities reported as outstanding liabilities from 2016 and previous years which remained outstanding on 31st December 2017

It was established that out of the amount of 1.370.849,87 €, which is related to outstanding liabilities from 2016 and previous years, the amount of 246.791,17 € was not planned by the Law on Budget for 2017. b) Liabilities arising from legal regulations and concluded contracts, for which no funds were planned by the Law on Budget of Montenegro for 2017, and which were reported as outstanding liabilities on 31.12.2017 in the amount of 3.133.913,43 €

The Ministry of Transport and Maritime Affairs did not plan funds for contribution costs for membership in international organisations in the amount of 73.583,31 € and the Health Insurance Fund for allowances for sick leave of over 60 days in the amount of 3.060.330,18 €. c) Outstanding liabilities related to contracting liabilities above the level of funds defined by the Law on Budget of Montenegro for 2017 in the amount of 48.155,03 €

The Judiciary in the amount of 15.541,45 €, Ministry of Justice in the amount of 15.769,87 € and Ministry of Economy in the amount of 16.843,71 € contracted the commitments above the limits determined by the annual Law on Budget. d) Current outstanding liabilities expressed in the Statement of Outstanding Liabilities which could not be confirmed as outstanding liabilities during the auditing process

Outstanding liabilities expressed for the spending unit Judiciary in the amount of 390.546,87 € could not be confirmed as current outstanding liabilities. It was established that some of these liabilities were paid in 2017 by means of enforced performance from position 463 – Repayment of arrears from the previous period. e) Inaccurate presentation of outstanding liabilities in the Statement of Outstanding Liabilities on 31 December 2017

In the Statement of Outstanding Liabilities as of 31 December 2017, the Ministry of Defence presented outstanding liabilities on accounts of group 463 - Repayment of arrears from the previous period in the amount of 669.905,40 €. The audit established that there is no documented basis for the presented current outstanding liabilities.

The spending unit Judiciary is obliged to harmonize, together with the Protector of Property and Legal interests, the balance of outstanding liabilities and inform the Ministry of Finance about the amount of outstanding liabilities which should make adjustment of current outstanding liabilities reported on 31st December 2017.

Spending units are obliged to act in accordance with Article 48 paragraphs 2 and 3 of the Law on Budget and Fiscal Responsibility, which prescribes that unpaid contracted commitments in the current business year shall be realized from the funds approved for the next fiscal year and have priority in terms of payments of obligations.

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In accordance with Article 40 paragraphs 5 and 6 of the Law on Budget and Fiscal Responsibility, commitments of a spending unit must be aligned with the planned and approved funds in accordance with the State Budget Law.

3. Budget overruns

The audit established that in 2017 the budget spending was overrun by the amount of 237.745.890,92 €. Out of the total expressed overrun of the budget spending, the amount of 218.353.517,92 € was the allowed overrun, while the non-allowed overrun amounts to 19.392.373,00 € and includes realized expenditures that were not planned in the annual Budget Law for 2017, as follows:  Expenditures in the amount of 19.012.698,76 € on the basis of court decisions were recorded at the expense of the spending units which incurred the court expenses. It was established that there is no basis in the Law on Budget and Fiscal Responsibility and the Law on Budget for 2017 for an overrun of the budget spending when paying for court decisions, which is why the stated amount was qualified as a non-allowed overrun of the budget spending for payments which were made at the spending units.  Expenditures in the amount of 379.674,24 € for the purchase of securities from the Investment and Development Fund of Montenegro, in accordance with the Law on the Investment and Development Fund and the Conclusion of the Government of Montenegro no. 07-1753 of 15.06.2017.

The spending units should plan the funds for expenses on the basis of court decisions in the annual budget law.

The Agency for the Development of Small and Medium Enterprises1 is obliged to plan the funds from the repayment of loans which are intended for the purchase of securities of the Investment and Development Fund in the annual state budget law.

4. Final tax statement

The audit of the Final tax statement for 2017 served to check the accounting accuracy of the data expressed in the tax bookkeeping. The opening balance of the tax debt as at 01.01.2017 represents neither the actual amount of the debt, nor the prepaid balance as at the stated date for the following reasons:  unorganised records on analytical accounts of state authorities;  recorded debt on the basis of the „Restructure from 2004“ expressed on accounts of tax groups 371 and 319 is not in accordance with the economic classification of revenues;  unrealized decisions on deferred payments and decisions on reallocation of funds;  deferred liabilities to municipalities were recorded as due debt.

By inspecting the financial records related to the Final tax statement for 2017, it was established that:  for 547 taxpayers, whose decisions on restructuring in 2017 were cancelled, there was no repeated borrowing for the due tax debt and the deferred tax debt, which led to underestimating the total tax debt expressed in the Final Tax Statement for 2017 in the amount of 15.284.159,27 €.  the Final tax statement contains deferred and restructured tax liabilities for taxpayers that perform agricultural activities and for public enterprises whose maturity, or due date of the tax liability should have been adjusted by an amount of 9.356.250,28 €.

1 The Agency for the Development of Small and Medium Enterprises is a special directorate within the Ministry of Economy

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The Tax Administration is recommended to establish tax records, in accordance with Article 8 of the Rulebook on Tax Bookkeeping which prescribes the principle of accuracy, and to ensure reliable information about the amount of the tax debt. For the purpose of expressing an accurate tax debt balance, it is necessary to:  record cancelled decisions on restructuring;  present additional information in the Final tax statement, for taxpayers whose tax debt and collection balance are recorded off-balance sheet;  conduct activities in order to determine the real tax debt balance of state authorities;  present information on the amount of outstanding restructured tax debt in the Final tax statement.

5. Restructuring of tax receivables

The audit of the implementation of the Law on Restructuring Tax Receivables established that the Tax Administration:

 does not have a breakdown of tax receivables on 31.12.2017 per taxpayers, which are entered in the tax receivables restructuring program, which is not in accordance with Article 16 of the Law on Restructuring Tax Receivables.

 decisions on cancelling decisions on restructuring tax debt are related to taxpayers which did not pay due liabilities on the basis of a decision on restructuring tax debt, which is not in accordance with Article 13 of the Law on Restructuring Tax Receivables.

The Tax Administration is obliged, in accordance with Article 16 of the Law on Restructuring Tax Receivables, to maintain records on tax receivables which are the subject of restructuring, type and amount of receivables, as well as the manner of their settlement.

BUDGET RECEIPTS

6. The audit of current revenues recorded in the General Ledger of the State Treasury on accounts of group 715 - Other revenues identified irregularities which lead to an inadequate expressing of revenues, and are related to:  Collection of revenues through the General Account of the State Treasury, direct payments. The record of revenues in the General Ledger of the State Treasury, which were collected by means of direct payments to the General Account of the State Treasury, is not harmonized with the procedure prescribed by the Instructions on Work of the State Treasury (Chapter IV - Collection of revenues).  Collection of public revenues through payment accounts opened in accordance with the Order on the manner of payment of public revenues. Revenue statements, in all cases, do not ensure a correct identification of revenues, per types of revenue in accordance with budget classification and regulations which determine the collection of revenues, which results in inaccurately expressed revenues in the General Ledger of the State Treasury.  Irregularity in revenue statements of ministries and other administration and judiciary authorities (accounts 832) where the creation of a revenue statement established a system in which one eco-code is determined for revenues from one transaction account. On the basis of such determined eco-code, revenues are expressed in the General Ledger of the State Treasury. The stated irregularity is conditioned by the collection of several types of revenues through one payment account and an inadequately determined eco-code.  Irregularity determined in revenue statements of the Ministry of Interior (825) where there is an established system in which different eco-codes can be determined for inflows from one transaction account, on the basis of determined codes (type of document/service). On the basis

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of such determined eco-codes, revenues re expressed in the General Ledger of the State Treasury which do not correspond to the type of revenues which are collected.

Revenue units (Tax Administration, Customs Administration, Ministry of Interior and Police Directorate) which perform the collection of revenues through accounts prescribed by the Order on the manner of payment of public revenues and the Ministry of Finance which performs the scheduling of revenues collected through the General Account of the State Treasury are recommended to record inflows in accordance with Article 9 of the Law on Budget and Fiscal Responsibility and Article 10 of the Rulebook on Unique Classification of Accounts for the State Budget of Montenegro and Municipal Budgets.

7. Receipts from the sale of assets - During the audit process, it was established that the payment account 832-213-43 - Revenues from the sale of weapons and military equipment and provision of services, which serve for financing the implementation of partner goals and equipping the Army in accordance with NATO standards of the Ministry of Defence, were used for the collection of revenues which are related to the lease of facilities, equipment, water and sewage spending, provided runway cleaning services and handle services and from participation in international projects. The stated revenues should have been recorded on accounts of group 715 - Other revenues. The Ministry of Defence is recommended to record revenues collected through accounts prescribed by the Order on the manner of payment of public revenues in the General Ledger of the State Treasury in accordance with Article 10 of the Rulebook on Unique Classification of Accounts for the State Budget of Montenegro and Municipal Budgets.

BUDGET EXPENDITURES

8. Current expenditures – The audit of current expenditures established irregularities related to:  concluding temporary service contracts for work tasks defined by systematization;  concluding certain contracts without established relevant contract elements, such as the service provision deadline, obligation to submit reports on provided services, as well as the provision on whether it is a fee expressed in gross or net amount and  non-purpose spending of funds.

The spending units are obliged to conclude contracts which contain the basic elements in accordance with the Labour Law and the Law on Obligations, to use the approved funds for intended purposes and to record expenditures in accordance with the Rulebook on Unique Classification of Accounts for the State Budget of Montenegro and Municipal Budgets.

The Ministry of European Affairs signed a Partnership Agreement with the Ministry of the Republic of Kosovo and the Ministry of European Integration of Albania on managing technical support within the framework of the IPA Cross border Cooperation Programme within the Western Balkans. The Ministry of European Affairs, as the leading partner in the stated Project, was obliged to perform the transfer of funds in the amount of 67.527,45 € to partner states from the account intended for funding the Project. The stated funds do not represent budget expenditure and they should have been recorded neither as an inflow nor as expenditure in the General Ledger of the State Treasury.

The Ministry of European Affairs is recommended to record funds transferred to partners within the Cross-Border Cooperation Programme neither as a budget inflow nor as expenditure. The Ministry of European Affairs is obliged to cancel the recorded receipts and expenditures in the General Ledger of the State Treasury in the amount of 67.527,45 €.

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9. Repayment of liabilities from the previous period - Expenditures recorded on the accounts of group 463 - Repayment of liabilities from the previous period in the amount of 39.960.824,65 € are related to liabilities on the basis of court decisions in the amount of 20.343.673,96 € and other liabilities in the amount of 19.617.150,69 €. The Ministry of Finance performed the payment of expenditures from the group of accounts 463 related to the current period.

The spending units are obliged not to charge expenditures which become due in the current fiscal year to the debit of the group of accounts 463 - Repayment of liabilities from the previous period. The payment of liabilities arising in the current period needs to be performed in accordance with the funds planned by the annual law on budget and recorded in accordance with the Rulebook on Unique Classification of Accounts for the State Budget of Montenegro and Municipal Budgets.

REPORT ON CAPITAL PROJECTS - CAPITAL BUDGET

10. The audit of the Capital Budget of the Directorate of Public Works established that, for the purpose of co-financing projects, funds were transferred to municipalities in the amount of 1.556.213,01 € and that there were direct payments to suppliers in the amount of 2.026.498,31€ in accordance with the Protocols on cooperation of the Directorate of Public Works and municipalities. The stated Protocol defines that the Directorate of Public Works shall transfer funds to the account of a selected processor and auditor of project documents, contractor of works and professional supervisor for the purpose of the implementation of projects, according to certified payment certificates. The obligation of municipalities is to inform the Directorate of Public Works about the status of the projects which are a subject of the Protocol on a monthly basis. The audit established that municipalities did not submit reports on conducted activities, as defined in the Protocol on cooperation.

The Directorate of Public Works is recommended to, in accordance with the signed protocols, follow activities on the implementation of projects per municipality and to request from municipalities the submission of monthly reports on conducted activities for the purpose of the implementation of projects.

The audit of the Capital Budget established that spending units which implement the Capital Budget did not conduct a detailed elaboration of the schedule deadlines in order to define a realistic deadline for the performance and completion of works. While nominating Capital Budget projects, priority was not given to projects commenced in the previous years.

The spending units which are implementing the Capital Budget are recommended, during the preparation of projects, to prepare a schedule plan in order to define a realistic deadline for the performance and completion of works and, while planning the budget, to give priority to projects commenced in the previous years.

During the nomination of Capital Budget projects, it is necessary to give priority to the projects commenced in the previous years, as defined by Article 7 of the Decision on the preparation of the Capital Budget in the part of the criteria on the basis of which priorities are determined during the selection of capital projects.

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PUBLIC DEBT OF MONTENEGRO

11. Debt of the local self-government is expressed in the Proposed Law on the Final Statement of Accounts of the State Budget of Montenegro for 2017 in the amount of 130.996.363,84 €.

On the basis of data collected from the Central Credit Registry, open item statements (OIS) and data of the Ministry of Finance, discrepancies of the expressed domestic debt were established, in the amount of 1.044.748,48 €, as follows:  Plav Municipality in the amount of 50.074,71 € of excess reported debt on the basis of a loan concluded with Ziraat bank Contract no. 0041006000027 of 23.06.2016. The Municipality did not reduce the loan amount paid by the Ministry of Finance from the Equalization Fund.  Plužine Municipality which reported less liabilities in the amount of 3.854,28 € on the basis of two contracts concluded with the Investment and Development Fund.  Rožaje Municipality which reported less liabilities in the amount of 2.636,44 € on the basis of a Contract concluded with Societe Generale bank on 18.12.2015.  Šavnik Municipality which reported less liabilities in the amount of 1.679,74 € on the basis of a Loan Agreement concluded with Societe Generale bank no. 0042131008966 on 01.12.2015.  Herceg Novi Municipality which reported less liabilities in the amount of 44.094,48 € on the basis of a Contract concluded with CKB no. 950-93-935 of 28.05.2015, on the basis of which there were less reported liabilities in the amount of 17.600,19 € and no. 950-88-2198 of 04.10.2017, on the basis of which there were less reported liabilities in the amount of 26.494,29 €.  Bijelo Polje Municipality reported a debt in an amount higher by 32.102,58 € than the expressed debt balance in the Credit Registry of the Central Bank of Montenegro. The discrepancy of the debt balance is related to the loan arrangement concluded with the Investment and Development Fund. The Bijelo Polje Municipality did not present a debt in the amount of 910.183,32 € to Prva bank in the form for establishing the portfolio of debts.

Local self-government units are recommended to prepare reports on public debt at the end of the current year on the basis of the balance debt harmonized with the Central Bank of Montenegro, commercial banks and the Ministry of Finance.

PUBLIC PROCUREMENT

12. The audit of the implementation of the Public Procurement Law established irregularities, as follows:

 The Ministry of Transport and Maritime Affairs published the Public Procurements Plan on the Public Procurements Portal on 10.03.2017, which is not in accordance with Article 38 of the Public Procurement Law.

 The Directorate of Transport was obliged to conduct a public procurement procedure in accordance with Article 21 of the valid Public Procurement Law2, which prescribes that in cases when the estimated value of the public procurement is up to 5.000,00 €, the contracting authority shall perform the direct agreement.

 In accordance with Article 153d of the Law amending the Public Procurement Law, the Directorate of Transport was obliged to adopt the Rulebook for Conducting Emergency Procurements within 30 days since the entry into force of the Law. In accordance with Article 29 of the Public Procurement Law, it was obliged to publish the document on emergency procedures on the web page.

 Concluded contracts on conducted emergency procurement procedures were not published on the Public Procurement Portal in accordance with Article 107 of the Public Procurement Law.

2 Official Gazette of Montenegro 28/15

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The Directorate of Public Works should conduct public procurements in the part of the Capital Budget in a manner which would avoid changing the tender documentation multiple times and thus significantly prolonging the duration of the public procurement procedure.

In the tender documents for vehicle procurement, the Ministry of Economy and the Ministry of Human and Minority Rights stated technical specifications which contain vehicle characteristics which could lead to the limitation of competition and favouring a specific bidder. The contracting authority is obliged, in accordance with Article 6 of the Public Procurement Law, to undertake necessary measures which ensure competition among the bidders.

The spending units are obliged to ensure the full implementation of the Public Procurement Law which regulates the procedure for the procurement of goods, services and the performance of works for the purpose of transparent spending of budget funds.

PRESIDENT OF THE SENATE Milan Dabović, PhD, Head of the Auditing Board

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CONTENTS:

PART I - GENERAL PART………………………………………………………………………………………………….....12 1. LEGAL BASIS FOR THE AUDIT……………………………………………………………………………...…………..12 2. OBJECTIVE, SUBJECT-MATTER, TYPE AND SCOPE OF THE AUDIT………..…….……………….………….12 3. AUDIT METHODS……………………………………………………………………………………..…………..……….13 4. RECORDING SYSTEM ...... 13 PART II – ESTABLISHED FACTS……………………………………………………………………………………………. 14 1. FINANCIAL STATEMENTS AND ACCOUNTING ACCURACY……………………………………………. 14 1.2. Deficit financing sources ...... 16 1.3. Compliance audit of cash flows ...... 17 1.4. State Treasury General Ledger ...... 19 1.5. Statement of outstanding liabilities ...... 20 1.6. Budgetary overrun ...... 24 2. CASH DEPOSITS……………………………………………………………………………………………………….....25 3. FINAL TAX STATEMENT……………………………………………………………………………………………… 28 3.1. Restructuring of tax receivables ...... 30 3.2. Statement of deferred tax and non-tax receivables ...... 32 4. BUDGET RECEIPTS……………………………………………………………………………………………………... 32 4.1. Current revenues ...... 33 4.2. Receipts from the sale of assets...... 36 4.3. Receipts from the repayment of loans ...... 37 4.4. Donations and transfers ...... 37 4.5. Receipts from borrowings and loans ...... 38 5. BUDGET EXPENDITURES………………………………………………………………………………………………39 5.1. Current expenditures ...... 40 5.2. Rights in the field of pension and disability insurance (423)...... 43 5.3. Repayment of debts ...... 43 6. REPORT ON BUDGET RESERVES EXPENDITURES………………………………………………………… . 46 7. REPORT ON CAPITAL PROJECTS - CAPITAL BUDGET……………………………………………………..48 7.1. Directorate of Transport – Capital Budget ...... 49 7.2. Directorate of Public Works – Capital budget ...... 58 8. PUBLIC DEBT OF MONTENEGRO………………………………………………………………………………… 63 8.1. National debt of Montenegro ...... 64 8.2. Debt of the local administration...... 66 9. STATE PROPERTY………………………………………………………………………………………………………..68 10. PUBLIC PROCUREMENTS…………………………………………………………………………………………….69 11. INTERNAL FINANCIAL CONTROLS SYSTEM………………………………………………………………... 75 REALIZATION OF RECOMMENDATIONS FROM THE PREVIOUS REPORT…………………………….…76 OVERVIEW OF IRREGULARITIES ESTABLISHED BY THE AUDIT………………………………….…………..79

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PART I - GENERAL PART

1. LEGAL BASIS FOR THE AUDIT

The legal basis for performing the audit of the Proposed Law on the Final Statement of Accounts of the State Budget of Montenegro for 2017 is contained in the following:  Constitution of Montenegro, Article 144 (“Official Gazette of Montenegro”, no. 01/07 and 38/13);  Law on State Audit Institution, Article 9 (“Official Gazette of the Republic of Montenegro” no. 28/04, 78/6 and “Official Gazette of Montenegro” no. 17/7, 73/10, 40/11, 31/14 and 70/17);  Annual audit plan of the State Audit Institution for 2018 (no. 06-288/17 of 14 December 2017);  Decision on performing the audit SAI no. 40111/18-011-112/2 of 22.01.2018. The audit was performed in accordance with:  Rules of Procedure of the State Audit Institution (“Official Gazette of Montenegro”, no. 3/15);  Instructions on Methodology for Performing Financial and Regularity Audit (“Official Gazette of Montenegro”, no. 07/15);  Guidelines for audit quality control (SAI no. 4011-06-79 of 26.01.2015);  International Standards for Supreme Audit Institutions (ISSAI).

2. OBJECTIVE, SUBJECT-MATTER, TYPE AND SCOPE OF THE AUDIT

Objective of the audit of the Proposed Law on Final Statement of Accounts of the State Budget of Montenegro for 2017 is established for the financial audit and regularity audit, as follows: 1. for the financial audit - expressing an opinion on the accuracy and reliability of financial statements and 2. for the regularity audit - expressing an opinion on compliance of the implementation of legal and other regulations which govern the public spending system in Montenegro.

Subject-matter of the audit is the Proposed Law on the Final Statement of Accounts of the State Budget of Montenegro for 2017, delivered to the State Audit Institution by the memorandum no. 06- 3090/1 (SAI no. 06-412/18/1100/1) dated 13 June 2018. According to Article 68 the Law on Budget and Fiscal Responsibility3, the audit controlled the following: opening and closing balance in the Consolidated Account of the State Treasury; overview of the deviations from the budgeted amounts; report on the borrowings; report on the expenditures from the budget reserves; report on the guarantees given throughout the fiscal year; report on the capital projects; report on the implementation of the programme budget; report on the state debt and issued guarantees; report on the written-off tax and non-tax receivables as defined by Article 12 of this Law; report on receipts and expenditures of public institutions that are not included in the Consolidated Account of the State Treasury and report on the status of outstanding liabilities that are not considered as borrowings in accordance with Article 14 paragraph 2 of the Law.

Type of audit - The State Audit Institution performed a financial audit and regularity audit of the Proposed Law on the Final Statement of Accounts of the State Budget of Montenegro for 2017, i.e. for the period from 1 January to 31 December 2017. The financial audit includes control of the reliability and accuracy of financial statements. The regularity audit includes control of compliance with legal and other relevant regulations governing the public spending system in Montenegro.

3 Official Gazette of Montenegro 20/14, 056/14

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Scope of audit - The audit of the Proposed Law on the Final Statement of Accounts of the Budget of Montenegro for 2017 included the system of planning, recording and reporting in line with the Law on Budget and Fiscal Responsibility,4 Rulebook on Unique Classification of Accounts for the Budget of Montenegro and Municipal Budgets,5 and the Rulebook on the Manner of Drafting, Compiling and Filling Financial Statements of the Budget, State Funds and Local Self-Government.6 Apart from the documentation and reports which were controlled in the Ministry of Finance - State Treasury, the audit also included individual financial statements, records and documents per spending units. In accordance with the subject-matter of the audit, the following was controlled:  Outstanding liabilities at spending units: Judiciary, Ministry of Justice, Ministry of Defence, Ministry of Education, Centre for Conservation and Archaeology of Montenegro, Ministry of Economy, Ministry of Transport and Maritime Affairs, Ministry of Agriculture and Rural Development, National Tourism Organisation of Montenegro and Health Insurance Fund.  Expenditures (specific lines of expenditures) at spending units, in accordance with a selected sample at: Ministry of Interior, Ministry of Defence, Montenegrin Academy of Arts and Sciences, Ministry of Transport and Maritime Affairs, Ministry of Foreign Affairs and European Integration, Employment Office, Ministry of Agriculture and Rural Development, Ministry of Economy, Ministry of Culture, Ministry of Science, NTOs, Music Centre of Montenegro, Ministry of Sustainable Development and Tourism, Ministry of Public Administration, Ministry of Finance, Tax Administration, National Library of Montenegro, Centre for Professional Education, Centre for Conservation, Centre for the Development and Preservation of Cultural Minorities, Montenegrin National Theatre, Film Centre of Montenegro, Ministry of Health, Ministry of Human and Minority Rights, Council for Privatisation, Institute of Meteorology, Statistical Office, Royal Theatre Zetski Dom and Agency for Data Protection.  Capital budget at: Directorate of Transport and Directorate of Public Works.  Public procurement at: Directorate of Transport, Directorate of Public Works, Pension and Disability Insurance Fund of Montenegro, Ministry of Economy and Ministry of Human and Minority Rights.

3. AUDIT METHODS

The audit was planned and carried out in accordance with International Standards for Supreme Audit Institutions (ISSAI), in a way that allows it to provide reasonable assurance about whether the financial statements are free of material misstatement and whether the business activities, financial transactions and information comply with laws, bylaws and other regulations. In the preparatory phase of the audit, the identification and assessment of risks was carried out, through an understanding of the audited entity and its environment, including internal controls. In the planning phase of the financial audit, materiality was determined at the level of 0.53% (11.283.276,13 €) of total expenditures for financial statements as a whole, i.e. assessment of the extent to which a misstatement in the financial statements can be tolerated, so that it does not significantly affect their fairness and objectivity.

4. RECORDING SYSTEM

The system for keeping records of the budget of Montenegro is organized on a cash basis or modified cash basis. The Proposed Law on the Final Statement of Accounts of the State Budget of Montenegro was drafted based on the General Ledger of the Treasury kept in the Ministry of Finance and the records of the spending units. According to the Rulebook on the Manner of Drafting, Compiling and Filling Financial Statements of the Budget, State Funds and Local Self-Governments, spending units prepare financial statements and deliver them by 31 March of the current year for the previous year

4 Official Gazette of Montenegro 20/14, 056/14 5 Official Gazette of Montenegro 72/16 6 Official Gazette of Montenegro 23/14

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Audit Report of the Proposed Law on the Final Statement of Accounts of the State Budget of Montenegro for 2017 on the following forms: Statement of Cash Flows I - economic classification, Statement of Cash Flows II - functional classification, Statement of Cash Flows III, Statement of Cash Flows IV, Statement of Arrears, Consolidated statement of a spending unit with public institutions in its structure, Statement on consolidated budget spending, Statement on the manner of spending funds after the expiry of the fiscal year and the Statement on the manner of spending budget reserve funds.

PART II – ESTABLISHED FACTS

1. FINANCIAL STATEMENTS AND ACCOUNTING ACCURACY

The audit of the Proposed Law on the Final Statement of Accounts of the State Budget of Montenegro for 2017 included the audit of the public spending structure through planning, execution and financing sources, as well as the reasons for the creation of a cash and modified deficit. In the Proposed Law on the Final Statement of Accounts of the State Budget of Montenegro for 2017, the budget deficit was stated in the amount of 236.862.400,90 €, while the adjusted deficit amounted to 250.855.628,18 €, as presented in the following table: Table 1: Cash deficit and adjusted cash deficit for 2017 Proposal Law on final state budget accounts of Audit finding Net change Montenegro for 2017 Description Planned - current Executed Adjustment (+) Adjustment (-) Balance budget 1. Cash inflows 1.580.022.265,13 1.566.273.677,88 1.955.257,71 - 1.977.870,23 1.566.251.065,36 - 22.612,52 Current revenues 1.546.655.618,98 1.534.411.996,24 1.239.910,01 - 1.035.668,61 1.534.616.237,64 204.241,40 1.1 Taxes 979.100.310,27 971.155.574,28 - - 971.155.574,28 - 1.2 Social protection contributions 500.463.503,16 494.952.632,42 - - 494.952.632,42 - 1.3 Fees 13.428.059,49 13.613.004,68 - - 13.613.004,68 - 1.4 Charges 18.062.763,47 18.967.775,13 - 18.967.775,13 - 1.5 Other revenues 35.600.982,59 35.723.009,73 1.239.910,01 - 1.035.668,61 35.927.251,13 204.241,40 1.6 Receipts from repayment of loans 6.728.562,22 6.580.211,88 715.347,70 - 942.201,62 6.353.357,96 - 226.853,92 1.7 Donations and transfers 26.638.083,93 25.281.469,76 - - 25.281.469,76 - 2. Cash outflows 1.785.737.482,76 1.803.136.078,78 19.165.508,69 - 19.165.508,69 1.803.136.078,78 - 2.1 Gross salaries and contributions paid by employer 449.922.844,48 445.363.693,67 51.528,57 - 445.415.222,24 51.528,57 2.2 Other personal earnings 11.907.441,32 10.648.738,73 6.957,00 - 10.655.695,73 6.957,00 2.3 Expenses for material 31.103.203,36 29.199.822,02 213.356,43 - 29.413.178,45 213.356,43 2.4 Expenses for services 71.217.150,31 66.705.488,45 150.321,93 66.855.810,38 150.321,93 2.5 Expenses for current maintenance 20.631.496,40 20.203.326,92 58.552,76 - 20.261.879,68 58.552,76 2.6 Interests 84.239.942,49 98.705.378,58 - 98.705.378,58 - 2.7 Rents 9.382.023,63 8.940.947,37 - 8.940.947,37 - 2.8 Subsidies 27.992.758,95 27.803.826,27 - 27.803.826,27 - 2.9 Other expenditures 41.974.052,26 38.242.445,06 417.369,54 38.659.814,60 417.369,54 2.10 Social protection transfers 540.630.399,01 538.050.896,13 538.050.896,13 - 2.11 Transfers to institutions, individuals, non-governmental and public sector 169.429.954,01 166.881.124,76 17.837.067,98 - 184.718.192,74 17.837.067,98 2.12 Capital expenditures 268.083.908,68 287.888.325,48 41.038,78 - 287.929.364,26 41.038,78 2.13 Borrowings and loans 5.027.120,76 4.857.410,76 - 4.857.410,76 - 2.14 Repayment of guarantees - - - - - 2.15 Repayment of liabilities from previous period 33.700.098,80 39.960.824,65 - 19.165.508,69 20.795.315,96 - 19.165.508,69 2.16 Reserves 20.495.088,30 19.683.829,93 389.315,70 - 20.073.145,63 389.315,70 3 Cash deficit (1-2) - 205.715.217,63 - 236.862.400,90 - 17.210.250,98 17.187.638,46 - 236.885.013,42 - 22.612,52 4 Primary deficit - 121.475.275,14 - 138.157.022,32 - 17.210.250,98 17.187.638,46 - 138.179.634,84 - 22.612,52 5 Sources of financing cash deficit 205.715.217,65 236.862.400,90 17.210.250,98 - 17.187.638,46 236.885.013,42 22.612,52 6 Net borrowings 205.715.217,65 254.239.283,53 - - 254.239.283,53 - 6.1 Borrowings and loans from domestic and foreign sources 392.414.222,00 612.839.852,38 - - 612.839.852,38 - 6.2 Repayment of debt 186.699.004,35 358.600.568,85 - - 358.600.568,85 - 7 Sale of assets - 6.191.115,23 320.320,91 - 297.708,39 6.213.727,75 22.612,52 8 Net cash change - - 23.567.997,86 16.889.930,07 - 16.889.930,07 - 23.567.997,86 - 0,00 9 Net increase/decrease of liabilities (9.1 - 9.2) - 13.993.227,28 - - 669.905,40 13.323.321,88 - 669.905,40 9.1 Liabilities as of 31 December 2016 (current) - 77.005.089,00 - - 669.905,40 76.335.183,60 - 669.905,40 9.2 Liabilities as of 31 December 2015 (previous) - 63.011.861,72 - - 63.011.861,72 - 10 Corrected expenditures (2. + 9) 1.785.737.482,76 1.817.129.306,06 19.165.508,69 - 19.835.414,09 1.816.459.400,66 - 669.905,40 11 Cash inflows (1.) 1.580.022.265,13 1.566.273.677,88 1.955.257,71 - 1.977.870,23 1.566.251.065,36 - 22.612,52 12 Modified cash deficit (11 - 10) - 205.715.217,63 - 250.855.628,18 - 17.210.250,98 17.857.543,86 - 250.208.335,30 647.292,88 13 Sources of financing deficit 205.715.217,65 250.855.628,18 17.210.250,98 - 17.857.543,86 250.208.335,30 - 647.292,88 13.1 Net borrowings 205.715.217,65 254.239.283,53 - - 254.239.283,53 - 13.2 Sale of assets - 6.191.115,23 320.320,91 - 297.708,39 6.213.727,75 22.612,52 13.3 Donations - - 13.4 Liabilities to suppliers - 13.993.227,28 - - 669.905,40 13.323.321,88 - 669.905,40 14 Net cash change - - 23.567.997,86 16.889.930,07 - 16.889.930,07 - 23.567.997,86 -

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Audit Report of the Proposed Law on the Final Statement of Accounts of the State Budget of Montenegro for 2017

During the audit of the Proposed Law on the Final Statement of Accounts of the State Budget of Montenegro for 2017, adjustments were made in relation to public revenues, public expenditures, and sources of financing and outstanding liabilities.  Adjustment of cash inflows in the net amount of 22.612,52 € arising from:  decrease of receipts in the amount of 2.275.578,62 €, as follows: - Other revenues in the amount of 1.035.668,61 €; - Receipts from the repayment of loans in the amount of 942.201,62 € and - Income from the sale of assets in the amount of 297.708,39 €.  increase of receipts in the amount of 2.275.578,62, as follows: - Other revenues in the amount of 1.239.910,01€; - Receipts from the repayment of loans in the amount of 715.347,70 € and - Receipts from the sale of assets in the amount of 320.320,91 €.  Adjustment of public expenditures relates to non-purpose spending of funds, arising from:  decrease of expenditures as follows: - Repayment of liabilities from the previous period in the amount of 19.165.508,69 €.  increase of expenditures in the amount of 19.165.508,69 € as follows: - gross salaries and contributions paid by the employer in the amount of 51.528,57 €; - other personal earnings in the amount of 6.957,00 €; - expenses for material in the amount of 213.356,43 €; - expenses for services in the amount of 150.321,93 €; - expenses for current maintenance in the amount of 58.552,76 €; - other expenditures in the amount of 417.369,54 €; - transfers to institutions, individuals, non-governmental and public sector in the amount of 17.837.067,98€; - capital expenditures in the amount of 41.038,78 €; - reserves in the amount of 389.315,70 €.  Adjustment of outstanding liabilities expressed in the Consolidated statement of outstanding liabilities is related to the decrease of the balance of outstanding liabilities on 31.12.2017 in the amount of 669.905,40 €.

Statement of Cash Flows (SCF) for the period 2013 - 2017 is given in the following table: Table 2: Statement of cash flows for 2013 – 2017 2013 2014 2015 2016 2017 DESCRIPTION BALANCE OF CURRENT TRANSACTIONS CURRENT REVENUES 1.228.279.417,81 1.339.592.834,24 1.312.180.585,31 1.470.808.839,11 1.534.411.996,24 CURRENT BUDGET SPENDING 1.359.495.367,07 1.322.721.190,50 1.361.467.111,98 1.515.118.543,21 1.515.247.753,30 DEFICIT OF CASH - 131.215.949,26 16.871.643,74 - 49.286.526,67 - 44.309.704,10 SURPLUS OF CASH 19.164.242,94 BALANCE OF CAPITAL TRANSACTIONS INLOWS FROM SALE OF ASSETS, IPA AND DONATION 27.196.148,27 20.768.808,61 22.370.996,12 20.461.959,64 38.052.796,87 CAPITAL EXPENDITURES 85.294.347,28 133.972.150,24 256.488.589,42 106.908.718,07 287.888.325,48 DEFICIT OF CASH - 58.098.199,01 - 113.203.341,63 - 234.117.593,30 - 86.446.758,43 - 249.835.528,61 SURPLUS OF CASH BALANCE OF FINANCING TRANSACTIONS INFLOWS FROM BORROWINGS AND LOANS 333.867.350,25 535.749.125,50 832.790.323,20 649.560.576,06 612.839.852,38 REPAYMENT OF DEBT 158.591.727,18 434.061.211,94 541.742.968,76 533.116.186,31 358.600.568,85 DEFICIT OF CASH SURPLUS OF CASH 175.275.623,07 101.687.913,56 291.047.354,44 116.444.389,75 254.239.283,53 NET CHANGE OF CASH CASH INFLOWS 1.589.342.916,33 1.896.110.768,35 2.167.341.904,62 2.140.831.374,81 2.185.304.645,49 CASH EXPENDITURES 1.603.381.441,53 1.890.754.552,68 2.159.698.670,26 2.155.143.447,59 2.161.736.647,63 DEFICIT OF CASH - 14.038.525,20 - 14.312.072,78 SURPLUS OF CASH 5.356.215,67 7.643.234,36 23.567.997,86 OPENING CASH BALANCE 20.882.788,91 6.844.263,71 12.200.479,38 19.843.713,84 5.531.641,06 INCREASE/REDUCTION OF CASH - 14.038.525,20 5.356.215,67 7.643.234,46 - 14.312.072,78 23.567.997,86 CLOSING CASH BALANCE 6.844.263,71 12.200.479,38 19.843.713,84 5.531.641,06 29.099.638,92

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Audit Report of the Proposed Law on the Final Statement of Accounts of the State Budget of Montenegro for 2017

The analysis of the Statement of Cash Flows for 2017 established:  that the current budget spending in the amount of 1.515.247.753,30 € was financed by current revenues which amount to 1.534.411.996,24 € and that there was a surplus of cash in the amount of 19.164.242,94 €;  that capital expenditures in the amount of 287.888.325,48 € were financed by inflows from the sale of assets, donations and IPA funds in the amount of 38.052.796,87 €. The lack of funds for financing capital expenditures in the amount of 249.835.528,61 € was provided from the surplus of cash from current transactions in the amount of 19.164.242,94 € and from loan funds in the amount of 230.671.285,67 €.  that the surplus of cash from financing transactions in the amount of 254.239.3283,53 € was used for financing of capital expenditures in the amount of 230.671.285,67 € and that the cash balance on 31.12.2017 was increased by the amount of 23.567.997,86 €.  the cash balance on 31.12.2017 amounts to 29.099.638,92 € and, in relation to the opening balance in the amount of 5.531.641,06 €, it was increased by 23.567.997,86 €. 1.2. Sources of financing deficit Sources of financing deficit were expressed for cash and modified cash deficit. Sources for financing cash deficit were expressed through net borrowings and inflows from the sale of assets, while the financing of modified cash deficit was increased by the net change of outstanding liabilities to suppliers. The structure of deficit financing sources on cash and modified cash basis is presented in the following table: Table 3: Sources of financing cash and modified deficit in 2017 AMOUNTS

DESCRIPTION Proposal law on final state budget accounts Adjustment Identified by audit for 2017 Cash budget deficit - 236.862.400,90 - 22.612,52 - 236.885.013,42 Increase of deposit 23.567.997,86 23.567.997,86 TOTAL - 260.430.398,76 - 22.612,52 - 260.453.011,28 Domestic sources of financing 34.057.344,17 - 34.057.344,17 Foreign sources of financing 220.181.939,36 - 220.181.939,36 Sale of assets 6.191.115,23 22.612,52 6.213.727,75 TOTAL 260.430.398,76 22.612,52 260.453.011,28 Adjusted cash budget deficit - 250.855.628,18 647.292,88 - 250.208.335,30 Increase of deposit 23.567.997,86 23.567.997,86 TOTAL - 274.423.626,04 647.292,88 - 273.776.333,16 Domestic sources of financing 34.057.344,17 34.057.344,17 Foreign sources of financing 220.181.939,36 220.181.939,36 Sale of assets 6.191.115,23 22.612,52 6.213.727,75 Net increase of outstanding liabilities 13.993.227,28 - 669.905,40 13.323.321,88 TOTAL 274.423.626,04 - 647.292,88 273.776.333,16

According to the data from the Proposed Law on the Final Statement of Accounts of the State Budget of Montenegro for 2017, deficit on cash basis is stated in the amount of 236.862.400,90 € and increase in cash in the amount of 23.567.997,86 €, which were financed by net borrowings in the amount of 254.239.283,53 € and by the sale of assets in the amount of 6.191.115,23 €. The audit has determined that the cash budget deficit and inflows from the sale of assets should be increased by 22.612,52 €, so that the cash deficit amounts to 236.885.013,42 € and inflows from the sale of assets 6.213.727,75 €. The adjusted cash deficit reported in the Proposed Law on the Final Statement of Accounts of the State Budget of Montenegro for 2017 amounts to 250.855.628,18 €. After performed audit, outstanding liabilities were reduced by 669.905,40 €, so that the net changes in outstanding liabilities amount to 13.323.321,88 € and the adjusted deficit 250.208.335,30 €.

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Audit Report of the Proposed Law on the Final Statement of Accounts of the State Budget of Montenegro for 2017

1.3. Compliance audit of cash flows Collection of public revenues - The State Audit Institution has audited the compliance of the budget revenues and expenditures, as well as financing transactions with the data expressed in the Central Bank of Montenegro. This was done by checking the cash inflows and outflows through accounts intended for the collection and distribution of public revenues. The collection of public revenues is performed in accordance with the Order on Public Revenues Payment Method7. The accounts intended for the collection of public revenues and transfers to the Central Account of the State Treasury are: Customs Administration 805 (transaction account 90700000008050150), Tax Administration 820 (transaction account 90700000008200112), Ministry of Interior 825 (transaction account 907000000008250164) and Police Directorate 840 (transaction account 907000000008400126). The collection of revenues of ministries and other administration bodies is done through the payment account 832, and the revenue statement is compiled by the Directorate of State Treasury. Payments of public revenues to payment accounts per revenue units, according to the data of the Central Bank of Montenegro and their transfer to the Central Account of the State Treasury are given in the table below: Table 4: Collection of public revenues from revenue units in 2017 CLEARING ACCOUNTS

DESCRIPTION Accounts for Transfer to Inflows Difference collection Central account

Custom administration of Montenegro 805 703.001.016,55 692.444.831,28 10.556.185,27 Tax administration of Montenegro 820 969.086.485,48 946.393.482,54 22.693.002,94 Ministry of interior affairs 825 9.104.244,35 9.034.777,33 69.467,02 Police administration 840 3.846.808,64 3.838.526,65 8.281,99 Ministries and other administration 832 0,00 bodies 49.756.657,03 49.756.657,03 Total 1.734.795.212,05 1.701.468.274,83 33.326.937,22 Rest 3.522,00 Total 1.734.795.212,05 1.701.471.796,83 33.326.937,22

The total amount of inflows as well as outflows of funds on payment accounts of revenue units amount to 1.734.795.212,05 €. Funds transferred to the Central Account of the State Treasury amount to 1.701.471.796,83 €. The difference between outflows of funds from clearing accounts and inflows of funds to the Central Account of the State Treasury in the amount of 33.326.937,22 € is related to:  Customs Administration in the amount of 10.556.185,27 €, for the return of overpaid funds in the amount of 9.834.806,03 € and reallocation of funds to the Tax Administration for the purpose of settling tax liabilities in the amount of 721.379,24 €;  Tax Administration in the amount of 22.693.002,94 €, out of which 22.692.284,23 € relates to the reimbursement of wrong payments and return of overpaid funds on the basis of VAT loans and 718,71 € relates to the transfer of funds to the account Collection of due outstanding taxes and contributions;  Ministry of Interior in the amount of 69.467,02 € for the return of wrong payments and overpaid funds;  Police Department in the amount of 8.281,99 € for the return of wrong payments and overpaid funds. Central Account of the State Treasury - The inflow and outflow of funds from the State Treasury Central Account amount to 1.701.471.796,83 € in 2017 and was related to the inflow from revenue units and outflow of funds as presented in the table below:

7 Official Gazette of Montenegro 83/16 and 30/18

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Audit Report of the Proposed Law on the Final Statement of Accounts of the State Budget of Montenegro for 2017

Table 5: Collection and allocations of funds from the State Treasury Central Account CENTRAL ACCOUNT OF THE STATE TREASURY INFLOWS OUTFLOWS Custom Administration 692.444.831,28 1.535.971.704,54 State Treasury General account Tax Administration 946.393.482,54 34.153.473,84 Revenues of Equalization Fund Ministry of interior affairs 9.034.777,33 4.623.867,02 Revenues of PI Morsko dobro Police Administration 3.838.526,65 43.894.542,71 Revenues of municipalities Accounts of ministries and other 49.756.657,03 196.439,75 Veterinary Chamber and Veterinary ambulances administration bodies 357.410,72 Revenues of Union of municipalities 82.270.836,25 Decisions of MF(refunds and reallocation of funds) Other inflows 3.522,00 3.522,00 Correction of errors in transferring funds Total 1.701.471.796,83 1.701.471.796,83 Total

The outflow of funds from the State Treasury Central Account is distributed through the revenue model in the amount of 1.701.265.575,75 €, while the amount of 206.221,14 € is distributed as per the Ministry of Finance's decisions.

State Treasury General Account – The overview of the balance and turnover of funds on the account no. 90700000083001-19 - State Treasury General Account, through which the payment and distribution of state money were performed for the needs of budget users is given in the following table:

Table 6: Inflow and outflow of funds from the State Treasury General Account STATE TREASURY CENTRAL ACCOUNT Opening balance 858.805,62 1.808.556.436,64 Outflows from account Inflow from the Central account 1.535.971.704,54 23.482.856,96 Closing balance Other inflows 295.208.783,44 Total inflows in 2017 1.831.180.487,98 Total: inflows with the opening balance 1.832.039.293,60 1.832.039.293,60 Total

Inflows of cash to the State Treasury General Account amount to 1.831.180.487,98 € (without the opening cash balance). Funds transferred from the State Treasury Central Account to the State Treasury General Account amount to 1.535.971.704,54 €, whereas funds transferred from state accounts/parties opened with the Central Bank and commercial banks amounted to 295.208.783,44€.

Inflows to the State Treasury General Account in the amount of 3.733.499,78 € were not recorded in the General Ledger of the Treasury. The stated inflows are related to inflows on the basis of returns of loans given to the Equalisation Fund, inflows on the basis of returns of overpaid funds to the Central Bank (for the purpose of settling credit liabilities toward foreign creditors) and inflows on the basis of wrong payments to the State Treasury General Account. Funds allocated to municipalities in 2017, in accordance with legal decisions, amount to 43.894.542,77 €. The overview of funds allocated to municipalities for the period 2013–2017 is given in the table below:

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Audit Report of the Proposed Law on the Final Statement of Accounts of the State Budget of Montenegro for 2017

Table 7: Transfer of funds from the State Treasury Central Account to municipalities Municipalities 2013 2014 2015 2016 2017 Podgorica 10.303.206,00 11.294.099,25 10.832.778,61 11.629.132,20 11.904.360,36 Cetinje 761.097,55 669.828,18 746.061,06 825.785,39 825.022,92 Danilovgrad 755.047,13 805.071,41 762.708,44 825.786,65 871.674,46 Niksic 2.095.226,07 2.662.960,22 2.208.146,53 2.990.277,89 3.157.209,50 Savnik 41.981,28 38.345,97 45.817,64 75.687,51 79.861,97 Plužine 607.822,84 623.313,72 621.094,27 772.330,40 789.165,74 Pljevlja 5.028.624,74 2.134.975,22 2.539.667,68 2.886.452,35 2.525.258,90 Žabljak 298.398,61 348.538,78 277.284,58 623.820,64 629.395,65 Berane 929.464,60 840.110,88 816.750,72 1.113.733,72 1.335.019,70 Plav 216.671,87 259.280,24 172.285,33 189.555,75 278.594,23 Rožaje 1.015.796,74 1.024.161,05 984.905,44 1.052.674,45 957.295,16 Andrijevica 176.420,30 208.135,25 234.321,60 219.679,76 240.793,60 Petnjica 4.579,72 77.569,63 51.701,92 13.264,32 Gusinje 7.739,95 Bijelo Polje 1.168.132,60 1.225.073,59 1.223.859,38 1.598.706,37 1.355.547,25 Mojkovac 286.862,29 286.100,62 294.182,58 378.786,93 355.033,20 Kolašin 512.967,26 533.689,63 548.322,79 788.301,91 739.790,66 Bar 3.611.291,40 3.584.170,09 3.409.475,45 3.493.241,96 2.919.116,36 Budva 4.499.850,31 4.690.439,42 5.079.861,37 5.007.757,64 5.773.854,69 Ulcinj 1.393.023,34 1.102.114,93 1.280.893,98 1.456.226,46 1.508.790,76 Herceg Novi 3.281.235,45 2.901.322,47 2.923.861,06 2.711.676,96 2.894.718,57 Tivat 1.321.990,84 1.940.603,54 2.119.603,90 2.193.902,83 1.908.041,58 Kotor 2.257.044,08 2.650.010,87 2.535.558,50 2.347.084,58 2.824.993,24 Total 40.562.155,30 39.826.925,05 39.735.010,54 43.232.304,27 43.894.542,77

Veterinary chamber and veterinary ambulances funds were allocated from the State Treasury Central Account in the amount of 196.439,75 €, in accordance with the Decision on the Amount of Fees for Veterinary and Sanitary Inspections in Domestic Trade8.

Funds for the Equalisation Fund in the amount of 35.053.473,84 € were transferred in the amount of 34.153.473,84 € from the State Treasury Central Account and in the amount of 900.000,00 € from the State Treasury General Account. According to data of the Central Bank of Montenegro, the funds balance on 01.01.2017 on the account of the Equalisation Fund no. 907-83301-89 amounted to 876.002,62 €. The inflow of funds in 2017 amounted to 35.053.473,84 €, while the outflow of funds amounted to 34.242.596,01 €, so that the balance as at 31.12.2017 amounted to 1.686.880,45 €.

PE Morsko Dobro - the amount of 4.623.867,02 € was transferred from the Central Account of the State Treasury to the PE Morsko Dobro.

Union of Municipalities - the amount of 357.410,72 € was transferred from the Central Account of the State Treasury to the Union of Municipalities.

Refund and reallocation of funds was performed in 2017 as per decisions of the Ministry of Finance in the amount of 82.270.836,25 € to payment accounts of the Tax Administration and accounts of legal entities. Funds in the amount of 54.729.960,12 € are related to the return of VAT loans to legal entities, and the amount of 168.415,69 € is related to the return of funds from the payment account 832 to accounts of natural persons and legal entities. Funds in the amount of 27.372.460,44 € were transferred to the Tax Administration (Unique account of taxes and contributions 820-30000-74) for the purpose of settling tax liabilities. 1.4. State Treasury General Ledger The cash balance expressed in the Proposed Law on the Final Statement of Accounts of the State Budget of Montenegro for 2017 amounted to 5.531.641,03 € on 1st January 2017. The receipts expressed in the State Treasury General Ledger amount to 2.185.304.645,49 €, recorded payments amount to 2.161.736.647,63 €, while cash was expressed in the amount of 29.099.638,89 € at the end of the calculation period, as given in the following table:

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Table 8: Inflows and outflows of funds recorded in the State Treasury General Ledger GENERAL LEDGER OF THE STATE TREASURY Opening balance 5.531.641,03 445.363.693,67 Gross salaries and contributions paid by employer Taxes 971.155.574,28 10.648.738,73 Other personal earnings Contributions 494.952.632,42 29.199.822,02 Expenses for material Duties 13.613.004,68 66.705.488,45 Expenses for services Fees 18.967.775,13 20.203.326,92 Expenses for current maintenance Other revenues 35.723.009,73 98.705.378,58 Interests Receipts from sale of assets 6.191.115,23 8.940.947,37 Rents Receipts from repayment of loans 6.580.211,88 27.803.826,27 Subsidies Donations and transfers 25.281.469,76 38.242.445,06 Other expenditures Borrowings and loans 612.839.852,38 98.704.880,72 Rights from the social protection 12.968.450,79 Redundancy funds 401.263.898,72 Rights from pension and disability insurance 16.489.379,11 Other rights in health care 8.624.286,79 Other rights in health insurance 166.881.124,76 Transfers inst., ind. non-gov.and public sector 287.888.325,48 Capital expenditures 4.857.410,76 Borrowings and loans 358.600.568,85 Repayment of debt 39.960.824,65 Repayment of liabilities from previous period 19.683.829,93 Reserves Total inflows 2.185.304.645,49 2.161.736.647,63 Total outflows Total inflows + opening balance 2.190.836.286,52 29.099.638,89 Closing cash balance

The total recorded inflows and outflows in the State Treasury General Ledger correspond to the revenues and expenditures in the Proposed Law on the Final Statement of Accounts of the State Budget of Montenegro for 2017. 1.5. Statement of outstanding liabilities Records of liabilities or records of outstanding liabilities in accordance with the Rulebook on Unique Classification of Accounts for the State Budget of Montenegro and Municipal Budgets9 were not ensured in the State Treasury General Ledger. The balance of outstanding liabilities expressed per economic classification and per years is given in the following table:

Table 9: Balance of outstanding liabilities for 2013-2017 BALANCE OF OUTSTANDING LIABILITIES ON DATE DESCRIPTION No. 31.12.2013 31.12.2014 31.12.2015 31.12.2016 31.12.2017 1 Liabilities for current expenditures (1.1+1.2+1.3) 15.929.611,32 14.390.905,00 11.557.894,48 14.066.747,60 14.501.369,06 Liabilities for gross wages and contributions paid by 154.436,64 1.1 employer 1.572.240,19 12.727,00 33.658,33 92.350,36 1.2 Liabilities for other personal earnings 1.357.596,31 1.100.699,00 1.676.072,78 376.225,24 297.974,46 1.3 Liabilities for other current expenditures 12.999.774,82 13.277.480,00 9.848.163,37 13.598.172,00 14.048.957,96 2 Liabilities for social protection transfers 55.706.078,99 57.524.526,00 55.661.688,34 46.855.868,72 46.934.356,20 3 Liabilities for transfers to institutions,individuals and loans 14.415.800,67 19.507.913,00 7.893.559,19 864.783,99 11.705.296,54 4 Liabilities for capital expenditures 364.261,85 326.296,00 482.309,95 1.126.943,97 3.174.829,67 5 Liabilities for borrowings and loans 3.001,00 30.624,00 7.151,30 - 6 Liabilities based on debt repayment 1.670.043,00 473.985,00 495.922,00 97.517,44 689.237,53 7 Liabilities from reserves 8 TOTAL 88.088.796,83 92.254.249,00 76.098.525,26 63.011.861,72 77.005.089,00

Graph 1: Outstanding liabilities in 2013-2017

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An overview of outstanding liabilities on 31st December 2017 per spending units is given in the following table:

Table 10: Outstanding liabilities per spending units Consolidated outstanding Consolidated Consolidated Balance of liabilities from outstanding outstanding Balance of consolidated 2016 and liabilities in liabilities in consolidated No. Name of spending unit liabilities as of previous years 2017 due for 2017 due for liabilities as of 31.12.2016 which remain payment till payment after 31.12.2017 outstanding on 31.12.2017. 31.12.2017. 31.12.2017 10101 President of Montenegro 14.615,34 1.632,00 6.043,90 7.675,90 20101 Parliament of Montenegro 30.066,29 8.559,84 36.259,99 44.819,83 20102 State Election Commission 307,95 982,13 982,13 20106 Parliamentary forum of Cetinje 0 100,06 966,86 1.066,92 30101 Constitutional court 362,33 286,79 365,6 652,39 30102 Judicial courts 425.797,47 188.116,42 366.899,65 283.071,59 838.087,66 30103 Prosecutor Offices 244.887,97 97.774,03 45.113,15 142.887,18 30104 Training center in the judiciary and prosecution 491,6 1.236,90 368,7 1.605,60 40101 General Secretariat of Government 65.911,95 1.192,59 11.532,81 12.725,40 40103 Council for privatization and capital projects 1.382.778,14 152,66 152,66 40108 Agency for foreign investment promotion 4.158,07 3.781,93 3.781,93 40115 Commission for control of public procurement procedures 1.189,71 360,64 656,77 1.017,41 40116 Commission for concession 0 10.148,36 10.148,36 40121 Secretariat for development projects 1.208,33 237,1 1.242,64 598,36 2.078,10 40201 Ministry of justice 82.481,71 208.542,83 4.190,72 212.733,55 40204 Mediation Center 0 989,6 989,60 40301 Ministry of interior 2.296.307,51 1.823,26 579.456,33 581.279,59 40306 Human resources Administration 75.466,83 24.417,18 24.417,18 40401 Ministry of defence 791.218,42 669.905,40 130.084,24 799.989,64 40402 Direction for protection of classified information 279,36 626,98 626,98 40501 Ministry of finance 540.972,07 2.315,40 250.530,90 94.490,27 347.336,57 40507 Administration for prevention of money laundering and terrorism financing 8.147,64 1.717,54 1.717,54 40508 Property administration 1.794.554,17 2.190.340,73 779.060,51 2.969.401,24 40510 Statistical Office 2.882,76 124,8 1.927,25 2.052,05 40515 Protector of property and legal interests 2.200,08 2.203,53 2.203,53 40601 Ministry of foreign affairs 32.473,60 38.999,98 25.075,63 148.443,02 212.518,63 40701 Ministry of education 309.868,00 207.601,00 207.601,00 40704 Bureau for education services 4.305,06 1.045,22 5.082,36 6.127,58 40705 Examination Center 18.103,35 52,73 1.323,66 1.376,39 40707 Police academy 0 10.084,15 10.084,15 40708 Faculty for montenegrin language 7.586,35 463,53 22.272,98 837,83 23.574,34 40709 Center for vocational education 61.941,17 60.443,00 9.534,33 7.505,85 77.483,18 40801 Ministry of culture 287.689,58 37.848,95 55.692,13 93.541,08 40802 State archive 2.683,64 1.675,74 1.675,74 40803 Montenegrin National Theatre 52.220,99 8.700,00 47.209,92 8.120,27 64.030,19 40804 Royal Theatre "Zetski dom" 39.763,38 23.557,37 23.557,37 40805 National library of Montenegro "Đurđe Crnojević" 19.425,86 1.081,49 3.060,20 5.945,68 10.087,37 40808 Natural Museum Montenegro 4.541,19 422,7 422,70 40809 Montenegrin Film Archive 4.294,45 750 12.540,71 13.290,71 40810 Music center Montenegro 18.599,86 23.290,36 1.914,97 25.205,33 40811 Library for the visually impaired 7.566,02 677,13 677,13 40813 PI National museum of Montenegro 45.547,65 18.260,94 18.260,94 40814 Maritime museum of Montenegro 2.462,62 1.635,68 1.635,68 40816 Contemporary art center 3.730,48 1.830,08 39,12 1.869,20 40818 Center for conservation and archaelogy 79.167,02 216,54 3.166,31 3.382,85 40819 PI Film Center 0 142,8 2.371,58 2.514,38 40901 Ministry of economy 136.829,15 58.688,15 23.937,49 232.649,16 315.274,80 40904 Bureau of metrology 6.763,79 688,5 2.162,58 1.629,74 4.480,82 40910 Bureau for intellectual property 958,84 0,00 40914 Hydrocarbon Administration 152,64 0 9.194,41 57,16 9.251,57 41001 Ministry of transport and maritime affairs 324.602,57 99.395,49 806.504,71 905.900,20 41007 Commission for investigation of accidents 356,84 318,89 318,89 41101 Ministry of agriculture and rural development 193.185,72 64.143,87 133.417,03 14.393,09 211.953,99 41301 Ministry of health 6.114,87 1.546,19 13.087,05 14.633,24 41401 Ministry for human and minority rights 0 2.886,39 2.886,39 41402 Fund for protection and exercise of minority rights 1.496,41 2.869,08 2.869,08 41405 Center for development and preservation of the cultures of minorities 11.406,73 441,13 441,13 41501 Ministry of sustainable development and tourism 193.470,15 174.501,87 174.501,87 41504 Environmental protection Agency 16.263,44 0,00 41509 National Tourism Organization 37.297,04 26.370,46 426.158,08 48.404,88 500.933,42 41510 Institute for hydrometeorology and seismology 3.361,08 6.364,65 6.364,65 41601 Ministry of labour and social welfare 11.550.810,19 22.684,99 102.688,26 6.245.704,36 6.371.077,61 41604 Bureau for social and child protection 291,16 0,00 41701 Ministry of information society and telecommunication 18.729,54 0,00 41801 Ministry of european affairs 88,17 3.530,25 3.618,42 41901 Ministry of science 8.835,63 4.599,31 692,71 5.292,02 42001 Ministry of public administration 17.863,56 70.910,37 88.773,93 42101 Ministry of sports 2.001,71 2.001,71 50201 Human rights and freedom protector 397,52 0,00 50301 State audit institution 6.849,92 1.244,72 3.089,12 4.333,84 50401 Montenegrin Academy of science and art 73.562,75 7.198,05 7.198,05 50901 National security Agency 26.845,51 3.421,63 25.192,66 28.614,29 51001 Agency for personal data protection and free access to information 16.207,07 10.609,95 10.609,95 51301 Agency for peaceful settlement of labour disputes 323,2 1.454,40 1.454,40 51601 Audit Authority 877,05 644,72 644,72 51701 Administration for inspection affairs 79.051,87 1.571,00 29.058,21 30.629,21 52001 Anticorruption Agency 6.527,81 10.369,62 10.369,62 60101 Pension and Disability Insurance Fund 33.063.087,73 47.837,48 10.419,67 34.046.757,54 34.105.014,69 60201 Health Insurance Fund 6.955.979,14 169.890,02 9.162.736,65 17.726.066,08 27.058.692,75 60301 Employment Bureau 189.211,62 150.896,31 150.896,31 60601 Labour Fund 1.313.111,62 7.704,00 146.393,80 12.614,75 166.712,55 Total 63.011.214,57 1.370.849,87 13.953.300,82 61.680.938,31 77.005.089,00

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The highest amount of outstanding liabilities was reported by the Pension and Disability Insurance Fund, in the amount of 34.105.014,69 €, Health Fund in the amount of 27.058.692,75 € and Ministry of Labour and Social Welfare in the amount of 6.371.077,61 €. Outstanding current liabilities of the budget of Montenegro on 31.12.2017, after an adjustment of the initial balance on the basis of a recommendation by the State Audit Institution in the amount of 400.408,00 € and the consolidation of current liabilities in 2017 in the amount of 116.559.341,64 €, amount to 77.005.089,00 €. The net increase of outstanding liabilities in 2017 was expressed in the amount of 13.993.228,28 €, i.e. 22.21% higher in comparison to the previous year. The balance of outstanding liabilities on 31.12.2017 is given in the following table: Table 11: Balance of outstanding liabilities as at 31.12.2017 Outstanding Outstanding Outstanding Balance of liabilities liabilities from liabilities arising in liabilities arising in Net changes of Liabilities on No. DESCRIPTION on 31.12.2016. 2016 and 2017 and due for 2017 and due for outstanding 31.12.2017 (adjusted by the SAI) previous years on payment till payment after liabilities 31.12.2017 31.12.2017. 31.12.2017 1 Liabilities for current expenditures (1.1+1.2+1.3) 14.066.747,60 603.195,30 8.612.664,03 5.285.509,73 14.501.370,06 434.622,46 1.1 Liabilities for gross salaries and contributions paid by employer 92.350,36 77.161,01 77.276,36 - 154.436,64 62.086,28 1.2 Liabilities for other presonal earnings 376.225,24 188.103,02 80.485,62 29.385,82 297.974,46 - 78.250,78 1.3 Liabilities for other current expenditures 13.598.172,00 337.931,27 8.454.902,05 5.256.123,91 14.048.958,96 450.786,96 2 Liabilities for transfer for social welfare 46.855.868,72 7.704,00 1.818.769,35 45.107.882,85 46.934.356,20 78.487,48 3 Liabilities for transfers to institutions, individuals and loans 864.783,99 67.957,00 2.662.056,68 8.975.282,86 11.705.296,54 10.840.512,55 4 Liabilities for capital expenditures 1.126.943,97 2.756,04 859.810,77 2.312.262,86 3.174.829,67 2.047.885,70 5 Liabilities for borrowings and loans - - 6 Liabilities based on debt repayment 97.517,44 689.237,53 689.237,53 591.720,09 7 Liabilities from reserves 8 Balance of liabilities at the end of year 63.011.861,72 1.370.849,87 13.953.300,83 61.680.938,30 77.005.090,00 13.993.228,28

The audit of outstanding liabilities established irregularities related to: a) Liabilities reported as outstanding liabilities from 2016 and previous years which remained outstanding on 31 December 2017 It was established that out of the amount of 1.370.849,87 €, which is related to outstanding liabilities from 2016 and previous years, the amount of 246.791,17 € was not planned by the Law on Budget for 2017.

It is necessary to plan, within the annual law on budget, funds for the payment of outstanding liabilities from the previous period and that these liabilities, in accordance with Article 48 of the Law on Budget and Fiscal Responsibility, have priority in the payment of obligations of a spending unit. b) Liabilities arising from legal regulations and concluded contracts, for which no funds were planned by the Law on Budget of Montenegro for 2017, and which were reported as outstanding liabilities on 31.12.2017 in the amount of 3.133.913,43 €, as follows:  Liabilities of the Ministry of Transport and Maritime Affairs for contribution costs for membership in international organisations in the amount of 73.583,31 €.  Liabilities of the Health Insurance Fund for allowances for sick leave of over 60 days in the amount of 3.060.330,18 €. c) Outstanding liabilities related to contracting liabilities above the level of funds defined by the Law on Budget of Montenegro for 2017 in the amount of 48.155,03 €, as follows:  Judiciary in the amount of 15.541,45 € for the procurement of fuel and equipment,  Ministry of Justice in the amount of 15.769,87 € for the procurement of stationery and spare parts, for on-going maintenance of construction facilities and for the procurement of equipment and  Ministry of Economy in the amount of 16.843,71 € for entertainment.

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In accordance with Article 40 of the Law on Budget and Fiscal Responsibility, spending units are obliged to contract commitments in accordance with the planned and approved funds in line with the State Budget Law. d) Current outstanding liabilities expressed in the Statement of Outstanding Liabilities on 31.12.2017 which could not be confirmed as outstanding liabilities during the auditing process are related to:  Outstanding liabilities expressed for the spending unit Judiciary in the amount of 390.546,87 € (lawyer, notarial and legal services in the amount of 354.816,04 and liabilities arising from costs of court procedures in the amount of 35.730,83 €). It was established that some of these liabilities were paid in 2017 by means of enforced performance from position 463 – Repayment of arrears from the previous period. By the memorandum no. 10-4244/2018 of 14.06.2018, the court council gave the following explanation: “Outstanding liabilities for lawyers and court experts were recorded, even beside the fact that the approved funds are sufficient for settling the liabilities on this basis, because certain experts and lawyers are get their payment through enforcement, which is why there cannot be a payment of costs of experts and lawyers who regularly collect their fee in this manner, in order not to double the payment.”

The spending unit Judiciary is obliged to harmonize, together with the Ombudsman for Property- Based Interests, the balance of outstanding liabilities and inform the Ministry of Finance about the amount of outstanding liabilities for which there needs to be an adjustment of current outstanding liabilities reported on 31 December 2017. e) Inaccurate presentation of outstanding liabilities in the Statement of Outstanding Liabilities on 31 December 2017  In the Statement of Outstanding Liabilities as at 31 December 2017, the Ministry of Defence presented outstanding liabilities, on accounts of group 4630 - Repayment of liabilities from the previous period, in the amount of 669.905,40 €. The audit established that there is no documented basis for the presented current outstanding liabilities.

The Ministry of Defence is obliged to adjust the data in the Statement of Outstanding Liabilities presented on the position 4630 - Repayment of liabilities from the previous period, in the amount of 669.905,40 € and to inform the Ministry of Finance about the performed adjustments.

Outstanding liabilities of the Health Insurance Fund

The Health Insurance Fund (60201) expressed on 31.12.2017 outstanding liabilities in the amount of 27.058.692,75 €, i.e. higher by 20.102.713,61 € in relation to the outstanding liabilities expressed on 31 December 2016 which amount to 6.955.979,14 €. The outstanding liabilities of the Health Insurance Fund have a 35.13% share in the total outstanding liabilities expressed in the Statement of Outstanding Liabilities on 31.12.2017. Out of the 27.058.692,75 € of the Health Insurance Fund’s outstanding liabilities, 18.141.492,61 € is related to the Health Insurance Fund Programme, while 8.917.200,14 € is related to the Clinical Centre of Montenegro, health centres, special hospitals, institutes and the Institute of Public Health. The stated data were confirmed with OIS forms, received from the supplier per selected sample. The fluctuation of outstanding liabilities of the Health Insurance Fund (Programme - Health Insurance Fund 602012491) is given in the following table:

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Table 12: Outstanding liabilities of the Health Insurance Fund Balance of outstanding liabilities E.C. Description 2013 2014 2015 2016 2017 41 Liabilities for other current expenditures 80.668,90 106.997,08 120.564,63 43.737,99 38.274,34 4241 Treatment outside of Montenegro 3.941.834,24 5.354.340,79 2.568.219,21 941.118,01 3.165.060,60 4251 Orthopaedic devices and aids 305.227,56 669.647,10 532.127,93 242.806,80 449.802,99 4252 Allowances for sick leave of over 60 days 5.372.575,06 8.210.693,70 8.831.901,62 634.852,38 3.060.330,18 4253 Allowances for travel costs of the insured 275.709,58 4311 Transfers for health protection of the insured 11.642.053,50 18.783.973,70 7.301.997,71 390.493,37 11.428.024,50

Total 21.342.359,26 33.125.652,37 19.630.520,68 2.253.008,55 18.141.492,61

Graph 2: Outstanding liabilities of the Health Insurance Fund

Outstanding liabilities of the Health Insurance Fund expressed on 31.12.2017 (without health institutions) amount to 18.141.492,61 € and are related to:  liabilities for transfers for healthcare to PE Montefarm in the amount of 9.861.950,41 €;  liabilities for 60 private pharmacies with which the Health Insurance Fund has concluded contracts in the amount of 1.246.604,06 €;  liabilities for 187 dental clinics in the amount of 319.470,03 €;  allowances for sick leave of over 60 days in the amount of 3.060.330,18 €;  expenses for treatment outside of Montenegro in the amount of 1.104.561,21 €,  liabilities to clinics in Montenegro which are not in the system of the Health Fund in the amount of 2.060.499,45 €;  expenses for orthopaedic devices and aids in the amount of 449.802,99 €.

Outstanding liabilities of the Health Insurance Fund which are related to health institutions which are in the system of the Health Insurance Fund as at 31.12.2017 amounted to 8.971.802,42 € and to the largest extent these related to: expenses for healthcare material in the amount of 3.726.930,04 €, expenses for energy in the amount of 1.025.059,86 €, other expenses in the amount of 647.153,26€ and expenses for equipment in the amount of 1.822.722,33 €. 1.6. Budgetary overrun The audit established that in 2017, budget spending was exceeded in the amount of 237.745.890,92 €, as given in the following table: Table 13: Budgetary overruns Description Amount Total amount of overruns 237.745.890,92 Allowed overruns 218.353.517,92 Allowed overrun - interests 14.495.223,82 Allowed overruns - repayment of principal debt and guarantees 174.100.813,68 Allowed overrun - international agreements 27.998.247,27 Allowed overrun - expenditures financed by sale of state property 1.759.233,15 Unauthorized overruns 19.392.373,00 Payments based on judicial decisions 19.012.698,76 Expenditures for purchase of securities 379.674,24

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Out of the total expressed overrun of the budget spending amounting to 237.745.890,92 €, the amount of 218.353.517,92 € was the allowed overrun. The allowed overrun is related to the following: interest payments and repayment of the principal debt, expenditures financed through the implementation of international loan agreements, expenditures financed by the sale of state property, in accordance with Article 60 of the Law on Budget and Fiscal Responsibility and Articles 7 and 8 of the Law on Budget of 2017.

Unauthorized overruns of the budget spending in the amount of 19.392.373,00 € represent expenses which were not planned by the Law on Budget for 2017, and are related to:  Expenditure based on court rulings in the amount of 19.012.698,76 €, which was recorded at the expense of the spending units because of which the court costs arose. It was established that there was no basis in the Law on Budget and Fiscal Responsibility and the Law on Budget for 2017 for an overrun of budgetary spending regarding the payments of court rulings, which is why the stated amount was qualified as an unauthorized overrun of budgetary spending for payments which were made at spending units.  Expenditure for the purchase of securities from the Investment and Development Fund of Montenegro in accordance with the Conclusion of the Government no. 07-1753 of 15.06.2017 and the Law on the Investment and Development Fund of Montenegro.10

The spending units are recommended to plan the funds for expenditures on the basis of court rulings within the annual law on budget.

Funds from the repayment of loans which are intended for the purchase of securities from the Investment and Development Fund, in accordance with Article 9 of the Law on Budget and Fiscal Responsibility, must be planned by the Agency for the Development of Small and Medium Enterprises11 within the annual law on state budget.

2. CASH DEPOSITS

The cash expressed in the Proposed Law on the Final Statement of Accounts of the State Budget of Montenegro for 2017 was confirmed on the basis of data and documents delivered by the Ministry of Finance and open item statements (OIS) of the Central Bank and commercial banks. The Proposed Law on the Final Statement of Accounts of the State Budget of Montenegro for 2017 expressed the deposit balance as at 31.12.2017 in the amount of €29.09 mil. and €38,477.69 ounces of gold at the market price of €41.80 mil., which amounts to a total of €70.89 mil. The following table provides the overview of the deposit balance as at 31.12.2017:

Table 14: Deposit balance as at 31.12.2017 Funds at the Unspent funds Funds at the accounts of at the accounts Description accounts of the Total Ministry of of spending state funds finance units Central Bank of Montenegro 24.680.399,01 24.680.399,01 Crnogorska komercijalna banka 155.372,36 211.366,68 366.739,04 NLB Montenegrobanka 10.000,00 10.000,00 Erste banka 3.000.000,00 3.000.000,00 Societe Generale banka 32.770,39 32.770,39 Prva banka 42.968,53 42.968,53 Atlas banka 75.440,78 75.440,78 Unused funds of the spending units 891.321,14 891.321,14 Total 27.986.951,07 221.366,68 891.321,14 29.099.638,89

10 Official Gazette of Montenegro 40/10 and 80/17 11 The Agency for the Development of Small and Medium Enterprises is a special directorate within the Ministry of Economy

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Deposit funds as at 31.12.2017 in the amount of 29.099.638,89 € are kept on: a) Accounts of the Ministry of Finance in the amount of 27.986.951,07 € held with the following banks:  Central Bank of Montenegro in the amount of 24.680.399,01 € related to: - State Treasury General Account no. 907-8300119 in the amount of 23.782.856,96 €. - Approved advance payment - frozen foreign currency savings in the amount of 27.311,49 €. - Liabilities for received advance payments in the amount of 37,88 €. - Deposits on the basis of succession in the amount of 947.692,68 €. - Deposits realised on the basis of a syndicated loan in the amount of 222.500,00 €.  Montenegrin Commercial Bank in the amount of 155.372,36 € related to: - Funds for the payment of foreign currency savings DO in the amount of 18.604,91 €. - Funds for the payment of foreign currency savings DF and JSD in the amount of 11.094,45 €. - Funds of the Pension and Disability Insurance Fund in the amount of 125.673,00 €.  Erste Bank in the amount of 3.000.000,00 €. The funds refer to the purpose term deposit placed by the Government of Montenegro pursuant to the Agreement on term deposit number 540- 559059/8500001436 concluded between Erste Bank JSC Podgorica and the Ministry of Finance on 11.04.2016.  Societe Generale Bank in the amount of 32.770,39 € for the payment of frozen foreign currency savings OB.  Prva banka in the amount of 42.968,53 € for the payment of foreign currency savings OB in the amount of 7.184,16 € and for the payment of foreign currency savings DF and JCD in the amount of 35.784,37 €.  Atlas Banka in the amount of 75.440,78 € on the basis of frozen foreign currency savings OB Pljevlja in the amount of 61.207,78 € and frozen foreign currency savings OB Berane in the amount of 14.233,08 €. b) Accounts of state funds in the amount of 221.366,68 € held with the following banks: - Pension and Disability Insurance Fund / collateral in the amount of 121.691,32 €. The funds were deposited on behalf of loans granted to the employees of the PDI Fund as per the Earmarked Deposit Contract concluded between the Republic Pension and Disability Insurance Fund no. 01-3492/2 dated 11 August 2006 and the Montenegrin Commercial Bank no. 11729 of 09 August 2006. - Health Insurance Fund / collateral in the amount of 89.675,36 €. The funds were deposited as an earmarked deposit under the earmarked deposit contracts concluded between the Republic Health Insurance and the Montenegrin Commercial Bank.  NLB Montenegrobanka in the amount of 10.000,00 €. The Pension and Disability Insurance Fund deposited funds as collateral for the approval of loans to employees of the Fund under the Earmarked Deposit Contract no. DP2009/15 no. 01-740 of 08.06.2009. c) Budget users' unspent funds in the amount of 891.321,14 €, related to: - Funds of embassies in the amount of 179.622,27 € recorded by the Ministry of Finance's decisions. - Funds in the amount of 405.997,57 € recorded in accordance with submitted statements on the manner of spending funds after the expiration of the fiscal year by the Ministry of Foreign Affairs and European Integration, Ministry of Sport and Ministry of Culture. - Funds in the amount of 305.701,30 € recorded on the basis of the Decision of the Ministry of Finance 06-01-2931/1 of 21.02-2018, which are related to receipts from the repayment of loans given by the Directorate for the Development of Small and Medium Enterprises.

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Balance of funds on accounts/parties with the Central Bank of Montenegro and commercial banks, determined on the basis of submitted OIS12 as at 31.12.2017 amounted to 95.760.018,94 € as follows:

Table 15: Deposit balance as at 31.12.2017 Funds not Funds at the accounts on 31.12.2017 reported in the Proposal Law on Final Funds on 31.12.2017. not reported in the Proposal Law on final statement of reported in the Statement of Accounts for 2017 Proposal of the Law accounts for 2017 Proposal of the Bank on final statement of Difference Deposits Law on final Granted PIB PIB accounts for 2017 not stated at Total statement of loan funds donation funds IPA funds borrowings for Ministry of finance Spending units IOS forms accounts for 2017 Project 100+ flats Central Bank of Montenegro 41.116.606,67 41.116.606,67 24.680.399,01 16.436.207,66 1.911.046,21 12.821.219,38 1.703.942,07 Crnogorska komercijalna banka 19.602.871,27 3.870.211,83 211.366,68 23.684.449,78 366.739,04 23.317.710,74 4.575.975,27 11.482.456,45 279.207,12 2.243.941,51 4.736.130,39 NLB Montenegrobanka 9.299.088,82 1.074.192,51 10.000,00 10.383.281,33 10.000,00 10.373.281,33 3.802.779,85 5.495.538,41 1.074.963,07 Prva banka Crne Gore 1.747.697,08 1.053.655,57 2.801.352,65 42.968,53 2.758.384,12 225.150,43 777.649,03 27.771,07 651.191,76 1.076.621,83 Erste banka 6.364.399,68 1.187,07 6.365.586,75 3.000.000,00 3.365.586,75 426.454,25 10.004,40 2.769.859,37 159.268,73 Societe Generale banka 5.392.259,38 1.778.099,64 7.170.359,02 32.770,39 7.137.588,63 195.088,33 12.365,03 3.412.635,24 3.517.500,03 Komercijalna banka Ad Budva 425.759,55 425.759,55 425.759,55 425.759,55 - Hipo Alpe / Adiko banka 1.674.248,44 1.674.248,44 1.674.248,44 224,80 1.664.478,08 9.545,56 Hipotekarna banka 10.368,41 102.535,02 112.903,43 112.903,43 10.368,41 102.535,02 Atlas banka 76.049,91 51.011,55 127.061,46 75.440,78 51.620,68 485,71 51.134,97 Invest banka Montenegro 1.537,86 1.537,86 1.537,86 1.537,86 Lovćen banka 396.884,00 396.884,00 396.884,00 396.884,00 - Nova banka 1.499.988,00 1.499.988,00 1.499.988,00 1.499.988,00 Total 86.106.233,21 9.432.419,05 221.366,68 95.760.018,94 28.208.317,75 67.551.701,19 5.227.579,95 18.190.103,19 13.140.562,60 17.060.287,92 13.933.167,53

The balance of funds on accounts/parties with the Central Bank of Montenegro and commercial banks, which are recorded to the TIN of the Ministry of Finance amounts to 86.106.233,21 €, and on accounts/parties held with commercial banks, to the TIN of the spending units, it amounts to 9.432.419,05 €. Funds in the amount of 221.366,68 € were not expressed on banks' OIS, and are related to deposits of state funds.

The total recorded balance of funds in the General Ledger of the Treasury (on class 1 - Financial assets) as at 31.12.2017 amounts to 29.099.638,89 €, which is the amount expressed also in the Proposed Law on the Final Statement of Accounts of the State Budget of Montenegro for 2017. The table number 14 - Balance of deposits as at 31.12.2017 does not include the amount of 891.321,14 € which is expressed in the Proposed Law on the Final Statement of Accounts of the State Budget of Montenegro for 2017 as budget users' unspent funds. The Proposed Law on the Final Statement of Accounts of the State Budget of Montenegro for 2017 does not state the amount of funds which is kept on accounts/parties of the Ministry of Finance and spending units, budget users as follows: 67.551.701,19 €, 12.719,67 US, 2.500,00 CHF, 565,06 Gbp, 2.633,06 SEC and 401,00 CDA.

Funds in the amount of 67.551.701,19 € which are not expressed in the Proposed Law on the Final Statement of Accounts of the State Budget of Montenegro for 2017 are related to: funds from loans in the amount of 5.227.579,95 €, funds from donations in the amount of 18.190.103,19 €, funds from IPA funds in the amount of 13.140.562,60 € and funds in the amount of 17.060.287,92 € given as loans for the implementation of the Project “1000+” flats.

By its memorandum no. 06-5177/1 of 02.10.2018 (SAI: number 011-40111/18/112/161-33 of 02.10.2018), the Ministry of Finance provided the assessment of basic items in the amount of 13.933.167,53 € on the basis of the purpose of opening accounts by budget users, as follows:

12 Except for Prva banka’s OIS for expropriation funds

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Table 16: Balance of funds on state accounts/parties as per the Ministry of Finance’s data Description Amount Balance at the account of Equalization fund 1.686.880,45 Balance at the accounts of public institutions 3.004.975,09 Balance at the accounts opened for the need of international payment 1.185.453,14 Balance at the accounts opened for specific payment of public revenues and from which is envisaged that the funds, 736.715,89 after assessment of competent body are transferred partially or entirely within the Budget Balance at the accounts of spending units opened for Housing fund and Housing society 2.542.355,29 Balance at the accounts kept as deposits till completion of the procedure (custom, judicial and other proceeding 4.095.633,67 brought against state bodies) and deposits for participation in public competition Balance at the accounts of Commission for Allocation of a Share of Games of Chance Revenues 485.200,52 Outstanding interests payable at the Erste bank 20.958,92 Donations on behalf of Secretariat for european integration (not at the PIB Ministry of finance) 30.662,27 Funds at the accounts of Solidarity 94.474,87 Outstanding interest at the Adico bank for the funds in amount of 1.664,478,06 € 9.547,58 Total 13.892.857,69 The Ministry of Finance did not give a precise opinion on funds which are kept on accounts with the Central Bank and commercial banks, with the explanation that the competent authorities and their heads are responsible for the management and manner of use of funds which are kept on the accounts, as defined by the Law on Budget and Fiscal Responsibility.

3. FINAL TAX STATEMENT

By the document no. 03/1-15511/1-18 of 01.08.2018, the tax authority delivered the Final Tax Statement for the period from 01.01. to 31.12.2017 to the State Audit Institution. The tax authority was obliged to deliver the Final Tax Statement to the Ministry of Finance, pursuant to Article 19 of the Rulebook on Tax Bookkeeping13, by 31 March of the current year. Regarding the Final Tax Statement for 2017, the accounting accuracy of the data expressed in the tax bookkeeping was checked. The data regarding the opening balance, turnover and closing balance were taken from the tax records. The balance as at 01.01.2017 is presented in the following table: Table 17: Balance as at 01.01.2017 Balanse as of 01.01.2017 Class Description Taxes Contributions Fees Charges Other revenues Other Total debit 331.449.582,05 293.367.881,40 789.616,87 21.715.182,64 52.728.852,05 22.873.615,55 722.924.730,56 3 credit 328.102.837,00 82.101.024,84 256.661,36 876.667,44 1.446.117,42 378.510,59 413.161.818,65 debit 155.593.372,67 61.511.402,67 113.344,36 5.749.748,60 415.741,28 3.132.858,70 226.561.468,28 7 credit 187.420.521,37 231.551.309,24 646.299,87 24.857.956,86 59.474.251,86 32.374.040,99 536.324.380,19 Payments as per the “Restructuring from 2004” which were recorded on accounts 371111 and 319171 were performed to the payment account at the Tax Administration 820-71111-28. The stated payment account does not possess an eco-code and the payments are not performed through a revenue statement. The Ministry of Finance periodically transfers the collected funds to the General Account of the State Treasury, as per the structure delivered to them by the Tax Administration's memorandum. The bookkeeping balance of the tax debt, recorded as the opening balance, amounts to 722.924.730,56 €, while the bookkeeping balance of subscription on the basis of tax debt amounts to 413.161.818,65 €. The opening balance of the tax debt represents neither the actual amount of the debt, nor the prepaid balance as at the stated date for the following reasons:  unorganised records on analytical accounts of state authorities;  recorded debt on the basis of the “Restructuring from 2004” expressed on accounts of tax groups 371 and 319 is not in accordance with the economic classification of income;  unrealized decisions on deferred payments and decisions on reallocation of funds;  deferred liabilities to municipalities were recorded as due debt.

13 Official Gazette of Montenegro 81/06

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Turnover on accounts of classes 3, 1 and 7 in the period from 02.01.2017 to 31.12.2017 is given in the table below: Table 18: Turnover in the period from 02.01.2017 to 31.12.2017 Other Description Taxes Contributions Fees Charges Other Total revenues Debit 267.687.247,15 417.727.919,22 450.723,38 26.575.062,89 3.719.099,48 -1.233.031,30 714.927.020,82 3 Credit 346.644.262,34 484.301.724,31 473.699,15 32.025.503,96 1.076.662,37 718,71 864.522.570,84 Debit 346.707.185,84 484.274.785,35 473.699,15 32.025.503,96 1.040.677,83 718,71 864.522.570,84 1 Credit 346.707.185,84 484.274.785,35 473.699,15 32.025.503,96 1.040.677,83 718,71 864.522.570,84 Debit 335.914.906,14 494.960.907,94 473.699,15 32.025.503,96 1.146.834,94 718,71 864.522.570,84 7 Credit 267.308.004,20 417.727.919,22 450.723,38 26.575.062,89 4.098.342,43 -1.232.941,60 714.927.110,52

Turnover records in the tax bookkeeping are harmonized with the Rulebook on Tax Bookkeeping. The turnover on the debit side of class 3 in the amount of 714.927.020,82 € corresponds to the turnover on the credit side of class 7. The turnover of the credit side of class 3 expressed in the amount of 864.522.570,84 € corresponds to the turnover on the debit side of class 7, which is the same amount of the turnover on the debit side of class 1 which corresponds to the credit side of class 7. In accordance with the Law on Restructuring Tax Receivables14, the Tax Administration recorded in tax books 6749 decisions on restructuring and performed an adjustment of the maturity, i.e. due date of the debt by cancelling an amount of 150.923.729,17 €. In 2017, on the basis of restructuring, the amount of 28.844.986,19 € was due for payment and the recording of the due debt was performed by debiting the accounts of taxpayers. It is necessary to point out that for 315 decisions on restructuring in the amount of 11.199.136,24 € there was no adjustment of maturity, i.e. due date of the debt, out of which the amount of 1.842.885,96 € became due in 2017. By inspecting the accounting accuracy related to the Final tax statement for 2017, it was established that:  for 547 taxpayers, whose decisions on restructuring in 2017 were cancelled, there was no repeated borrowing for the due tax debt and the deferred tax debt, which led to underestimating the total tax debt expressed in the Final Tax Statement for 2017 in the amount of 15.284.159,27 €.  the Final tax statement contains deferred and restructured tax liabilities for taxpayers that perform agricultural activities and for public enterprises whose maturity, or due date of the tax liability should have been adjusted by an amount of 9.356.250,28 € (11.199.136,24 € less due liabilities in the amount of 1.824.885,96 €). As stated in the memorandum of the Tax Administration no. 03-18703/1-18 of 24.09.2018, a part of the tax receivables for taxpayers performing agricultural activities is also the obligation of the Ministry of Agriculture and the procedure for determining liabilities and their monitoring requires the use of additional records.

The Tax Administration is recommended to establish tax records, in accordance with Article 8 of the Rulebook on Tax Bookkeeping which prescribes the principle of accuracy, and to ensure reliable information about the amount of the tax debt. For the purpose of expressing an accurate tax debt balance, it is necessary to:  record cancelled decisions on restructuring;  present additional information in the Final tax statement, for taxpayers whose tax account balance and collection are recorded off-balance sheet;  conduct activities in order to establish the actual tax debt balance of state authorities;  present information on the amount of outstanding restructured tax debt in the Final tax statement.

14 Official Gazette of Montenegro 83/16

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3.1. Restructuring of tax receivables The Law on Restructuring Tax Receivables15 provides taxpayers with the possibility to restructure their tax liabilities, or to regularly settle current liabilities on the basis of public revenues, in accordance with adopted decisions on restructuring of the tax debt by the Tax Administration. The Ministry of Finance issued a Public call for all interest tax debtors for the submission of a request for the restructuring of tax receivables no. 04-2062/1 of 15.02.2017, which invites all interest taxpayers, legal entities and natural persons, that have tax debts due for payment conclusive with 15 February 2017. By inspecting the request for the restructuring of tax debt, taxpayers reported their liabilities as per the type of liability for: contributions for mandatory pension and disability insurance, contributions for mandatory health insurance, contributions for insurance against unemployment, contributions to the Labour Fund, concession fees, real estate sales tax, personal income tax, income tax for legal entities, value added taxes. On the basis of the submitted requests for restructuring of tax debt, the Tax Administration compiled decisions on restructuring, which contain the amount of the one-time payment, plan for the repayment of the outstanding debt and payment accounts to which the payments need to be made. The audit of the application of the Law on Restructuring Tax Debt, on the basis of the available documents, established the following: a) Number of issued decisions on restructuring and established tax debt covered by the restructuring:  7064 taxpayers restructured their tax debt in the total amount of 162.122.865,41 € (which did not include interest);  out of the total number of restructured debt, the amount of 18.847.364,72 € is related to a one- time payment of 10% which becomes due within 90 days since the adoption of the decision on restructuring;  the amount of 12.330.632,11 € is related to instalments becoming due by 31.12.2017;  the amount of 130.944.868,58 € is related to instalments becoming due after 31.12.2017. b) Records of decisions on restructuring at the Tax Administration:  Out of the total number (7064) of adopted decisions on the restructuring of tax debt, it was established that 6749 decisions on restructuring were recorded in the tax information system in the amount of 150.923.729,17 €. Due tax receivables in 2017, on the basis of the recorded decisions on the restructuring of tax receivables, amount to 29.961.766,81 €, while the amount of 22.620.547,07 € was collected by 31.12.2017, as presented in the table below:

Table 19: Unpaid public revenues per restructuring until 31.12.2017 Type of revenues Amount Contributions for obligatory pension and disability insurance 19.468.907,49 Contributions for obligatory health insurance 796.109,76 Contributions for insurance against unemployment 30.488,66 Contributions to Labor Fund 7.031,09 Concession fees 134.250,00 Tax on property 824.502,88 Personal income tax 320.089,66 Corporate income tax 204.236,37 Value added tax 834.931,16 Total 22.620.547,07

 The Tax Administration has no records on the balance of tax debt per restructuring for 315 decisions in the tax information system, i.e. 11.199.136,24 € of the tax debt covered by the restructuring. Out of the stated amount, tax receivables due and collected by 20.12.2017 amount to 1.295.271,10 €.16 The decisions on restructuring which were not recorded in the tax information system of the Tax Administration are related to agricultural taxpayers (for contributions in which the state participates with a 40% share) and public enterprises for which

15 Official Gazette of Montenegro 83/16 16 The Tax Administration did not have information on the collection of tax debt on this basis on 31 December 2017

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there are no precise records on the balance of tax debt, but for which the balance of the debt is established on the basis of the Tax Administration's off-balance sheet records. c) Cancelled decisions on the restructuring of tax receivables - The Tax Administration, on the basis of the taxpayer's appeal and after conducting an inspection control, cancelled 278 decisions on the restructuring of debt, where the debt amounted to 3.422.040,56 €. The Tax Administration adopted new decisions on restructuring with the debt amount of 3.586.433,24 €. d) Revoked decisions on the restructuring of tax receivables - In 2017, the Tax Administration adopted 547 decisions by which it revoked decisions on the restructuring of tax debt. The decisions on the revocation of decisions on the restructuring of tax debt are related to taxpayers which did not pay due liabilities on the basis of the decision on the restructuring of tax debt. The amount of funds per revoked and non-recorded tax decisions as at 20.12.2017 amounts to 15.284.159,27 €. e) Forced collection measures - Regarding 372 taxpayers, which performed the restructuring of tax receivables, and whose decision on restructuring was not revoked, the Tax Administration commenced the procedure of forced collection of due tax receivables. The procedure of forced collection was commenced because the stated number of taxpayers did not regularly settle the due current tax liabilities. The Tax Administration, through Call centre collection, calls the taxpayers to settle the due liabilities within the set deadline. If, even after the given deadline, the taxpayer does not settle the due liabilities, then the relevant regional unit is informed about that so that it could take legally prescribed collection measures. f) Status changes of the taxpayers - By inspecting the status changes of legal entities which went into bankruptcy, liquidation or were erased from the Central Register of the Commercial Court, it was established that 29 legal entities which restructured their tax liabilities initiated a bankruptcy procedure. Forced collection measures cannot be implemented for legal entities which are undergoing a status change.17 The stated legal entities settled their tax liabilities on the basis of the restructuring of tax receivables, on 20.12.2017 in the amount of 98.084,77 €, while the unsettled due and outstanding debt amounts to 5.421.297,86 €. g) Manner of record-keeping in the Tax Administration – By inspecting the manner of recording decisions on the restructuring of tax debt in the information system of the Tax Administration, it was established that there was a cancellation of the debit side of class 3, per each taxpayer. Liabilities for one-time payments and outstanding tax liabilities, liabilities on the basis of payments in instalments, in accordance with the decisions on the restructuring of tax debt, were recorded in group orders on synthetic accounts (where there was a cancellation of liabilities) and per taxpayer.

The audit of the implementation of the Law on Restructuring Tax Receivables established that the Tax Administration:

 Does not have a breakdown of tax receivables on 31.12.2017 per taxpayers, which entered the tax receivables restructuring program, which is not in accordance with Article 16 of the Law on Restructuring Tax Receivables.  Decisions on cancelling decisions on restructuring tax debt are related to taxpayers which did not pay due liabilities on the basis of a decision on restructuring tax debt, which is not in accordance with Article 13 of the Law on Restructuring Tax Receivables.

The Tax Administration is obliged, in accordance with Article 16 of the Law on Restructuring Tax Receivables, to maintain records on tax receivables which are the subject of restructuring, type and amount of receivables, as well as the manner of their settlement.

17 Article 43 of the Law on Tax Administration prescribes that the tax liability is performed in accordance with the Law on Bankruptcy

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3.2. Statement of deferred tax and non-tax receivables By the entry into force of the Law on Restructuring Tax Receivables which applies since 30.12.2016, the Decree on Conditions for Deferring Collection of Tax and Non-tax Receivables ceased to have effect.18 Article 17 of the Law on Restructuring Tax Receivables prescribes the obligation that requests for deferring collection of tax and non-tax receivables, submitted in accordance with the Decree on Conditions for Deferring Collection of Tax and Non-tax Receivables, shall be finalised in accordance with such Decree, if so is more favourable for the party. In accordance with the Law on Restructuring Tax Receivables, and as per the requests of the parties, there was a revocation of decisions adopted in accordance with the Decree on Conditions for Deferring Collection of Tax and Non-tax Receivables which were adopted in 2017 or earlier. The Ministry of Finance, acting upon the requests which were submitted during the validity of the Decree on Conditions for Deferring Collection of Tax and Non-tax Receivables, adopted in 2017 12 decisions on deferred payment of tax and non-tax receivables in a total amount of 1.767.840,93 €. According to the data of the Tax Administration, on 01.12.2017, there were 5 active decisions, which were adopted in accordance with the Decree on Conditions for Deferring Collection of Tax and Non-tax Receivables in 2017 or earlier years. The total tax receivables under active decisions amount to 329.825,50 €, while the due collected tax receivables amount to 94.360,26 €.

4. BUDGET RECEIPTS

Budget receipts expressed in accordance with Article 5 of the Law on Budget and Fiscal Responsibility are given in the following table for the period from 2013 to 2017:

Table 20: Budget receipts per year Description 2013 2014 2015 2016 2017 71 Current revenues 1.228.279.417,81 1.339.592.834,24 1.311.814.833,66 1.470.808.839,10 1.534.411.996,24 72 Receipts from sale of assets 11.948.846,35 6.691.829,70 7.843.144,35 4.219.567,51 6.191.115,23 73 Receipts from repaid loans 8.633.294,21 8.522.051,19 7.021.877,49 4.662.620,91 6.580.211,88 74 Donations and transfers 6.614.007,71 5.554.927,72 7.132.855,39 11.579.771,22 25.281.469,76 75 Borrowings and loans 333.867.350,25 535.749.125,50 828.578.309,03 649.560.576,06 612.839.852,38 TOTAL 1.589.342.916,33 1.896.110.768,35 2.162.391.019,92 2.140.831.374,80 2.185.304.645,49

Graph 3: Budget receipts per year

In 2017, revenues were collected in the amount of 2.185.304.645,49 € and the structure of the revenue collection per revenue units corresponds to the amounts expressed in the Proposed Law on the Final Statement of Accounts of the State Budget of Montenegro for 2017, as shown in the table below:

18 Official Gazette of Montenegro 33/16

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Table 21: Structure of revenues per revenue unit Ministries and Custom Ministry of Police other E.C. Description Tax Administration Total revenue units Administration interior Administration administration bodies 7 Receipts 866.725.677,14 613.484.069,47 7.205.774,91 3.838.526,65 694.050.597,32 2.185.304.645,49 71+73 Original revenues 866.725.677,14 613.484.069,47 7.205.774,91 3.838.526,65 49.738.159,95 1.540.992.208,12 71 Current revenues 866.725.677,14 613.484.069,47 7.205.774,91 3.838.526,65 43.157.948,07 1.534.411.996,24 711 Taxes 358.001.828,77 613.153.745,51 971.155.574,28 712 Contributions 494.952.632,42 494.952.632,42 713 Fees 473.699,15 33.362,00 2.923.069,69 167.114,00 10.015.759,84 13.613.004,68 714 Charges 12.150.681,86 8.147,47 6.808.945,80 18.967.775,13 715 Other revenues 1.146.834,94 296.961,96 4.274.557,75 3.671.412,65 26.333.242,43 35.723.009,73 72 Receipts from sale of assets 6.191.115,23 6.191.115,23 73 Receipts from repaid loans 6.580.211,88 6.580.211,88 74 Donations and transfers 25.281.469,76 25.281.469,76 75 Borrowings and loans 612.839.852,38 612.839.852,38 Total 866.725.677,14 613.484.069,47 7.205.774,91 3.838.526,65 694.050.597,32 2.185.304.645,49

4.1. Current revenues According to data reported in the Proposed Law on the Final Statement of Accounts of the State Budget of Montenegro for 2017, the current revenues amounted to 1.534.411.996,24 €, as follows: taxes in the amount of 971.155.574,28 €, contributions in the amount of 494.952.632,42 €, fees in the amount of 13.613.004,68 €, compensations in the amount of 18.967.775,13 € and other income in the amount of 35.723.009,73 €. The collection of current revenues was performed through payment accounts opened in accordance with the Decree on the Payment of Public Revenues. The transfer of funds is performed by revenue statements, through the revenue model in collection institutions as follows: Tax Administration through account 820, Customs Administration through account 805, Ministry of Interior through account 825 and Police Department through account 840. For collection through account 832, the revenue statement is compiled by the Directorate of the State Treasury. The allocation of revenues and the transfer of funds to the State Treasury General Account is performed on the basis of previous statements. The record-keeping of inflows to the State Treasury General Ledger was performed by direct payments to the State Treasury General Account19 and recorded on the basis of the Ministry of Finance's decision.

The audit of current revenues covered other revenues recorded on accounts of group 715, which amounted in 2017 to 35.723.009,73 €, as shown in the table blow, in accordance with the manner of collecting revenues: Table 22: Other revenues in accordance with the manner of collection Direct payments at Description Revenue module Decisions Total the General Account

7151 Capital revenues 5.332.671,10 610.114,86 434.124,97 6.376.910,93 7152 Fines and confiscated property rights 13.077.484,37 - 175.970,38 13.253.454,75 Revenues of public institutions generated by performance of 7153 2.193.904,28 - - 2.193.904,28 their own activities 7155 Other revenues 9.467.209,96 982.238,53 3.449.291,28 13.898.739,77 Total 30.071.269,71 1.592.353,39 4.059.386,63 35.723.009,73

19 The recording of inflows in the State Treasury General Ledger was performed on the basis of the excerpt of the State Treasury General Account, or on the basis of the bank’s message.

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Inflow of funds in the amount of 30.071.269,71 € were collected through payment accounts in accordance with the Decree on the Manner of Payment of Public Revenues. Inflows of funds in the amount of 4.059.386,63 € were recorded on the basis of an excerpt of the State Treasury General Account, while inflows in the amount of 1.592.353,39 € were recorded on the basis of the Ministry of Finance's decision. a) Collection of revenues through payment accounts prescribed by the Decree on the Collection of Public Revenues, as follows:  Inflows on account 832-181-42 - Revenues on the basis of the purchase of flats of the Real Estate Administration in the amount of 272.707,34 € were recorded on accounts of group 715 - Other income. Out of the stated amount, funds in the amount of 62.605.44 € were related to receipts from the repayment of loans (under contracts for the repayment of loans) which should have been recorded on accounts of group 73 - Proceeds from repayment of loans.  Inflows on account 832-182-39 - Revenues on the basis of the purchase of flats at the Ministry of Defence in the amount of 206.289,42 € were recorded on accounts of group 715 - Other income. Out of the stated amount, funds in the amount of 110.219,01 € were related to receipts from the sale of assets which should have been recorded on accounts of group 72 - Proceeds from sale of assets.  Inflows on account 832-206-64 - Revenues from the repayment of housing loans of the employees of the Pension and Disability Insurance Fund of Montenegro in the amount of 13.885,21 € were recorded on accounts of group 715 - Other income. The stated amount should have been recorded on accounts of group 73 - Proceeds from repayment of loans. b) Direct payments to the State Treasury General Account recorded on the basis of an excerpt in the State Treasury General Ledger, amounted to 4.431.529,33 €. By inspecting the excerpts of the State Treasury General Account, it was established that:  Inflow in the amount of 500.000,00 € was recorded on accounts of group 715-Other income on the basis of an excerpt of 28.02.2017. By the memorandum no. 09-46/1-2017 of 01.03.2017, the State commission for the control of public procurement procedures provided a clarification that the stated funds are related to compensations for conducting procedures upon appeals in accordance with Article 125 of the Law on Public Procurement.  Inflow in the amount of 95.549,31 € is related to the direct payment to the State Treasury General Account on the basis of the repayment of a part of a loan given to Montenegro Airlines. The loan was given under the Conclusion of the Government of Montenegro no. 07-179 of 19.05.2017 from the current budget reserve in the amount of 2.293.183,57 €. The inflow of funds should have been recorded on accounts of group 73 - Proceeds from repayment of loans.  Inflow in the amount of 419.293,77 € was recorded on accounts of group 715 - Other income on the basis of an excerpt of 14.06.2017. The inflow is related to the repayment of a part of a loan given to the bankruptcy debtor JSC Jadransko brodogradilište Bijela. The loan was given under the conclusions of the Government of Montenegro no. 08-661 of 02.04.2015 and no. 08- 1387 of 18.06.2015 from the current budget reserve in the total amount of 2.085.593,72 €. The stated inflow should have been recorded on accounts of group 73 - Proceeds from repayment of loans.  Inflow in the amount of 100.000,00 € was recorded on accounts of group 715 - Other income on the basis of an excerpt of 10.01.2017. The inflow is related to the repayment of a part of a loan given to Crnogorska plovidba under the Conclusion of the Government of Montenegro no. 08-275 of 11.02.2016. The stated inflow should have been recorded on accounts of group 73 - Proceeds from repayment of loans.  Inflow in the amount of 4.431.529,33 € was transferred from the payment account 825-79-81 - Revenues from issuing documents. The account was opened for the payment of revenues of the Ministry of Interior and Public Administration. The Ministry of Interior compiles a Revenue statement in which, inter alia, the eco-code is determined on the basis of internally established

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codes for the type of document / type of service for which the payment is performed and delivers it to the Ministry of Finance. The Ministry of Finance, on the basis of the delivered Revenue statement, records the revenues in the State Treasury General Ledger. During the audit process, on the basis of the obtained documents (Form F23 - Overview of revenues per eco-code from the account for the payment of revenues of the Ministry of Interior 825), there was a control of revenues from the issuance of documents, as follows: from the issuance of passports (code 233) and ID cards (code 236). The total collected amount for issued passports (after returns) was 465.338,65 €20, and for issued ID cards (after returns) it was 1.560.789,70 €21.  Inflow in the amount of 522.565,73 € was transferred from the payment account 832-975-85 - Revenues from testing criteria, standards and samples of reference materials and inspection of precious metal items (Institute of Meteorology)22 and was recorded as a revenue from the performance of own activities on accounts of group 715 - Other income.  Inflow in the amount of 24.013,97 € was transferred from the payment account 832-207-61 - Revenues from the repayment of housing loans given to pensioners of the Pension and Disability Insurance Fund. The revenue was recorded on accounts of group 715 - Other income, and should have been recorded on accounts of group 73 - Proceeds from repayment of loans.  Inflow in the amount of 822.367,79 € was recorded on accounts of group 715 - Other income on the basis of an excerpt of 29.12.2017. The inflow is related to the transfer of funds from accounts of commercial banks to the State Treasury General Account on the basis of orders unpaid to social welfare beneficiary. The amount of 132.940,42 € represents the balance as at 31.12.2017 on the basis of unpaid orders and is kept on the accounts of the Ministry of Labour and Social Welfare with commercial banks (Montenegrin Commercial Bank no. 51099900533005903 and Prva Banka Crne Gore no. 535-9990053300052-63 and no. 535- 9990053300059-42).  Inflow in the amount of 366.599,34 € was transferred from the payment account 832-195-97 - Revenues from prepaid pensions and was recorded on accounts of group 715 - Other income. The audit of transactions established that the inflow was related to unpaid funds on the basis of rights from the field of pension and disability insurance including returns on the basis of subscriptions on various bases.

The audit of current revenues recorded in the State Treasury General Ledger on accounts of group 715 - Other income established irregularities which lead to an inadequate expressing of income, and are related to:  Collection of public revenues through payment accounts opened in accordance with the Order on the manner of payment of public revenues. Revenue statements, in all cases, do not ensure a correct identification of revenues, per types of revenue in accordance with budget classification and regulations which determine the collection of revenues, which results in inaccurately expressed revenues in the General Ledger of the State Treasury.

 Collection of revenues through the General Account of the State Treasury, direct payments. The record of revenues in the General Ledger of the State Treasury, which were collected by means of direct payments to the General Account of the State Treasury, is not harmonized with the procedure prescribed by the Instructions on Work of the State Treasury23 (Chapter IV - Collection of revenues).

20 According to Article 43 of the Law on Travel Documents, a fee is charged for an issued document in accordance with the Decision on the amount of the fee for the passport and travel document templates. 21 According to Article 15 of the Law on Identity Card, the citizen pays the price of the ID form. There is a Rulebook on the manner of issuing identity cards and the price of the identity card form which determines the price of the identity card form. 22 Fees are charged in accordance with the Decree on the amount and manner of payment of fees from the field of meteorology, or in accordance with the Decree on the amount and manner of payment of fees from the field of inspection of precious metal items. 23 Official Gazette of Montenegro 72/15

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 Irregularity in revenue statements of ministries and other administration and judiciary authorities (accounts 832) where the creation of a revenue statement established a system in which one eco-code is determined for revenues from one transaction account. On the basis of an eco-code determined in this way, revenues are expressed in the General Ledger of the State Treasury. The stated irregularity is conditioned by the collection of several types of revenues through one payment account and an inadequately determined eco-code.

 Irregularity determined in revenue statements of the Ministry of Interior (825) where there is an established system in which different eco-codes can be determined for revenues from one transaction account, on the basis of determined codes (type of document/service). On the basis of eco-codes determined in this way, revenues which are expressed in the General Ledger of the State Treasury do not correspond to the type of revenues which are collected.

On the basis of the established irregularities, there was an adjustment of current revenues in the amount of 1.035.668,61 €, arising from:  decrease of revenues on accounts of group 715 - Other income by the amount of 1.035.668,61 €;  increase of revenues on accounts of group 72 – Proceeds from sale of assets by the amount of 320.320,91€;  increase of revenues on accounts of group 731 - Proceeds from repayment of loans by the amount of 715.347,70€.

Revenue units (Tax Administration, Customs Administration, Ministry of Interior and Police Department) which perform the collection of revenues through accounts prescribed by the Order on the manner of payment of public revenues and the Ministry of Finance which performs the scheduling of revenues collected through the General Account of the State Treasury are recommended to record inflows in accordance with Article 10 of the Rulebook on Unique Classification of Accounts for the State Budget of Montenegro and Municipal Budgets.

Public funds users are obliged to harmonize records with Article 9 paragraph 5 of the Law on Budget and Fiscal responsibility, which prescribes that where an amount is re-credited after having been recorded as expenditure, such transaction shall be annulled. If the return of funds represents a part of a payment order, the Ministry of Finance is recommended to consider the possibility of introducing a Statement on the manner of spending funds after the expiration of the fiscal year, which would oblige the users to spend the retained cash in accordance with the purpose expressed in the Final Statement of Accounts of the Budget. 4.2. Receipts from the sale of assets The Proposed Law on the Final Statement of Accounts of the State Budget of Montenegro for 2017 states receipts from the sale of financial assets in the amount of 6.191.115,23 €. The audit of the collection of revenues from the sale of state property and their recording within the group of accounts 72 - Proceeds from sale of assets was performed using the method of selecting a random payment accounts, prescribed by the Order on the collection of public revenues, as follows:  Payment account 832-52006-58 Proceeds from sold assets, which is controlled by the Real Estate Administration in the amount of 3.090.733,99 €. The audit of the turnover established that the inflow to this account was realized on the basis of the sale of state property, including transfers of funds from the account 550-5590-94 Deposits, opened with the Societe Generale bank. The inflows are related to the payment of deposits for participation in a public tender (sale and lease of state property) and inflows on the basis of collection of costs for the work of the commission for the performance of sale and lease procedures. After the completed procedure, the deposits were returned to the participants with which no contracts were concluded, and compensations for their work were paid to the members of the commission for the performance of the procedures along

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with bank costs. The closing balance amounted to 123.129,44 € and was related to deposits which were not returned to participants, deposits which were not transferred to payment accounts (accounts 832) after the procedures were finished and funds unpaid to the Commission for the performance of the procedure.

 Payment account 832-213-43 - Revenues from the sale of weapons and military equipment and provision of services. The funds from the stated revenues are intended for financing partner goals and equipping the Army in accordance with NATO standards of the Ministry of Defence. Inflow to accounts of group 721 - Proceeds from sale of assets in the amount of 1.765.224,66 € was recorded in the General Ledger. The audit established that this account was used for the collection of revenues in the amount of 297.708,39 €. The revenues are related to funds collected on the basis of lease of facilities, equipment, water and sewage spending, provided runway cleaning services and handle services and from participation in international projects. The stated revenues should have been recorded on accounts of group 715 - Other income

The revenues collected through accounts prescribed by the Order on the manner of payment of public revenues were not, in all cases, recorded in the General Ledger of the State Treasury in accordance with eco-codes and Article 10 of the Rulebook on Unique Classification of Accounts for the State Budget of Montenegro and Municipal Budgets. 4.3. Receipts from the repayment of loans Receipts from the repayment of loans were realized in the amount of 6.580.211,88 €. The stated receipts were recorded in the State Treasury General Ledger through the revenue model in the amount of 1.548.023,54 €, by decisions of the Ministry of Finance in the amount of 305.701,30 € and by direct payments to the State Treasury General Account in the amount of 4.726.487,04 €. The audit of the collection of receipts from the repayment of loans and their recording within the group of accounts 73 - Proceeds from repayment of loans established:

 that the amount of 4.726.487,04 € is related to direct payments to the State Treasury General Account made by municipalities, public enterprises and other legal entities. Inflows in the amount of 3.913.451,53 € were related to the payment of principals on the basis of granted loans: 2.191.555,22 € by municipalities and 1.721.896,31 € by public enterprises and other legal entities. Inflows in the amount of 813.035,51 € were related to interests, bank commissions and other, as follows: 649.716,08 € by municipalities and 163.319,43 € by public enterprises and other legal entities. Inflows in the amount of 813.035,51 € should be recorded on accounts of group 715 - Income from capital.

 that the amount of 734.443,43 € was paid on account 832-52008-52 - Revenue from interest and principal for the Project “1000+ flats”. The total turnover on the stated payment account amounted to 751.163,19 €. Upon the payers request, there was a return of overpaid funds from the account in the amount of 17.719,76 €, so that the inflow after the performed returns amounts to 734.443,43 €. The audit established that the inflows on the stated account are related to collected liabilities for principal and interest from 2017 under cooperation agreements regarding the implementation of the Project “1000+ flats”. The collected principal of the debt under the concluded agreements amounts to 605.277,32 €, whereas the amount of 129.166,11 € relates to interest. 4.4. Donations and transfers Receipts from donations and transfers were realized in the amount of 25.281.469,76 € as follows:  Funds in the amount of 24.904.220,68 € were payments to the State Treasury General Account. The amount of 2.423.466,90 € is related to the reimbursement of funds for participation in international projects, and the amount of 22.480.753,78 € was transferred from the accounts and parties opened with the Central Bank of Montenegro and commercial banks.

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 On the basis of the Ministry of Finance's decisions, receipts were recorded in the amount of 377.249,08 €. The stated funds were transferred by donors to the accounts of users of funds for the payment of goods and services, including the amounts of bank commissions from accounts on which funds paid by donors are kept.

The Ministry of Finance recorded donor funds in the General Ledger of the Treasury in accordance with Article 8 of the Law on Budget for 2017 and in the amount of their realization. Unspent funds are kept on accounts opened with commercial banks. 4.5. Receipts from borrowings and loans Receipts from borrowings and loans were realized in the amount of 612.839.852,38 €. The stated inflows were recorded in the State Treasury General Ledger by direct payment to the State Treasury General Account in the amount of 469.295.467,19 €, on the basis of the Ministry of Finance's decision in the amount of 143.544.233,00 € and through the revenue model in the amount of 152,19 €.

Borrowings and loans from domestic source amount to 260.070.000,00 € on the basis of loans taken out in the amount of 65.000.000,00 € and on the basis of issued securities in the amount of 195.070.000,00 €, as shown in the table below:

Table 23: Borrowings and loans from domestic sources Description Amount Annual interest rate Deadline for payment NLB Montenegro banka 15.000.000,00 3,9% and 6-months EURIBOR 60 months Societe Generale banka 15.000.000,00 3,9% and 3-months EURIBOR 60 months Prva banka Crne Gore 15.000.000,00 3,9% and 3-months EURIBOR 60 months Zirat banka Montenegro AD 15.000.000,00 3% fixed rate 60 months Komercijalna banka AD Budva 5.000.000,00 3,9% and 6-months EURIBOR 60 months Total 65.000.000,00 Treasury bills 195.070.000,00 9 auction emission treasury bills Total 260.070.000,00

Issued securities to residents in the amount of 195.070.000,00 € are related to borrowings on the basis of 9 auctions of the issuance of treasury bills with the intention of budget financing. Borrowings and loans from foreign sources amount to 352.769.852,38 € and are related to:

Table 24: Borrowings and loans from foreign sources

Recorded inflows in the Creditor State Treasury General Ledger in 2017

European Bank for reconstruction and development (EBRD) 1.996.319,94 European Investment Bank (EIB) 5.597.205,47 Chinese EXIM bank 149.868.821,13 Erste Group Bank A.g. OTP bank PLC bank 81.000.000,00 Banca Intesa ad Beograd 30.000.000,00 Credit Suisse 78.439.253,05 Ministry of agriculture - loan MIDAS (IBRD and IFAD) 444.209,96 Ministry of economy - loan for energy efficiency (KFW and IBRD) 2.199.195,48 Environment protection Agency (IBRD) 143.288,59 Ministry of education - WB - HERIC (IBRD) 634.869,26 Ministry of science WB - HERIC (IBRD) 775.329,38 Ministry of education (CEB) 1.671.147,91 Ukupno 352.769.640,17

The total recorded funds in the State Treasury General Ledger on accounts of group 752 - Borrowings and loans from foreign sources amount to 352.769.852,38 € (borrowings 352.769.640,17 € and interest in the amount of 212,12 €). The withdrawal of funds in 2017 on the basis of loans from foreign sources amounts to 378.488.123,13 €. The difference between the withdrawn funds and inflows recorded in the State Treasury General Ledger in the amount of 25.718.270,75 € is related to exchange

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5. BUDGET EXPENDITURES

Budget expenditures expressed in accordance with economic classification for the period from 2013 to 2017 are given in the following overview: Table 25: Budget expenditures per year Realized expenditures Economic classification 2013 2014 2015 2016 2017 41 Current expenditures 597.567.511,01 635.026.761,19 641.171.576,11 697.288.266,74 745.813.667,07 42 Transfers for social protection 482.967.420,48 492.148.010,12 487.041.860,10 554.983.220,35 538.050.896,13 43 Transfers to institutions, ind., ngo. and public sector 94.307.026,21 99.048.746,08 136.226.214,47 171.815.385,72 166.881.124,76 44 Capital expenditures 85.294.347,28 133.972.150,24 256.488.589,42 106.908.718,07 287.888.325,48 45 Borrowings and loans 2.752.781,98 2.484.899,77 2.975.830,12 2.868.099,30 4.857.410,76 46 Repayment debt 326.365.509,78 514.541.442,56 619.150.905,91 602.381.893,44 398.561.393,50 47 Reserves 14.126.844,79 13.532.542,72 16.643.694,03 18.897.863,97 19.683.829,93 TOTAL 1.603.381.441,53 1.890.754.552,68 2.159.698.670,16 2.155.143.447,59 2.161.736.647,63

Graph 4: Budget expenditures per year

Budget expenditures expressed in accordance with functional classification for the period from 2013 to 2017 are given in the following overview: Table 26: Budget expenditures per year Description 2013 2014 2015 2016 2017 1 GENERAL PUBLIC SERVICES 496.352.371,95 741.803.130,33 764.263.994,79 778.413.711,17 602.689.981,81 2 DEFENCE 34.282.235,93 37.182.579,09 38.562.538,36 41.380.560,83 44.546.653,24 3 PUBLIC ORDER AND SECURITY 128.050.132,96 123.913.332,50 129.932.469,12 159.089.029,60 155.932.400,53 4 ECONOMIC AFFAIRS 105.268.390,12 124.150.867,36 314.944.066,32 165.912.144,06 380.405.364,15 5 ENVIRONMENT PROTECTION 5.289.063,74 6.081.971,36 4.162.293,50 3.230.756,73 4.694.871,64 6 HOUSING AFFAIRS AND SOCIETY 6.243.677,18 5.055.655,76 5.777.293,89 5.888.978,91 5.253.847,26 7 HEALTH 171.066.967,80 174.852.462,31 212.946.173,71 235.482.531,80 204.266.456,42 8 SPORTS, CULTURE AND RELIGION 29.921.546,31 28.313.767,16 38.385.693,22 42.331.293,22 40.865.662,24 9 EDUCATION 145.005.157,37 165.863.872,87 164.896.656,48 176.834.356,08 177.916.875,75 10 SOCIAL PROTECTION 481.901.898,17 483.536.913,94 485.827.490,77 546.580.085,19 545.164.534,59 Total 1.603.381.441,53 1.890.754.552,68 2.159.698.670,16 2.155.143.447,59 2.161.736.647,63

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Graph 5: Budget expenditures expressed per functional classification and per year

Budget expenditures expressed in the Proposed Law on the Final Statement of Accounts of the State Budget of Montenegro for 2017 amount to 2.161.736.647,63 €. The following table provides an overview of realized expenditures in 2017, per structure of expenditures: Table 27: Overview of expenditures realized in 2017 2017 E.C. Description Rebalance Rebalance Reallocation Reallocation Proposal final Law on Budget Current budget 30.06.2017 27.12.2017 + - budget account 41 Current expenditures 739.058.373,46 739.093.543,46 735.049.951,96 46.150.749,47 32.829.618,24 748.370.913,20 745.813.667,07 42 Transfers for social protection 570.918.105,00 570.918.105,00 562.418.105,00 3.677.790,40 25.465.496,39 540.630.399,01 538.050.896,13 43 Transfers to institutions, individuals, non-governmental and public sector 163.695.308,30 163.060.308,30 167.760.308,30 4.831.254,93 3.161.609,22 169.429.954,01 166.881.124,76 44 Capital expenditures 294.979.523,31 295.579.353,31 261.580.353,31 14.887.134,52 8.383.749,15 268.083.908,68 287.888.325,48 45 Borrowings and loans 2.425.000,00 2.425.000,00 2.425.000,00 2.647.120,76 45.000,00 5.027.120,76 4.857.410,76 46 Repayment of debt 220.415.503,15 220.415.503,15 220.415.503,15 0,00 16.400,00 220.399.103,15 398.561.393,50 47 Reserves 14.298.673,88 22.298.673,88 22.787.265,38 10.731.833,27 13.024.010,35 20.495.088,30 19.683.829,93 Total 2.005.790.487,10 2.013.790.487,10 1.972.436.487,10 82.925.883,35 82.925.883,35 1.972.436.487,11 2.161.736.647,63

The structure of expenditures is the following: current expenditures with 34.50%, social welfare transfers with 24.89%, expenditures for transfers to institutions, individuals, NGO and the public sector 7.72%; capital expenditures 13.32%; borrowing and loans 0.22%; repayment of debts with 18.44%, and reserves 0.91%. Budget expenditures in 2017 were executed in the amount of 2.161.736.647,63 €, which exceeds the available funds reported in the current budget by 1.09%. 5.1. Current expenditures According to the Law on Budget for 2017, the funds for current expenditures were planned in the amount of 739.058.373,46 €, and realized in the amount of 745.813.667,07 €, as shown in the following table: Table 28: Overview of current expenditures Rebalance Rebalance Reallocation Reallocation Proposal final E.C. Description Law on budget Current budget 30.06.2017 27.12.2017 + - budget accounts 411 Gross salaries and contributions paid by employer 438.246.239,98 438.243.589,98 439.137.191,45 17.541.931,25 6.758.928,23 449.922.844,48 445.363.693,67 412 Other personal income 10.292.346,97 10.288.160,97 10.188.160,97 2.468.960,27 753.865,92 11.907.441,32 10.648.738,73 413 Expenses for material 29.637.372,88 29.636.562,88 29.266.562,88 4.282.041,33 2.446.210,85 31.103.203,36 29.199.822,02 414 Service costs 71.596.570,94 71.634.086,94 65.679.086,94 11.960.751,19 6.420.171,82 71.217.150,31 66.705.488,45 415 Current maintenance costs 21.241.969,72 21.241.969,72 20.651.969,72 730.994,51 751.467,83 20.631.496,40 20.203.326,92 416 Interests 95.363.625,91 95.363.625,91 95.363.625,91 0,00 11.123.683,42 84.239.942,49 98.705.378,58 417 Rents 9.323.779,52 9.323.779,52 9.103.779,52 1.095.638,57 817.394,46 9.382.023,63 8.940.947,37 418 Subsidies 24.921.800,00 24.921.800,00 27.339.607,03 954.279,74 301.127,82 27.992.758,95 27.803.826,27 419 Other expenditures 38.434.667,54 38.439.967,54 38.319.967,54 7.116.152,61 3.456.767,89 41.974.052,26 38.242.445,06 Total 739.058.373,46 739.093.543,46 735.049.951,96 46.150.749,47 32.829.618,24 748.370.913,20 745.813.667,07

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The audit of expenditures established irregularities with expenditures recorded on accounts of group 414 - Expenditures for services, as follows:  Institute of Meteorology concluded contracts on the provision of consulting services which did not define the deadline for the provision of services.  Ministry of Health concluded specific consulting contracts which do not contain the basic contractual elements, i.e. the legal basis and whether the fee is paid in a net or gross amount. The payment of fees for specific contracts was performed before submitting the report on provided services.  Montenegrin National Theatre concluded copyright contracts which do not contain the basic contractual elements, such as the period for which contractors are hired and the statement of fees (net or gross amount).  National Library concluded contracts which do not contain the basic elements such as the price and manner of payment. It is not possible to determine from the contracts which services were contracted, what was the price and manner of payment for the services. The submitted invoices do not contain a report on provided services, so it is not possible to determine whether the contracted service was provided.  PE Film centre and Ministry of Health did not plan, when concluding service contracts, the costs of airplane tickets and hotel accommodation for foreign consultants, while the Ministry of Health hired certain contractors on the basis of consulting contracts for work tasks which are defined by the jobs systematization.  Ministry of European Affairs signed a Partnership Agreement with the Ministry of the Republic of Kosovo and the Ministry of European Integration of Albania on managing technical support within the framework of the IPA Cross border Cooperation Programme. The Ministry of European Affairs, as the leading partner, was obliged to perform the transfer of funds in the amount of 67.527,45 € to partner states from the account intended for funding the Project. The stated funds do not represent budget expenditure and they should have been recorded neither as a budget inflow nor as expenditure in the General Ledger of the State Treasury. Spending units are obliged to conclude contracts which contain the basic elements in accordance with the Labour Law24 and the Law on Obligations25 and to make payments in accordance with the concluded contracts. The Ministry of European Affairs is recommended to record funds transferred to partners within the Cross-Border Cooperation Programme neither as a budget inflow nor as expenditure. The Ministry of European Affairs is obliged to cancel the recorded receipts and expenditures in the General Ledger of the State Treasury in the amount of 67.527,45 €.

Interest payments (416) - According to the Law on Budget for 2017, the funds for interest payments were planned in the amount of 95.209.125,91 €. After the rebalance and reallocation of funds, the available funds in the current budget amount to 84.239.942,49 €. Expenditures for interests totalled at 98.705.378,58 €, which exceeds the amount of funds planned by the current budget by 17.17%, as shown in the table below: Table 29: Expenditures for interest Interests to Interests to non- Description residents residents Total 4161 4162 1 Established by Law on budget for 2017 5.549.999,47 89.659.126,44 95.209.125,91 2 Changes due to budget rebalance - - - 4 Changes due to reallocations (minus) 28.846,55 11.094.836,87 11.123.683,42 5 Current budget 5.675.652,92 78.564.289,57 84.239.942,49 6 Execution in 2017 10.041.363,75 88.664.014,83 98.705.378,58 7 Executed/current budget 176,92 112,86 117,17

24 Official Gazette of Montenegro 53/14 and 04/18 25 Official Gazette of Montenegro 22/17

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Repayment of interests to residents – The realized expenditures on the basis of interest payments to residents amount to 10.041.363,75 €, i.e. 76.92% higher in relation to available funds in the current budget. Expenditures for interests were recorded at the Ministry of Finance in the amount of 9.945.498,03 €, Ministry of Defence in the amount of 165,54 €, Ministry of Economy in the amount of 1.089,71 €, Ministry of Sustainable Development and Tourism in the amount of 8.153,45 €, Health Insurance Fund in the amount of 15.793,14 € and Employment Office in the amount of 70.663,88 €. The expenditures of the Ministry of Finance on the basis of interests in the amount of 9.945.498,03 € are related to expenditures for interests per loans with commercial banks in the amount of 3.904.176,18 € and to expenditures for interests per issued securities in the amount of 5.939.161,89 €. Repayment of interests to non-residents amounts to 88.664.014,83 €, i.e. 12,86% higher than the planned available funds. The stated amount of realized expenditures is related to interests to non- residents on the basis of foreign loans in the amount of 21.079.660,04 €, interests to non-residents on the basis of Eurobonds in the amount of 51.675.000,00 € and other expenses connected to foreign loans in the amount of 15.909.355,79 €. The overview of expenditures for interests is given in the following table:

Table 30: Expenditures for interest to non-residents

Interests to residents Other costs Total Currency Bank - Creditor 4162 per contract Amount per Amount per Euro Euro Euro contract contract Development bank Council Europe(CEB) € 173.358,09 173.358,09 - - 173.358,09 Credit Suisse € 7.922.280,41 7.922.280,41 13.732.441,30 13.732.441,30 21.654.721,71 Czech Exim bank € 50.750,33 50.750,33 - - 50.750,33 European bank for reconstruction and development (EBRD) € 116.351,58 116.351,58 284.837,53 284.837,53 401.189,11 European Commission € 100.320,00 100.320,00 - - 100.320,00 European investment bank (EIB) € 2.145.280,13 2.084.010,13 - - 2.084.010,13 Erste bank AG Vienna € 376.556,64 376.556,64 - - 376.556,64 Eurofima CHF 517.900,00 452.948,12 72.500,00 66.745,06 519.693,18 Export-Import Bank China $ 4.072.855,47 3.637.947,99 1.883.649,30 1.698.464,44 5.336.412,43 Export-Import Bank Hungary € 44.725,45 44.725,45 - - 44.725,45 International bank for reconstruction and development (IBRD) € 2.011.496,75 2.011.496,75 5.957,92 5.957,92 2.017.454,67 Instituto de Credito Oficial (ICO) € 37.872,56 37.872,56 - - 37.872,56 International development agency (IDA) SDR 309.293,83 367.096,69 - - 367.096,69 Reconstruction credit bank - Germany (KFW) € 1.006.736,57 1.006.736,57 120.909,54 120.909,54 1.127.646,11 Natixis € 48.162,49 48.162,49 - - 48.162,49 Steiermarkische Sparkassen € 218.117,05 218.117,05 - - 218.117,05 Paris Club Creditors € 1.747.156,30 1.747.156,30 - - 1.747.156,30 Paris Club Creditors CHF 8.238,88 7.405,72 - - 7.405,72 Paris Club Creditors NOK 5.116,84 557,39 - - 557,39 Paris Club Creditors USD 878.772,33 650.294,39 - - 650.294,39 Bank Gospodarstwa Krajowego - ŽICG € 25.297,68 25.297,68 - - 25.297,68 International fund for agriculture development - IFAD € 217,71 217,71 217,71 Council of Europe - contribution to budget € Total 21.079.660,04 15.909.355,79 36.989.015,83

Funds in the amount of 15.909.355,79 € are related to:  Costs in the amount of 13.732.441,30 € paid on behalf of the difference in the price of gold. A loan agreement with Credit Suisse in the amount of 30.000.000,00 € was concluded in April 2012. The stated expenditures were recorded by Decision no. 06-3116/1 of 13.06.2017 with the description “interest on gold”.  Costs in the amount of 2.110.169,43 € on behalf of the fee for not withdrawn funds.  Commission costs in the amount of 66.745,06 €.

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Funds in the amount of 51.675.000,00 € are related to paid interests on the basis of bonds sold on the international market as follows: Eurobond 2014, Citigroup Global Markets Limited, Deutsche Bank, Erste Group Bank in the amount of 15.050.000,00 €; Eurobond 2015, Deutsche Bank, Citi bank, Societe General and Erste bank in the amount of 19.375.000,00 € and Eurobond 2016, Deutsche Bank, Citi bank, Societe General and Erste bank in the amount of 17.250.000,00 €. 5.2. Rights in the field of pension and disability insurance (423) The following table shows the realized expenditures on the basis of rights from the field of pension and disability insurance for the period from 2013 to 2017:

Table 31: Overview of expenditures on the basis of rights to pension and disability insurance per year Rights from the field of pension and disability insurance Description 2013 2014 2015 2016 2017 Age pension 214.355.752,44 218.172.024,75 222.428.711,02 227.282.267,59 235.114.332,27 Invalidity pension 70.353.392,76 68.774.818,87 67.308.144,72 65.847.351,38 65.742.850,99 Family pension 76.520.663,09 76.276.318,92 76.132,211,80 76.832.229,84 79.220.017,82 Compensations 9.990.457,13 9.548.578,79 9.434.280,43 9.038.078,89 9.079.266,78 Additional aid 2.643.143,73 2.458.062,68 2.268.163,00 2.160.700,30 2.026.144,96 Other rights 9.326.490,37 9.161.038,85 9.567.385.68 9.654.847,43 10.081.285,90

Total 383.189.899,52 384.390.842,85 387.038.896,65 390.815.475,43 401.263.898,72

According to the Law on Budget for 2017, the realized expenditures on the basis of rights in the field of pension and disability insurance were planned in the amount of 410.150.000,00 €. After the rebalance and reallocation, the available funds in the current budget amount to 401.971.500,00 €, while realized expenditures amount to 401.263.898,72 €. Liabilities on the basis of rights in the field of pension and disability insurance were paid for 12 months for the period December 2016 conclusive with November 2017.

Expenditures for interests totalled at 98.705.378,58 €, which exceeds the amount of funds planned by the current budget by 17.17%, as shown in the table below. The amount of 658.978,97 € was paid on behalf of postal service costs. 5.3. Repayment of debts Repayment of debts includes expenditures for the repayment of debt on the basis of securities and loans to residents and non-residents, repayment of guarantees in the country and abroad and repayment of liabilities from the past. The available funds expressed in the current budget amount to 220.399.103,15 €, while realized expenditures amount to 398.561.393,50 €. 5.3.1. Repayment of debt (461) According to the Law on Budget for 2017, expenditures for the repayment of debts were planned in the amount of 186.699.004,35€, and realized in the amount of 358.600.568,85 €, as shown in the table below: Table 32: Expenditures for the repayment of debt Repayment of Repayment of securities and securities and Description loans to loans to non- Total residents residents 4611 4612 Established in Law on budget for 2016 51.911.842,15 134.787.162,20 186.699.004,35 Increase of funds due to budget rebalance Changes due to reallocations (plus) Changes due to reallocations (minus) Current budget 51.911.842,15 134.787.162,20 186.699.004,35 Executed in 2016 226.012.655,83 132.587.913,02 358.600.568,85 Executed/current budget 435,38 98,37 192,07

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Repayment of securities and loans to residents (4611) - According to the Law on Budget for 2017, the expenditures pertaining to repayment of securities and loans to residents were planned in the amount of 51.911.842,15 €, and realized in the amount of 226.012.655,83 €. The stated expenditures are related to expenditures for the repayment of loans to commercial banks in the amount of 18.085.833,81 € and to expenditures for the repayment of debt per Treasury bills and bonds in the amount of 207.926.822,00 €.

Repayment of securities and loans to non-residents (4612) - According to the Law on Budget for 2017, the expenditures pertaining to repayment of securities and loans to non-residents were planned in the amount of 134.787.162,20 €, and realized in the amount of 132.587.913,02 €, as shown in the table below: Table 33: Repayment of principal per loans and securities to non-residents Repayment of securities and loans to non- residents Currency Bank-Creditor per contract 4612 Amount per Euro contract Development bank Council Europe(CEB) € 605.277,32 605.277,32 Credit Suisse € 68.000.000,00 68.000.000,00 Czech Exim bank € 1.882.810,59 1.882.810,59 European bank for reconstruction and development (EBRD) € 2.193.608,11 2.193.608,11 European Commission € 1.100.000,00 1.100.000,00 European investment bank (EIB) € 7.007.876,73 7.007.876,73 Erste bank AG Vienna € 7.214.433,36 7.214.433,36 Eurofima CHF 4.500.000,00 4.205.607,48 Export-Import Bank China $ 0 - Export-Import Bank Hungary € 1.262.413,54 1.262.413,54 International bank for reconstruction and development (IBRD) € 17.007.381,82 17.007.381,82 Instituto de Credito Oficial (ICO) € 452.885,54 452.885,54 International development agency (IDA) SDR 4.782.048,22 5.887.842,85 Reconstruction credit bank - Germany (KFW) € 7.837.334,00 7.837.334,00 Natixis € 847.104,00 847.104,00 Steiermarkische Sparkassen € 2.200.170,96 2.200.170,96 Paris Club Creditors € 3.060.866,55 3.060.866,55 Paris Club Creditors CHF 136.802,12 122.758,56 Paris Club Creditors NOK 24.970,69 2.717,13 Paris Club Creditors USD 1.517.534,47 1.347.383,27 Bank Gospodarstwa Krajowego - ŽICG € 347.275,22 347.275,22 International fund for agriculture development - IFAD € Council of Europe - contribution to budget € 2.165,99 Total 132.587.913,02

The due instalments of the principal for the loan signed with the International Development Agency (IDA) in the amount of 451.198,23 € (379.966,00 SDR) were paid by Montenegrin Electric Enterprise, after which it informed the Ministry of Finance. The due instalments of the principal for the loan signed between the Ministry of Agriculture and the Government of the Republic of Poland for incentives in agriculture in 2007, were paid from the account in CKB - party 2345011-47-02010658 to the account of Bank Gospodarstwa Krajowego in the amount of 350.156,05 €. 5.3.2. Repayment of liabilities from the past (463) According to the Law on Budget for 2017, the expenditures for the repayment of liabilities from the past were planned in the amount of 33.317.498,80 €, and the available funds after the rebalance and reallocation of funds amount to 33.700.098,80 €. In 2017, expenditures on the basis of repayment of liabilities from the past totalled at 39.960.824,65 €, which exceeds the amount of the planned funds by 18.58%, as shown in the table below:

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Table 34: Expenditures for the repayment of liabilities from the previous period DESCRIPTION AMOUNT 1 Established by the Law on budget for 2017 83.317.498,80 2 Reduction of funds due to budget rebalance 1,00 3 Changes due to reallocation (minus) 16.400,00 4 Current budget 33.700.098,80 5 Executed in 2017 39.960.824,65 6 Executed/current budget 18,58

Realized expenditures in the amount of 39.960.824,65 € are related to liabilities on the basis of court decision in the amount of 20.343.673,96 € and other liabilities in the amount of 19.617.150,69 €. Expenditures on the basis of court decisions in the amount of 20.343.673,96 € were executed at the expense of the spending units which caused these costs, as follows: Table 35: Expenditures on the basis of court rulings per spending unit Name of spending unit Amount Name of spending unit Total Judicial courts 6.013.213,68 Ministry of transport and maritime 1.234.302,53 State Prosecutor Offices 258.316,66 Ministry of agriculture and rural development 381.594,93 General Secretariat of Government 1.373,50 Ministry of health 59.072,00 Council for privatisation and capital projects 3.989,58 Fund for protection and exercise minority rights 1.180,58 Commission for control of public procurement procedures 7.441,40 Ministry of sustainable development and tourism 202.072,37 Secretary for development projects 1.859,00 Institute for hydrometeorology and seismology 2.076,73 Ministry of justice 589.148,11 Ministry of labour and social welfare 135.559,83 Ministry of interior 6.201.675,47 Ministry of public administration 686.095,62 Human resources administration 21.701,90 Ministry of sports 20.887,44 Ministry of defence 1.930.462,71 Human rights and freedom protector 6.330,45 Ministry of finance 1.301.044,29 Agency for personal data protection and free access to information 110.477,14 Property administration 841.690,26 Administration for inspection affairs 2.930,70 Ministry of foreign affairs and european integration 26.238,25 Anticorruption agency 20.598,00 Ministry od education 29.476,35 Pension and disability insurance fund 111.584,06 Ministry of culture 1.900,00 Health insurance fund 7.400,04 State archive 13.109,36 Employment Bureau 27.414,46 Ministry of economy 89.721,06 Labour Fund 450,00 Agency for competition protection 1.285,50 Total 20.343.673,96

A part of the spending units has no records on litigations which are conducted against them before courts and/or other relevant authorities, and which is supposed to enable precise and timely data on the value of the litigation, status of the case and the stage of the litigation, as well as the responsible person. Expenditures paid from position 463 - Repayment of liabilities from the past in the amount of 19.617.150,69 € are related to: Ministry of Defence in the amount of 771.442,59 €. The audit established that expenditures in the amount of 498.565,97 € arose in the current period and that they should have been paid from the group of accounts in accordance with the annual law on budget. Compensation Fund in the amount of 2.365.754,62 €. The funds were paid on the basis of decisions prepared in accordance with the Law on Restitution of Property Rights and Compensation and the Decree on determining payment and redemption of compensation to former owners of taken away property rights in cash for 2017. The repayment of debt on the basis of restitution of taken away property rights was paid in the amount of 2.365.754,62€, as shown in the table below: Table 39: Repayment of liabilities based on restitution Debt balance based on restitution on date: Data 31.12.2106 31.12.2107 Difference Amount of total final decisions 1525 1558 33 Monetary amount of final decisions 222.117.394,67 223.723.143,16 1.605.748,49 Paid based on decisions 31.698.787,02 34.064.541,64 2.365.754,62 Amount of registered matured bonds F001 18.528.502,00 Amount of registered bonds F002 87.794.218,00 Total amount of issued bonds 106.322.720,00 Value of issued matured bonds owned by Montenegro 99.398.968,00 101.645.984,00 2.247.016,00 Balance of final decisions reduced by matured bonds and repayment 91.019.639,65 88.012.617,52 3.007.022,13

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It is necessary that the Restitution Fund plans and makes the payment of due liabilities on the basis of final and executive decisions on the restitution of taken away property rights from the group of accounts 431 - Transfers to institutions, individuals, NGO and public sector, in accordance with Article 9 of the Rulebook on Unique Classification of Accounts for the State Budget of Montenegro and Municipal Budgets.

Ministry of Finance realized expenditures in the amount of 16.237.639,82 € related to:  rulings and agreements (with court procedure costs) before the European Court of Human Rights, adopted on the basis of a memorandum of the Office of the Representative of Montenegro before the European Court of Human Rights in the amount of 389.315,70 €, as well as bank fees for foreign payments in the amount of 195,15 €;  court rulings related to frozen foreign currency savings in the amount of 191,00 €;  expenditures for settling debt on the basis of frozen foreign currency savings in the amount of 15.419.786,05 €;  expenditures for settling debt on the basis of due bonds for overdue pensions in the amount of 10.029,58 €;  expenditures for the payment of taxes and contributions D.O.O. "Komunalno" Berane on the basis of the Conclusion of the Government of Montenegro no. 08-1816 of 11.07.2016 in the amount of 41.306,73 €;  expenditures for paying the costs of the local UNDP office for 2016 in the amount of 376.815,53 € (413.442,00 USD as per the exchange rate on the payment date 1.0972).

The audit of the expenditures in the amount of 19.617.150,69 € established that expenditures in the amount of 18.776.026,04 € are related to liabilities which arose in the current period as follows: Ministry of Finance in the amount of 16.237.639,82 €, PE Centre for Conservation and Archaeology of Montenegro in the amount of 23.564,99 € and the General Secretariat of the Government of Montenegro in the amount of 39.816,39 €.

Spending units are obliged not to debit expenditures whose payment liability becomes due in the current year to the group of accounts 463 - Repayment of liabilities from the past. It is necessary to record outstanding liabilities from the past in accordance with the Law on Budget and Fiscal Responsibility and to perform the payment and recording of obligations which arose in the current period in accordance with the annual law on budget and the Rulebook on Unique Classification of Accounts for the State Budget of Montenegro and Municipal Budgets.

6. REPORT ON BUDGET RESERVES EXPENDITURES

According to the Law on Budget for 2017, the funds planned for the needs of the budget reserve amount to 14.298.673,88 € and, according to the Law amending the Law on Budget for 2017, they amount to 22.787.265,37 €. The funds available for spending, after the reallocation of funds, amount to 20.495.088,30 €, while the realized expenditures amount to 19.683.829,93 €, as shown in the table below:

Table 36: Overview of current budget reserve expenditures DESCRIPTION AMOUNT 1 Law on budget for 2017 14.298.673,88 2 Law on amendments to Law on budget for 2017 22.787.265,37 3 Increase due to reallocation 10.731.833,27 4 Reduction due to reallocation 13.024.010,35 5 Available funds in current budget 20.495.088,30 6 Executed 19.683.829,93

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The spending of funds from the current budget reserve in the amount of 19.683.829,93 € was approved by conclusions of the Government of Montenegro in the amount of 15.588.361,93 €, decisions of the Inner Cabinet of the Government in the amount of 1.732.965,00 € and the decisions of the Commission for allocation of a part of the funds from the current budget reserve in the amount of 2.362.503,00 €. The expenditures from the current budget reserve are related to: a) Spending units in the amount of 10.278.731,07 € as follows: Ministry of Sport paid the amount of 300.000,00 € to the Montenegrin Olympic Committee for the organisation of the “Games of the Small States” which will be held in 2019. General Secretariat of the Government of Montenegro in the amount of 45.888,18 €. Funds in the amount of 21.600,00 € were paid to the Capital City Podgorica for the organisation of the Second forum of mayors of capital cities in Central and Eastern European countries and PR China, and funds in the amount of 24.288,18 € were paid to the credit of payment account no. 820-30000-74 Unique account for personal income tax and contributions for mandatory social insurance for pensionable service calculated with increased duration. Ministry of Interior paid the amount of 20.000,00 € to the Montenegrin Amateur Radio Pool. Ministry of Finance paid the amount of 71.128,96 €, out of which 21.128,96 € to the members of the Commission for control of state aid and 50.000,00 € to D.O.O. “Čistoća” Podgorica. Ministry of Foreign Affairs in the amount of 487.417,50 €. The amount of 50.000,00 € was paid to the Atlantic Council of Montenegro for the assistance in the realization of the “To Be Secure” forum; amount of 10.000,00 € for the assistance of the United Mexican States for the amelioration of consequences of natural hazards; amount of 70.000,00 € for the realization of the project “Montenegrin House” in the Chaco Province, Argentina; amount of 10.000,00 € for creating necessary administrative and technical preconditions for the operations of DKP in Argentina; amount of 5.000,00 € for printing the book “History of Montenegro” and the amount of 342.000,00 € as financial contribution to UNDP. Ministry of Education in the amount of 55.796,00 €, which was paid to the Tax Administration for the reduction of the tax receivables regarding the Faculty of Montenegrin Language and Literature Cetinje. Ministry of Economy in the amount of 200.000,00 €, which was paid to Radio difuzni centar DOO, on the basis of assumed liabilities of commercial and local radio and TV broadcasters. Ministry of Transport and Maritime Affairs in the amount of 6.590.101,31 € as follows: amount of 2.292.945,42 € for due debt of Montenegro Airlines AD to a bank, and which was covered by a state guarantee, so it would not be activated, and the amount of 4.297.155,89 € to the giro account of Montenegro Airlines AD. Ministry of Agriculture and Rural Development in the amount of 904.009,09 € as follows: amount of 60.000,00 € paid to the Žabljak Municipality for overcoming problems in water supply and amount of 844.009,09 € for the implementation of the Plan of preventive measures for the prevention of lumpy skin disease and bluetongue disease. Ministry of Health paid the amount of 210.000,00 € to the housing community of health workers “Zdravstvo”. Ministry of Human and Minority Rights paid the amount of 80.000,00 € to the Roma Education Fund of Montenegro. Ministry of Sustainable Development and Tourism in the amount of 921.500,00 € as follows: amount of 600.000,00 € paid to the company Sindčel D.O.O Nikšić for settling unpaid salaries to employees; amount of 81.500,00 € for severance pay for employees of SKI Centre Durmitor in bankruptcy; amount of 160.000,00 € for the regular functioning of the Public enterprise for national parks of Montenegro and the amount of 80.000,00 € for securing a part of funds for the maintenance and improvement of the established ecosystem of the company AD Solana Bajo Sekulić in bankruptcy.

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Ministry of Labour and Social Welfare in the amount of 18.000,00 € as follows: amount of 6.000,00 € each for the birth of triplets in families in Nikšić, Podgorica and Cetinje. Ministry of Public Administration in the amount of 11.912,13 € on behalf of fees for the Arbitration committee for the division of property and liabilities between the Plav Municipality and Gusinje Municipality. Judiciary in the amount of 362.977,90 € which was paid to the Montenegrin Fund for Solidarity Housing Development. b) Assistance to legal entities for financing activities under conclusions of the Government of Montenegro, in the amount of 5.387.055,16 € as follows: 2.358.935,00 € for municipalities, 343.063,44 € for political parties, 2.386.250,00 € for sport organisations and 298.806,72 € for NGOs, cultural, humanitarian and other organisations. c) Assistance to natural persons for medical treatment in the amount of 885.000,00 €. As per decisions of the Inner Cabinet of the Government the amount of 627.250,00 €, decisions of the Commission for allocation of a part of the funds from the reserve in the amount of 253.150,00 € and decisions of the Government of Montenegro in the amount of 4.600,00 €. d) Assistance for improving the material situation in the amount of 2.438.423,00 €. As per decisions of the Inner Cabinet of the Government the amount of 712.290,00 €, decisions of the Commission for allocation of a part of the funds from the reserve in the amount of 1.716.133,00 € and decisions of the Government of Montenegro in the amount of 10.000,00 €. e) Assistance for education in the amount of 388.170,00 €. As per decisions of the Inner Cabinet of the Government the amount of 116.900,00 €, decisions of the Commission for allocation of a part of the funds from the reserve in the amount of 270.770,00 € and decisions of the Government of Montenegro in the amount of 500,00 €. f) Other payments in the amount of 306.450,70 € are related to payments of funds for assistance to households for the purpose of ameliorating and eliminating the consequences of natural hazards in the amount of 156.787,00 € and for assistance to citizens, church, sport and other associations 149.663,70 €, on the basis of minutes from meetings of the Inner Cabinet of the Government of Montenegro and the decisions of the Commission for the allocation of a part of the revenues from gambling.

7. REPORT ON CAPITAL PROJECTS - CAPITAL BUDGET

The Capital budget is implemented through a centralized system by the Directorate of Transport and Directorate of Public Works. The Capital budget is expressed as per economic, functional and programme classification. By the Decree on the amendments to the Decree on the organisation and manner of work of the state administration,26 the Directorate of Public Works, which was until then the administration authority within the structure of the Ministry of Sustainable Development and Tourism, became a subject and a part of the Ministry of Transport and Maritime Affairs. By the Decree on the amendments to the Decree on the organisation and manner of work of the state administration,27 the Directorate of Public Works, as an administrative authority, was again returned to the structure and competence of the Ministry of Sustainable Development and Tourism. The following table gives an overview of the Capital budget expressed per year:

26 Official Gazette of Montenegro 73/16 27 Official Gazette of Montenegro 019/17

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Table: 37 – Capital budget overview per year

DESCRIPTION 2013 2014 2015 2016 2017 Directorate of Transport 35.736.742,96 31.315.825,22 202.745.099,46 47.251.589,46 223.806.298,92 Directorate of Public Works 41.482.484,47 44.577.205,31 35.677.808,24 30.028.661,16 50.280.153,81

Total 77.219.227,43 75.893.030,53 238.422.907,70 77.280.250,62 274.086.452,73

Graph 6: Capital budget overview 250.000.000,00

200.000.000,00

150.000.000,00

100.000.000,00

50.000.000,00

- 2013 2014 2015 2016 2017

Directorate of Transport Directorate of Public Works

According to the Law on Budget for 2017, the Capital budget was planned in the amount of 283.078.600,00 €. According to the Law on the amendments to the Law on Budget for 2017, the budget was decreased by 24.500.000,00 €, while it was increased by 7.155.681,04 € after the reallocation of funds. The available funds for spending amount to 265.734.281,04 €, and the realized funds amount to 274.086.452,73 € or 103.14% of the available funds, as provided in the table below:

Table 38: Capital budget in 2017 Directorate of Directorate of Description Transport Public Works Total 1 Law on budget for 2017 224.200.000,00 58.878.600,00 283.078.600,00 2 Increase by budget rebalance 0,00 54.941.077,26 54.941.077,26 3 Decrease by budget rebalance 12.000.000,00 67.441.077,26 79.441.077,26 4 Increase by budget reballocation (plus) 5.347.747,65 6.393.383,39 11.741.131,04 5 Decrease by budget reallocation (minus) 1.126.000,00 3.459.450,00 4.585.450,00 6 Available funds from the current budget 216.421.747,65 49.312.533,39 265.734.281,04 7 Executed 223.806.298,92 50.280.153,81 274.086.452,73 8 Executed / planed x100 103,41% 101,96% 103,14%

7.1. Directorate of Transport – Capital Budget The Capital budget of the Ministry of Transport and Maritime Affairs - Directorate of Transport, for 2017, was planned in the amount of 224.200.000,00 €. According to the Law on the amendments to the Law on Budget for 2017, the planned amount was decreased by 12.000.000,00 €. After performed reallocation, the available funds of the current budget amount to 216.421.747,65 € and the realized expenditures amount to 223.806.298,92 €, i.e. 3.41% higher than the available funds. Out of the total amount of realized funds, 13.561.549,49 € or 6,06% is related to current expenditures, and 210.244.749,39 € or 93,94% is related to capital expenditures, as given in the table below:

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Table 39: Capital budget overview of the Directorate of Transport in 2017 per programme Rebalance Reallocation % of Ec. clas. D E S C R I P T I O N Law on budget Current budget Execution + - + - execution Reconstruction of regional and main roads 761 in Montenegro 21.700.000,00 0,00 0,00 2.230.000,00 0,00 23.930.000,00 25.371.676,82 106,02% Reconstruction and remediation of critical 762 points 1.000.000,00 0,00 0,00 0,00 90.000,00 910.000,00 841.129,18 92,43% Highway Bar-Boljare, section from 764 Smokovac to Matesevo 194.300.000,00 0,00 12.000.000,00 821.747,65 600.000,00 182.521.747,65 184.925.906,34 101,32% 765 Crossings 400.000,00 0,00 0,00 0,00 0,00 400.000,00 201.879,13 50,47% Repair of bridges, landslides and slopes on 767 the main and regional roads 1.300.000,00 0,00 0,00 0,00 124.000,00 1.176.000,00 1.005.975,61 85,54% Removal of bottlenecks in the traffic 771 network of Montenegro 1.400.000,00 0,00 0,00 2.000.000,00 100.000,00 3.300.000,00 5.069.071,64 153,61% Investment overhaul of main and regional 772 roads 2.000.000,00 0,00 0,00 0,00 192.000,00 1.808.000,00 1.780.048,57 98,45% Investment maintenance of regional and 773 main roads, supervision, design, expropriation, auditing 1.900.000,00 0,00 0,00 296.000,00 0,00 2.196.000,00 2.096.675,71 95,48% 775 Construction of third lanes 200.000,00 0,00 0,00 0,00 20.000,00 180.000,00 2.513.935,92 1396,63%

TOTAL 224.200.000,00 0,00 12.000.000,00 5.347.747,65 1.126.000,00 216.421.747,65 223.806.298,92 103,41% The Capital budget of the Directorate of Transport amounting to 223.806.298,92 € was funded from the general revenues in the amount of 66.343.952,38 € (29,64%), as well as from the loan granted in the amount of 157.462.346,54 € (70,36%), as shown in the following table:

Table 40: Capital budget – Sources of financing Sources of financing Code Project name Execution budget loan Reconstruction of regional and main roads in 761 22.205.418,52 3.166.258,30 25.371.676,82 Montenegro 762 Reconstruction and remediation of critical points 841.129,18 841.129,18 Highway Bar-Boljare, section from Smokovac to 764 35.057.085,21 149.868.821,13 184.925.906,34 Matesevo 765 Crossings 201.879,13 201.879,13 Repair of bridges, landslides and slopes on the main 767 1.005.975,61 1.005.975,61 and regional roads Removal of bottlenecks in the traffic network of 771 3.091.239,63 1.977.832,01 5.069.071,64 Montenegro 772 Investment overhaul of main and regional roads 1.780.048,57 1.780.048,57 Investment maintenance of regional and main roads, 773 2.096.675,71 2.096.675,71 supervision, design, expropriation, auditing 775 Construction of third lanes 64.500,82 2.449.435,10 2.513.935,92 TOTAL: 66.343.952,38 157.462.346,54 223.806.298,92

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Projects funded by loan funds in the amount of 157.462.346,54 € are given in the table below: Table 41: Overview of projects financed from loan funds No. Description Program Project Amount Total

Reconstruction of the main road Ribarevina-Mojkovac, locality 2.438.263,02 "Lepenac" 775 Construction of third lanes

Fee based on withdrawal 11.172,08 European Investment Bank (EIB) loan for 1 the project "Road remediation and 5.597.205,47 bypasses around cities" Removal of bottlenecks in the traffic network of 771 Construction of the Rožaje II Phase Bypass 1.977.832,01 Montenegro

Reconstruction of regional and main roads in Reconstruction of the main road Ulcinj-Sukobin, section Ulcinj- 761 1.169.938,36 Montenegro Krute

Reconstruction of Berane-Kolasin road and tunnel construction, 1.693.035,94 European Bank for Reconstruction and Lubnica-Jezerina section Development (EBRD) loan for the project Reconstruction of regional and main roads in 2 761 1.996.319,94 "Reconstruction and improvement of local Montenegro Supervision over reconstruction of Berane-Kolašin road and roads" 303.284,00 construction of tunnels, Lubnica-Jezerina section

Chinese EXIM Bank for the Project Highway Bar-Boljare, section from Smokovac to Execution of works on the construction of the Bar-Boljare highway, 3 "Construction of the Bar-Boljari Highway, 764 149.868.821,13 149.868.821,13 Matesevo section Smokovac-Uvac-Mateševo priority section Smokovac-Uvac-Matesevo"

Ukupno isplaćeno iz sredstava kredita: 157.462.346,54 157.462.346,54

The stated projects were funded by a loan of the European Investment Bank (EIB) in the amount of 5.597.205,47 €, European Bank for Reconstruction and Development (EBRD) in the amount of 1.996.319,94 and of EXIM bank China in the amount of 149.868.821,13 €. Capital budget overrun - The audit established that, in 2017, the Capital budget was exceeded in relation to the available funds in the amount of 7.948.843,07 € as follows:  Programme 761 was planned in the amount of 23.930.000,00 €, and realized in the amount of 25.371.676,82 €, i.e. 1.441.676,82 € or 6.02% higher compared to the plan;  Programme 764 Highway Bar-Boljare, section from Smokovac to Mateševo was planned in the amount of 182.521.474,65 € and realized in the amount of 184.925.906,34 €, i.e. 2.404.158,69 € or 1.32% higher compared to the plan.  Programme 771 was planned in the amount of 3.300.000,00 €, and realized in the amount of 5.069.071,64 €, i.e. 1.769.071,64 € or 53.61% higher compared to the plan;  Programme 775 was planned in the amount of 180.000,00 €, and realized in the amount of 2.513.935,92 € which is higher compared to the plan by 2.333.935,92 €. The reported overrun was funded from:  loans by EIB and EBRD in accordance with Article 12 of the Law on Budget for 2017, which defines that the funds of the Capital budget for expenditures of spending units which are financed by loans shall be executed to the level of their realization.  unspent funds planned for the realization of other programmes in the amount of 1.500.000,00 €, in accordance with Conclusion no. 07-3754 of 07.12.2017. The Government of Montenegro gave its consent to the Directorate of Transport, in accordance with the provisions of Article 46 of the Law on Budget and Fiscal Responsibility, that it can pay liabilities to contractors for projects from Programme 761 Reconstruction of regional roads and highways in Montenegro from other programmes. The following table provides an overview of unfinished projects as at 31.12.2017, which will be implemented in the following period:28

28 The Ministry of Transport and Maritime Affairs is competent for the realization of the Project 764 Highway Bar- Boljari, section from Smokovac to Mateševo, and the Directorate of Railways is competent for the Project 765 Level crossings.

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Table 42 – Overview of finished projects as at 31.12.2017 Contract Realized Program Completed projects Total Date Value 2015 2016 2017 Reconstruction of the road PG-CT, Barutana site 11.11.2015. 1.296.801,79 129.680,17 1.166.973,52 1.296.653,69 Reconstruction of the road CT-BD, Obzovica-Brajići site 28.10.2015. 2.686.096,28 795.881,02 1.890.088,92 2.685.969,94 Reconstruction of the road Nikšić-Vilusi, location Trubjela 04.11.2015. 889.292,00 88.929,20 788.881,37 877.810,57 Reconstruction of the roadPG-CT,location Ulići 16.10.2015. 2.149.812,50 643.183,81 1.506.612,91 2.149.796,72 Reconstruction of the road Tuzi-Pljoče 08.02.2016. 876.529,47 875.072,53 875.072,53 761 Reconstruction of the road PG-CT Tunnel Mekavac 27.01.2016. 2.007.923,84 660.617,71 1.347.143,94 2.007.761,65 Reconstruction of the road CT-BD location Ugnji-Obzovica 12.05.2016. 1.346.296,79 367.647,31 978.484,82 1.346.132,13 Reconstruction of the road Ilino brdo-Vilusi 26.12.2016. 2.492.229,12 249.222,19 2.242.954,99 2.492.177,18 Reconstruction of the road entrance to Petnjica II phaze (Podvade - 19.09.2016. 3.442.593,40 810.768,39 2.281.415,95 3.092.184,34 Petnjica) Reconstruction of the crossroad in Bijelo Polje 09.07.2015. 218.511,78 181.500,42 37.010,14 218.510,56 766 Reconstruction of the crossroad. M-2 I st. J. Vukotića - Entrance to 238.680,90 214.810,92 23.867,89 238.678,81 Mojkovac 09.07.2015. Fratak landslide rehabilitation 22.10.2015. 177.979,23 95.248,25 69.060,21 164.308,46 767 Baošići landslide rehabilitation 22.10.2015. 248.894,14 24.889,41 224.004,66 248.894,07 Reconstruction of 2 bulevards from Budva to Becici with 771 04.05.2015. 3.679.585,65 367.958,56 3.309.052,63 3.677.011,19 reconstrucion of a crossroad Investment overlay of asphalt (works by section -5 of the contract) 2.272.091,75 2.272.091,75 2.272.091,75 05.2016. 772 Investment overlay of asphalt (works by section - NK, PV, PG, BA) 05.2017. 1.509.161,61 1.480.048,57 1.480.048,57 05.2016. Reconstruction of the road entrance to Žabljak 12.10.2015. 287.919,24 287.140,92 287.140,92 Dobrilovina I i II landslide rehabilitation 26.10.2015. 231.270,94 170.582,70 60.684,11 231.266,81 773 Performing works on the lights in Tunnel Mekavac 26.10.2016. 239.924,37 235.746,50 235.746,50 Performing works on the crossroad Sutomore 13.03.2017. 124.978,92 124.978,92 124.978,92 775 Reconstruction of the road CT-BD, Markovići site 22.10.2015 3.288.946,60 708.530,42 2.579.960,36 3.288.490,78 766 reconstrucion of the crossroad in Sutomore 27.04.2015. 916.855,79 546.410,38 370.443,98 916.854,36 TOTAL: 30.622.376,11 3.967.605,26 17.549.201,50 8.690.773,69 30.207.580,45 The following table provides an overview of unfinished projects as at 31.12.2017, i.e. projects which will be implemented in the following period: Table 43 - Overview of unfinished projects as at 31.12.2017 Contract Realized Non completed projects Total Date Value 2015 2016 2017 Reconstruction of road and construction of tunnel road section 02.12.2016. 34.694.804,35 3.469.480,44 1.693.035,94 5.162.516,38 Lubnice-Jezerine Reconstruction of road and construction of tunnel road section 08.12.2016. 1.269.600,00 303.284,00 303.284,00 Lubnice-Jezerine /oversight Reconstruction of road Cetinje-Njeguši 12.10.2015. 9.548.292,71 954.829,27 2.159.251,15 5.023.828,59 8.137.909,01 761 Reconstruction of road Crkvice-Vrulja 27.10.2015. 4.766.552,00 476.655,20 866.093,00 1.879.466,81 3.222.215,01 Reconstruction of road CT-BD, Brajići- Lapčići site 26.05.2016. 7.599.999,99 2.755.937,40 4.387.926,69 7.143.864,09 Reconstruction of road Petrovići-Vraćenovići 26.05.2016. 3.588.000,00 409.815,63 815.804,13 1.225.619,76 Reconstruction of road road section Ulići- Roundabout CT-Ugnji 29.08.2016. 2.926.617,56 292.661,76 2.286.265,59 2.578.927,35 Reconstruction of road Krstac- Ivanova korita 16.10.2017. 3.982.192,45 389.219,25 389.219,25 Reconstruction of road Ulcinj-Krute 09.08.2017. 5.824.687,33 1.169.938,36 1.169.938,36 Reconstruction and rehabilitation of the critical point of Kosljun - 762 30.12.2016. 1.096.444,39 636.226,53 636.226,53 Zavala Rehabilitation of the slopes Debeli brijeg 22.10.2015. 491.837,52 49.183,75 49.183,75 Reconstruction of 8 bridges (Slijepač most-Pavino polje) 999.757,39 414.721,74 142.214,09 556.935,83 767 Reconstruction of walls on the road Slijepač most - Pljevlja 24.10.2016. 372.123,96 295.779,23 295.779,23 Rehabilitation of the slopes Besnik and Zeleni 15.11.2016. 342.274,24 34.227,24 267.982,29 302.209,53 Reconstruction of road Petrovac-Podgorica, bypass Golubovci, II 18.11.2016. 4.696.396,33 0,00 Directorate of Transport 3.600.993,23 360.099,32 360.099,32 Agreement Capital city 1.095.403,10 771 Construction of Bulevard D. Gorica 14.11.2017. Directorate of Transport 6.006.553,10 600.653,51 600.653,51 Agreement Capital city 3.466.539,36 0,00 Execution of works on the construction of the Rozaje II Phase 25.10.2017. 19.778.320,09 1.977.832,01 1.977.832,01 773 Performing works on the lights in tunnel Cetinje-Njeguši 26.10.2016. 149.658,62 14.658,62 14.658,62 775 Construction of the 3rd lane Lepenac 15.03.2017. 3.327.977,89 2.438.263,02 2.438.263,02 TOTAL: 119.625.025,61 1.431.484,47 10.811.471,43 24.322.378,66 36.565.334,56

By inspecting the documents of projects financed from Capital budget funds in 2017, contracts, interim and final payment certificates, analytical cards of contractors and other accompanying documents, the following was established:

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Programme 761: Reconstruction of highways and regional roads in Montenegro The funds for the reconstruction of highways and regional roads in Montenegro were planned by the Law on Budget for 2017 in the amount of 21.700.000,00 €, while the available funds after reallocation amounted to 23.930.000,00 €. The funds spent for capital expenditures for the implementation of projects from Programme 761 in 2017 amount to 24.798.769,06 €, out of which 6.849.999,70 € (table 41 – Overview of finished projects as at 31.12.2017) for projects which are finished and 17.948.769,36 € (table 42 – Overview of unfinished projects as at 31.12.2017) for on-going projects, whereas a total of 1.490.586,12 € was spent at the expense of other programmes, as follows: 762 - Reconstruction and rehabilitation of critical points, position 4411 totalling 200.000,00 €, 767 - Restoration of bridges, landslides and slopes, position 4411, totalling 300.000,00 €, 771 - Solving bottlenecks in the transport network, all programme positions, totalling 490.586,12 €, 772 - Investment repaving of asphalt surfaces, position 4411, totalling 300.000,00 €, 773 - Investment maintrance, control, design, audit, all programme position, totaling 200.000,00 €

The funding of capital expenditures of Programme 761 - Reconstruction of highways and regional roads in Montenegro in the amount of 23.308.182,94 € was secured from the general budget revenues in the amount of 22.205.418,52 € and loans in the amount of 3.166.258,30 €.

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Programme 761 Reconstruction of highways and regional roads in Montenegro includes the following projects: Table 44 – Programme 761 Reconstruction of highways and regional roads in Montenegro per project Contract Realized in 2017 Source of Total realized by Realized from Project No Subproject name Plan deadline/da Capital Current financing Date Number Amount 31.12.2017. other programs status ys expenditures expenditures 1 Reconstruction of Vilusi - Vraćenovići road, section Petrovići - 2.000.000,00 OPB 26.05.2016. 01-5456/1 3.588.000,00 300 815.804,13 69.119,50 1.225.619,76 in progress 2 Reconstruction of the part of the road Slijepač most - 2.000.000,00 OPB 27.10.2015. 01-10725/1 4.766.552,00 360 1.279.466,81 24.896,65 3.222.215,01 600.000,00 in progress 3 Reconstruction of Berane Petnjica road, phase I 1.900.000,00 OPB 19.09.2016. 01-9311/1 3.442.593,44 300 2.081.415,95 334.235,91 3.092.184,34 200.000,00 in progress 4 Reconstruction of the Berane - Petnjica road, phase II 100.000,00 Contract concluded in 2018 - - 5 Reconstruction of the road Pljevlja-Metaljka 200.000,00 The tender procedure will be implemented in 2018 - - 6 Reconstruction of the road Ulcinj – Krute 200.000,00 EIB 09.08.2017. 34/17-01- 5.824.687,33 360 1.169.938,36 205.739,00 1.169.938,36 in progress 7 Reconstruction of Berane - Kolašin road, Lubnica-Jezerina 500.000,00 EBRD 02.12.2016. 01-5591/2 34.694.804,35 1095 1.996.319,94 382.927,60 5.162.516,38 in progress 8 Reconstruction of the road Cetinje – Njeguši 3.000.000,00 OPB 12.10.2015. 01-10208/1 9.548.292,71 450 4.598.498,96 353.810,41 8.137.909,01 425.329,63 in progress 9 Reconstruction and rehabilitation of the road M-2.3 Cetinje- 3.000.000,00 OPB 26.05.2016. 01-5457/1 7.599.999,99 360 4.387.926,69 91.260,65 7.143.864,09 in progress 10 Reconstruction and rehabilitation of the road M-2.3 600.000,00 OPB 27.01.2016. 01-567/1 2.007.923,84 240 1.347.143,94 20.760,34 2.007.761,65 completed 11 Reconstruction and rehabilitation of the road M-2.3 300.000,00 OPB 12.05.2016. 01-4703/1 1.346.296,79 100 978.484,82 64.237,00 1.346.132,13 completed 12 Reconstruction and rehabilitation of the road M-2.3 1.500.000,00 OPB 29.08.2016. 01-8617/2 2.926.617,56 210 2.286.265,59 46.416,76 2.578.927,35 in progress 13 Reconstruction and rehabilitation of the road M-6 Ilino Brdo- 1.200.000,00 OPB 26.12.2016. 01-12535/1 2.492.229,12 150 1.977.698,50 38.354,46 2.492.177,90 265.256,49 completed 14 Reconstruction and rehabilitation of the road M-2.1 Barski 200.000,00 - - Tender for the selection of the contractor will be announced after the 15 Reconstruction and rehabilitation of the road M-2.1 Bar 200.000,00 - - signing of the contract with the banks from whose funds the projects 16 Reconstruction and rehabilitation of road M-8 Pljevlja - 200.000,00 67.160,00 - will be financed (EIB and EBRD) 17 Reconstruction and rehabilitation of the road M-2.1 Bijelo 1.500.000,00 - - 18 Reconstruction of the regional road Krstac - Ivanova Korita 100.000,00 OPB 16.10.2017. 01-10133/1 3.892.192,45 270 389.219,25 - 389.219,25 in progress 19 Reconstruction of the regional road R-1 in the length of 3.5 km 800.000,00 Contract concluded in 2018 - - 20 Reconstruction of main road M-18 Danilovgrad - Podgorica 200.000,00 - - 21 Reconstruction of main road M-2 Rožaje - Špiljani from km 200.000,00 - - 22 Reconstruction of the main road M-2 Tivat - Jaz from km 885 + 200.000,00 - - 23 Reconstruction of the main road M-2 of the Lepenac- 200.000,00 - - 24 Reconstruction of the main road M-2 Ribarevina - Poda, L = 200.000,00 Tender for the selection of the contractor will be announced after the - - 25 Reconstruction of the main road M-2 section Poda - Berane, L 200.000,00 signing of the contract with the banks from whose funds the projects - - 26 Reconstruction of main road M-2 part Berane - tunnel 200.000,00 will be financed (EIB and EBRD) - - 27 Reconstruction of the main road M-2 section tunnel "Lokve" - 200.000,00 - - 28 Reconstruction of the main road M-2 Kamenovo - Petrovac, L 200.000,00 - - 29 Reconstruction of main road M-2.4 section Petrovac - Bar, L = 200.000,00 - - 30 Reconstruction of the road Dinoša - Cijevna Zatrijebačka 200.000,00 - - 21.700.000,00 82.130.189,58 23.308.182,94 1.698.918,28 37.968.465,23 1.490.586,12 REAL ESTATE EXPROPRIATION 364.575,60 Cetinje-Budva, location Košljun-Zavala Related to Program 762 351.520,00 related to 762 Obzovica-Brajići Contract concluded in 2016 2.912,60 Completed in 2016 Meterizi-Barutana Contract concluded in 2016 9.555,00 Completed in 2016 Trubjela Contract concluded in 2016 588,00 Completed in 2016 Total: 21.700.000,00 82.130.189,58 23.308.182,94 2.063.493,88 37.968.465,23 1.490.586,12

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For the project stated in the above table under item 4 - Reconstruction of the road Berane - Petnjica, phase II and item 19 - Reconstruction of the regional road R-1 in the length of 3.5 km, contracts were concluded in 2018. For projects which were not implemented, and which will be financed from loans, the tender for the selection of the most favourable contractor of works will be announced after the signing of a contract with banks whose funds will be used to finance the stated projects (EIB and EBRD). The expenditures for the expropriation of immovables, for the sections stated in the table, were paid in the amount of 364.575,60 €. The amount of 13.055,60 € is related to Programme 761, or projects finished in 2016. The expenditure in the amount of 351.520,00 € was at the expense of the stated Programme, and is related to the Programme 762 - Reconstruction and rehabilitation of critical points.

Capital expenditure - Within the Programme 761, capital expenditures were recorded on accounts of group 441, position 4411-Expenditure for infrastructure of general importance in the amount of 23.308.182,94 €. The audit of the expenditures established that contracts were concluded in 2015, 2016 and 2017, and that payments were made on the basis of submitted interim payment certificates, in accordance with concluded contracts and annexes to contracts. It was established that, regarding specific projects, the contracted deadlines were exceeded and it was impossible to conduct the works as per the planned schedule because of delays in the implementation of activities connected to solving property and legal relations in the land expropriation procedure. From the position 4411-Expenditure for infrastructure of general importance, there was a payment of loan funds on behalf of services of professional supervision over the performance of works on the project for road reconstruction and construction of a tunnel on the section Lubnice-Jezerine, in the amount of 303.284,00 €. The stated payment should have been made from the position 4147 Consulting services, projects and studies.

Programme 771: Solving bottlenecks in the transport network in Montenegro - The funds for solving bottlenecks in the transport network in Montenegro were planned by the Law on Budget for 2017 in the amount of 1.400.000,00 €, while the available funds after reallocation amount to 3.300.000,00 €. The realized expenditures amount to 5.069.071,64 € or 53.61% more than the available funds. Programme 771 includes the following projects: Table 45: Programme 771 - Solving bottlenecks in the transport network of Montenegro Contract Realized in 2017 Burrent Source of Total realized by Project No Subproject name Plan Capital Current Current expenditures Realized in budget financing Date Number Amount Deadline 31.12.2017. status expenditures expenditures 4147 4199 previous years 1 Bypass Rožaje II phaze 1400000 3300000 LOAN EIB 25.10.2017 01-10421/1 19.778.320,09 730 1.977.832,01 - 1.977.832,01 in progress Reconstruction of the road section (construction of a boulevard) 18.11.2016 231/1; 01- 2 Podgorica - Petrovac section exit to Golubovci Airport - start of the OPB 4.696.396,33 240 / / / / 360.099,32 360.099,32 in progress 26.04.2016 4255/1 Golubovci bypass OPB I Reconstruction of main road M-2.3 Podgorica - Cetinje, section Cetinje 3 Capital city 14.11.2017 01-11049/1 9.473.074,45 270 600.653,51 2.000.000,00 2.000.000,00 600.653,51 in progress traffic lights - bridge on Sitnica budget On behalf of the reconstruction of the regional road Cetinje-Njeguši 300.000,00 125.329,63 50.000,00 75.329,63 Financed Program 761

On behalf of the reconstruction of the main road Ilino Brdo-Vilusi 65.256,49 65.256,49 Financed Program 761

1.400.000,00 3.300.000,00 33.947.790,87 2.878.485,52 2.190.586,12 50.000,00 2.140.586,12 360.099,32 5.429.170,96 Total:

Out of the realized expenditures in the amount of 5.069.071,64 €, the amount of 4.578.485,52 € is related to the stated Programme, while the amount of 490.586,12 € is related to the Programme 761.29 The financing of the Programme 771 Reconstruction of highways and regional roads in Montenegro in the amount of 5.069.071,64 € was performed from the general budget revenues in the amount of 3.091.239,63 € and the EIB loan in the amount of 1.977.832,01€. Within the structure of realized expenditures, current expenditures participated with the amount of 2.190.586,12 € or 43.21%, while capital expenditures amounted to 2.878.485,52 € or 56.79%.

29 The Conclusion of the Government of Montenegro no. 07-3754 of 07.12.2017 allows that, on behalf of savings, liabilities to suppliers can be paid from Programme 771 for projects from Programme 761.

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Programme 775: Construction of third lanes - The funds for the construction of third lanes were planned in the amount of 180.000,00 €, while the implementation of this Programme in 2017 amounted to 2.513.935,92 €. Within the structure of expenditures of the stated programme, current expenditures participated with the amount of 75.672,90 € or 3.01%, while capital expenditures amounted to 2.438.236,02 € or 96.99%. The financing of the Programme 775 was performed from the general budget revenues in the amount of 64.500,82 € and the EIB loan in the amount of 2.449.435,10 €

Capital expenditures - Within the Programme 775, capital expenditures were recorded on accounts of group 441, position 4411-Expenditure for infrastructure of general importance in the amount of 100.000,00 €, and were realized in the amount of 2.438.263,02 €. It was established that the payments were made from loan funds of the European Investment Bank (EIB). The realized expenditures above the planned available funds were performed in accordance with Article 12 of the Law on Budget for 2017, which defines that Capital budget funds for expenditures of spending units which are financed by loans shall be executed to the level of their realization.

Programme 764: Highway Bar-Boljare, section from Smokovac to Mateševo - The Contract on the design and construction of the highway Bar-Boljare, section Smokovac-Uvač-Mateševo30, no. 01-827/1 of 26.02.2014 was concluded between the Government of Montenegro, represented by the Ministry of Transport and Maritime Affairs, and the Chinese company China Road and Bridge Corporation (CRBC) for the amount of 809.577.356,14 €. The Contract on the design and construction of the highway Bar-Boljare, section Smokovac-Uvač-Mateševo defines that the contracted price is paid in EUR/USD, at the middle rate on the day of signing the Contract. The rate at which the payment to the contractor of works is made is fixed and amounts to 1 € 1.3718 USD and is stated in the loan application of the Government of Montenegro, i.e. the Ministry of Finance to the Chinese EXIM bank. The total spent funds as at 31.12.2017 amount to 379.154.796,30 €. Within the structure of spent funds, capital expenditures amount to 355.127.881,10 € or 93.67%, while current expenditures amount to 24.016.915,20 € or 6.33%. According to the Capital budget for 2017, the approved funds amount to 182.521.747,65 €, for the construction of the highway Bar-Boljare, section from Smokovac to Mateševo, and the realized funds amount to 184.925.906,34 €, i.e. they are 1.32% higher. The following table gives an overview of the planned and performed tasks for the programme 764: Table 46: Planned and executed expenditures per economic classification Ec. Law on budget Description Rebalance Reallocation Current budget Execution % class. for 2017 4131 Administrative material 14.500,00 - - 14.500,00 6.843,86 47,20 4144 Banking services and negative exchange rate differences12.000,00 - - 12.000,00 4.593,74 38,28 4147 Consultancy services, projects and studies 10.742.000,00 - 2.000.000,00 - 600.000,00 8.142.000,00 4.859.023,29 59,68 4149 Other Services 50.000,00 - - 50.000,00 37.310,30 74,62 4199 Other 3.000.000,00 - 221.747,65 3.221.747,65 2.686.850,58 83,40 4411 Expenses for infrastructure of general importance180.460.000,00 - 10.000.000,00 600.000,00 171.060.000,00 177.321.393,54 103,66 4415 Expenses for equipment 21.500,00 - - 21.500,00 9.891,03 46,00 Total: 194.300.000,00 - 12.000.000,00 221.747,65 182.521.747,65 184.925.906,34 101,32

Capital expenditures for the implementation of the stated project in 2017 were planned in the amount of 171.081.500,00 €, and realized in the amount of 177.331.374,53 €. The financing of capital expenditures was performed from the loan funds of the EXIM bank in the amount of 149.868.821,13 €, while expenditures in the amount of 27.462.553,44 € were financed from the general budget revenues.

30 Official Gazette of Montenegro 54/14

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The total funds paid to the contractor of works since the day of signing the Contract until 31.12.2017 amount to 355.127.881,10 €, or 405.222.146,55 USD (as per the contracted fixed rate 1€ = 1.3718 USD). The financing of the stated expenditures was performed from the budget funds in the amount of 59.733.510,89 € and from loan funds in the amount of 295.394.479,18 €, as given in the below table: Table 47: Overview of funds paid to the contractor

Payments to the Part of Budget Part of the loan (85%) No Date Description contractor (15%) Euro Dollar 1 27.02.2015. I ADVANCE INSTALLMENT80.957.735,61 12.143.660,34 68.814.075,27 94.399.148,46 2 29.04.2015. II ADVANCE INSTALLMENT80.957.735,61 12.143.660,34 68.814.075,27 94.399.148,46 3 06.06.2015 I INSTALLMENT FOR6.599.940,00 TEMPORARY POWER6.599.940,00 I Ukupno 2015 168.515.411,22 30.887.260,68 137.628.150,54 188.798.296,92 3 22.09.2016. INVOICE NO.3 1.802.166,95 270.325,04 1.531.841,91 2.101.380,73 4 10.11.2016. INVOICE NO..4 2.688.509,05 403.276,36 2.285.232,69 3.134.882,20 5 09.12.2016. INVOICE NO.5 4.800.509,31 720.076,40 4.080.432,91 5.597.537,87 II Ukupno 2016 9.291.185,31 1.393.677,80 7.897.507,51 10.833.800,80 6 24.02.2017. TEMPORARY SITUATION5.669.867,25 NO.6 850.480,09 4.819.387,16 6.611.235,31 7 24.03.2017. TEMPORARY SITUATION5.090.462,64 NO7 763.569,40 4.326.893,24 5.935.632,15 8 01.06.2017. TEMPORARY SITUATION18.310.002,61 NO8 2.746.500,39 15.563.502,22 21.350.012,35 TEMPORARY 23.06.2017. SITUATION 1.005.133,37 9 NO2 1.005.133,37 10 30.06.2017. TEMPORARY SITUATION15.930.856,73 NO. 9 2.389.628,51 13.541.228,22 18.575.856,88 11 27.07.2017. TEMPORARY SITUATION14.271.492,79 NO.10 2.140.723,92 12.130.768,87 16.640.988,73 12 04.09.2017. TEMPORARY SITUATION14.119.835,25 NO.11 2.117.975,29 12.001.859,96 16.464.151,49 13 03.10.2017. TEMPORARY SITUATION22.893.517,52 NO.12 3.434.027,63 19.459.489,89 26.694.528,23 14 03.11.2017. TEMPORARY SITUATION31.637.447,08 NO.13 4.745.617,06 26.891.830,02 36.890.212,42 15 01.12.2017. TEMPORARY SITUATION20.711.809,38 NO.14 3.106.771,41 17.605.037,97 24.150.591,08 16 19.12.2017. TEMPORARY SITUATION27.680.968,92 NO.15 4.152.145,34 23.528.823,58 32.276.840,19 III Total 2017 177.321.393,54 27.452.572,41 149.868.821,13 205.590.048,83 Total (I+II+III) 355.127.990,07 59.733.510,89 295.394.479,18 405.222.146,55 By 31.12.2017, the contractor of works received payments in the amount of 355.127.990,07 €, out of which the amount of 161.915.471,22 € was paid as advance payments. The following table gives an overview of performed works and payments per year: Table 48: Overview of executed works per year Advance Notification Payment Paid from the Paid from the Paid from the Calculated value Guarantee Description repayment of mismatch amount budget 15% loan 85% loan 85% (€) deposit (€) (€) (€) (€) (€) (€) ($) Advance 161.915.471,22 0,00 0,00 0,00 161.915.471,22 24.287.320,68 137.628.150,54 188.798.296,92 Temporaty power 6.599.940,00 0,00 0,00 0,00 6.599.940,00 6.599.940,00 I Total in 2015 168.515.411,22 0,00 0,00 0,00 168.515.411,22 30.887.260,68 137.628.150,54 188.798.296,92 Main works performed 10.542.825,63 0,00 527.141,28 -724.500,00 9.291.184,35 1.393.677,80 7.897.507,51 10.833.800,80 II Total in 2016 10.542.825,63 0,00 527.141,28 -724.500,00 9.291.184,35 1.393.677,80 7.897.507,51 10.833.800,80 Main works performed 195.192.308,33 8.763.932,75 9.759.615,41 -352.500,00 176.316.260,17 26.447.439,04 149.868.821,13 205.590.048,83 Temporaty power 1.005.133,37 0,00 0,00 0,00 1.005.133,37 1.005.133,37 0,00 0,00 III Total in 2017 196.197.441,70 8.763.932,75 9.759.615,41 -352.500,00 177.321.393,54 27.452.572,41 149.868.821,13 205.590.048,83

The total performed works until 31.12.2017 are given in the table below: Table 49: Overview of total executed works as at 31.12.2017

Calculated value Advance Notification of Payment Paid from the Paid from the Paid from the of performed Guarantee Description repayment mismatch amount budget 15% loan 85% loan 85% works deposit (€) (€) (€) (€) (€) (€) ($) (€)

Total performed main works 205.735.133,96 8.763.932,75 10.286.756,69 -1.077.000,00 185.607.444,52 27.841.116,84 157.766.328,64 216.423.849,63 Total for temporary power 7.605.073,37 0,00 0,00 0,00 7.605.073,37 7.605.073,37 TOTAL PERFORMED WORKS 213.340.207,33 8.763.932,75 10.286.756,69 -1.077.000,00 193.212.517,89 35.446.190,21 157.766.328,64 216.423.849,63

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The following was established from the stated data:  The calculated value of the total performed works is 213.340.207,33 €, out of which 205.735.133,96 € for performed works and 7.605.073,73 € for temporary power supply services31;  Out of the total advance payments made in the amount of 161.915.471,22 €, repaid advances amount to 8.763.932,75 €, while advances which were not repaid on 31.12.2017 amount to 153.151.538,47 €. The contract defines that advance payments are repaid at the rate of 20% of the amount of the interim payment certificate (calculated value for the scope of the actual performed works), when the value of the total performed works reaches 20% of the contracted value of works.  The retained guarantee deposit in the amount of 10.286.756,69 €, i.e. 5% of the amount of the interim certificate. The accumulate sum will be paid to the contractor of works in two parts, 50% after the completion of works upon the issuance of the hand-over certificate and 50% after the expiration of the period for the elimination of defects upon the issuance of the performance certificate.  The retained amount of funds from the amount of the interim payment certificate on the basis of non-compliance in the amount of 1.077.000,00 €32.  The total amount for payments for performed works is 193.212.517,89 €. The payments were made from the budget funds in the amount of 35.446.190,21 € and from loan funds in the amount of 157.766.328,64 € or 216.423.849,63 USD.

The audit established that the payments were made on the basis of submitted interim payment certificates, where the calculated values of the actual performed works were reduced by the repayment of advance payments made, retained funds on behalf of a guarantee deposit and on behalf of notification of non-compliance. 7.2. Directorate of Public Works – Capital budget The Capital budget of the Directorate of Public Works was planned in the amount of 58.878.600,00 €. According to the Law on the amendments to the Law on the Budget of Montenegro for 201733, the planned amount was decreased by 12.500.000,00 €. After an increase through reallocation in the amount of 2.933.933,39 €, the available funds of the current budget amount to 49.312.533,39 € and the realized expenditures amount to 50.280.153,81 €, i.e. 1.96% higher than the available funds. Current expenditures within the Capital budget were realized in the amount of 5.015.552,69 € or 9.98%, while capital expenditures were realized in the amount of 45.264.601,12 € or 90.02% of the total expenditures, as given in the following table: Table 50: Capital budget of the Directorate of Public Works Realized in 2017 Program Source of % of Program Current budget code finance Current Capital Total execution

Construction and reconstruction of administrative space for 804 2.184.000,00 the work of state bodies OPB 126.481,94 1.813.017,92 1.939.499,86 88,80% Construction, reconstruction and adaptation of cultural 805 1.419.700,00 OPB 100.281,19 1.384.093,55 objects 1.283.812,36 97,49% 806 Construction and reconstruction of sports facilities 2.155.000,00 OPB 43.800,43 2.001.775,66 2.045.576,09 94,92% 810 Building local infrastructure 6.285.000,00 OPB 185.951,07 5.753.820,54 5.939.771,61 94,51% 812 Environmental projects 3.566.300,00 OPB 379.405,87 2.841.099,30 3.220.505,17 90,30% 818 Construction and reconstruction of health facilities 698.000,00 OPB / 657.500,00 657.500,00 94,20% 819 Construction and reconstruction of social care facilities 925.250,00 OPB 4.950,00 896.934,85 901.884,85 97,47% Construction and reconstruction of educational and science OPB and 821 4.244.500,00 514.842,03 5.876.886,45 facilities LOAN 5.362.044,42 138,46% 826 Improvement of tourist offer 9.378.500,00 OPB 929.479,29 8.146.854,38 9.076.333,67 96,78% 829 Projects financed by IPA funds 17.609.033,39 OPB and IPA 1.916.287,77 16.504.230,18 18.420.517,95 104,61% 830 National Commission for technical inspection of the Bar- 847.250,00 OPB 814.073,10 3.511,51 817.584,61 96,50% Total: 49.312.533,39 5.015.552,69 45.264.601,12 50.280.153,81 101,96%

31 Temporary power supply is related to the supply of the construction site with electricity - Schedule 2 of the Contract on the design and construction of the highway 32 The supervisory authority, in cases when the contractor executes specific works which are not in accordance with the approved Main design or relevant regulations (environmental protection, health and safety, etc.), retains a specific amount of the amount of the interim certificate until the contractor eliminates the defects which were recorded by the issued statements of non-compliance 33 Official Gazette of Montenegro 89/17

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The Capital budget of the Directorate of Public Works in 2017, in the amount of 50.280.153,81 €, was financed from the general revenues in the amount of 38.096.878,13 € or 75.77%, loan funds in the amount of 1.671.057,71 € or 3.32% and IPA funds in the amount of 10.512.217,97 € or 20.91%.

Loan by the Council of Europe Development Bank (CEB) in the amount of 1.671.057,71 € (commission in the amount of 3.335,62 €) was used for financing the programme 821-Construction and reconstruction of educational and scientific facilities. The following projects were funded: Kindergarten in Stari Aerodrom, Podgorica, in the amount of 1.637.486,23 €, Kindergarten in Pljevlja in the amount of 10.633,62 €, Kindergarten in Blok VI, Podgorica, in the amount of 5.697,00 € and Kindergarten in Tuzi in the amount of 13.335,62 €. Loan funds were used in accordance with Article 12 of the Law on Budget for 2017 up to the level of realization.

Funds from Pre-Accession IPA Funds in the amount of 10.512.217,97 € were used for financing projects of constructing wastewater treatment facilities, sewage network and water supply network, rehabilitation of unsanitary landfills, railway infrastructure projects and projecst in the field of technical assistance. The funds were used, in accordance with Article 14 of the Law on the Budget of Montenegro for 2017, to the level of their realization.

Overruns of planned funds - The amount of realized Capital budget funds in 2017 was 50.280.153,81 €, i.e. 1.96% higher than the planned funds. Allowed overruns of planned funds were performed regarding: Programme 821 - Construction and reconstruction of educational and scientific facilities by 38.46%. Specific projects were financed, in accordance with Article 12 of the Law on Budget for 2017, to the level of realization of loan funds of the Council of Europe Development Bank (CEB) and Programme 829 - Projects which are financed from IPA funds by 4.61% or 1.916.287,77 € higher than the amount of planned funds, in accordance with Article 14 of the Law on Budget for 2017. The Ministry of Sustainable Development and Tourism - Directorate of Public Works, on the basis of conclusions of the Government of Montenegro, transferred funds to the municipalities in the amount of 1.556.213,01 € and made direct payments to suppliers in the amount of 2.026.498,31 €, for the purpose of co-financing projects as shown in the tale below: Table 51: Transfer of funds to municipalities Protocol / Conclusion Program Municipality Project Paid Number Date PROT 19/2-01- Sanitary landfills, wastewater treatment plants and water supply (land 812 MUNICIPALITY BIJELO POLJE 30.01.2017. 50.000,00 218/1 expropriation for the construction of wastewater treatment plants and sewage PROT 101-1560/1- 821 MUNICIPALITY ULCINJ 10.11.2017. Construction of Elementary School in Ulcinj 100.000,00 4063/1 Reconstruction of "Ribarska ulica" - for the needs of resolving property-legal relations 812 MUNICIPALITY PLAV ZV 07-3762 14.12.2017. 243.167,79 and financing of land expropriation Reconstruction of "Ribarska ulica" - for the needs of resolving property-legal relations 812 MUNICIPALITY PLAV ZV 07-3762 14.12.2017. 256.832,21 and financing of land expropriation 812 MUNICIPALITY ROZAJE ZV 07-3763 14.12.2017. Water supply and local road infrastructure project 43.568,01

810 MUNICIPALITY ROZAJE ZV 07-3763 14.12.2017. Water supply and local road infrastructure project 55.994,00

810 MUNICIPALITY GUSINJE ZV 07-3764 14.12.2017. Local Road Infrastructure Project 70.000,00

819 MUNICIPAL ASSEMBLY PLJEVLJA ZV 07-4016 21.12.2017. Rehabilitation of local and unclassified roads 14.000,00

819 MUNICIPAL ASSEMBLY PLJEVLJA ZV 07-4016 21.12.2017. Rehabilitation of local and unclassified roads 335.801,00

812 MUNICIPALITY ULCINJ ZV 07-4017 21.12.2017. Construction of a new pipeline on the road Vladimir-Krute-Ulcinj 256.850,00

805 MUNICIPAL ASSEMBLY NIKŠIĆ ZV 07-4079 25.12.2017. Reconstruction of the building of the King Nikola's Castle in Niksic 130.000,00

Direct payments to suppliers 2.026.498,31 3.582.711,32 The Protocols on cooperation of the Directorate of Public Works and municipalities define that the Directorate shall perform the transfer of funds to the account of the selected processor and auditor of the project documents, contractor of works and professional supervisor, for the purpose of the implementation of projects, in accordance with certified payment certificates. The obligation of the municipalities is to inform in writing, once a month, the Directorate of Public Works about the status of projects which are the subject of the Protocols. The audit established that municipalities did not submit reports on conducted activities, as defined in the Protocol on cooperation.34

34 During the period of the audit, the auditor did not receive the reports on completed activities on the implementation of projects for inspection.

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The Directorate of Public Works is recommended to, in accordance with the signed protocols, follow activities on the implementation of projects per municipality, and to request from municipalities the submission of monthly reports on the implementation of projects.

The costs of the project implementation include the costs of the preparation of surveying maps, geomechanical studies, preliminary and main designs, costs of project documentation audit, costs of construction and equipment of the facility, professional supervision costs, costs of fees for connecting the facility to infrastructure, costs of municipal development of city construction land, costs of technical inspections of the facility, land expropriation costs and other costs connected to the project implementation.35 The tables contain the signature dates of the first contract for the implementation of the project, while the amounts in the column “contractual value” contain the total contracted value. The following table presents projects initiated in previous years and finished in 201736.

Table 52: Overview of the Capital budget programmes whose projects were finished in 2017 Contract Realized Program Completed projects In previous Date Value 2015 2016 2017 years Camp at Zlatica 02.08.2011. 4.869.549,85 2.921.729,91 973.909,97 973.909,97 0,00 Business building of the real estate administration 08.01.2010. 10.223.923,76 8.631.174,28 1.592.749,48 0,00 0,00 Administrative building in Mojkovac 21.10.2014 1.317.924,71 327.838,42 943.993,53 0,00 0,00 Administrative building in Petnjica 17.02.2015. 1.482.954,14 0,00 13.982,50 1.353.659,39 115.312,25 Construction and furnishing of the kitchen of the ZIKS 18.05.2015 365.112,71 0,00 364.875,99 0,00 0,00 Adaptation of the premises of the State Prosecutor's Office in Cetinje 13.08.2015 124.018,92 0,00 124.009,37 0,00 0,00 804 Adaptation of the MUP business premises in Podgorica 21.08.2015 258.641,44 0,00 203.906,26 0,00 0,00 Border crossings 30.07.2015 353.953,57 0,00 353.519,67 0,00 0,00 Assembly building 28.08.2016. 429.737,49 21.762,80 0,00 399.557,96 19.032,66 Reconstruction of the administrative building of local government authorities06.10.2017. in Andrijevica 37.854,00 0,00 0,00 0,00 37.781,99 Reconstruction of the administrative building in Andrijevica 06.08.2015 81.924,54 0,00 81.874,08 0,00 0,00 State Prosecutor's Office in Kotor 18.01.2011. 914.790,28 66.136,25 530.273,38 301.956,56 0,00 Cultural Center in Pljevlja 28.06.2016. 1.257.147,24 0,00 0,00 430.352,71 219.647,29 The building of the former Russian mission for the needs of the MFA-Cetinje 07.08.2014. 2.817.230,05 504.581,50 9.098,55 2.258.925,00 44.625,00 805 National library Đurađ Crnojević 02.04.2015 75.797,81 0,00 75.797,81 0,00 0,00 Remodeling of the monument on Stražnjica in Pljevlja 21.07.2015 100.000,00 0,00 99.997,61 0,00 0,00 Remediation of the memorial to the fallen NOR fighters in Zabljak 24.06.2016. 50.716,56 0,00 0,00 50.552,55 806 Additional football courts with artificial turf 20.11.2019 363,608,10 10.918,25 348.504,23 0,00 0,00 Sewerage network and WWTP Šavnik 12.01.2015 358.540,90 0,00 47.655,00 309.718,85 0,00 Sewer Network in Plav 31.03.2015 69.496,00 0,00 69.496,00 0,00 0,00 812 Sewerage network in Pljevlja 19.08.2015 175,737,84 0,00 175.730,23 0,00 0,00 Remediation of the landfill in Zabljak 25.12.2015 264.398,50 0,00 50.100,00 193.186,95 1.481,55 Construction of recycling yard and transshipment station in Zabljak 01.07.2014 1.291.588,68 488.373,67 803.215,01 0,00 0,00 Infrastructure in MZ Bukovica 4.08.2009. 4.545.474,76 3.476.210,62 427.822,04 641.442,10 0,00 Electrification of katuns in Rožaje "Dobro Buče" and "Giljevo polje" 12.04.2016. 250.000,00 7.240,00 0,00 242.760,00 0,00 City Market in Bijelo Polje 23.01.2017 2.250.545,29 790.716,42 1.455.802,09 0,00 0,00 810 Asphalting the Durmitor ring 08.08.2013 485.854,83 396.456,18 178.252,56 0,00 0,00 Reconstruction of Krkori Plumbing, Chlorine station in Andrijevica 07.11.2014 822.071,85 55.492,68 659.156,34 0,00 0,00 Construction of rural waterworks in Lovnica in Rožaje 30.06.2015 169.926,69 54.740,00 150.583,00 0,00 0,00 Funds for solving the housing needs of employees in health care 16.02.2012. 1.050.000,00 650.000,00 350.000,00 50.000,00 0,00 Polyclinic with emergency center in Berane 01.11.2013 2.134.883,09 1.654.080,82 301.540,55 163.525,54 0,00 818 Blood Transfusion Institute in Podgorica 31.12.2012. 3.060.121,86 2.523.090,29 493.520,74 10.824,34 0,00 Reconstruction of the internal department of the General Hospital in Bijelo Polje06.03.2015 884.999,81 0,00 84.999,81 0,00 0,00 Purchase of buildings from municipalities 03.10.2014 522.076,55 0,00 522.076,55 0,00 0,00 Day care center for children with disabilities in Rozaje 16.10.2013. 603.591,99 1.574,00 337.771,50 264.889,66 0,00 819 Resolving housing issues of socially vulnerable categories 02.04.2015. 1.598.814,00 0,00 999.544,00 599.270,00 0,00 Day Center Ljubovic in Podgorica 07.06.2012 33.117,65 14.415,07 18.799,59 0,00 0,00 Reconstruction of primary school in Kotor 22.12.2016. 40.000,00 0,00 0,00 40.000,00 0,00 Innovation-Entrepreneur Center "Tehnopolis" in Niksic 21.06.2014. 1.930.607,41 4.940,00 908.199,43 1.017.467,91 0,00 Kindergarten in Zagorič, Podgorica 15.10.2014. 1.295.572,89 0,00 403.729,51 885.919,65 0,00 821 Construction of infrastructure connections for the Niko Labović Health Center complex, Polyclinic and the University Center in Berane 06.06.2017. 233.293,05 0,00 0,00 0,00 227.341,30 Elementary School "Dušan Korač" in Bijelo Polje 19.12.2016. 2.219.170,00 0,00 0,00 2.219.170,00 0,00 Sports Hall of the University Center in Podgorica 20.09.2012 3.875.094,44 1.537.563,73 2.222.789,27 0,00 0,00 Solana "Bajo Sekulic" in Ulcinj 10.12.2015. 270.000,00 0,00 70.000,00 200.000,00 0,00 Improving the tourist offer in Rozaje 18.09.2015 300.000,00 0,00 300.000,00 0,00 0,00 826 Revitalization of Lake Ponikvica 10.10.2014 182.207,50 0,00 173.807,47 0,00 0,00 ConstructionDismantling the of camping existing, campsite procurement infrastructure and installation of new electric 10.08.2015 39.556,82 0,00 38.906,04 0,00 0,00 towage of the substation "Trebešica" 03.12.2015 3.554.549,67 0,00 873.883,25 58.651,74 2.568.781,06 829 Reconstruction of the rail section Virpazar-Sutomore 23.12.2016. 4.636.915,93 0,00 0,00 0,00 4.314.668,61 830 Ambulance and flood prevention 03.08.2011 9.600.406,66 7.885.822,44 1.714.584,22 0,00 0,00 TOTAL: 73.334.153,89 32.024.857,33 19.548.456,63 12.665.740,88 7.548.671,71

35 The table does not state contracts for the stated expenditures 36 The spreadsheet contains capital and current expenditures related to projects

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Projects initiated in previous years, which will be implemented in the next period are presented in the following table: Table 53: Overview of Capital budget programmes whose projects are in progress Contract Realized Program Completed projects In previous Date Value 2015 2016 2017 Total years The building of the Montenegrin Academy of Science and Art 26.09.2009. 6.616.870,44 3.614.359,93 440.598,01 0,00 0,00 4.054.957,94 Eco Building Ministry of Sustainable Development and Tourism 03.12.2009. 9.807.819,89 5.450.788,46 339.612,84 0,00 0,00 5.790.401,30 AdaptationAction plan offor the adapting space infacilities the building in public "Limenka" use for access- the building and movement of the Ministry for persons of Interior with of reduced Montenegro 23.10.2014. in Podgorica 1.210.865,40 403.407,35 807.213,57 0,00 0,00 1.210.620,92 mobility and persons with disabilities 07.08.2014. 2.453.251,15 90.767,24 403.540,72 528.081,12 1.121.460,97 2.143.850,05 804 Administrative building in Gusinje 30.09.2015. 593.749,32 0,00 149.998,39 253.743,61 175.944,38 579.686,38 Police station and branch offices of the Administrative Internal Affairs in Gusinje 19.11.2016. 525.243,95 0,00 0,00 2.167,16 278.245,17 280.412,33 Reconstruction of the assembly hall in Bijelo Polje 28.09.2017. 222.489,13 0,00 0,00 0,00 124.945,97 124.945,97 Upgrade and reconstruct the existing CANU facility in PG 20.12.2017. 24.438,41 0,00 0,00 0,00 24.438,41 24.438,41 Accommodation facilities for SAJ and PJP in Podgorica 04.02.2016. 97.450,29 0,00 0,00 55.112,23 42.338,06 97.450,29 Music Center of Montenegro in Podgorica 25.05.2007. 13.451.238,30 8.165.025,50 538.038,18 0,00 889.639,84 9.592.703,52 The arrangement of the terrain around the memorial to the fallen NOR fighters in Zabljak 25.09.2017. 96.577,95 0,00 0,00 0,00 96.525,22 96.525,22 805 Zetski dom on Cetinje 02.12.2016. 22.101,39 0,00 0,00 22.101,39 0,00 22.101,39 Construction, reconstruction and adaptation of the facility for the needs of the CNP 30.08.2017. 118.153,20 0,00 0,00 0,00 3.656,20 3.656,20 Castle of King Nikola in Niksic 26.12.2017. 130.000,00 0,00 0,00 0,00 130.000,00 130.000,00 Sports hall in Berane 16.10.2008. 5.420.711,18 2.182.107,02 1.238.397,32 1.576.103,11 350.153,90 5.346.761,35 Sport hall in Kotor 25.10.2011. 3.762.899,11 1.470.711,18 0,00 48.135,69 0,00 1.518.846,87 Construction and reconstruction of football fields 16.11.2016. 9.161.185,45 352.442,56 0,00 0,00 201.651,39 554.093,95 806 ConstructionPreparation of of documentation sports grounds and performancehalls of works on reconstruction of sports facilities in 05.10.2017. 130.022,15 0,00 0,00 0,00 44.615,91 44.615,91 gymnasium and secondary specialized school in Rozaje 26.09.2017. 39.494,20 0,00 0,00 0,00 1.065,05 1.065,05 Government Decision Lok. Road MR Tivat savings 07.12.2017 0,00 630.000,00 630.000,00 Pool in Kotor and Tivat 25.03.2014. 828.333,22 0,00 0,00 9.945,00 818.089,84 828.034,84 Sanitary landfills, wastewater treatment plants and water supply 16.02.2009 2.211.832,93 672.727,26 229.366,00 370.679,60 855.658,78 2.128.431,64 Construction of transfer stations and rehabilitation of the existing waste disposal site 20.06.2016 1.015.695,59 2.599,50 0,00 122.218,52 110.104,05 234.922,07 Channel network in Rožaje 15.07.2015 55.930,00 0,00 44.744,00 0,00 44.744,00 Rehabilitation and reconstruction of the hydraulic tunnel in Mojdež, Herceg Novi 25.07.2014 893.043,57 301.451,59 588.792,98 2.659,91 0,00 892.904,48 Construction and reconstruction of waterworks 04.08.2015 2.377.677,13 599.773,34 0,00 546.557,42 601.173,14 1.747.503,90 Water supply MZ Hoti (Drume and Traboin) 14.10.2016 307.336,22 0,00 0,00 59.325,24 205.355,00 264.680,24 812 Construction, reconstruction and rehabilitation of wastewater disposal systems 15.09.2016 653.712,93 0,00 0,00 0,00 297.190,78 297.190,78 Measures for reduction of pollution and heating of Pljevlja 20.09.2016 1.062.544,75 34.358,81 500.000,00 64.210,09 463.975,85 1.062.544,75 Improvement of the existing network of meteorological and precipitation stations 03.10.2017 2.500,00 0,00 0,00 0,00 2.500,00 2.500,00 Construction of PPOV in Vranjina 15.11.2016. 125.000,00 0,00 0,00 24.500,00 15.280,50 39.780,50 Sanitation of the landfill in Plav 15.11.2016. 125.000,00 0,00 0,00 24.700,00 17.785,50 42.485,50 Government Decision Lok. Road MR Tivat savings 0,00 650.000,00 650.000,00 Reconstruction of Ribarska ulica in the Municipality of Plav 12.10.2015 5.000,00 0,00 0,00 0,00 0,00 0,00 Reconstruction of the street "Vojda Vojvodića" in Berane 11.11.2015 381.980,01 8.142,84 0,00 49.068,32 298.835,01 356.046,17 Construction of a promenade near the Tara river in Mojkovac 02.03.2016 398.665,79 0,00 0,00 154.137,57 243.358,45 397.496,02 Construction of a promenade near the Tara River in Kolasin 23.04.2015 30.000,00 0,00 30.000,00 0,00 0,00 30.000,00 Local roads 30.06.2015. 6.892.320,57 65.026,86 3.454.744,50 747.589,28 1.542.847,36 5.810.208,00 Reconstruction of the bridge Radovan Pavićević 15.11.2017. 12.691,00 0,00 0,00 0,00 12.691,00 12.691,00 City Market in Gusinje and Cetinje 16.06.2017. 468.316,36 0,00 0,00 0,00 254.010,76 254.010,76 810 The arrangement of the river bank, the coastal fortification and arrangement of the riverbed 21.09.2017. 710.783,54 23.517,38 0,00 0,00 423.723,49 447.240,87 Construction of infrastructure for playing MOSI games in Pljevlja 22.06.2017. 255.000,00 0,00 0,00 0,00 174.709,62 174.709,62 Construction of public lighting in Bijelo Polje 23.11.2017. 233.030,80 110.551,00 0,00 0,00 110.551,00 Elimination of the pedestrian bridge Njegnjevo in Bijelo Polje 25.12.2017. 295.512,14 0,00 0,00 0,00 88.653,64 88.653,64 The reconstruction of the Plav-Vojno village road, Gusinje 13.12.2017. 885.612,89 0,00 0,00 0,00 177.122,57 177.122,57 Construction of the city market in Rožaje 18.12.2017. 9.980,00 0,00 0,00 0,00 9.980,00 9.980,00 Construction of a regional livestock market in Berane 12.10.2017. 243.598,95 0,00 0,00 0,00 4.998,00 4.998,00 City roads 02.09.2013. 12.070.034,01 3.737.378,72 2.779.748,82 2.454.879,64 2.708.841,71 11.680.848,89 Cultural Center Pljevlja Government's conclusion 07-3765 for savings 387.495,43 387.495,43 Žičara Kolašin government's conclusion 07-4148 for savings 264.055,76 264.055,76 ReconstructionConstruction of facilitiesof space forand HLA the labs necessary and HLA infrastructure typing in MNE for facilities for socially vulnerable 5.948,81 5.948,81 categories of population 13.06.2017. 245.583,74 0,00 0,00 0,00 94.495,00 94.495,00 government decision 07-4016 - local infrastructure for savings 21.12.2017 0,00 349.801,00 349.801,00 819 the government's conclusion 07-4148 - the Kolasin lift for savings 28.12.2017 0,00 331.000,00 331.000,00 Elderly home in Podgorici 28.12.2015 8.994.189,22 0,00 0,00 87.281,74 126.588,85 213.870,59 Academy of Arts in Cetinje 23.03.2010 7.752.711,40 3.324.936,73 1.512.222,24 1.734.383,97 1.120.188,17 7.691.731,11 Kindergarten at the Old Airport, Podgorica 12.09.2015 2.861.623,91 0,00 82.251,16 3.718,10 1.951.952,23 2.037.921,49 Kindergarten in Pljevlja 21.11.2016. 14.039,00 0,00 0,00 0,00 12.654,00 12.654,00 Kindergarten in Block VI, Podgorica 09.03.2017. 43.171,58 0,00 0,00 0,00 27.350,83 27.350,83 Kindergarten in Tuzi 24.12.2014 30.357,49 0,00 4.879,00 8.931,25 16.547,24 30.357,49 Reconstruction of kindergarten in Zabljak 06.10.2015 130.455,13 0,00 130.455,13 0,00 0,00 130.455,13 KindergartenConstruction ofin theRožaje main project of reconstruction of technical faculties of the University of 27.10.2017. 17.850,00 0,00 0,00 0,00 10.710,00 10.710,00 Montenegro in Podgorica 09.03.2017. 116.874,07 0,00 0,00 0,00 23.374,81 23.374,81 Repair of the landslide on the Savina for the construction and reconstruction of school buildings HN 29.08.2016 1.037.713,76 0,00 0,00 301.984,19 445.592,72 747.576,91 821 Secondary vocational school in Golubovci 17.01.2014 5.110.036,71 50.039,04 45.327,46 771.821,72 822.732,93 1.689.921,15 Elementary school in Guk 18.12.2015 794.737,01 0,00 714,00 644.546,21 157.317,87 802.578,08 Reconstruction of the heating plant of the University of Montenegro in the Dup room Reconstruction of the elementary school in Bač in Rožaje 28.06.2017. 90.000,00 0,00 0,00 0,00 82.624,35 82.624,35 Reconstruction and adaptation of the building for the needs of the Business Incubator in Cetinje 13.06.2017. 295.000,00 0,00 0,00 0,00 293.500,00 293.500,00 Construction of primary and music school in Bijelo Polje 26.12.2017. 5.000,00 0,00 0,00 0,00 5.000,00 5.000,00 Government Conclusion 07-4149 ski center collage - savings 0,00 580.000,00 580.000,00 Elementary School in Sukobin Ulcinj 25.06.2015. 100.000,00 0,00 0,00 0,00 100.000,00 100.000,00 Construction of gymnasium for sport and physical education in Niksic 22.06.2015 4.760,00 0,00 4.760,00 0,00 0,00 4.760,00 Ski Center "Kolašin 1600", Kolašin 23.12.2014 15.469.877,98 1.407.054,76 1.236.478,70 2.994.401,03 5.090.847,93 10.728.782,42 Ski center at the location of Cmiljača, Bijelo Polje 18.08.2014 4.409.221,82 143.929,11 426.653,13 217.584,92 765.134,07 1.553.301,23 Ski center at Žarski, Mojkovac 11.28.2014 3.134.897,09 0,00 23.283,00 16.707,60 1.166.858,19 1.206.848,79 Ski center at Hajla, Rožaje 22.07.2014 1.907.523,42 322.383,90 37.867,60 549.118,88 206.940,15 1.116.310,53 SkiPreparation center at ofDurmitor planning locality, documentation Žabljak and other technical documentation, feasibility study, 25.08.2016 724.569,14 0,00 0,00 5.300,00 210.671,97 215.971,97 environmental impact assessment, competition, conceptual and main projects that are in the 06.11.2009 883.443,85 152.021,29 97.538,00 525.984,61 42.498,00 818.041,90 Valorization of Đalović Cave, Bijelo Polje 11.11.2014 2.956.334,93 20.310,79 26.590,00 92.294,15 851.076,21 990.271,15 826 SKI Center Vucje - construction of reservoir lake, municipality Niksic 19.08.2016 242.584,30 0,00 0,00 39.780,69 103.832,55 143.613,24 The House of the Revolution in Niksic 05.07.2016 307.912,50 0,00 0,00 80.325,00 227.587,50 307.912,50 Moving the icon of the Virgin Philermos in Cetinje 29.09.2014 1.750.014,73 138.425,00 7.100,00 0,00 4.900,00 150.425,00 Construction of apartments and restaurants in NP "Biogradska gora", Kolašin 17.10.2014 578.102,88 46.648,54 207.994,78 227.120,17 60.404,89 542.168,38 House "Fruit", Andrijevica 08.06.2016 1.387.027,82 0,00 0,00 32.244,40 700,27 32.944,67 Reconstruction of the former prison in Kotor 22.12.2015 31.097,88 0,00 29.097,88 2.000,00 0,00 31.097,88 Preparation of a reconstruction project for Kanli Kula in Herceg Novi 01.03.2017. 83.650,00 0,00 0,00 0,00 50.190,00 50.190,00 NationalState Commission parks for technical inspection of Bar-Boljare highway priority shares Smokovac - Uvac - 07.12.2017 295.685,59 0,00 0,00 833,00 294.691,94 295.524,94 830 MateševoPPOV, sewage ​​and networkothers and water supply regulation in Berane - preparation of project 08.06.2017 1.222.022,08 0,00 0,00 404.098,56 817.584,61 1.221.683,17 documentation and construction 06.04.2016 12.495.881,23 0,00 0,00 1.098.365,77 8.323.878,41 9.422.244,18 Remediation of the Vrtijeljka landfill in Cetinje 20.12.2016. 1.727.999,50 0,00 0,00 0,00 1.552.652,82 1.552.652,82 829 Remediation of the "Caffe" landfill in Bar 04.12.2015 3.818.472,80 0,00 691.344,20 333.509,70 564.051,38 1.588.905,28 Technical assistance 17.12.2015. 1.318.853,81 0,00 20.000,00 50.753,00 1.096.485,67 1.167.238,67 TOTAL: 168.824.969,68 32.890.885,70 16.129.351,61 17.339.003,56 42.731.482,08 109.090.722,95

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Programme 821: Construction and reconstruction of educational and scientific facilities - The implementation of this Programme in 2017 amounted to 5.876.886,45 €, i.e. 38.46% higher compared to the planned funds. The stated Programme was financed from the general budget revenues in the amount of 4.205.828,74 € and from the loan of the Council of Europe Development Bank (CEB) for the construction and reconstruction of kindergartens in the amount of 1.671.057,71 €. The audit established that deadlines were exceeded because the detailed elaboration of projects was not prepared, which is why annexes were made to the contract. The following projects should be pointed out:  Preparation of the Main design for the facility of the Faculty of Fine Arts and Music in Cetinje, pursuant to the signed Contract no. 19/2-01-4407/1 of 08.10.2013 and Annex no. 19/2-01-7505/1 of 15.12.2016, by which the contracted deadline was extended because of a subsequent request by the Contracting Authority to design the Faculty of Music in two construction phases.  Performance of works on the construction of the facility of the Faculty of Fine Arts in Cetinje, pursuant to the signed contract no. 19/2-01-4942/1 of 09.10.2015 to the amount of 3.438.436,90 €. The total amount paid on this basis is 1.077.651,86 €, and annexes to the contract were signed as follows: Annex II no. 19/2-01-7098/1 of 30.11.2016 because of an extension of the deadline defined by the Construction Contract, because the necessary funds for the implementation of this project were not secured, so the deadline was extended until 01.06.2017; Annex III no. 19/2-01- 2272/1 of 29.05.2017 whose subject is the extension of the deadline, because the necessary funds for the implementation of this project were not secured, so the final deadline for the performance of the contracted works will be defined after securing the missing funds; Annex IV no. 101-1560/1- 2824/2 of 03.10.2017 whose subject is the determination of the deadline from Annex III.  Preparation of the Main design for a kindergarten and nursery in the Guke neighbourhood, Pljevlja Municipality, in accordance with the signed Contract no. 19/2-01-6854/1 of 22.11.2016 to the amount of 7.854,00 €. Annex I no. 19/2-01-57/2 of 13.01.2017 defined an extension of the contracted deadline because of non-compliance between the urban and technical conditions and the conditions presented in the Competition.

During the nomination of Capital budget projects, it is necessary to give priority to projects commenced in the previous years, as defined by Article 7 of the Decision on the preparation of the Capital budget in the part of the criteria on the basis of which priorities are determined during the selection of capital projects.

Payments from other programmes - From Programme 821, there was a payment of liabilities to contractors of works for the project Ski centre “Kolašin 1600” of Programme 826 in accordance with the Conclusion of the Government of Montenegro no. 07-4148 of 28 December 2017 in the amount of 580.000,00 €. The Directorate of Public Works was given consent to, in accordance with the provisions of Article 46 of the Law on Budget and Financial Responsibility, it can use savings on other programmes in the amount of 1.238.000,00 € to pay for liabilities to contractors of works for the project Ski centre “Kolašin 1600” from Programme 826 Improvement of tourism offer, as follows:

- from the Programme 818 Construction and reconstruction of health facilities the amount of 327.000,00 €; - from the Programme 819 Construction and reconstruction of social welfare facilities the amount of 331.000,00 €; - from the Programme 821 Construction and reconstruction of educational facilities the amount of 343.000,00 €; - from the Programme 821, payments were made to former owners of immovables on the basis of land expropriation on behalf of the implementation of the project for the construction of a primary school in Golubovci in the amount of 87.500,00 €.

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Projects financed from IPA funds 829 - The implementation of this Programme in 2017 amounted to 18.420.517,95 €, i.e. 4.61% higher compared to the plan. The stated Programme was financed from the general budget revenues in the amount of 7.908.299,98 € and from IPA funds in the amount of 10.512.217,97 €.

Extension of the contractual deadline and modification of the contractual amount - The audit established that, concerning the implementation of projects of Programme 829 on the basis of concluded contracts for the performance of works and professional supervision, many annexes were signed which amended the contracted deadlines and prices. All concluded contracts and annexes to the contracts were accepted and signed by the European Commission for the “Operational Programme Regional Development” within the Instrument for Pre-Accession Assistance.

Spending units which are implementing the Capital budget are recommended to prepare, during the preparation of projects, a schedule plan in order to define a realistic deadline for the performance and completion of works and, while planning the budget, to give priority to projects commenced in the previous years.

8. PUBLIC DEBT OF MONTENEGRO

In accordance with the Law on Budget and Fiscal Responsibility, the public debt of Montenegro represents the debt of the central and local level, precisely of the general state level. The following table gives an overview of the public debt of Montenegro for the period from 2013 to 2017:37 Table 54: Public debt of Montenegro for 2013 – 2017 Description 2013 2014 2015 2016 2017 External public debt 1.433,00 1.561,69 1.956,36 2.002,76 2.213,97 Foreign bonds 460,00 647,36 957,80 1.080,00 1.080,00 Foreign loans 973,00 914,33 998,56 922,76 1.133,97 Domestic government debt 364,10 381,22 320,29 400,90 413,89 Domestic loans 101,40 71,37 36,58 61,24 107,47 Debt under HOV 262,70 273,80 246,37 299,06 267,29 Debt of state enterprises and legal entities - 36,05 37,34 40,59 39,13 STATE DEBT OF MONTENEGRO 1.797,10 1.942,91 2.276,65 2.403,66 2.627,86 Consolidated debt of local self-government 135,90 128,80 143,10 130,97 PUBLIC DEBT OF MONTENEGRO 1.933,00 2.071,71 2.276,65 2.546,76 2.758,83

Graph 7: Public debt of Montenegro

3.000,00

2.000,00

1.000,00

- 2013 2014 2015 2016 2017

STATE DEBT OF MONTENEGRO PUBLIC DEBT OF MONTENEGRO

On 31 December 2016, the public debt of Montenegro amounted to 2.546.763.857,56 €, and on 31.12.2017, it amounted to 2.758.831.748,28 €, i.e. 8.33% higher compared to the previous year. The established balance of the public debt of Montenegro as at 31 December 2016 and 31.12.2017 is given in the table below:38

37 Source of data on the public debt: local administrations, Ministry of Finance and Proposed Law on the Final Statement of Accounts of the State Budget of Montenegro for 2017 and previous years 38 Currency exchange rate in relation to euro on 31.12.2016: USD-0,9487; CHF-0,9312; NOK-0,1101 and SDR-1,2753 Currency exchange rate in relation to euro on 31.12.2017: USD-0,8338; CHF-,8546; NOK-0,1016 and SDR-1,1875

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Table 55: Public debt overview Debt balance on Debt balance on Description 31.12.2016 31.12.2017 External public debt 2.002.763.121,53 2.213.974.940,61 Foreign bonds 1.080.000.000,00 1.080.000.000,00 Foreign loans 922.763.121,53 1.133.974.940,61 Domestic public debt 400.899.413,13 413.890.443,72 Domestic loans 61.244.935,62 107.470.121,46 Debt under securities 299.066.983,81 267.292.474,89 Debt of state enterprises and legal entities 40.587.493,70 39.127.847,37 Consolidated debt of local self-government 143.101.322,90 130.966.363,95

Public debt of Montenegro 2.546.763.857,56 2.758.831.748,28

8.1. National debt of Montenegro External national debt as at 31.12.2017 amounted to 2.213.974.940,61 €. The debt balance includes the principal of the debt on the basis of concluded international agreements in the amount of 1.133.974.940,61 € and the principal of the debt on the basis of the issuance of EUROBOND securities on the international market in the amount of 1.080.000.000,00 €. Table 56: Balance of foreign debt on the basis of foreign loans Debt balance on 31.12.2016. Debt balance on 31.12.2017. Currency Debt on Debt on Bank - Creditor under 31.12.2016. at the 31.12.2016. at the rate on 31.12.2017. Contract currency contract rate on 31.12.2016 rate on 31.12.2017 euro euro contract currency euro The Council of Europe Development Bank (CEB)€ 17.676.521,09 17.676.521,09 17.676.521,09 20.657.648,77 20.657.648,77 Credit Suisse € 128.000.000,00 128.000.000,00 128.000.000,00 138.439.253,05 138.439.253,05 Czech Exim Bank € 4.357.825,98 4.357.825,98 4.357.825,98 1.037.646,72 1.037.646,72 European Bank for Reconstruction and Development€ (EBRD) 14.708.665,54 14.708.665,54 14.708.665,54 14.904.135,64 14.904.135,64 European Community / Commission € 2.800.000,00 2.800.000,00 2.800.000,00 1.700.000,00 1.700.000,00 European Investment Bank (EIB) € 105.389.782,42 105.389.782,42 105.389.782,42 98.181.905,69 98.181.905,69 Erste Bank AG Vienna € 10.976.633,27 10.976.633,27 10.976.633,27 3.762.199,91 3.762.199,91 Eurofima CHF 14.500.000,00 13.502.188,29 12.391.044,27 10.000.000,00 8.545.547,77 Export-Import Bank China $ 199.632.097,72 189.386.298,95 166.457.181,46 405.222.146,55 337.882.220,09 Export-Import Bank Hungary € 6.755.563,36 6.755.563,36 6.755.563,36 5.493.149,82 5.493.149,82 The International Bank for Reconstruction and€ Development 210.983.111,89 (IBRD) 210.983.111,89 210.983.111,89 197.553.810,59 197.553.810,59 Instituto de Credito Oficial (ICO) € 3.849.527,12 3.849.527,12 3.849.527,12 3.396.641,58 3.396.641,58 International Development Organization (IDA)SDR 40.452.724,10 51.590.977,15 48.036.395,04 35.670.674,83 42.357.856,24 Credit Bank for Reconstruction - Germany (KFW)€ 42.170.741,56 42.170.741,56 42.170.741,56 40.758.985,99 40.758.985,99 Natixis € 5.563.163,18 5.563.163,18 5.563.163,18 4.716.059,18 4.716.059,18 Steiermarkische Sparkassen € 9.898.945,10 9.898.945,10 9.898.945,30 7.698.390,74 7.698.390,74 Paris Club of Creditors € 65.012.640,31 65.012.640,31 65.012.640,31 61.951.773,76 61.951.773,76 Paris Club of Creditors CHF 1.658.668,09 1.544.527,51 1.417.422,74 1.521.865,97 1.300.517,83 Paris Club of Creditors NOK 302.759,11 33.320,40 30.767,26 277.788,42 28.229,67 Paris Club of Creditors $ 30.525.895,41 28.959.202,55 25.453.093,81 29.008.360,94 24.187.743,63 Bank Gospodarstwa Krajowego - ŽICG € 3.413.899,17 3.413.899,17 3.413.899,17 3.066.623,95 3.066.623,95 International Fund for Agricultural Development€ - IFAD - - - 150.000,00 150.000,00 Banca Intesa AD Belgrade € - - - 30.000.000,00 30.000.000,00 OTP, Zagrebačka, Erste and CKB Bank (syndicated€ loan) - - - 81.000.000,00 81.000.000,00 International Development Organization (IDA)SDR 2.089.819,49 2.665.230,39 2.481.597,95 1.709.853,49 2.030.399,72 Bank Gospodarstwa Krajowego - Ministry of Agriculture€ 3.524.356,31 3.524.356,31 3.524.356,31 3.174.200,26 3.174.200,26 Loans paid outside GRT 6.189.586,70 6.005.954,26 5.204.599,98 Total 922.763.121,53 891.348.879,03 1.133.974.940,61 Total EUR 635.081.376,30 717.642.425,65 Total CHF 16.158.668,09 11.521.865,97 Total US$ 230.157.993,13 434.230.507,49 Total NOK 302.759,11 277.788,42 Total SDR 42.542.543,59 37.380.528,32

Debt on the basis of securities (EUROBOND) issued on the international market in the previous years amounts to 1.080.000.000,00 €, as follows: 280.000.000,00 € from 2014, 500.000.000,00 € from 2015 and 300.000.000,00 € from 2016. In 2017, no securities were issued on the international financial market.

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The external debt was reduced, apart from the repayment of due liabilities, through harmonization with international creditors. In this way, the debt was reduced by the amount of 2.880.752,86 € and with:  Council of Europe Development Bank (CEB) under the signed Contract no. 1871 - Social housing project II. There was a return of withdrawn but unused funds in the amount of 1.263.595,00 €.  Czech Exim bank under the signed Contract no. 21026 for funding the Project - Railway Podgorica - Nikšić, there was a harmonization of the balance of liabilities where they were reduced by the amount of 1.437.368,67 €.  International Bank for Reconstruction and Development (IBRD) under the signed Contract no. 77160 for the Project MIDAS - Loan for agriculture. Contracted funds were cancelled which reduced the debt by the amount of 179.405,59 €.  Steiermarkische Sparkassen under the signed Contract no. FN 34274 d for the procurement of fire engines. The balance of liabilities was harmonized on the basis of the principal of the debt, thereby reducing it by the amount of 383,60 €.

Internal national debt covers loans with commercial banks which operate on the domestic market (principal of the debt), issuance of securities on the domestic market (principal of the debt), legally prescribed liabilities, debt of legal entities and companies. The balance of the internal debt as at 31.12.2017 amounts to 413.890.443,72 €, as shown in the following table: Table 57: Domestic debt balance Debt balance on Debt balance on Bank lender 31.12.2016. 31.12.2017. Erste banka 8.914.641,11 3.354.485,99 Societe Generale banka 3.751.314,16 12.824.048,55 NLB banka 15.000.000,00 27.932.967,46 Ziraat banka 11.890.000,00 25.297.599,81 Prva banka 6.000.000,00 18.750.000,00 Universal Capital banka 5.000.000,00 5.000.000,00 Hipotekarna banka 10.000.000,00 10.000.000,00 Komercijalna banka AD Budva 688.980,35 4.311.019,65 Total for bank loans 61.244.935,62 107.470.121,46 Domestic bonds - GB14 17.175.390,00 5.865.348,94 Domestic bonds - GB16 80.410.000,00 80.410.000,00 National records 77.714.300,00 77.535.000,00 Old foreign currency savings 29.449.950,66 13.742.054,43 Restitution 91.019.639,65 87.819.878,52 Labor fund bonds - OBFR 1.367.480,92 - Bonds for outstanding pensions 1.930.222,58 1.920.193,00 Debt on the basis of the issued securities 299.066.983,81 267.292.474,89 Debt of legal entities 40.587.493,70 39.127.847,37 Total 400.899.413,13 413.890.443,72 Loans with commercial banks which operate on the domestic market (principal of the debt) - expressed balance of the internal debt on the basis of loans granted by commercial banks, amounts to 107.470.121,46 € and is confirmed by the debt balance expressed in the commercial banks' OIS.

Issuance of securities on the domestic market (principal of the debt on the basis of issuance of securities) - The balance of the debt on the basis of domestic long-term bonds (GB14 and GB16) amounts to 86.275.348,94 €, and the balance of the debt on the basis of treasury bills (harmonized with excerpts from CDA) amounts to 77.535.000,00 €. Legally prescribed liabilities in the amount of 103.482.125,95 € arose on the basis of: Law on the regulation of liabilities and receivables on the basis of foreign debt and foreign currency savings of citizens, Law on the payment of the citizens' foreign currency savings deposited with authorized banks outside Montenegro, Law on the payment of the citizens' foreign currency funds deposited with Dafiment bank AD Belgrade and private economy bank DD Podgorica deposited through the company Jugoskandik DD Belgrade (foreign currency savings), Law on remuneration for users of rights from pension and disability insurance (overdue pensions) and the Law on the redemption of taken away property rights and compensation (restitution). The stated liabilities are related to:

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 liabilities on the basis of frozen foreign currency savings in the amount of 13.742.054,43 €;  liabilities for overdue pensions in the amount of 1.920.193,00 € i  liabilities on the basis of restitution in the amount of 87.819.878,52 €.

Liabilities on the basis of restitutions were established on the basis of a memorandum by the Restitution Fund sent to the Ministry of Finance no. 01/11 of 11.01.2018. Insight into the submitted Statement showed that, in addition to cash payments for restitution on the basis of taken away property rights in the amount of 2.365.754,62 €, there was a reduction of the debt by the purchase of issued bonds FO02 in the amount of 2.247.016,00 €. In that way, the debt was reduced by the amount of 4.612.770,62 € and increased on the basis of adopted final decisions by the amount of 1.605.748,49 €, so that the debt balance on this basis was decreased by 3.199.761,13 €.

Debt of legal entities and companies amounting to 39.127.847,37 € is shown in the table below: Table 58: Debt balance of legal entities Debt balance as of Debtor Bank lender 31.12.2017 JU OŠ " Ivan Vušović" Vidrovan Nikšić Crnogorska komercijalna banka 8.000,00 JU OS"Radojica Perović" Podgorica Societe generale banka Montenegro 7.575,69 Maritime school Kotor NLB Montenegro banka 16.030,66 Maritime school Kotor Crnogorska komercijalna banka 8.810,50 Gimnazija Kotor Crnogorska komercijalna banka 8.411,18 Gimnazija "Slobodan Škerović" Podgorica Societe generale banka Montenegro 15.000,00 Gimnazija "Slobodan Škerović" Podgorica Societe generale banka Montenegro 9.597,20 JU OŠ "Luka Simonović" Nikšić Atlasmont banka 7.640,51 JU SMS "Braća Selić" Kolašin Societe generale banka Montenegro 1.893,06 JU SMS "Braća Selić" Kolašin Societe generale banka Montenegro 3.389,87 JU OŠ "Sutjeska" Podgorica Prva banka Crne Gore 13.103,86 Total elementary and high schools 99.452,53 European Bank for Reconstruction and Railway transport of Montenegro 9.222.022,80 Development (EBRD) Total for Rail transport of Montenegro 9.222.022,80 Railway infrastructure of Montenegro Czech Export Bank 3.247.895,05 European Bank for Reconstruction and Railway infrastructure of Montenegro 18.403.372,53 Development (EBRD) Railway infrastructure of Montenegro European Investment Bank (EIB) 7.000.000,00 Total for Railway Infrastructure of MNE 28.651.267,58 Public company RTCG Societe Generale Montenegro 487.295,34 Public company RTCG Prva Banka AD Podgorica 667.809,12 Total for PC RTCG 1.155.104,46 Total 39.127.847,37

The debt of legal entities and companies is included in the debt of the central governmental level, in accordance with Article 2 of the Law on Budget and Fiscal Responsibility39. 8.2. Debt of the local administration By collecting data on the local administration debt and by inspecting the forms for the determination of the debt portfolio of municipalities submitted by the Ministry of Finance, it was established that the Ministry of Finance divided the local administration debt into three parts as follows: - Domestic debt which consists of the local administration debt toward financial and non- financial institutions in the country for taken out loans, where the data was taken from the forms submitted by local administration units; - Local administration debt which consists of the debt to the Ministry of Finance on the basis of transfer loans, where the Ministry of Finance used the data from its own records to prepare Reports on public debt; - Foreign debt to creditors abroad for which the data submitted in the forms for the determination of debt portfolios were used.

39 Item 12 of this Article defines that the Central Government Level shall be the State authorities and State administration authorities, legal entities and business organisations predominantly providing services of public interest which are controlled and mostly financed by the State.

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The consolidated local administration debt as at 31.12.2017 expressed in the Proposed Law on the Final Statement of Accounts of the State Budget for 2017 amounts to 130.996.363,84 €. The stated local administration debt is included in the Public debt of Montenegro and is related to:

Domestic local administration debt in the amount of 50.250.876,99 €. On the basis of data collected from the Central Credit Registry, open item statements (OIS) and data of the Ministry of Finance, discrepancies were established, in the amount of 1.044.748,48 €, as follows:  Plav Municipality in the amount of 50.074,71 € of excess reported debt on the basis of a loan concluded with Ziraat bank Contract no. 0041006000027 of 23.06.2016. The Municipality did not reduce the loan amount paid by the Ministry of Finance from the Equalization Fund.  Plužine Municipality which reported less liabilities in the amount of 3.854,28 € on the basis of two contracts concluded with the Investment and Development Fund.  Rožaje Municipality which reported less liabilities in the amount of 2.636,44 € on the basis of a Contract concluded with Societe Generale bank on 18.12.2015.  Šavnik Municipality which reported less liabilities in the amount of 1.679,74 € on the basis of a Loan Agreement concluded with Societe Generale bank no. 0042131008966 on 01.12.2015.  Herceg Novi Municipality which reported less liabilities in the amount of 44.094,48 € on the basis of a Contract concluded with CKB no. 950-93-935 of 28.05.2015, on the basis of which there were less reported liabilities in the amount of 17.600,19 € and no. 950-88-2198 of 04.10.2017, on the basis of which there were less reported liabilities in the amount of 26.494,29 €.  Bijelo Polje Municipality reported a debt in an amount higher by 32.102,58 € than the expressed debt balance in the Credit Registry of the Central Bank of Montenegro. The discrepancy of the debt balance is related to the loan facility concluded with the Investment and Development Fund. The Bijelo Polje Municipality did not present a debt in the amount of 910.183,32 € to Prva bank in the form for establishing the portfolio of debts. Liabilities under the loan in the total amount of 2.511.681,18 € are settled through the Cession Agreement no. 05/1-2018 of 23.02.2018 concluded between the Bijelo Polje Municipality, Prva banka AD and the Real Estate Adminsitration of Montenegro. The Real Estate Adminsitration (Cesus) undertook to pay the debt of the Bijelo Polje Municipality (Cedent) to Prva banka AD (Cessionary) up to the amount of 2.511.681,18 €. The debt balance on this basis as at 31.12.2017 amounted to 910.183,32 €. In case the Real Estate Administration does not fulfil its obligations to Prva banka, the Municipality shall assume the payment obligation in accordance with Article 5 of said Cession Agreement.

Local administration debt on the basis of foreign loans, expressed in forms for determining debt portfolios, in the amount of 80.715.486,85 €, relates to the Podgorica Municipality in the amount of 16.194.447,89 € and Budva Municipality in the amount of 64.521.038,96 €40.

Transfer loans which the Government of Montenegro took from foreign creditors and gave as a loan to local administrations. The audit established discrepancies between the reported data on the debt balance on the basis of transfer loans of the local administration and data of the Ministry of Finance. The local administration debt on the basis of transfer loans presented in the forms for determining debt portfolios was expressed in the amount of 40.897.724,38 €, while the records of the Ministry of Finance present an amount of 36.002.848,04 €. The difference in the amount of 4.894.876,34 € is related to the higher reported local administration debt in the amount of 8.970.635,24 € and the less reported debt of the Ministry of Finance in the amount of 4.075.758,90 €.

40 By inspecting the submitted data of Budva Municipality, it was not possible to confirm the debt balance on the basis of foreign loan stated in the Form for determining portfolio such as “WTE wastewater treatment” which was expressed in the amount of 64.521.038,96 €.

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Debt of legal entities and companies - The audit of the debt balance of 21 municipality-owned legal entities and companies which are financed from municipal budgets established that the conditions are met, in accordance with Article 2 of the Law on Budget and Fiscal Responsibility, to include the liabilities on the basis of long-term and short-term loans in the local administration debt, for: - Komunalno preduzeće D.O.O. Danilovgrad in the amount of 214.573,00 € and - Komunalno preduzeće D.O.O. Andrijevica in the amount of 333.888,00 €. The debt is related to the restructuring of tax debt.

Local administration units are recommended to prepare reports on public debt at the end of the current year on the basis of the balance debt harmonized with the Central Bank of Montenegro, commercial banks and the Ministry of Finance.

9. STATE PROPERTY

Law on State Property41 and by-laws governs the use, management and disposal of items and other goods that belong to Montenegro and local governments.

Pension and Disability Insurance Fund - The Commission for making a list of property was established by Decision no. 01-2881 of 13.11.2017. The Report on completed count list was adopted by the Administrative Board by Decision no. 16 of 28.02.2018. The data on movables and immovables were sent to the Real Estate Administration by the memorandum no. 01-925 of 26.03.2018.

The audit of state property established:  That the Pension and Disability Insurance Fund submitted the Report on movables and immovables to the Real Estate Administration on 26.03.2018. The data on movables and immovables should be submitted to the Real Estate Administration by the end of February of the current year for the previous year, in accordance with Article 50 of the Law on State Property.

 Depreciation calculation (Form OA) was made in the electronic form and does not contain the date and signatures of the accounting manager and head of the authority.

The OA form should contain the date and signatures as prescribed by the Rulebook on the arrangement of tangible and intangible assets per groups and methods for determining the depreciation of budgetary and non-budgetary users42.

Ministry of Economy - The Commission for making a list of property was established by Decision no. 602-431/2017-1 of 29.12.2017. The Report on the list of property no. 602-431/2017-2 of 27.02.2018 was adopted by Decision no. 602-431/2017-4 of 27.02.2018. The data on movables and immovables were sent to the Real Estate Administration by the memorandum no. 602-431/2017-5 of 28.02.2018.

Ministry of Human and Minority Rights - The Commission for making a list of property was established by Decision no. 01-023-2273/17-1 of 29.12.2017. The Report on the list of property no. 01-023- 2273/18-3 of 31.01.2018 was adopted by Decision no. 01-023-2273/18-4 of 31.01.2018. The data on movables and immovables were sent to the Real Estate Administration by the memorandum no. 01- 023-2273/18-5 of 31.01.2018. The OA form does not contain the signatures of responsible persons, as prescribed by the Rulebook on the arrangement of tangible and intangible assets per groups and methods for determining the depreciation of budgetary and non-budgetary users.

41 Official Gazette of Montenegro 21/09 and 40/11 42 Official Gazette of Montenegro 032/03

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The audit of the management of state property established slight irregularities, just like in previous years. The Commission for making a list of property is obliged to make a list of the capital assets in accordance with the Law on Property and the Guidelines on a more detailed manner of making a list of state-owned movables and immovables.

10. PUBLIC PROCUREMENTS

The audit of public procurements checked the compliance of the conducted procedures in the process of public procurements in relation to the Public Procurement Law43. The subject of the audit of public procurements was the public procurements plan, conducted public procurement procedures and reports on awarded public procurements in 2017 at: Directorate of Transport, Directorate of Public Works, Pension and Disability Insurance Fund, Ministry of Economy and Ministry of Human and Minority Rights.

Directorate of Transport

The Ministry of Transport and Maritime Affairs authorized the Directorate of Transport to conduct all necessary public procurement procedures, adopt decisions on initiating procedures, decisions on the establishment of commissions for the opening and valuation of bids. The director, as the head of the authority, signs contracts on behalf of the contracting authority. The Ministry of Transport and Maritime Affairs, in accordance with the Law on amendments to the Public Procurement Law44 adopted the Rulebook on small value procurements no. 34/17-01-7087/1 of 03.08.2017 and the Rulebook on emergency procurements no. 406/18-01-1350/1 of 23.02.2018. Public procurement plan - The Public procurement plan for 2017 was published on 10.03.2017 on the Public procurement portal. The first amendment of the Public procurement plan, in accordance with the Opinion of the Ministry of Finance no. 03-12764/1 of 03.08.2017, was published on 03.08.2017, while the second amendment, in accordance with the Opinion of the Ministry of Finance no. 03- 15782/1 of 16.10.2017, which amended the structure of budget funds, was published on 23.10.2017. The Public procurement plan of the Directorate of Transport for 2017 amounted to 314.331.023,34 €, and after the amendments it amounted to 193.088.296,40 €. Out of the stated amount, 737.620,00 € was planned for the procurement of goods, 187.039.595,54 € for the execution of works and 5.311.080,86 € for the procurement of services. Annual report on awarded public procurements of the Directorate of Transport in 2017 was submitted to the Public Procurements Administration in accordance with Article 118 of the Public Procurement Law. The total value of awarded public procurements in 2017 presented in the Report on awarded public procurements amounts to 46.375.452,59 €.

The audit of the selected sample covered the following public procurement procedures for which contracts were signed in 2017:

Open procedure 52/16: Reconstruction of highway Ulcinj-Sukobin, section Ulcinj-Krute: - The estimated value incl. VAT amounted to 7.500.000,00 €. After the procedure was conducted, the Construction contract no. 34/17-01-5796/2 of 09.08.2017 was concluded to the amount of 5.824.687,33 €.

Open procedure 58/16: Reconstruction of highway, section Ribarevina-Mojkovac, locality “Lepenac” construction of III lane - The estimated value incl. VAT amounted to 3.600.000,00 €. After the procedure was conducted, the Construction contract no. 406/17-01-1535/2 of 15.03.2017 was concluded to the amount of 3.327.977,89 €.

43 Official Gazette of Montenegro 42/11, 57/14 and 28/15 and 42/17 44 Official Gazette of Montenegro 42/17

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Open procedure 59/16: Services of permanent professional supervision over the execution of works on the reconstruction of highway, section Ribarevine-Mojkovac, locality “Lepenac” construction of III lane - The estimated value incl. VAT amounted to 50.000,00 €. After the procedure was conducted, the Service contract no. 406/17-01-845/2 of 16.02.2017 was concluded to the amount of 17.850,00 €.

Open procedure 24/17: Reconstruction of the regional road Krstac-Ivanova Korita - The estimated value incl. VAT amounted to 4.500.000,00 €. After the procedure was conducted, the Construction contract no. 01-10133/1 of 16.10.2017 was concluded to the amount of 3.892.192,45 €.

Open procedure 25/17: Reconstruction of highway Podgorica-Cetinje, from Cetinje traffic lights to the Sitnica bridge - The estimated value incl. VAT amounted to 10.000.000,00 €. After the procedure was conducted, the Construction contract no. 01-11049/1 of 14.11.2017 was concluded to the amount of 9.473.074,45 €.

Emergency procurement: Collapse of the road slope on the highway section Cetinje-Budva, in Brajići - The contractor of works on the Project of the highway Cetinje-Budva section Brajići-Lapčići informed the Ministry of Transport and Maritime Affairs-Directorate of Transport, by the memorandum no. 02- 11717/1 of 04.12.2017, that on the section of the Cetinje-Budva road there has been a landslide of a large quantity of material, which covered the entire width of the existing road. By Decision no. 01- 11756/2 of 04.12.2017, the Directorate of Transport formed an expert team with the task of determining the cause of the collapse of the road slope in Brajići, with a proposal of emergency and permanent rehabilitation measures. The expert team compiled a Report on the visit to the location and proposal of measures for the rehabilitation of the landslide “Brajići” no. 01-11756/3 of 04.12.2017. The Directorate of Transport, in accordance with Article 29 of the Public Procurement Law, and on the basis of a proposal submitted by the contractor and the Conclusion of the Government of Montenegro no. 07-4157 of 28.12.2017, conducted an emergency procurement and concluded the Contract no. 01-12887/1 of 29.12.2017 to the amount of 950.256,29 € and with a deadline of 90 calendar days for the performance of works. The payment will be made from the funds of the budget of Montenegro for 2018 from the Programme 761. Pursuant to Article 29 of the Public Procurement Law, a procedure established by the contracting authority by a special act shall apply to emergency procurements, while respecting the principle of public procurements. The same Article defines that the contracting authority is obliged to publish the act on its internet page, which the Directorate of Transport did not do. The subject of this emergency procurement did not have an attached: - Decision on initiation of emergency procurement procedure by the authorized person of the contracting authority (Form 1) - Request for submitting bids (Form 2) - the request was submitted but not in the prescribed form, - Minutes on the receipt, inspection, assessment and valuation of bids (Form 3), - Notification on the outcome of the emergency procurement procedure (Form 4). The stated forms are an integral part of the Rulebook for conducting emergency procurements of the Ministry of Transport and Maritime Affairs with the bodies within its structure no. 406/18-01- 1350/1 of 23.02.2018. Article 153d of the Public Procurement Law defines that the deadline for the submission of bylaws referred to in Article 29 and 30 (emergency procurements and small value procurements) is 30 days since the day of entry into force of the Law. The stated procedure was not published on the Public procurement portal, even though Article 107 of the Public Procurement Law defines that the contracting authority is obliged to submit the concluded public procurement contract to the competent state authority, within three days from the date of conclusion, for the purpose of its publication on the Public Procurement Portal.

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Form C for the submission of data on awarded public procurements by the application of direct agreement - The Report on conducted public procurement procedures for 2017, which was compiled in accordance with the Public Procurement Law, which was in force until 30.06.2017, and its Form C, intended for the submission of data on awarded public procurements by the application of direct agreement, shows procurements which in the total amount exceed the allowed amount of procurements conducted by direct agreement, which is not in accordance with Article 21 of the Public Procurement Law.

The established irregularities in the application of the Public Procurement Law:  The Ministry of Transport and Maritime Affairs published the Public Procurements Plan on the Public Procurements Portal on 10.03.2017, which is not in accordance with Article 38 of the Public Procurement Law, which defines that the contracting authority shall adopt and submit to the competent state authority a public procurement plan, so that it could be published on the Public Procurement Portal, by 31 January of the current fiscal year.  The Directorate of Transport was obliged to conduct a public procurement procedure in accordance with Article 21 of the Public Procurement Law45.  In accordance with Article 153d of the Law amending the Public Procurement Law, the Directorate of Transport was obliged to adopt the Rulebook for Conducting Emergency Procurements within 30 days since the entry into force of the Law.  The Directorate of Transport did not publish the document on emergency procedures on the internet page. The subject documentation does not include the necessary forms which accompany the public procurement procedure, which is not in accordance with Article 29 of the Public Procurement Law.  The conducted emergency procurement procedure was not published on the Public Procurement Portal in accordance with Article 107 of the Public Procurement Law, which prescribes that the contracting authority shall submit the concluded public procurement contract to the competent state authority, within three days from the date of conclusion, for the purpose of its publication on the Public Procurement Portal.

The Directorate of Transport is obliged, for the purpose of a lawful spending of budget funds, to strictly apply Articles 21, 29, 38, 107 and 153d of the Public Procurement Law.

Directorate of Public Works The Ministry of Sustainable Development and Tourism adopted an Internal rule for the activities of the Ministry and the bodies in its structure during the conducting of small value procurement procedures (no. 101-20174/1 of 18.09.2017), as well as an Internal rule for the activities of the Ministry and the bodies in its structure during the conducting of emergency procurement procedures (no. 101-224/5 of 19.02.2018). The Ministry of Sustainable Development and Tourism, in accordance with Article 153d of the Law on amendments to the Public Procurement Law, was obliged to adopt a Rulebook on conducting emergency procurements within 30 days since the entry into force of the Law.

Public procurement plan for 2017 - The Ministry of Sustainable Development and Tourism submitted the Public procurement plan with adopted amendments, for which the Ministry of Finance gave its consent, to the Public Procurements Administration. After the amendments, the Public procurement plan of the Ministry of Sustainable Development and Tourism for 2017 amounted to 158.711.541,19 €.

45 Official Gazette of Montenegro 28/15

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Out of the total amount of funds prescribed by the Public procurement plan for 2017, 42.313.567,39 € or 27.29% were realized, which indicates that the Public procurement plan needs to be prepared on the basis of real needs and priorities of procurement. Annual report on awarded public procurements of the Directorate of Public Works for 2017 was submitted to the Public Procurements Administration in accordance with Article 118 of the Public Procurement Law. The total value of awarded public procurements in 2017 presented in the Report on awarded public procurements amounts to 42.313.567,39 €.

The audit of public procurement procedures, on the basis of the selected sample, established that the tender documentation was amended multiple times in several public procurement procedures, thereby prolonging the public procurement procedure, which resulted in a delay in the selection of the most favourable bidder. The Directorate of Public Works should have avoided procedures which lead to the change of the tender documentation multiple times and to the prolonging of the duration of the procedure. The audit, on the basis of the selected sample, checked the following public procurement procedures: Open procedure 05-120/15: Execution of works on the construction of a kindergarten, equipped, in Stari Aerodrom neighbourhood, Podgorica Municipality - The estimated value incl. VAT amounted to 3.100.000,00€. After the conducted procedure, the Construction contract no. 19/2-01-486/1 of 15.02.2017 was concluded to the amount of 2.745.754,65 €.

Open procedure 05-23/17: Execution of works on the construction of the commercial facility “Kuća voća”, Andrijevica Municipality - The estimated value incl. VAT amounted to 1.350.000,00€. After the conducted procedure, the Construction contract no. 101-1560/1-4811/1 of 05.12.2017 was concluded to the amount of 1.332.656,37 €.

Open procedure 04-76/17: Execution of works on the construction of the road Jasikovac-Cmiljača, II phase, Bijelo Polje Municipality - The estimated value incl. VAT amounted to 3.000.000,00€. After the conducted procedure, the Construction contract no. 101-1560/1-4537/1 of 21.11.2017 was concluded to the amount of 2.166.431,53 €.

Open procedure 04-58/17: Execution of works on the construction of the road Vragodo-Vrioci-Žarski katun, II phase, Mojkovac Municipality - The estimated value incl. VAT amounted to 2.500.000,00€. After the conducted procedure, the Construction contract no. 101-1560/1-5124/1 of 13.12.2017 was concluded to the amount of 1.878.449,21 €.

Open procedure 04-75/16: Execution of works on the construction of II phase of the facility next to the cableway of the SKI resort "Kolašin 1600", Kolašin Municipality - The estimated value incl. VAT amounted to 1.500.000,00€. After the conducted procedure, the Construction contract no. 19/2-01- 2727/1 of 19.06.2017 was concluded to the amount of 1.420.302,43 €.

Open procedure 04-140/17: Execution of works on the construction of a football stadium in Old Royal Capital Cetinje - The estimated value incl. VAT amounted to 8.790.000,00€. After the conducted procedure, the Construction contract no. 101-1560/1 of 10.11.2017 was concluded to the amount of 8.784.604,06 €. Pension and Disability Insurance Fund

Public procurement plan - The Pension and Disability Insurance Fund adopted the Amendment to the public procurement plan for 2017 no. 01-9718 of 25.10.2017. The estimated value of public procurement amounts to 680.500,00 €, as follows: 149.500,00 € for the procurement of goods, 57.000,00 € for the execution of works and 474.000,00 € for the procurement of services.

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Report on conducted public procurement procedures - The total value of awarded public procurements of the Pension and Disability Insurance Fund was expressed in the Report on awarded public procurements in the amount of 640.429,37 €. The audit of the selected sample covered the following public procurement procedures for which contracts were signed in 2017: Open procedure: Procurement of computer equipment and supplies on the basis of tender documents no. 03-1196/6 of 03.05.2017. The subject of the public procurement is CPV 30200000-1 Computer equipment and supplies. The estimated value amounts to 17.000,00 € incl. VAT. The criterion for the selection of the bidder is the lowest offered price. The Minutes of public announcement no. 03-1196/7 of 25.05.2017 state that two offers were received. According to the Minutes on the inspection, assessment and valuation of bids no. 03-1196/8 of 29.05.2017, the received bids were valued with 100 points each. Contracts on the public procurement of goods were concluded, in accordance with the performed selection of the most favourable bidder. Shopping procedure: Procurement of shelves for holding documents on the basis of tender documents no. 01-1409/5 of 26.05.2017. The subject of the public procurement is CPV 39516000-2 Products for internal equipping. The estimated value amounts to 4.500,00 € incl. VAT. The criterion for the selection of the bidder is the lowest offered price. The Minutes of public announcement no. 03-1409/6 of 07.06.2017 state that two offers were received. After the valuation of the received bids, a bidder with 100 points was selected and the Contract on the public procurement of goods no. 01- 1409/9 of 03.07.2017 was signed with that bidder. Open procedure: Translation services on the basis of tender documents no. 03-2317/6 of 02.10.2017. The subject of the public procurement is CPV 79530000-8 Translation services. The estimated value of the public procurement amounted to 15.000,00 € incl. VAT. The criterion for the selection of the bidder is the lowest offered price. The Minutes of public announcement no. 03-2317/7 of 24.10.2017 state that four offers were received. According to the Minutes on the inspection, assessment and valuation of bids no. 03-2317/8 of 03.11.2017, the most favourable bidder was awarded 100 points, and the Contract on the provision of written translation services no. 01-2937 of 23.11.2017 was signed with that bidder.

Ministry of Economy

Public procurement plan – The Ministry of Economy adopted the Amendment to the public procurement plan for 2017 no. 406-3/2017-12 of 29.11.2017. The estimated value of public procurement amounts to 461.883,43 €, as follows: 128.113,43 € for the procurement of goods and 333.770,00 € for the procurement of services. The total value of awarded public procurements expressed in the reports on conducted public procurements amounts to 387.429,45 €. The audit of the selected sample covered the following public procurement procedures for which contracts were signed in 2017: Open procedure: Procurement of vehicle maintenance services and accompanying equipment on the basis of the tender documentation no. 406-6/2017-6 of 20.03.2017. The subject of the public procurement is: CPV 50112000-3 vehicle maintenance and repair services, CPV 50110000-9 maintenance and repair services for motor vehicles and accompanying equipment CPV 50112110-7 vehicle body repair services and CPV 50112111-4 bodywork services. The criterion for the selection of the most favourable bidder is the lowest offered price. The Minutes on the public announcement no. 406-6/2017-13 of 19.04.2017 stated that two offers were received. According to the Minutes on the inspection, assessment and valuation of bids no. 406-6/2017-14 of 03.05.2017 one bid was assessed as invalid because the bid's guarantee issued by a commercial bank stated the wrong tender documentation number. After an appeal was lodged, the State commission for the control of public procurement procedures, by decision no. UP.0902-396/3-2017 of 10.10.2017, upheld the appeal of the bidder. The Contract for the provision of services, maintenance of vehicles and accompanying equipment no. 406-6/2017-21 of 21.11.2017 was concluded with the most favourable bidder.

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Shopping procedure: Procurement of postal services on the basis of the tender documentation no. 406-13/2017-5 of 18.05.2017. The subject of the public procurement is: CPV 64121000-0 courier services with various transport, CPV 64110000-0 postal services, CPV 64100000-7 postal and courier services, CPV 64112000-4 postal services connected to letters and CPV 64113000-1 postal services connected to packages. The estimated value of the public procurement is 2.500,00 € incl. VAT. The criterion for the selection of the most favourable bidder is the lowest offered price. According to the Minutes on the inspection, assessment and valuation of bids no. 406-13/2017-8 of 01.06.2017, the bid was valued as valid and 100 points were assigned. The Contract for the procurement of services of express transport of shipments no. 406-13/2017-10 of 19.06.2017 was concluded with the most favourable bidder. Open procedure: Procurement of new vehicle by the “old for new” method on the basis of the tender documentation no. 406-37/2017-6 of 04.12.2017. The subject of the public procurement is CPV 34100000-8 motor vehicles. The value of the old vehicles which are exchanged amounted to 9.004,65 €. The contracting authority makes an additional payment in the amount of up to 50.000,00 €. The specification of old vehicles which are exchanged for new vehicle that is procured is given in the technical characteristics or specification of the public procurement subject. The estimated value of the public procurement is 50.000,00 € incl. VAT. The criterion for the selection of the most favourable bidder is the lowest offered price. The Minutes on the public announcement no. 406- 37/2017-8 of 26.12.2017 stated that one bid was received, with the offered price of 47.503,69 € incl. VAT. According to the Minutes on the inspection, assessment and valuation of bids no. 406-37/2017- 9 of 26.12.2017, the bid of the most favourable bidder was awarded 100 points. The Contract on the procurement of a vehicle no. 406-37/817-11 of 27.12.2017 was concluded with the most favourable bidder. The audit established that the technical specifications given in the tender contain characteristics of vehicles which could lead to a limitation of competition and favouring of a specific bidder. Ministry of Human and Minority Rights Public procurement plan – The Ministry of Human and Minority Rights adopted the Amendment to the public procurement plan for 2017 no. 07-406-643/17-3 of 06.07.2017. The estimated value of public procurement amounts to 178.505,43 €, as follows: 48.745,43 € for the procurement of goods and 129.760,00 € for the procurement of services. The total value of awarded public procurements expressed in the reports on conducted public procurements amounts to 139.475,55 €. The audit of the selected sample covered the following public procurement procedures for which contracts were signed in 2017: Open procedure: Services of a media campaign on the prohibition of discrimination on the basis of the tender documentation no. 07-406-1147/17-3 of 24.09.2017. The subject of the public procurement is: CPV 92200000-3 (2) radio and television services and CPV 79340000-9 advertising and marketing services. The estimated value of public procurement amounts to 20.000,00 € incl. VAT. The criterion for the selection of the most favourable bidder is the lowest offered price. The Minutes on the public announcement no. 07-406-1147/17-9 of 24.10.2017 stated that two bids were received. One bid was assessed as invalid. The Contract on public procurement no. 07-406-1147/17-17 of 07.12.2017 was concluded with the most favourable bidder. Open procedure: Procurement of automobile on the basis of the tender documentation no. 07-406- 1033/17-3 of 01.08.2017. The subject of the public procurement is CPV 34110000-1 passenger automobiles. The estimated value of public procurement amounts to 24.000,00 € incl. VAT. The criterion for the selection of the most favourable bidder is the lowest offered price. The Minutes on the public announcement of bids no. 07-406-1033/17-8 of 11.09.2017 stated that one bid was received. The Contract on public procurement no. 07-406-1033/17-11 of 12.10.2017 was concluded with the bidder. The audit established that the technical specifications given in the tender contain characteristics of vehicles which could lead to a limitation of competition and favouring of a specific bidder.

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The audit of the public procurement system and the compliance of conducted public procurement procedures with the Public Procurement Law established that the Ministry of Economy and the Ministry of Human and Minority Rights, in their tender documents for the procurement of vehicles, stated technical specifications which contain vehicle characteristics which could lead to the limitation of competition and favouring a specific bidder.

The contracting authority is obliged, in accordance with Article 6 of the Public Procurement Law, to undertake necessary measures which ensure competition among the bidders.

11. INTERNAL FINANCIAL CONTROLS SYSTEM

The system of internal financial control represents the policies and procedures adopted by the management of budget funds users to achieve the determined objectives, ensure efficiency and performance success and reliability of financial reporting. The system of internal financial controls consists of financial management and control and internal audit.

System of internal financial control - The audit of the system of internal financial control, on the basis of the selected sample, established that the observed spending units established a system of internal financial control in accordance with the Law on the system of internal financial control. The audited spending units adopted internal acts and procedures for the purpose of establishing internal financial controls (FMC framework). The National Library of Montenegro does not have a developed system of internal financial control, which is not in accordance with Article 13 of the Law on the system of internal financial control in the public sector. The audited spending units delivered an Annual report on the implementation of the planned activities regarding the establishment and development of the system of financial management and controls (GI-FMC Form).

The National Library is recommended to adopt internal procedures for the establishment of the control of financial management, in accordance with Article 13 of the Law on the system of internal financial control in the public sector.

Internal audit - By an internal act on the organization and systematization of jobs, spending units have established, in an organizational manner, internal audit or concluded an agreement on the assignment of internal audit tasks with the competent ministries. The control of the internal audit of the Pension and Disability Insurance Fund established that the Department for internal audit is a part of the Sector for the provision of legal assistance in the procedure of establishing rights of pension and disability insurance and internal audit, as per the systematization. According to the systematization, the above sector has the job position of assistant director whose job description includes the preparation of annual and strategic plans, compiling of audit reports, monitoring the implementation of the annual internal audit plan, proposal of the plan for the professional training of internal auditors, management of internal audit activities.

Internal audit should be organized as a special organizational unit for internal audit within the subject and which is directly responsible to the head of the subject and must be separated from other organizational units in an organizational and functional sense. Because of this, it is necessary to establish internal audit in the manner prescribed by Articles 18 and 20 of the Law on the system of internal financial control in the public sector46. Also, the job description of the assistant director cannot cover tasks which are performed by internal auditors and the head of the internal audit unit thus violates the principle of independence.

46 Official Gazette of Montenegro 34/14

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REALIZATION OF RECOMMENDATIONS FROM THE PREVIOUS REPORT

In terms of considering the Proposed Law on the Final Statement of Accounts of the State Budget of Montenegro for 2016 and the Annual report on performed audits and activities of the State Audit Institution of Montenegro for the period from October 2016 to October 2017, on 23 November 2017, the Parliament of Montenegro adopted the Conclusion no. 33/17-5/7 - EPA 260XXVI and published it in the Official Gazette of Montenegro47 under the title "Conclusion on observing and fulfilling the recommendations of the State Audit Institution given in the Audit Report of the Proposed Law on the Final Statement of Accounts of the State Budget of Montenegro for 2016." The Conclusion of the Parliament of Montenegro no. 33/17-5/7 states the following: "The Parliament of Montenegro calls upon the Government of Montenegro to observe and fulfil all recommendations of the State Audit Institution given in the Audit Report of the Proposed Law on the Final Statement of Accounts of the State Budget of Montenegro for 2016. In addition, the Government is obliged to monitor the implementation of all recommendations of the State Audit Institution which are related to individual audits performed in the period October 2016 - October 2017 and recommendations which are repeated from previous periods, as well as to inform the Parliament of Montenegro about this on a quarterly basis.” The State Audit Institution, on the basis of the findings established by the audit of the Proposed Law on the Final Statement of Accounts of the State Budget of Montenegro for 2017 and the Information on the realization of the Action plan for the implementation of recommendations of the State Audit Institution at the end of the first quarter of 2018, which was adopted at the session of the Government of Montenegro (memorandum no. 06-3817/1 of 18.07.2018), established the following: 1. Financial statements and accounting accuracy - The Ministry of Finance shall be obliged to adjust the data in the Statement of Arrears in the amount of 400.408,00 €. It is necessary that spending units plan through the annual law on budget the funds for the settlement of legally established liabilities and obligations arising from concluded multiannual contracts and that, when contracting liabilities, respect the limits prescribed by the annual law on the state budget.

Recommendation partly realized. The Ministry of Finance adjusted the data expressed in the Statement of Arrears as of 31.12.2017 at the Real Estate Administration in the amount 400.408,00 €, but it is necessary to adjust the balance of outstanding liabilities as of 31.12.2017 for the amount of 669.905,40 € at the Ministry of Defence.

2. Budget overruns - The Agency for the Development of Small and Medium Enterprises is obliged to plan the funds from the repayment of loans which are intended for the purchase of securities of the Investment and Development Fund by the annual state budget law. Recommendation not realized.

3. Final tax statement - In accordance with the findings of the audit, the Ministry of Finance and Tax Administration are recommended to establish records which will ensure accurate information about the amount of the tax debt and, through the amendment to the tax regulation, enable the application of Article 8 of the Rulebook on Tax Bookkeeping which prescribes the principle of accuracy. Recommendation partly realized.

4. Report on deferred tax and non-tax receivables - It is necessary that the Ministry of Finance and Tax Administration submit the report on undertaken activities in accordance with the Law on Restructuring Tax Receivables. Recommendation not realized.

47 Official Gazette of Montenegro 81/17

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BUDGET RECEIPTS

5. Current revenues - Revenue units which perform the collection of revenues through accounts prescribed by the Order on the manner of payment of public revenues and the Ministry of Finance which performs the scheduling of revenues collected through the General Account of the State Treasury are recommended to record inflows in accordance with Article 10 of the Rulebook on Unique Classification of Accounts for the State Budget of Montenegro, Budgets of Non-Budget Funds and Municipal Budgets. The Information on the realization of the Action plan for the implementation of recommendations of the State Audit Institution no. 06-3817 of 19.07.2018 states that the Action plan prescribes the continuous realization of this recommendation.

6. Receipts from the sale of assets - The revenues collected through accounts prescribed by the Order on the manner of payment of public revenues were not, in all cases, recorded in the General Ledger of the State Treasury in accordance with eco-codes and Article 10 of the Rulebook on Unique Classification of Accounts for the State Budget of Montenegro, Budgets of Non-Budget Funds and Municipal Budgets. Recommendation realized. In the Information on the realization of the Action plan for the implementation of recommendations of the State Audit Institution, the Ministry of Finance, Directorate of State Treasury stated the following: The Ministry of Finance, in cooperation with revenue units which perform the collection of revenues through payment accounts, audited the payment accounts prescribed by the Order on the manner of payment of public revenues and the codes of economic classification which were connected to the payment accounts and as of 1 January 2018 performed the modification of those codes which were not appropriate. The new Order on the manner of payment of public revenues is published in the Official Gazette of Montenegro 30/18.

7. Receipts from borrowings and loans - The Ministry of Finance is recommended to establish special records in the State Treasury General Ledger for the amount of transfer loans to municipalities, which would ensure adequate reporting and consolidation of the public debt at the state level. Recommendation not realized. The Information on the realization of the Action plan for the implementation of recommendations of the State Audit Institution no. 06-3817 of 19.07.2018 states that the deadline for the realization of the stated recommendation is the second quarter of 2018. The audit of the Proposed Law on the Final Statement of Accounts of the State Budget of Montenegro for 2017 established that the Ministry of Finance did not establish special records in the State Treasury General Ledger for the amount of transfer loans to municipalities.

BUDGET EXPENDITURES

8. Current expenditures - Spending units are recommended to eliminate, in the following period, the established irregularities and to perform their activities and payments of expenses in accordance with the Rulebook on the form, contents, manner of filling in and submission of the unique form of the report on calculated and paid income tax for natural persons and contributions for mandatory social insurance, Decree on the compensation for costs of state officials and employees, Rulebook on unique classification of accounts for the state budget of Montenegro, budgets of non-budget funds and municipal budgets, Instructions on the work of the State Treasury and the Public Procurement Law. Recommendation not realized.

9. Rights from the field of social security - The Ministry of Labour and Social Welfare is recommended to perform the payment of expenses in accordance with the Rulebook on unique classification of accounts for the state budget of Montenegro, budgets of non-budget funds and

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municipal budgets and not charge social welfare with expenses which are not from the field of social security.

The realization of this recommendation will be controlled through the individual audit of the Ministry of Labour and Social Welfare which is in progress.

10. Transfers to institutions, individuals, NGO and public sector - The Sport Administration is recommended to allocate funds on the basis of a public competition in accordance with Article 3 of the Rulebook on more detailed conditions, manner, procedure and criteria for the allocation of funds to sport entities and control of realization.

The Ministry of Agriculture and Rural Development and the Ministry of Science are recommended to perform payments in accordance with the Rulebook on unique classification of accounts for the state budget of Montenegro, budgets of non-budget funds and municipal budgets, and the Ministry of Agriculture and Rural Development is recommended to perform the payments of fees in accordance with the Law on earning in the public sector and the Law on income tax of natural persons. Recommendation partly realized.

11. Repayment of liabilities from the previous period - Spending units are recommended not to record expenditures which become due in the current fiscal year to the debit of the group of accounts 463 - Repayment of liabilities from the previous period, and instead to record the expenditures on the basis of outstanding liabilities from the previous period in accordance with the Law on Budget and Fiscal Responsibility and the Rulebook on unique classification of accounts for the state budget of Montenegro, budgets of non-budget funds and municipal budgets. Recommendation not realized.

REPORT ON BUDGET RESERVE EXPENDITURES

12. Budget reserve audit - Spending units are recommended to use the current budget reserve funds up to level of 5% of funds planned by the annual law on budget for such spending units, as prescribed by Article 3 paragraph 1 of the Rulebook on more detailed criteria for the use of funds of current and permanent budget reserves. Recommendation partly realized.

REPORT ON CAPITAL PROJECTS - CAPITAL BUDGET

13. Capital budget audit - Spending units which are executing the Capital budget are recommended to observe Article 9 of the Law on Budget and Fiscal Responsibility, to realistically plan capital budget funds per project while nominating projects, to perform detailed elaboration while preparing project documents in order to define a realistic deadline for the execution and completion of works and to give priority to projects initiated in previous years when planning the budget. Recommendation partly realized.

PROPERTY

14. Audit of the management of state property - All spending units are recommended to observe the Law on Property and bylaws. Recommendation partly realized.

PUBLIC PROCUREMENTS

15. Audit of the public procurement system - The State Audit Institution recommends that spending units ensure the full application of the Public Procurement Law which regulates the procedure of the procurement of goods, services and execution of works, for the purpose of a lawful spending of budget funds. Recommendation partly realized.

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INTERNAL FINANCIAL CONTROL SYSTEM

16. Audit of the internal financial control system - The State Audit Institution believes that activities need to continue in relation to the establishment of the function of financial control and internal audit in spending units in accordance with the Law on internal financial control in the public sector and standards of internal audit. Recommendation realized.

OVERVIEW OF IRREGULARITIES ESTABLISHED BY THE AUDIT

The audit of the Final Statement of Accounts of the Budget of Montenegro shows in the part of financial audit that, during the last five years, there were materially insignificant irregularities which resulted in an unqualified opinion with an emphasis of matter. The overview of the deviations and mistakes established during the audit in the previous five-year period is given in the table below: Table 59: Overview of established irregularities CORRECTIONS Description 2013 2014 2015 2016 2017 1. Cash inflows - 3.508.595,70 1.003.391,43 - 409.661,22 - 22.612,52 1.1 Income Taxes 1.2 Contributions to social protection 1.3 Taxes 1.4 Fees 1.087.959,40 1.5 Other income 3.508.595,70 939.436,43 - 1.640.309,79 204.241,40 1.6 Receipts from loan repayment 142.689,17 - 226.853,92 1.7 Donations and transfers 63.955,00 2. Cash payments 996.466,51 3.457.863,67 1.977.471,01 - 0,00 2.1 Gross salaries and contributions at the expense of 379.753,62 the employer - 544.304,39 51.528,57 2.2 Other personal earnings 223.883,82 263.297,00 65.883,83 6.957,00 2.3 Expenses for material 317.456,60 - 500.494,70 110.733,80 213.356,43 2.4 Expenses for services 996.466,51 1.500.756,03 890.004,40 871.115,57 150.321,93 2.5 Current maintenance costs 195.338,90 116.051,51 30.209,55 58.552,76 2.6 Interest 138.869,03 58.171,05 - 726.719,38 2.7 Rent 10.686,36 - 33.144,09 2.8 Subsidies 109.424,54 - 12.000,00 2.9 Other expenditures 364.241,79 523.408,25 495.605,00 417.369,54 2.10 Transfers for social protection - 2.781.278,05 2.11 Transfers to institutions, individuals, NGOs and the public sector 221.040,53 18.885.525,09 17.837.067,98 2.12 Capital expenditures 2.574.625,98 448.856,60 166.868,12 41.038,78 2.13 Loans and borrowings - - 104.028,08 2.14 Repayment of guarantees - 2.15 Repayment of obligations from the previous period- 2.357.173,00 2.280,46 - 23.120.775,94 - 19.165.508,69 2.16 Reserves - 389.315,70 3 Cash deficit (1-2) - 996.466,51 50.732,03 - 974.079,58 - 409.661,22 - 22.612,52 4 Sources of financing cash deficit 996.466,51 50.732,03 974.079,58 409.661,22 - 22.612,52 5 Net lending 996.466,51 137.544,00 - 6 Sale of property 269.043,71 1.015.409,38 409.661,22 22.612,52 7 Net change in cash - 457.319,74 - 41.329,80 8 Net increase/decrease in liabilities (9.2 - 9.1) - - 1.021.777,33 - 400.408,81 - 669.905,40 8.1 Liabilities balance as at 31.12.2017. (current) - 669.905,40 8.2 Liabilities balance as of 31.12. 2016 (previous) 9 Corrected expenditures (2. + 8) 996.466,51 3.457.863,67 955.693,68 - 400.408,81 - 669.905,40 10 Cash inflows (1.) 3.508.595,70 1.003.391,43 409.661,22 - 22.612,52 11 Modified cash deficit (11- - 10) 996.466,51 50.732,03 47.697,75 9.252,41 647.292,88 12 Sources of financing deficits 996.466,51 50.732,03 47.697,75 9.252,41 13.1 Net lending 996.466,51 137.544,00 13.3 Sale of property 269.043,71 1.015.409,38 409.661,22 22.612,52 13.4 Donations 13.5 Payables - 1.021.777,33 - 400.408,81 669.905,40 13 Net change in cash - 457.319,74 - 41.329,80 Irregularities established by the audit in 2013

The audit established that the expenses of banking services in the amount of 996.466,51 € were not recorded in the General Ledger of the State Treasury, because they were directly reduced at the expense of withdrawn funds by commercial banks. For this amount of funds, there was an adjustment of expenses for banking services and negative exchange rate differences, deficits and inflows from net borrowings.

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Irregularities established by the audit in 2014 The audit established that the receipts and expenses of public institutions which are direct budget users were not planned and recorded, in accordance with Article 7 paragraph 1 of the Law on the Budget of Montenegro for 2014. These include public cultural institutions, Police Academy, PE Regional centre for the training of divers, National tourism organisation, PE Examination Centre and Montenegrin Academy of Sciences and Arts. The stated spending units realized revenues in the net amount of 3.508.595,70 €, expenditures in the net amount of 3.457.863,67 € and surplus in the amount of 50.732,03 €. The level of the expressed cash deficit needs to reduced on these grounds to the amount of 102.972.795,56 €, and the adjusted cash deficit needs to be reduced to 107.138.248,73 €.

The audit adjusted financing sources, by increasing the amount of net borrowings by 137.544,00 € and receipts from the sale of assets by 269.043,71 €, so that this, together with the surplus of 50.732,03 €, affected the increase of deposits to the amount of 457.319,74 € and the cash balance at the end of the fiscal period, which amounts to 5.813.535,43 € after adjustment.

The audit of the financial statements delivered to the Ministry of Finance by the spending units established that 95 spending units, which are financed from the budget, did not deliver annual financial statements in the set deadline, 11 spending units whose expenditures are related to transfers and 4 spending units whose expenditures are related to “other expenditures” did not submit financial statements to the Ministry of Finance.

Irregularities established by the audit in 2015

Proposed Law on the Final Statement of Accounts of the State Budget of Montenegro for 2015 stated a deficit on cash basis in the amount of €291,247,264.32 and the increase in deposits in the amount of €7,643,234.49, which amounts in total to €298,890,498.81. Financing of deficit and cash deposits was secured by net borrowings in the amount of €291,047,354.46 and the sale of assets in the amount of €7,843,144.35. After the performed audit, it was determined that the cash deficit of the budget should be increased by €974,079.58, deposits by €41,329.80 and the inflows from sale of state assets by €1,015,409.38, so that the cash deficit amounts to €292,221,343.90, net change of cash flows €7,684,564.29, cash inflows from the sale of assets €8,858,553.73 and cash balance as of 31 December 2015 €19,885,043.61.

Proposed Law on the Final Statement of Accounts of the State Budget of Montenegro for 2015 adjusted cash deficit was reported in the amount of €276,113,318.20. After the performed audit, the outstanding liabilities with the Employment Agency were reduced by the amount of €1,021,777.33, so that the net change in arrears amounted to €16,155,723.45.

Irregularities established by the audit in 2016 The Proposed Law on the Final Statement of Accounts of the State Budget of Montenegro for 2016 stated a deficit on cash basis in the amount of 134.976.030,04 €. Financing of deficit was secured by net borrowings in the amount of 116.444.389,75 €, the sale of assets in the amount of 4.219.567,51 € and from cash deposits in the amount of 14.312.072,78 €. After the performed audit, it was determined that the cash deficit of the budget and inflows from sale of state assets should be increased by 409.661,22 €, so that the cash deficit amounts to 135.385.691,26 €, inflows from the sale of assets 4.629.228,73 € and cash balance as of 31 December 2016 5.531.640,95 €. According to the Proposed Law on the Final Statement of Accounts of the State Budget of Montenegro for 2016, the adjusted cash deficit was expressed in the amount of 122.289.773,81 €, by adjusting the cash deficit by the net changes of outstanding liabilities in the amount of 12.686.256,23 €. The audit established that outstanding liabilities need to be reduced by 400.408,81 €, so that the balance of outstanding liabilities as of 31 December 2016 amounts to 63.011.860,51 €, net changes of outstanding liabilities 13.086.665,04 €, while adjusted cash deficit of the budget amounts to 122.299.026,22 €.

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The audit of the Statement on Arrears established that the outstanding liabilities were incorrectly expressed in the Consolidated Statement on Arrears in the amount of 400.408,00 €, that the liabilities arising from legal regulations and concluded contracts which arose in 2016 were not planned by the Law on Budget for 2016. On 31 December 2016, the stated liabilities were expressed as outstanding in the amount of 2.184.293,32 € along with outstanding liabilities which are related to the contracting of liabilities above the level of funds defined by the Law on the Budget of Montenegro for 2016 in the amount of 1.874.079,54 €.

Irregularities established by the audit in 2017 The data from the Proposed Law on the Final Statement of Accounts of the State Budget of Montenegro for 2017 stated a deficit on cash basis in the amount of 236.862.400,90 € and an increase in cash in the amount of 23.567.997,86 €, which were financed by net borrowings in the amount of 254.239.283,53 € and by the sale of assets in the amount of 6.191.115,23 €.

The audit established that the cash deficit of the budget along with inflows from the sale of assets should be increased by 22.612,52 €. After adjustment, the cash deficit was reported in the amount of 236.885.013,42 € and inflows from the sale of assets were reported in the amount of 6.213.727,75 €. The adjusted cash deficit reported in the Proposed Law on the Final Statement of Accounts of the State Budget of Montenegro for 2017 amounted to 250.855.628,18 €. After the performed audit, outstanding liabilities were reduced by 669.905,40 €, so that the net changes in arrears amounted to 13.323.321,88 €, and the adjusted deficit amounted to 250.208.335,30 €. Regarding the regularity audit (compliance of business activities with the law and bylaws), a qualified opinion prevails because of the violation of legal provisions which prescribe the functioning of the fiscal system and which are imperative. Special attention needs to be paid the irregularities established during the audit which have been repeated in a longer period, and are related to:  Records in the General Ledger of the State Treasury, which, according to Article 2 of the Law on Budget and Fiscal Responsibility, represents the basic book of double-entry bookkeeping, but which does not ensure total record-keeping on accounts of prescribed classes in accordance with the Rulebook on Unique Classification of Accounts for the State Budget of Montenegro and Municipal Budgets.  Records of outstanding liabilities which still has not been centralized in a manner which ensures data on the balance of outstanding liabilities at the end of the accounting period.  Records of public revenues in accordance with the Decree on the manner of payment of public revenues.  Records of expenditures for the repayment of liabilities from the previous period, which is related, in a significant part, to expenditures which become due in the current fiscal year.  Capital budget - A number of projects was not realized because of insufficiently studied preconditions in the part regarding the consideration of urban and technical conditions and planning documents.  Public procurements and consistent application of the Public Procurement Law.

PRESIDENT OF THE SENATE Milan Dabović, PhD, Head of the Auditing Board

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