Financed by the European Union PEFA-based Assessment of Greenland EUROPEAID/127054/C/SV/multi Framework contract Beneficiaries – Lot n°11 – Macro Economy, Statistics and Public Finance Management Final Report Client: Development and Co-operation Directorate-General – EuropeAid (DEVCO) Contract 2013/334462 ECORYS MACRO Consortium Implemented by: Peter Jensen 5 August 2014 ECORYS Nederland BV P.O. Box 4175 3006 AD Rotterdam Watermanweg 44 3067 GG Rotterdam The Netherlands T +31 10 453 88 00 F +31 10 453 07 68 E [email protected] W www.ecorys.nl Registration no. 24316726 Dept. of Marketing & Communication T +31 (0)10 453 88 31 F +31 (0)10 453 07 68 Initials Date Author(s) PJ 05/08/2014 Counter-reading FP 23/07/2014 EV 05/08/2014 Lay-out / editing EV 05/08/2014 Table of contents Abbreviations 7 1 Executive Summary 9 2 Introduction 19 2.1 Background 19 2.2 Objectives and Outputs 19 2.3 Methodology 20 3 Relationship with Denmark and the European Union 23 3.1 Relationship with Denmark 23 3.2 Relationship with the European Union 24 4 Macro-Economic Situation and Outlook 27 4.1 Macro-Economic Situation 27 4.2 Fiscal Policy 29 4.3 Municipalities 31 4.4 Public Enterprises 33 4.5 Oil and Mineral Resources 34 4.6 Medium-Term Macro-Economic Outlook 36 5 PFM Review 39 5.1 Background 40 5.2 PFM Out-turns – A. Credibility of the Budget 42 PI-01 Aggregate expenditure out-turn compared to original approved budget 42 PI-02 Composition of expenditure out-turn compared to original approved budget 45 PI-03 Aggregate revenue out-turn compared to original approved budget 48 PI-04 Stock and monitoring of expenditure payment arrears 50 5.3 Key Cross-Cutting Issues – B. Comprehensiveness and transparency 51 PI-05 Classification of the budget 51 PI-06 Comprehensiveness of information included in budget documentation 54 PI-07 Extent of unreported government operations 55 PI-08 Transparency of Inter-Governmental Fiscal Relations 56 PI-09 Oversight of aggregate fiscal risk from other public sector entities 60 PI-10 Public access to key fiscal information 64 5.4 Budget Cycle – C.1 Policy-based budgeting 66 PI-11 Orderliness and participation in the annual budget process 66 PI-12 Multi-year perspective in fiscal planning, expenditure policy and budgeting 68 5.5 Budget Cycle – C.2 Predictability and control in budget execution 71 PI-13 Transparency of taxpayer obligations and liabilities 71 PI-14 Effectiveness of measures for taxpayer registration and tax assessment 74 PI-15 Effectiveness in collection of tax payments 77 PI-16 Predictability in the availability of funds for commitment of expenditures 81 PI-17 Recording and management of cash balances, debt and guarantees 83 PI-18 Effectiveness of payroll controls 85 PI-19 Competition, value-for-money and controls in procurement 88 PI-20 Effectiveness of internal controls for non-salary expenditure 98 PEFA-based Assessment of Greenland 5 PI-21 Effectiveness of internal audit 100 5.6 Budget Cycle – C.3 Accounting, recording and reporting 103 PI-22 Timeliness and regularity of accounts reconciliation 103 PI-23 Availability of information on resources received by service delivery units 104 PI-24 Quality and timeliness of in-year budget reports 105 PI-25 Quality and timeliness of annual financial statements 107 5.7 Budget Cycle – C.4 External scrutiny and audit 109 PI-26 Scope, nature and follow-up of external audit 109 PI-27 Legislative scrutiny of the annual budget law 111 PI-28 Legislative scrutiny of external audit reports 114 5.8 Summary Overview 116 6 Assessment of Budget Support Eligibility Criteria 119 6.1 Stable Macro-Economic Framework 119 6.2 Public Financial Management (PFM) 120 6.3 Transparency and Oversight of the Budget 122 6.4 Risk Management 123 7 Conclusions and Recommendations 125 7.1 Conclusions 125 7.1.1 Main Findings on the Macro-Economic Situation and Medium-Term Outlook 125 7.1.2 Review of the 3 Focus Areas that were monitored annually during 2009-2013 126 7.1.3 Identified weaknesses in the PFM system according to the PEFA Assessment 127 7.1.4 On-Going PFM Developments and Reform Initiatives 128 7.2 Key Indicators to Measure Budgetary Effectiveness and Efficiency 130 7.3 Proposal for Elements to be included in a Medium-Term PFM Reform Plan 131 Annexes 135 Annex A – ToR 136 Annex B – Work Plan 137 Annex C – Aide Memoire 138 Annex D – Documents Reviewed 139 Annex E – Persons Consulted 145 Annex F – Transparency and Oversight of the Budget 147 Annex G – Data applied for the Calculation of PI-01 and PI-02 155 Annex H – GoG Housing 157 Annex I – Comments on the Draft Report 159 6 PEFA-based Assessment of Greenland Abbreviations AGA Autonomous Government Agency COFOG Classification of Functions of Government CPR Centrale PersonRegister [Civil Registration System] CSR Corporate Social Responsibility EC European Commission EEC European Economic Community EMU Economic and Monetary Union ERP Enterprise Resource Planning EU European Union GDP Gross Domestic Product GEC Greenland Economic Council GEP Greenland Education Programme GER Grønlandske ErhvervsRegister [Greenlandic Business Register] GFS Government Finance Statistics GoG Government of Greenland HR Human Resources ICT Information and Communication Technology IIA Institute of Internal Auditors INTOSAI International Organisation of Supreme Audit Institutions ISPPIA International Standards for the Professional Practice in Internal Audit ISSAI International Standards of Supreme Audit Institutions KANUKOKA Kalaallit Nunaanni Kommunit Kattuffiannit [Association of Municipalities] MDA Ministry, Department, Agency MoFDA Ministry of Finance & Domestic Affairs MTEF Medium-Term Expenditure Framework NA Not Applicable NR Not Rated OCTs Overseas Countries and Territories PDSD Programming Document for the Sustainable Development PE Public Enterprise PEFA Public Expenditure and Financial Accountability PI Performance Indicator PFM Public Financial Management SAI Supreme Audit Institution TA Technical Assistance TSA Treasury Single Account XAL eXtended Application Language Fiscal Year: 1 January to 31 December. Exchange Rate: EUR 1 = DKK 7.45. PEFA-based Assessment of Greenland 7 1 Executive Summary Background The European Commission (EC) has proposed to its Budgetary Authority to provide budget support to the Government of Greenland (GoG) for the period 2014-2020. This requires that an assessment is carried out of eligibility criteria, including 1) Macro-economic framework; 2) Public Financial Management (PFM); and, 3) Transparency and oversight of the budget. An assessment has carried out on to provide the EC with an opinion on the three eligibility criteria so as to enable the EC Services to make a decision as to whether and on which conditions Greenland meets the criteria. This report provides a review of Greenland’s macro-economic situation and outlook (Chapter 4), a full PEFA-based PFM performance assessment of the GoG (Chapter 5), and a review of the transparency and oversight of the budget (Annex F). The conclusions of the analytical work are for the budget support eligibility criteria provided in Chapter 6. The conclusions regarding the GoG’s performance regarding PFM reform under the previous programme (2009-2013) are presented in Chapter 7, which also includes a summary of the identified weaknesses in the existing PFM system together with an overview of the GoG’s current reform initiatives. This provides the basis for a proposed new PFM reform plan to be discussed and agreed between the EC and the GoG. The activities carried out as part of the assessment include a desk-based review of documentation (Annex D provides the applicable list of documents), a three-week field mission to Nuuk during February 2014 (Annex E lists the persons consulted) as well as briefing and debriefing meetings with EuropeAid (DEVCO) in Brussels before and after the field mission. Relationship with Denmark and with the European Union Greenland has been an integral part of the Kingdom of Denmark since 1953. Self-Rule was established in June 2009 based on which Greenland can gradually assume responsibility for 34 specific areas, while the Danish Government retains control of tasks related to the commonwealth. The GoG in January 2010 took over the responsibility for mineral resource activities. An annual block grant Denmark is fixed at DKK 3.4 billion (EUR 456 million) and is now adjusted annually in line with the price-wage index used for the Danish budget for that year. Greenland became a member of the European Economic Community (EEC) in 1973 together with Denmark, but left in 1985 following a referendum and has since then been associated as one of the Overseas Countries and Territories (OCTs). The Treaty on Greenland conferred some rights and financial compensation to Greenland based on a Fisheries Agreement. In 2006 a Partnership was established to broaden and strengthen relations between the EC and Greenland as well as to support Greenland’s sustainable development. The EC provided financial assistance for 2007-2013 through sector budget support based on the Greenland Education Programme (GEP). A new Partnership for the period 2014-2020 was adopted by the EU on 14 March 2014. Macro-Economic Assessment Greenland has during the past decades seen relatively rapid economic development, and is now a modern society based on the Danish welfare model and with a high standard of living. GDP per capita is above the EU average, but below that of Denmark. Greenland has a population of 56,282. The macro-economic assessment has noted the following current status and future outlook: PEFA-based Assessment of Greenland 9 GDP growth – Business activities and economic growth increased during 2010 and, especially 2011, due to investments in exploration activities, some large-scale capital investments and a stable fishery sector. Declining investments in oil exploration led to negative growth in 2012, which is expected to have lasted into 2013 although earlier forecasts operating with more significant declines in growth did not seem to have materialised.