Final Report

FINAL REPORT

USAID’S FISCAL SECTOR REFORM ACTIVITY

IN BOSNIA AND HERZEGOVINA

SEPTEMBER 2014 – MARCH 2020

USAID Contract No.: AID-168-C-14-0000 This document was produced for review by the United States Agency for International Development. It was prepared by Finit Consulting d.o.o.. The views expressed in this publication do not necessarily reflect the views of the United States Agency for International Development or the United States Government.

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April 2020

333ited States Agency for International Development. It was prepared by Deloitte Consulting

USAID'S FISCAL SECTOR REFORM ACTIVITY

FINAL REPORTAPRIL 1 – JUNE 30, 2015 SEPTEMBER 7, 2014 – MARCH 7, 2020

USAID Contract No.: AID-168-C-14-00001

Implemented by: Finit Consulting d.o.o. Sarajevo Company and project address: Maršala Tita 21/2 Sarajevo

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1. Abbreviations

BD Brcko District BIH Bosnia and Herzegovina BMIS Budget Management Information System CIT Corporate income tax EC European Commission E-FILING Electronic filing for tax declaration ELMO Enabling Labor Mobility Activity in Bosnia and Herzegovina EU European Union FAR Fiscal Sector Reform Activity in Bosnia and Herzegovina FBIH Federation of Bosnia and Herzegovina FIA Financial Information Agency FMoF Federal Ministry of Finance IMF International Monetary Fund IT Information technology MoF Ministry of Finance MoF BD Directorate of Finance of Brcko District of Bosnia and Herzegovina MoF RS Ministry of Finance of Republic of Srpska MoFT Ministry of Finance and Treasury of BiH MoU Memorandum of Understanding NGO Non-Government Organization PARCO Public Administration Reform PDM Public Debt Management PIO/MIO Pension Insurance Fund PIT Personal income tax PKI Public Key Infrastructure RS Republic of Srpska SOW Statement of Work SSC Social security contributions STATA Data Analysis and Statistical Software TA Tax Administration TA FBIH Tax Administration of the Federation of Bosnia and Herzegovina TA RS Tax Administration of the Republic of Srpska TAF Tax and Fiscal TAMP Tax (Administration) Modernization Project in Bosnia and Herzegovina TARA Tax Reform Activity in Bosnia and Herzegovina TS Treasury System UCS Unified Collection System UI User Interface UNCTAD United Nations Conference on Trade and Development USAID United States Agency for International Development VAT Value Added Tax WB World Bank WP Work Plan

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Contents

1. ABBREVIATIONS ...... 3

2. EXECUTIVE SUMMARY ...... 5

3. OVERALL DESCRIPTION OF ACTIVITIES AND ACCOMPLISHMENTS ...... 9

4. PROBLEMS / OBSTACLES ENCOUNTERED DURING IMPLEMENTATION ...... 33

5. LESSONS LEARNED, FINDINGS, COMMENTS AND RECOMMENDATIONS ...... 36

6. OVERALL MONITORING AND EVALUATION SUCCESSES AND RESULTS (QUANTITATIVE EVALUATION) ...... 38

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2. Executive Summary

USAID designed the Fiscal Sector Reform Activity (FAR) to build upon the critical initiatives that have been implemented under previous USAID activities (TAMP, TARA, ELMO and TAF). FAR offers a comprehensive set of initiatives addressing better coordination between different levels of the BiH governments, strengthening treasury and IT systems. At the same time, the USAID FAR activity sought to reduce the compliance burden on taxpayers through targeted assistance, including: continued implementation of the online based payment and verification processes in the FBiH and RS; creating registers of fees in the FBiH, RS and BD, implementing a regulatory framework and the elimination, reduction and streamlining of “para-fiscal” fees; development of new business processes to diminish tax evasion through improvement of the gaming industry taxation and the establishment of the FBiH register of business bank accounts. IT lead intervention was also envisaged in the area of both external and internal debt management. Figure 1: Chief of Party Mark Campbell at the Celebration of FAR activities – February 2020

The main objectives, either from the outset or by evolution during implementation may be identified as follows:

1) Improve the business environment by regulation, streamlining, reduction and elimination of what are commonly referred to “nuisance taxes” – fees & para-fiscal fees and charges

2) Use of IT systems to boost fiscal transparency and reduce opportunities for malfeasance, corruption and misuse of public revenues

3) Use of IT systems to boost tax compliance and enforcement as well as modernization of internal institutional operations, by use of state-of-the-art e-services and operations

4) Provision of technical assistance to develop and embed fiscal expertise within Ministries of Finance in the areas of modelling and fiscal reporting

Key Results at a Glance

Regulation of fees and charges including parafiscal fees

In Republika Srpska and the Brcko District, standardized and rationalized systems have been introduced for the introduction, amendment to and elimination of fees and charges. As a result of USAID FAR assistance:

 All fees and charges must be published in the official registers of tax and non-tax revenues of the RS and BD. If they are not included in these registers, they cannot be imposed on businesses and citizens. This is a major boost to transparency and the business environment.

 In the RS and BD, all taxes, fees and charges must be adopted by law only (i.e. cannot be imposed by government decision or decree). A comprehensive adoption and evaluation of process for introduction of all fees and charges must be followed.

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 In the FBiH, we constructed a comprehensive register of fees and charges and demonstrated that the introduction of a system for their regulation similar to those in the RS and BD is constitutionally feasible. We drafted the Law of the Register of Fees and Charges in the FBiH which was adopted by the FBiH Government and forwarded to the FBiH Parliament for adoption under shortened procedure.

 Interactive and available online web-based registers which include all fees and charges were developed for the RS, Brcko District and FBiH.

IT Interventions with FBiH and RS Tax Administrations and FBiH Financial Information Agency (FIA)

Our work with the FBiH Tax Administration and Financial Information Agency achieved many successes. In the FBiH, as a result of USAID FAR assistance:

 We developed the online statement, which gives citizens direct e-access to their employment contribution records and verification that employers correctly remit and pay contributions. This has concretely empowered citizens who do not need to wait until they visit their doctor or reach pensionable age to discover that their contributions have not been paid and entitlements denied!

 We boosted enforcement and compliance of gambling operators (games of chance) which includes real time data updates, cross checks and triangulation of data, introduced an early warning system of company non-compliance and failure of businesses to report taxes, tracking systems of appeals, law suits and seized assets.

 We designed, developed, and implemented the single register of business bank accounts so that all public revenue payments are conducted by each companies’ approved account and all accounts with common ownership are linked and acted upon when enforcement measures are required. This system provided a significant boost to old tax debts and forced collection procedures.

Our work with the RS Tax Administration led to extensive positive results. As a result of USAID FAR assistance:

 All RS businesses now report and file all tax declarations online only. We enabled critical platforms for this including the Public Key Infrastructure (PKI) and Certification Authority (CA).

 The Tax Administration now has a two-way electronic mailbox which allows for interaction between taxpayer businesses and the administration in an efficient and user-friendly format.

 The RS Tax Administration now has an electronic archiving system. This removes the need for paper storage and boosts accessibility of documents.

These IT interventions alone produced direct administrative cost savings of over US$10 million, which is more than double the amount USAID invested into this activity.

IT System Interventions for boosting transparency and reducing malfeasance opportunities

We worked with over seventy individual institutions (FBiH municipalities, all FBiH Cantons, RS entity level Health Institutions) to introduce IT based treasury and budget management systems. The results of USAID FAR’s assistance include:

 We enabled the introduction of IT based treasury systems into 42 FBiH municipalities. These track and provide transparency to the use of and allocation of public revenues and so that spending must follow what has been set in municipal budgets. We provided training on these systems to over 200 municipal officials.

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 IT based treasury systems were completely technically rolled out into all 20 RS entity level health institutions (hospitals and similar sized institutions) with close to one third of these executing full implementation.

 We secured the successful installation training and usage of a state-of-the-art web-based budget planning application into all ten cantonal ministries of finance of the FBiH. More than 300 cantonal civil servants were trained on how to use this system.

Provision of technical assistance to develop and embed fiscal expertise within Ministries of Finance in the areas of modelling and fiscal reporting

We worked with the FBiH, RS, Brcko, BiH State Level and Canton Sarajevo Finance Ministries and developed and embedded fiscal expertise and long-term capacity building within all these ministries. As a result of USAID FAR assistance:

 We developed comprehensive static microsimulation models that allow finance ministries and other policy makers to explore the impact of reform and / or changes to any, any combination or all of corporate income tax, personal income tax, social security contributions and social benefits. These models were used to calculate rates for proposed new laws impacting Personal Income Tax and Social Security Contributions that are currently under parliamentary procedures.

 We developed aggregate revenue forecasting models. These significantly enhance future budget planning, the budgeting process itself by modelling for future revenue changes based on fiscal policy change projections. These also increase forecasts reliability.

 We expanded this work to include modeling work on property transfer tax and property tax with the Sarajevo Canton Ministry of Finance with no additional cost implications for USAID.

We achieved highly respectable progress and results in fiscal reporting harmonization. As a result of USAID FAR assistance:

 The methodology for determining the Global Fiscal Framework (GFF) was adopted by the BiH Fiscal Council and a new Rule Book for the Fiscal Council Advisory Group was completed.

 For the first time in BiH, date from actual budget execution is compared with planned targets. This was achieved with a fraction of the resources that were utilized by earlier international community interventions.

Brief Background and Contextual Observations

USAID FAR demonstrated that significant, substantial, and sustainable progress is achievable across a wide swathe of reform initiatives, be they fiscal policy development or fiscal policy implementation and enforcement. USAID FAR commenced activities on September 7, 2014. There was a three-month delay in moving forward due to an appeal made by an alternate candidate contractor. All formal activities were given the full go-ahead on December 7, 2014. During 2019, USAID approved two three-month no cost extensions to enable specific support and assistance to be targeted at FBiH counterparts, with a strong emphasis on the FBiH Register of Fees and Charges and assisting the FBiH Ministry of Finance in giving full legal effect to this register.

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During the time of activities, due to political realities and other factors that could not have been reasonably foreseen at the outset back in 2014, USAID worked and cooperated with us closely and we were able to mutually agree upon certain contractual modifications to activities to ensure that efforts and US tax dollars were most effectively targeted. Our Contracting Officer Representative, Samir Dizdar, was outstanding and fully supported us and deployed his own expertise throughout these processes so that our SOW was best optimized. While finalization of this report was underway, we heard the awful news of his death. He Figure 2: Contracting Officer Representative Samir will be deeply missed! Dizdar joins a meeting to show determination and support for parafiscal fee reform in the FBiH The modifications allowed us to further target and fine tuning our activities. We adjusted our IT assistance to the RS Tax Administration by implementing its e-archiving system, enabling its e-filing facility for all taxpayers, building its two may electronic mailbox, widening our modelling activities to include Canton Sarajevo and expanding further the functionalities of the FBiH register of business bank accounts and TA FBiH’s IT systems. Due to external factors beyond our control, the full scope of initially planned debt management activities was not attainable. An absence of political will impeded us in further simplifying payroll processes for businesses in the FBiH. We also adjusted our approach to the harmonization of fiscal reporting to direct attention to a more feasible and address the prevailing realpolitik in which we found ourselves.

At USAID FAR’s closure, the combined total of measurable savings to citizens, businesses and administrative processes arising from the full scope of our activities and interventions had reached KM 60 million – approximately US$34.5 million! USAID FAR did this within the ceiling / obligated amount approved by USAID in 2014 of US$4,970,016 – less than five million dollars. This number, these savings will continue to grow and indeed, gain their own momentum, as IT interventions and reforms become further embedded and beneficiary counterparts consolidate their knowledge and confidence in their use.

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3. Overall Description of Activities and Accomplishments

Objective A.1: Assistance for improved intergovernmental fiscal coordination

Goal: Improved intergovernmental fiscal coordination ACTIVITIES  Analyzed the status of Intergovernmental fiscal coordination  “Legislation analysis of the Fiscal Council with proposals for improvement”  Analyzed current status of fiscal reporting  Purchased STATA software  Developed static microsimulation models in FMoF, RS MoF, BD Directorate of Finance and Sarajevo Canton MoF  Aggregate revenue forecasting, modelling in FMoF, RS MoF, BD Directorate of Finance and State Ministry of Finance  Provided training to enable all counterparts to effectively use and update microsimulation models and aggregate revenue forecast models for annual budget planning and three-year projections. RESULTS  Produced “Analysis of Legislation and Status of BiH Fiscal Council Including Recommendation for Work Improvement”  “Analysis of fiscal reporting in Bosnia and Herzegovina with recommendations for improvements” produced  16 STATA software licenses donated  Personnel trained to effectively use and update static microsimulation models in FMoF, RS MoF, Sarajevo Canton, BD Directorate of Finance and Sarajevo Canton  Personnel trained to effectively use and update aggregate revenue forecasting models in FMoF, RS MoF, BD Directorate of Finance and State Ministry of Finance  Analytical capacity of the FMoF, RS MoF, Sarajevo Canton, BD Directorate of Finance and State strengthened  Institutional capacity to utilize these models enhanced

Fiscal Reporting Harmonization

When activities commenced, we identified the existing legal framework and system, insofar as it existed, for fiscal coordination. This was followed up by a detailed report on the actions and amendments required for moving towards enhancing the work of the BiH Fiscal Council and establishing a form of State Level mechanism for fiscal policy coordination, consistency and reporting to required international standards that conform with the IMF’s and EU’s requirements.

After securing agreement with USAID to adjust contractual activities to target an approach of subsidiarity and deferring from a top down revised version of the BiH State Level Law on the Fiscal Council, we worked with all levels of government that influence fiscal policy and report their activities.

In the FBiH, we reviewed Cantonal accounting practices to review consistency at the cantonal level of recording and consolidation of financial differences. We also reviewed municipal accounting and also discovered that as with the Cantons, the same types of transactions were recorded differently. Full accuracy of fiscal reporting relies on all levels following the same rules and revealed the importance of applying this type of bottom-up approach. Previous interventions had mainly just focused at the Fiscal Council level.

We worked with the Public Interest Advocacy Center (CPI) to identify all accounting and bookkeeping transactional discrepancies at the FBiH Cantonal and municipal level. We worked with the Brcko District and Office of the High Representative (OHR) to ensure that the Brcko District Law on Budget required the

FAR Final Report 9 September 7, 2014 - March 7, 2020 reporting of expenses in accordance with the Common Functions of Government (COFOG) classification. We had excellent cooperating with the Center of Excellence in Finance (CEF) which greatly assisted us with the preparation of by-laws for introduction of ESA2010 codes into financial reports.

We engaged the services of a legal expert for the (re) drafting of the rulebook on the functioning of the Fiscal Council. All key levels of government accepted this approach which avoided the need for primary legislation, especially at the BiH level to which RS opposition would be predictable. This more “below the radar” approach can gain trust by demonstrating that competencies and rights afforded to each level of government are not compromised by adoption of the same or similar transactional recording processes.

All other previous international community interventions into the area of harmonization of fiscal reporting did not to any significant extent address all of the lower levels of government and the basic everyday mechanics of how they record transactions. While there has been inconsistency between the Entities in how they do this, their overall consolidated outputs, especially in the FBiH with ten cantons and 80 units of local self-governance very much influence the overall quality of data. We invested significant time and resources into this and gained a deep and comprehensive understanding of practices across BiH

We achieved the following successes:

 The BiH Fiscal Council adopted the Global Fiscal Framework (GFF) with effect from the three-year period of 2018 through to 2020 including retention of the “t-1” budget execution data.

 For the first time since the establishment of the BiH Fiscal Council, data from actual budget execution will be available to compare with planned targets.

 We (re) drafted the Rule Book for the Advisory Group to the Fiscal Council. When this is adopted, it will explicitly introduce reference to fiscal data in accordance with the international standards of the GFS and ESA. This remains to be adopted due to the significant delay in forming the current BiH Council of Ministers.

Fiscal modelling and microsimulation / Modify / create microsimulation, economic (revenue projection) models and train Ministries of Finance (FBiH, RS, BD, BiH, Sarajevo Canton) staff on their use

We had five main counterparts for the implementation of these activities. These were the Finance Ministries of the Federation of Bosnia and Herzegovina, Republika Srpska, Brcko District and Canton Sarajevo and the BiH Ministry of Finance and Treasury.

USAID FAR implemented the following:

Ministry of Finance, Federation of Bosnia and Herzegovina:

 Microsimulation model for Corporate Income Tax  Microsimulation model for Personal Income Tax  Microsimulation model for Social Security Contributions  Microsimulation model for Social Benefits1  Aggregate revenue forecasting model

Figure 3: Certificate award ceremony at FMoF

1 Social benefits model in the Federation of BiH was developed for Federation Ministry of Labor and Social Policy

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Ministry of Finance, Republika Srpska:

Figure 4: Training for aggregate revenue forecasting model at MoF RS

Brcko District, Directorate of Finance

Figure 5: Presentation of the modeling activities at DF BD BiH

Canton Sarajevo, Ministry of Finance

 Microsimulation model for property related taxation – property tax, real estate transfer: sales, gifts and inheritance  Microsimulation model for communal charges  Creation of formula for real estate valuation

Figure 6: Training on microsimulation model at Canton Sarajevo

BiH Ministry of Finance and Treasury

 Aggregate revenue forecasting model for non-tax revenues that are within the competency of the BiH State level

Most of training for these models was conducted on site at the finance ministries. Comprehensive and extensive training was provided on the processes of modeling, quality and quantity of data inputs and real-life situations. On several occasions, we adjusted on-site training to deal with actual requests received from the IMF. This also demonstrated to finance ministry officials the usefulness of these models and the benefits they Figure 7: Training for revenue forecasting model at bring for budget setting and fiscal policy formulation. MoFT BiH

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On-site training for aggregate revenue forecasting and the development of these models for the FBiH and RS was reinforced by external experts from Slovenia. We also engaged the assistance of other short-term experts in order to deliver the models and make necessary data adjustments and reconcile differences between reports for taxation purposes and financial statements that follow general accounting rules and principles.

Development and training on microsimulation and aggregate revenue forecasting models also required extensive preparatory work. The accuracy of models depends on the quality of data used for their generation. We worked with the tax administrations to filter and refine the raw data that was in their possession. This generated spin- offs so that future data outputs and requests from these institutions were improved and more adjusted and relevant to the needs of the Finance Ministries.

USAID FAR donated 16 STATA software licenses for use of STATA software by all counterpart Ministries. This is the core software that enables models to be produced.

Practical application of model, training and results Microsimulation modelling is a state-of-the-art process used by governments and policy makers across the world. It enables evidence-based policy making rather than fiscal guess work and rules of thumb. During the delivery of training to both the FBiH and RS Ministries of Finance, the IMF made specific requests of these ministries to explore the impact of changes to allowances, rates, allowances and exemptions to personal income tax and social insurance contribution laws. During these times, USAID FAR adjusted its approach to training and model development to specifically address these real time requests and issues. This assisted the governments in the steps they were expected to take in order to meet the requirements’ set out by the IMF in its draft Letter of Intent. The IMF expressed satisfaction that USAID FAR was able to assist the Ministries in generation of results.

The FBiH Ministry of Finance extensively used the model that we developed for them when determining their proposals for new PIT and Social Insurance Contribution laws. This was a clear and direct recognition that USAID FAR provided valuable and effective support to the Ministry where it was most needed.

With Canton Sarajevo, we provided the technical assistance that they needed for their formulation of policies for reform of property transfer (real estate) taxation) and the government’s policy aim of assisting younger people to afford their own home.

Objective A.2: Strengthening of the FBIH Treasury System

Goal: Increased coverage of the government / public sector units in treasury and budget planning information systems ACTIVITIES  Analyzed the existing status at the FBiH level and prospects for introduction of the solution to the cantonal level conducted  Awarded contract for BMIS implementation and supervised contract execution  Supervised and assisted cantons in their usage of BMIS software and facilitate best practice amongst Cantonal Finance Ministries  Analyzed the existing status of Treasury Systems in FBiH  Introduced the treasury software in FBiH municipalities  Included additional budget users into TS  Analyzed the existing organization and functioning and financing of health institutions in RS  Award contract for TS in RS and supervise implementation and assist TS roll out into local health centers

RESULTS

 “Analysis of the existing BMIS status on the FBIH level and prospects for introduction the solution to the cantonal level” produced  BMIS software solution implemented into all ten cantonal ministries of finance of the FBiH.

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 More than 300 cantonal civil servants trained on how to use BMIS system  BMIS used by all ten cantons  Analysis of the current state of treasury system in the FBiH completed, recommending the most viable solution for TS system  42 municipalities in the FBiH included in a real-time  Created several rulebooks, decisions and instruction required for TS operations  “Analysis of the existing organization and functioning and financing of health institutions in RS” produced  Tender for TS system in RS awarded and supervision of contract execution  Equipment, software purchased and delivered/deployed  Treasury ORACLE SUFI system prepared for operation in new surrounding for the entity level health institutions and Health Insurance Fund (test and production)  Six health care institutions included in TS.

Budget Management Information System (BMIS) introduction in FBiH Cantons (E-Budget System)

USAID FAR implemented a state-of-the-art web-based budget planning application into all ten cantonal finance ministries of the FBiH. Before this successful implementation, budget planning processes by the cantons, which account for approximately 50% of all FBiH public revenue spending were using analogue and inconsistent approaches for their budget planning which were at best excel based, prone to error and unreliability of submission to the FBiH Finance Ministry.

This was an extensive activity and was USAID FAR’s highest value in terms of resource commitment during our five years of activities. In view of this, we surveyed cantonal finance ministries to determine their technical need and requirements and diligently worked with the FBiH Finance Ministry to identify in advance the optimal deployment of IT servers and other IT infrastructural needs.

We launched a full tender process to identify a partner / subcontractor for development and implementation of the BMIS software. We made extensive enquiries and determined at an early stage that USAID Serbia had also implemented a budget management system into the Serbian Ministry of Finance. USAID was not able to secure delivery of the source code from its intervention in Serbia which delayed the actual start of implementation by approximately eight months; however, we were successful in securing a reduction in the final price charged for BMIS development by Figure 8: Meeting of the BMIS working group our selected subcontractor.

We selected a modern web-based system for BMIS. The other alternatives were an older fashioned (initially developed in 2006) windows-based system and a system developed by ORACLE. This ORACLE system, while would have met the needs of the cantons and FBiH Finance Ministries, the total cost of ownership for the initial five- year period and beyond that was considerably more expensive both for implementation and for ongoing support and maintenance. We placed significant emphasis on ongoing use and sustainability and the ability of the beneficiaries to finance this. Figure 9: The BMIS application in action

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USAID FAR trained more than 300 cantonal civil servants in the use of the BMIS system. Training was provided on-site across all ten cantons during implementation and was significantly reinforced by follow-up training during 2019. The scope of users was extended to apply to significant budget users (e.g. education) to directly enter their initial budget requests into the system, which added further efficiency into the budget preparation process. USAID FAR also worked closely with USAID SGIP. Their Financial Impact Assessment (FIA) tool was successfully integrated into the BMIS system by us.

Figures 10 and 11: Signing of transfer documents ceremony for BMIS

In March 2018, USAID Ambassador Cormack led a ceremony attended by all ten Cantonal Prime Ministers and Finance Ministers. This marked the success of this implementation and the importance that USAID and the US Embassy attach to fiscal transparency and the fight against corruption and misuse of public revenues.

Due to the success of the BMIS and counterparts appreciating its capabilities, with the support of the FBiH Ministry of Finance, the system was further enhanced with a salary module. This introduced even more enhanced financial discipline into the Cantonal sector. The salary module requires that full details of all planned employees and hires are budgeted for in advance by the Cantons. Previously, just headline total budget amounts were entered. This was method used to be less than fully transparent about the number of public employees (information which the IMF and other International Financial Organizations require) as a part of method of control over all public expenditures. It also removed the ability to create fictitious employment posts and divert public revenues to less than fully transparent uses.

USAID’s activities and assistance in this arena also stimulated many positive side effects of shared learning and enhanced cooperation between the FBiH Finance Ministry and all ten Cantonal Finance Ministries. USAID FAR chaired regular Implementation Group meetings comprising of officials of all cantons and the FBiH Ministry. We also developed an online database for sharing expertise, knowledge and issues encountered by Ministries when using the BMIS application which was widely used.

USAID FAR continued to provide active support and engagement through to December 7, 2019 (the date of the first three-month no-cost extension) and financed the support, maintenance and updating of this. Continuity of support and maintenance was maintained when in January 2019, the provider of support and maintenance changed. The transition to a new provider however proved to be highly successful and clearly demonstrates that both ongoing sustainability of the BMIS application is feasible and that the support and maintenance service provider can sought and replaced by public tendering and competition procedures.

In addition to the development of the BMIS software, significant hardware donations were made to boost the capacities of the FBiH Ministry of Finance’s hard drive storage and also to all ten Cantonal Finance Ministries.

The BMIS implementation process led to significant other positive impacts and spin offs. The ten Cantonal Finance Ministries were not legally required to use this centralized software solution. They were however persuaded by the benefits it directly offered to them. Cooperation between then Cantonal and FBiH Finance Ministries improved during implementation and roll out. We chaired regular implementation group meetings

FAR Final Report 14 September 7, 2014 - March 7, 2020 which were very well attended. The software that we delivered was considered by the FBiH Finance Ministry to be superior to their current application which led to them switching over to it.

Treasury System (TS) Introduction in FBiH Municipalities

At the early stage of our activities, USAID FAR assessed the current status of treasury system implementation and usage across the 80 municipalities in the FBiH. In cooperation with the FBiH Association of Cities and Municipalities (ACM) we determined that 20 municipalities had treasury systems, all of which were provided by the USAID GAP project around a decade and a half ago. This meant that 60 did not have treasury systems or had only partial systems requiring a major upgrade and were effectively in outright violation of the FBiH Law on Treasury.

These municipalities were of course keeping some form of budgeting data and information. We noted that they tended to submit reports, quite often in excel format to their respected cantonal finance ministries. Compliance levels were variable and sporadic. They relied very much on manual input of data which was prone to error and inconsistency. Such inconsistency also militates against full harmonization of fiscal reporting.

Our survey activities confirmed that all cantons did have IT treasury-based systems provided by ORACLE. However, many of these were not adequately maintained due high support charges. This prompted us to explore other “off the shelf” locally available in BiH software solutions. Municipalities have much lower resources than cantons and with USAID we chose to avoid “gold plated” solutions that would more likely jeopardize sustainability and ongoing use. We also required the one full year of support and maintenance would be provided to each municipality that received a treasury system would be provided free of charge (i.e. included in the price paid by USAID FAR).

Having determined the most appropriate level and type of treasury roll out, we held a full public tender process for treasury providers. Two companies were selected, whose systems were deemed most relevant for the municipalities needs (Itineris doo and Japet d.o.o.).

Due to large number of municipalities (60 out of 80) that did not have treasury systems, we considered it could be useful, due to the potential cost, to cooperate with the Public Administrator’s Reform Coordination Office (PARCO). During 2016 and 2017 we worked closely with them and agreed upon an MOU with the for shared implementation responsibilities and costs. We prepared for PARCO documentation setting out the technical requirements for the tendering and procurement process for the municipalities for which they had agreed to finance. We had agreed that we would provide all training and documented procedures and training to enable municipalities to use the systems and follow the FBiH Law on Treasury.

Regretfully, due to failures in PARCO’s tendering and procurement processes, PARCO did not honor what they had agreed to. We were left in a situation in the second half of our activity to determine what could be done to cover the gap left by PARCO. However, in spite of this disappointment, we rose to the challenge and many achievements and successes were realized.

Forty-two FBiH municipalities received either substantial upgrades (which in many cases turned out to be tantamount to full introduction) to their treasury systems or received completely new IT based treasury systems.

Twelve Rule Books or similar sublegal acts and documents were prepared and given many FBiH municipalities including some those that already had an existing IT treasury system that wanted to benefit from USAID’s intervention. These rule books enabled the FBiH Law on Treasury to be correctly followed and for treasury best practice to be adopted by all.

Training on the use of the systems was provided with follow up reinforcement sessions. More than 120 municipal financial officers received full training on the rolled-out systems.

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In the case of four of the least affluent FBiH municipalities that did not have the hardware capacity to receive treasury software, we donated one desk-top base unit and monitor to each of these.

The scope of our intervention was additionally widened than initially anticipated. In addition to including many more municipalities into the main system, many of these requested that we also include key external budget users into this (for example kindergartens, cultural centers). This means that transparency was extended to the use of municipal public revenues beyond municipal finance departments.

While much success was achieved in this aspect of activities, there remain 18 FBiH municipalities which, to the best our knowledge, after we reached out to them on numerous occasions, do not have up to date treasury systems. It is quite likely that if we had more time and extra resources, this number would have been reduced as PARCO’s failure to uphold their part of this rollout may have deterred some overstretched municipalities from further participating. However, even with additional resources, not all remaining municipalities could have been upgraded. Several were quite resistant, either being vehemently opposed to transparency or in the case of very small municipalities, were simply human resource constrained. When USAID FAR commenced its intervention, just 20 out of 80 municipalities had IT based treasury systems. By the close of our work, this was significantly uplifted and improved to 62 out of 80.

Including RS Health Sector in the RS Treasury System

Similarly, as we did in the FBiH, we assessed the current status of treasury roll out and usage of treasury systems across the RS overall and its health sector in particular. The findings of this investigation revealed that the RS exclusively uses ORACLE based systems for all its treasury operations. For consistency and compatibility with the RS Finance Ministry’s systems, this meant that an ORACLE based solution would be suitable and acceptable.

Our findings also revealed that as anticipated, not one health institution in the RS was using treasury systems. They also indicated that the health sector was the only remaining significant sector that uses RS public revenues not to have adopted such systems.

The RS has 20 Entity level health institutions (hospitals and similar) and 54 local health centers. When we examined how resources are allocated from the RS Health Fund to these institutions, it transpired that around 80% of all funds spent on health care were at the RS Entity level with the remaining 20% at the local level.

We pressed for and succeeded with the RS Ministry of Health establishing a Government Working Group (GWG) to oversee treasury implementation. Dr. Alen Šarenić was appointed as its chairman (in 2019 he became the RS Minister of Health). We engaged with the working group which determined that it wanted to introduce treasury as quickly as possible in all local health centers and entity level institutions.

When reviewing resources available to us for this component of our activities, we decided that given 80% of health spending (at around KM 650 million annually) was incurred at the 20 RS Entity level organizations, that these should be targeted by us for assistance with hardware and software systems. For financing treasury introduction in the local health centers, PARCO also had indicated that it would finance this aspect. Unfortunately, the same situation arose in the failure of their tender processes as it did for their promised assistance for treasury systems in FBiH municipalities (see above).

Following on from this, we launched a full public tender process for the provision and implementation of ORACLE based treasury systems in all the RS Entity level health institutions and selected Core doo as the implementer,

In September 2016, prior to the commencement of formal work with the GWG and selected implementer, we made a presentation to representatives of all the Entity level health institutions. There was some worry and concern about what this would mean combined with an anticipated level of institutional friction. However, the GWG in coordination with the Ministry of Health agreed that work should go ahead.

FAR Final Report 16 September 7, 2014 - March 7, 2020

By the end of 2017, all 20 of the Entity level health institutions were technically ready to implement treasury. In addition to the software roll out, licenses and extensive training provided to all institutions, we also financed communications support to enable all institutions to communicate and link up with the RS Ministry of Finance’s central treasury system. With effect from January 2018, the Banja Luka Dentistry Institute commenced treasury as part of pilot operations.

We fully supported this pilot, and a pilot with one local health center (Celinac) which received a small amount of non-USAID finance to link its treasury to that of its local municipality.

Due to resistance to the actual full take up of these systems, which had earlier received the express support of the RS Health Ministry and Government, we reached out directly to other International Organizations that are active in the reform of the health sector across BiH. We explained this position to the IMF who pointed us in the direction of the World Bank’s (WB) new (2018) initiative for holistic health reform. We met with the then newly appointed WB Mission Head, Emanuel Salinas who introduced us to the then also recently appointed head of the WB’s be initiative, Dr. Ian Forde.

This cooperation led us to find out about and participate with the International Community’s Health Development Partner’s Cooperation Group. This group chaired by the Swiss Embassy enabled the profile of treasury’s role in health sector reform and better management of health resources to be highlighted. We were able to meet with Dr. Forde and other WB experts to the extent and result that the WB’s plans for holistic health sector reform included and attached great importance to roll out and usage of treasury systems. Treasury is a key part of the WB’s governance reform proposals. This level of pressure and future conditionalities maximizes the likelihood of usage of these systems.

There is no doubt that the reluctance of the health institutions to use treasury is due to rent seeking behavior and other forms of financial corruption and practice. The lack of treasury means that there simply is not any transparency of health sector expenditures. Those in charge have excessive flexibility over who they can hire, which providers are paid on time those that are not.

The full inclusion of institutions into the treasury system would have meant that the accumulated debts of those health institutions would require the RS Government to officially recognize these debts on its balance sheet. While reluctance to do this is perhaps understandable and often cited to justify reluctance, these debts continue to exist and increase regardless. Despite this set back, USAID was right to target and, in the future, to continue to target this sector. The hard work undertaken has brought the full attention of the WB to this and in the RS Government’s published plans for the period 2020 to 2022, expanding treasury in its health sector is a key component.

Objective A.3: Strengthening of the Public Debt Management (PDM)

Goal: Improved IT systems for debt management ACTIVITIES  Examined the potential for the adoption of a unified strategy on the state level regarding public debt management (PDM) in BiH  Analyzed various available PDM software for introduction to different levels of government  Assisted local institutions to adopt necessary procedures for successful debt management RESULTS  Strategy regarding public debt management (PDM) in BiH developed  “Analysis of Debt Management Software Solutions” document produced and shared with counterparts  DMFAS was selected as the most viable solution for PDM, and agreed by all levels of governments  Two documents regarding necessary procedures for successful debt management produced: “Rulebook on Code of Conduct and Business Ethics in FMoF” and “Business Continuity Plan in FMoF”

FAR Final Report 17 September 7, 2014 - March 7, 2020

Strengthening of BiH’s public debt management was identified by USAID as a key area in IT intervention and systemization is very much in need. Both BiH’s records on external (foreign debt) and internal (debt to its own citizens and residents, companies and institutions) are maintained archaically on “Access” type databases for external debt and excel for internal debt. Use of these systems and their update is prone to error in recording of transactions and the increase and / or decrease in debt. Additionally, they are not integrated so it is extremely difficult to get an accurate impression of BiH’s overall public debt level. Public debt records are currently maintained at four government levels: BiH State Level, RS, FBiH and Brcko.

To determine and agree with these four governments upon the most optimal IT based solution for public debt management, in September 2015, we convened a workshop with Assistant Finance Ministers and / or other senior representatives of their respective ministries and presented them with the two suitable options for debt management software, UNCTAD’s Debt Management and Financial Analysis System (DMFAS) and the Commonwealth Secretariat’s Debt Recording and Management System (CS-DRMS). They all unanimously agreed upon UNCTAD’s DMFAS system due to affordability and compatibility and agreed upon principles of debt data exchanged to enable an accurate and consolidated picture of BiH’s debt levels to be created. We secured the written agreement and intent of all four finance ministries.

The SOW and contract concluded for USAID FAR’s activities (Section C.9 A.3) also specifically identified UNCTAD’s DMFAS software as being the most optimal and noted that this could be provided at a minimal cost basis by UNCTAD to BiH. This was determinant on BiH’s status classification by the World Bank remaining at “lower middle-income status”. During 2014, the World Bank’s classification of BiH’s status to that of “upper- middle income” country status meant that UNCTAD could no longer provide this for no cost and it now would cost around US$400,000. This change of status was unfortunately a game changer and meant that funding for DMFAS would have to be found externally. The initial approved budget did not envisage this type of expenditure and there was consequently no capacity for this.

Despite this, we, as implementer strived to find alternate sources of funding for the financing of DMFAS. FAR extensively lobbied PARCO and its management board members to use the exceptional provision of the BiH Procurement Law to purchase DMFAS and were successful in persuading PARCO to include debt software on its approved procurement list. FAR met with all PARCO management board members. It is due to institutional resistance and lack of insight of both PARCO, and its board members (including some of its international donors) that funding from PARCO did not materialize. FAR organized the drafting of a legal opinion which showed how the BiH Public Procurement Law could be utilized in the DMFAS context and proposed amendments to the PARCO Fund MOU. We in coordination with USAID also contacted the EU Delegation to see if they had capacity to fund this. The EU responded well, but due to their own tendering and competition processes, they were not able to procure DMFAS from UNCTAD without a full open competition process. UNCTAD, as a UN Agency, is not able to participate in these.

Notwithstanding this, we still secured significant progress in the debt management arena. We produced a debt continuity and ethics plan which could be used should there be a future funded push for debt management IT systems in BiH. We also produced draft rule books that, at a future date, may be adopted by Finance Ministries following implementation of a debt IT solution. Regrettably, the IT debt management part of our SOW, out of necessity, was withdrawn.

Objective A.4: Increased compliance and improved business environment

Objectives A.4.1. Tax Compliance – reducing tax evasion and A.4.2. Impact on Business Environment

Goal: Tax compliance increased, and business environment improved ACTIVITIES

 Analyzed current software solution implemented in TA FBIH “Tracking online betting”.  Included existing data in the risk calculation model in ADRIS and prepare reports on real time data collection for the TA

FAR Final Report 18 September 7, 2014 - March 7, 2020

 Created “Functional Requirements Document” regarding stop filers  Implemented stop-fillers application and modules  Integrated and implemented software support for tracking appeals, lawsuits, and exempt assets in TA FBiH in existing IT environment in TA FBiH  Analyzed current status of business registries produced  Analyzed the hardware and communication requirements  Single business registry software programmed  Prepared “User manual” and organized end user training

RESULTS

 Analysis of available data on gaming produced and based on that “System Functional Requirements” have been completed.  Games of chance organizers included in the ADRIS risk calculation model and current system for data collection and reporting strengthened  Boost enforcement and compliance of gambling operators (games of chance) which includes real time data updates  Functional Requirements Document regarding stop filers produced  Stop-fillers application and modules fully live  TA has an effective early warning system either that companies are in some form of distress or that some form of evasion or avoidance could be happening  Obtained agreement on system design regarding Single Registry of Business Accounts  Identified and purchased required hardware, software, and communication infrastructure  Single business registry software installed  User manual published on site  In the FBiH, all business bank accounts are linked in Single business registry  Forced tax collections increased

Gaming Industry in FBiH - Integration of online gaming (gambling) tracking software into the TAFADRIS – Audit and Inspection Software

The key object of this IT intervention was to build upon the success of the ADRIS system, introduced by USAID’s earlier Tax and Fiscal (TAF) activity into the FBiH Tax Administration. This introduced a systemized and objective system for the selection of companies to be subject to tax audit and inspection processes and removed opportunities for subjective selection of audit and control candidates. Audit selection criteria is risk based, and considers size of turnover (revenues), reported profits, numbers of employees etc.

The ADRIS system did not however include providers of games of chance specifically the ever-expanding online gaming and gambling services. This sector remained particularly unregulated and nontransparent. This clearly posed a substantial opportunity for evasion, fraud, and other illegal financial activities.

In order to introduce games of chance providers into the ADRIS system, the then (2015) new FBiH Law on Games of Chance was reviewed to ensure that the best targeted additional software modules were introduced. There were also additional delays due the FBiH Ministry of Finance and Government introducing amendments to the Games of Chance Law. We provided a technical review of these proposed amendments and interviewed a wide number of stakeholders during this process including the private sector gaming industry, that part that is publicly owned (lottery), and ministry and government officials. We also reviewed and compared the approach to gaming taxation taken in the RS, and neighboring and some EU member states.

The proposed legal amendments became deadlocked in parliament which lead to a delay in the commencement of full implementation of these changes. However, we went ahead and delivered and agreed upon the functional requirements for inclusion of games of chance providers during 2018 and all work was completed by June 2019.

FAR Final Report 19 September 7, 2014 - March 7, 2020

The system became fully live and operational on the TA’s production in November 2019. This was less timely than we would have preferred due the cessation of our assistance in this area on December 7, 2019. However, this implementation now means that there are E-scrutiny functionalities for several “favorite” activities that can be deployed to evade taxation including:

 Cancelled bets and deposits – a deposit or a bet in advance is placed online and the deposit is not utilized, is only partially utilized or a bet made in advance is cancelled. Previously, only funds utilized for actual bets were monitored in the system. Now all transactions of these type can be surveilled. This reduces the opportunity for money laundering (large deposit place, one small bet made, balance refunded) and concealment of wealth opportunities.

 Manipulation of de-minimums limit of betting prizes. Only prizes worth KM100 or more are taxed. Now, “coincidental” multiple prizes of just under KM 100 can be monitored and action taken

 Comparative criteria and cross referencing can now be used to detect potential evasion by highlighting anomalies of reporting. Real time placement of bets, monthly tax returns and monthly payroll reports for example may indicate underreporting of profits based on the volume of bets placed or staff employed.

In order to make this new system work effectively, USAID financed the purchase of additional hardware to boost the storage capacities at TA FBiH and also financed the upgrade of its software system used to monitor games of chance providers (CBOM system). This cost of this alone was approximately US$40,000.

Stop filers

We developed a system for the automatic generation of alerts and reports when companies suddenly or randomly stop filing their tax declarations and other regular tax reports.

This was achieved by the establishment of a working group which scrutinized the TA’s previous approach and a detailed workflow and procedure was mutually developed on how to deal with potential cessation of filing. A key finding of this working group which was implemented was to integrate stop filer system into an existing system (nPIS) currently used at the TA. The alerts were then built into an existing system rather than TA staff needing to access (and remember to access) an additional application.

This now means that the TA has an effective early warning system either that companies are in some form of distress or that some form of evasion or avoidance could be happening. Previously, if a “stop filer” had remained undetected, its bank accounts could be emptied and assets stripped, depriving the TA and the FBiH of revenues and unfairly impacting on compliant businesses.

Provide IT software support for tracking tax appeals, tax lawsuit processes and asset seizures in TA FBiH

We further expanded the functionalities of the TA’s IT systems with the provision of IT based tracking of appeals, other lawsuits and assets seized during the course of taxation investigations and procedures.

Prior to this, the TA was unable to keep track of tax appeals that went into their second instance (appeal stage), due to the fact that second instance issues are determined by the FBiH Ministry of Finance and not the Tax Administration. When appeals and other lawsuit processes were transferred to the Ministry, the TA could not monitor their progress. This meant that statutory deadlines for the issuance of a formal response could and in several cases were missed. If the authorities do not respond to a further appeal within legally specified time frames, then the TA’s case is lost, leading to potential significant revenues losses. This could be particularly exploited by companies that are able to hire experienced lawyers. Tracking these appeals and lawsuit processes now means that the business environment and playing field has been further levelled out.

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Another procedure for collection of outstanding tax debts and disputed claims is the seizure of companies’ assets. Before USAID FAR’s work, the TA did not have an effective IT system for tracking the seizures, returns or disposals for these assets in cases when they were liquidated. This also could mean that deadlines for their return or dispute resolution of the seized assets were missed. If the TA were to lose track of assets, it could also then be liable for the loss of these and compensation. This has been directly tackled by E-tracking of seized assets.

Development of the Single Register of Business Bank Accounts in the FBiH

The development and successful launch of the single register of business bank accounts is a major success story. The register was introduced into the FBiH’s Financial Information Agency (FIA), which itself was a new institution, established in 2015 by the FBiH Law on Internal Payment Systems. FIA was the result of the merger of two former agencies. This merger was subject to some challenges in the courts but the status of FIA, led also by its then newly appointed Director, Esad Mahmutovic, was solidified during 2016.

USAID FAR and FIA were then able to proceed with the development of the single register, which was legally required under the FBiH Law on Internal Payment Systems. This law stipulated that the register must be established and obligated every business to nominate a single “main” bank account for conducting all of its main transactions, including tax payments and other public revenue obligations. Businesses must have only one main bank account. Naturally, business may hold more than one bank account but all of these are automatically linked in the register.

Before the register was established, 1,936 companies had two or more main nominated bank accounts and 24,599 number of companies had not nominated a main bank account. At March 2020, these transgressions were close to eliminated. The status at this time is 8 companies have two or more main nominated bank accounts and 543 number of companies have not nominated a main bank account.

Figure 12: Promotional poster for the Single Register of Business Accounts in the FBiH

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The establishment of this register marked a major and significant strengthening of the FBiH’s compliance and enforcement capacities. Since its establishment, its financial compliance mechanisms now prevent the shifting funds to avoid paying their taxes. This means that when the courts or tax authorities issue an enforcement action and freeze a business bank account, all the accounts belonging to that business are simultaneously frozen. Before the single register was established, businesses could siphon funds to their other bank accounts and avoid the impact of any tax enforcement action against them. A similar system has been in operation in the RS since 2012.

Figure 13: Screenshot of the Register of Business Accounts Figure 14: Signing of transfer documents between FIA and USAID

The entity-level FIA and Tax Administration, the state-level Indirect Tax Administration, FBiH courts, and all banks that operate within the entity have direct online access to the register.

It is already proving to be an effective enforcement tool. By the close of activities, around 1,700 companies have had blocking action taken against them by the courts, at the request of the FBiH Tax Administration.

Online access to the register was later expanded to the wider business community. Previously, when a company is investigating entering into contractual relations with a business located in the FBiH, it had to make a paper- based request into the status of its potential business partner’s bank account status (i.e., to see if it is financially compliant, free of enforcement proceedings, etc.). In its full functional status, online access to the register now speeds up that process and encourages wider usage of this verification technique. The FBiH Employers Association has also proposed to expand the register to include bankruptcy and pre-bankruptcy proceedings.

The full scale of structural reforms and interventions in the area of tax enforcement require a sufficient time to pass before becoming fully embedded but the forced collection results indicate initial positive results with forced collection of 419,312 attained between 2016 and the cessation of our activities.

Objective A.4.2. Business environment

Goal: Introduced and enhanced E-government and E-communication into Ministry of Finance and Tax Administrations ACTIVITIES  System analysis of the current state regarding Annual Online Statement produced  Designed and implemented software for Annual Online Statement  Devised public information and publicity plan  System analysis and legal requirements for E-Document platform in TA RS conducted

FAR Final Report 22 September 7, 2014 - March 7, 2020

 System analysis of the current document management system and system for data exchange between TA RS and other government/public institutions, taxpayers  Software for E-archive designed and implemented  CA servers installed, root and subordinate certificates  Created PKI infrastructure for E-archiving

RESULTS

 “Specification of Requirements for ‘Online Annual Statement’ E-Service for FBiH Tax Administration” produced  Software Online Annul Statement installed on servers in the TA.  Citizens can go online to view and verify that their social contributions have been correctly paid by their employers  Media campaign included showing the video, audio and printed advertisements on TV, radio, newspapers, local portals, and social media: Facebook and others  177,462 previewed / printed annual statements by the end of project  “E-Document platform” produced  Completed “Functional Requirements for eDocument Archiving System in TARS”  Software for E-archive operational  The RS Tax Administration has full capacities to electronically archive all of its official documents  3,981,116 of documents that had been previously paper archived had been digitized  Certification Authority root and subordinate servers installed, and certificates created  E-Archive digital certificate installed  E-archive digital certificates repository created  Data encryption and confidentiality across the internet to a very high level and permits the RSTA to issue taxpayers with a “key” so that they can use this service enabled  Developed a web based electronic mailbox application for two-way use operational  Created Data Warehouse for analysis of public revenue data

Online Annual Statement

Our work with the TA FBiH also led to a major boost in transparency for citizens and was a major step to the involvement of the public in monitoring tax and payroll compliance in an area that directly impacts upon them and their rights to receive services to which they directly contributed (health care, pensions).

The launch of the FBiH Annual Online Statement means that FBiH citizens can check online that their employers are correctly paying their Social Security Contributions, boosting transparency and assisting the fight against corruption. The launch of this was accompanied by an extensive media campaign.

Since it was launched 177,462 online statements have been generated. This clearly demonstrates the empowerment of FBiH based employees and citizens. This also has led to savings by the TA. Previously, it was required to send a Figure 15: Launch event for the online annual statement at statement to all FBiH employees annually at a cost of KM TA FBiH 2million.

FAR Final Report 23 September 7, 2014 - March 7, 2020

This has therefore reduced administration costs to the tune of KM 8 million (US$ 4.5 million) since it was brought into use.

During the final year of our activities, while not initially envisaged, we completed further upgrades and added additional functionalities to the online statement. In addition to providing verification of actual paid contributions, employees can now confirm if they were officially registered as workers and reported to the social funds. This is important for determination of certain Figure 16: Snapshot from promotional video for the pension entitlements. online annual statement in the FBiH

Public Revenues (Payroll) Payment Simplification in FBiH

The intention of simplifying the payment of payroll taxes (personal income tax and all social contributions) made by employers in the FBiH was to reduce the number of monthly bank payments that range from nine to for larger employers in excess of thirty to just one.

In the FBiH, employers must directly allocate, by separate payment orders, each and every employees’ personal income tax payment, health insurance, unemployment insurance to the appropriate cantonal deposit account, determine by the place of residence of the employee.

There was intense political resistance, inside the FBiH Finance Ministry and across the Cantons, in particular the more Croatian majority Cantons to this. This level of distrust frustrated all our direct and the USAID Mission Director’s attempts for the establishment of an official working group to allow this activity to go ahead. Prevailing distrust (note more than one year after the 2018 elections, a new FBiH Government had not yet been formed) means that there is continuation of employers doing the administration and revenue allocation that should be and technically could be transferred to the FBiH Tax Administration.

USAID formally withdrew this from the SOW in spring 2018.

Activities with the Tax Administration of Republika Srpska

USAID FAR’s team was focused primarily with providing high level technical IT assistance to the RSTA to introduce new electronic services and to digitalize a major part of its document handling.

Enabling Electronic Filing (E-filing) in the RS

At the direct request of the then Director of the RSTA, Zora Vidovic, USAID agreed to target support to enabling online electronic filing for all payroll taxes (personal income tax and social insurance contributions). The RSTA had earlier contracted with an external commercial provider to introduce e-filing. This had been left unfinished and therefore not in use. At the time, it was also our understanding that the RSTA was in a commercial dispute with their contractor and resolution was not expected to be resolved in the immediate future.

The crucial outstanding tasks to enable E-filing were also the most significant: namely the establishment of a Public Key Infrastructure (PKI) and private Certification Authority (CA) hosted at the RSTA.

The establishment of the PKI required extensive development of a set of rules and procedures to enable management, distribution, usage and where necessary revocation of usage (digital certificates). In more layman’s terms, this is the part that sets up a system for users – in this case RS taxpayers to register an online filing account with the RSTA. The PKI provides data encryption and confidentiality across the internet to an extremely high level and permits the RSTA to issue taxpayers with a “key” so that they can use this service.

FAR Final Report 24 September 7, 2014 - March 7, 2020

The actual issuance of the “key” is undertaken by the Certification Authority (CA). The RSTA’s CA means that itself can issue “keys” to its taxpayers. It also generates a trusted E-signature that tells the RSTA that it is dealing with a trusted third party when a user / taxpayer gains access to and uses the online filing system. Due to the ongoing absence of a legal framework for CAs in BiH, this private CA had to be developed specifically for the RSTA.

The assistance brought the E-filing system into use during 2016 so that by the end of that year, 70% of all RS businesses were reporting and filing declarations for all of their payroll taxes online. Within less than 18 months of this, all RS business (100%) were required to and all were filing payroll online and other tax forms were also moved to an online basis.

By the close of our RS based activities (December 7, 2019), 80% of all direct tax declaration forms in the RS were being filed online (profit tax, property tax etc).

This means that both the RSTA, every business and a growing number of citizens in the RS gains both time and money savings. Taxpayers and payroll service providers can file and submit declarations at any time, day or night, weekend, or public holiday, and receive a secure electronic confirmation that they have submitted their reports and met their compliance deadlines.

Electronic Archive (E-Archive) Development

Paper and analogue based archiving was congesting the RSTA’s existing archive and with there being close to 10 million documents in it and growing daily, it was rapidly exhausting all its existing archiving space. In view of this, and due to boosted document security and increasing problems for physical retrieval of archived documents, worked commenced on the establishment of an E-Archive.

Figure 17: Paper archive at TARS before USAID intervention for establishing electronic archive

We developed the software for the digitization of the paper documents and also for the automatic storage and archive of electronic documents received under the E-filing system and the electronic mailbox (see below) that we also delivered. In 2019, two older scanners ceased to be functional meaning that digitization of paper documents slowed down in pace. We were able to donate a new scanner to enable resumption of digitization activities.

Electronic mailbox Due to the successful implementation of the PKI and CA, it became possible to considerably expand communication by email and e-documents between the RSTA and its taxpayers. As standard email communication was not feasible nor sufficiently secure, we developed a web based electronic mailbox application for two-way use. We also added an auxiliary application for automatic signing and e- archiving of relevant communications.

This system is already in live use and making a real positive Figure 18: Electronic mailbox log-in screen difference to RS taxpayers.

FAR Final Report 25 September 7, 2014 - March 7, 2020

Establish Data Warehouse for “Real Time” revenue data accessibility and availability directly from RSTA to RSMF and general public

The database for the “date warehouse” has been created with all necessary data needed for microsimulation of taxes by the Finance Ministry. The RSTA has the technical ability to use this and update this. Real time and up to date data are needed so that the Ministry of Finance is able to produce accurate revenue forecasts and impacts of potential tax and fiscal policy changes. This facility likely needs further support to bring it fully into use and then could be further built upon to provide financial data access to the wider public, boosting public revenue receipt transparency. Figure 19: Visual illustration of transition from paper archive to electronic archive

Objective A.4.3. Business environment – Elimination of Nuisance Taxes

Goal: Decreased cost of doing business ACTIVITIES  Reviewed and analyze relevant documents, laws and bylaws governing and collection of public revenues in FBiH, RS, and BD:  Compile the Study of Onerous Taxes, Fees and Charges, with recommendations for elimination  Established Register of all taxes, fees and charges in both entities and BD  Provided ongoing ad-hoc assistance prior to and during processes of review of all fees and charges to assist counterparts in maintaining and keeping registers of fees up to date  Assisted MoF RS and BD to develop rulebooks needed to implement adopted fee reforms  Transferred existing FBiH, RS and BD registers of fees onto interactive web-based platform  Reporting tool designed RESULTS  Study on Fees in the FBIH, cantons and Sarajevo City Municipalities produced  Report on Implementation of the reform of fees in FBIH and Report on Fees produced  The FBiH register of fees completed  RS Register of taxes and fees, and Law on Tax System adopted and enter into legal force Established the Register of para-fiscal charges in Republika Srpska,  BD Register of taxes and fees, and Law on Register of taxes and fees adopted  Drafted law on the Register of Fees and Charges in the FBiH  Two rulebooks needed to implement adopted fee reforms produced and adopted in RS and in BD  All registers of fees (FBiH, RS, BD) are developed onto an interactive web-based format making these extensively available to the public, businesses, potential investors and the public sector  51 fees and charges eliminated/reduced  Cost savings for business from eliminated/reduced fees 49.4 million KM  Reporting tool fully functional and delivering real time revenue collection data to FMoF

A significant element of our activities was the attention paid and work focused on what are in common language often referred to as “para-fiscal fees or taxes” which are viewed to impede the business environment in across

FAR Final Report 26 September 7, 2014 - March 7, 2020

BiH. This aspect of our endeavors for some time attracted the most public and media attention. While our attention was focused across a wide area, we achieved notable success across BiH.

It should always be borne in mind that many interventions in BiH are made particularly complicated as the IP cannot deal with just one government, with just one or two relevant counterpart ministries. Achieving reform across BiH in many aspects is rather akin to dealing with three countries, perhaps four when one considers that interaction is required with governments at the BiH level, FBiH, RS and Brcko. These are four constituent governments with their own separate constitutions (Final Award in Brcko). When we directly tackled head on this issue of para-fiscal or nuisance taxes, this also required us getting “knee deep” in the resonance of the Dayton Peace Agreement’s legacy in the FBiH; namely its ten cantons, all with their own constitutions, governments and assemblies and the particular strong emphasis on local self-governance and self-determination awarded to the municipal level and avidly defend by the FBiH Association of Municipalities and Cities (AMC).

In spite of the at times intense pressure that we faced to apply and go for a quick fix of the so-called para-fiscal tax problem in BiH, we instead adopted a fully comprehensive and holistic approach. Following on from this, our results and successes in the RS, FBiH and Brcko are set out below.

Definition of “para-fiscal”:

Given that for many years, the term para-fiscal had been bounded around without clarity nor definition, it was logical to investigate what was meant by this. We determined that a para-fiscal fee is something that while it is called a fee, in reality, because there is no service, license, permit, concession or something of a similar nature provided in return for the fee, that this in fact makes it a tax. Calling a charge imposed on a citizen or business a fee under these circumstances makes it akin to a tax. Hence it may be referred to as a parafiscal fee. Key examples of parafiscal fees / taxes are the general water fees where each employer pays 0.5% of its monthly net salary costs to water protection and so-called forestry fee when each company pays a small fraction of its turnover (gross revenues) to so called “forestry protection”. No service at all is provided. They are a de-facto tax, just given the name of a fee to “soften the blow”.

Fees and Charges in general

Fees and charges occur just about everywhere. It is common to pay for parking. A fee is charged and the service (parking) is provided. A fee is paid for a copy birth certificate, for a driving license, ID card or passport. It is usual to pay a municipality a fee for a building permit, for a concession to open a business. It is common to pay a level of government an amount to access natural resources such as natural mineral water resources or forestry.

Determination of fair level of fees and overall number of fees in effect

Our investigations also revealed that there should be appropriate value or “equivalence” to the amount charges for fees in addition to other criteria for their future imposition. For example, if large profits are made from extraction of natural mineral water, the amount paid for their use should reflect this in addition to taking into the account of potential environmental impact of such exploitation. The amount paid for a driving license, ID card etc should reflect the amount that citizens should reasonably be expected to afford.

The public debate also became rather distorted. There were many claims by some lobby groups, for example the Mostar based Independent Bureau for Development (NBR) often would claim that there were more than 3,500 so called parafiscal fees in the FBiH. This claim was nothing but absurd. An exact figure cannot be placed on the FBiH position because of variations across municipalities and cantons, however a total of no more than 350 is much more realistic. Most of these are real fees and charges (driving licenses, building permits, car parking etc).

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The FBiH Employers’ Association (EA) often made a lot of noise about what they considered to be parafiscal fees and intensely lobbied USAID FAR, USAID and the wider diplomatic community in general to “get something done”. This group attacked our FBiH register and claimed it did not include several parafiscal fees that impacted upon its members. Upon scrutiny, these transpired not to be fees at all but a general list of costs for businesses that the EA wanted scrapping. If was politely pointed out to the EA that social protection and employment rights for new mothers to leave work early for young baby care, the rights of disabled employees to receive further benefits, training requirements for waiters and bank charges are clearly costs that employers do not like, but they are not para fiscal fees.

There may be a justified debate concerning the overall level of charges imposed, even when they are actual fees and not “parafiscal”, and civil society and business groups have every right to draw attention to these. At times, bogus claims such as these diverted our attention.

Transparency

It is very much worth noting that transparency of how fees and charges are imposed turned out to be significant. It was clear early on that there was no easy way for citizens, businesses, potential investors and even the authorities themselves to find out the full extent of fees and charges that are imposed. The Foreign Investors Council and BiH Foreign Investment Promotion Agency (FIPA) could not give a clear answer to potential investors. Most fees and charges are brought into effect by laws which are published in the official gazettes of the jurisdiction to which they apply. Figure 20: USAID FAR and FMoF representatives attending Economic fair at Mostar in 2016 to present the efforts to establish Register of fees

The issue of transparency played a determining role in our holistic approach to our reform proposals and successes. Our actual approaches to this in the RS, Brcko and FBiH are focused on below.

Republika Srpska

At the close of activities, the RS has a fully interactive web based, fully publicly accessible register of fees and charges. In fact, this is not just a register of all fees and charges imposed at both the RS Entity and municipal levels; the register also contains all direct taxes, fees and charges that in force in the RS (note VAT, excise and customs duties are BiH State level).

Figure 21: USAID FAR presenting the Law on Tax System in the RS to FMoF

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This register is given legal power and force by the RS Law on the Fiscal / Tax System. This law is now fully in force and all its transitional provisions have expired. The legal position in the RS since summer 2018 is:

 No tax, fee or charge within the jurisdiction and competency of the RS can be levied, charged nor imposed on taxpayers if it is not in the register. A tax, fee or charge must therefore be published in the register

 All taxes, fees and charges within the RS’s jurisdiction must be adopted by law by the RS National Assembly. If fees and charges do not have full legal / law basis, they cannot be included in the register and therefore are not valid. Prior to USAID’s intervention, many fees were imposed based on Ministry Decisions. This is no longer possible

 Any new draft law which proposes a fee, charge or tax to be adopted must go through a detailed review process. A fee or charge must be assessed against a set of criteria (equivalence, serve provided etc.). This opinion must be sent with the proposed / draft law to the RS National Assembly for the consideration of the lawmakers.

As a direct result of the adoption of this law and the systemized process that it introduced, 45 fees (mainly parafiscal in nature) have been abolished leading to cumulative savings to businesses and citizens by the end of activities of KM 10 million.

This is radical progress and a major success. It boosts transparency and the business environment. It has established an ongoing and systemized approach as all fees, charges and taxes must be periodically scrutinized and reviewed to verify that they comply with the principles set out in law.

RS Minister of Finance, Zoran Vidovic observed that since the adoption of the RS Law on the Fiscal / Tax System, not one new fee has been introduced. The procedure does not prevent new fees from being introduced; it does require that any such proposal must be fully justified, explained, and defended by their proponents.

Brcko District

At the close of activities, the Brcko District also had a fully interactive web based, fully publicly accessible register of fees and charges. As in the RS, this is not just a register of all fees and charges imposed in the District, but also of all direct taxes, fees, and charges over which the District has jurisdiction.

This register is given legal power and force by the Brcko Law on the Fiscal Register. This law entered into force during 2019 so, at the time of writing, remains under transitional provisions which consist of verification and data submission processes. When the transitional processes have been completed, (end of 2020), as in the RS, this will mean that:

 No tax, fee or charge within the jurisdiction and competency of Brcko can be levied, charged nor imposed on taxpayers if it is not in the register. A tax, fee or charge must therefore be published in the register

 All taxes, fees, and charges within Brcko’s jurisdiction must be adopted by law by the Brcko Assembly. If fees and charges do not have full legal / law basis, they cannot be included in the register and therefore are not valid.

 Any new draft law which proposes a fee, charge, or tax to be adopted must go through a detailed review process. A fee or charge must be assessed against a set of criteria (equivalence, serve provided etc). This opinion must be sent with the proposed / draft law to the Brcko Assembly for the consideration of the lawmakers.

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In both the RS and Brcko, USAID FAR led the ministry working groups which drafted the laws and rule books needed to fully implement these. USAID FAR led the establishment and completion of the registers. USAID FAR built the interactive web-based applications for these registers.

Federation of Bosnia and Herzegovina

The RS and Brcko both a unitary structure of governance. Both are centralized. This facilitated speedier progress that that of the FBiH. The FBiH has a much more complicated constitutional and governance structure. There are eleven constitutions: the FBiH level constitution and one for each of the ten FBiH Cantons. Municipalities, (units of local self-governance) have considerable levels of autonomy as set out constitutionally, by the FBiH Law on Local Self Governance and other statutes.

Due to the influence of these additional complicating factors in the FBiH, we undertook an alternate approach which consisted of:

 Defining the scope of the content of the FBiH Register of Fees and Charges. This was of critical importance due the three levels of authority in the FBiH and the shared uses for fee revenues

 In cooperation with the FBiH AMC, we undertook extensive consultation with all FBiH municipalities. We held workshops with municipal representatives in five locations across the FBiH

 We analyzed and highlighted ten major examples of parafiscal fees that were ripe for reduction or abolition across the FBiH. This revealed the extent of the issues and problems facing us. Fees and charges set at one level of government (FBiH) are used by other government levels (Cantons, municipalities, and sometimes external agencies with statutory power such as water protection, environment and civil protection agencies)

 Extensive wide public consultation. We presented at events and met with groups such as the FBiH Employers’ Association, Foreign Investor’s Council, CPI, etc.

All of this work enabled us to produce a register of all the fees and charges in the FBiH. We became aware of the extent of these, the different way (some more legal than others) by which they are imposed and brought into effect. It highlighted that the only true way to deal with the issue of parafiscal fees, once the scope of extent of the FBiH register had been defined, was to determine the possibility of an approach as similar as possible to that adopted in the RS and Brcko.

We used the successes achieved as a driver. We brought these to the attention of the FBiH authorities, and wider business community. If it is good enough for the RS and Brcko, it should be also be feasible in the FBiH.

We engaged the services of an external lawyer and tasked this person to explore the constitutional possibility of adopted an overall framework type law that were at that time adopted or in the process of adoption in the RS and Brcko. This review considered the eleven constitutions of the FBiH, the FBiH Law on Local Self Governance (rights and competencies of municipalities) and other relevant legislation.

The report concluded that it was constitutionally feasible, albeit more difficult and complicated, to achieve and similar regulatory environment for the regulation of fees and charges in the FBiH as had been attained elsewhere.

Moving on from the report. We again engaged the lawyer to draft a FBiH Regulatory draft Law for Fees and Charges that mirrored the RS results. This draft stipulated that only fees and charges can be levied if they are included in the register, that all fees and charges must be adopted by law / legislation only and a set of principles / criteria should be applied when introducing new fees.

This gained some traction within the Ministry of Finance. The draft was submitted and reviewed by them. Wide consultation was held on this draft. We visited the Ministers of Finance of all ten FBiH Cantons. We extensive

FAR Final Report 30 September 7, 2014 - March 7, 2020 consulted with the FBiH AMC. Support for the concept of adopting a legal basis for the register was universal. Support for the concept of fees not being charged if they are not published in the register was less, especially from the AMC.

This consultation also revealed that there were a multitude of consultation phases and if the utmost care were not taken, less than immediately obvious constitutional blocks and delays could be encountered. In heed of this, we took the strategic approach of dividing the reform in the FBiH into two stages: the first stage - establishing the legal basis of the FBiH Register of Fees and Charges and an enforcement mechanism for their inclusion: the second stage - establishing the legal framework for adoption of fees, requiring these to be in law only and application of objective criteria to these.

We drove ahead with this first stage. We produced a draft law for giving legal basis to the FBiH Register of Fees and charges. We intensively lobbied with the FBiH Finance Ministry for this draft law to complete all required internal validation procedures (for example Ministry of Justice review, Government Law Office legal review) and then for the draft Law to be sent to the FBiH Government for adoption. On February 6, 2020, the FBiH Government adopted the draft law on the Register of Fees and Charges in the FBiH and sent it to the FBiH Parliament for adoption under the shortened / urgent procedure.

This success means that as soon as this law is adopted, there will be one official interactive and online register of fees and charges across the entire FBiH. It will be one of the major stopping points for investors to visit when taking business decisions. There will be a transition period of one year from the entry of this law into force to allow every municipality, Canton and the FBiH level to verify that their fees and charges are included before the penalty provisions for failing to do so would apply.

Figure 22: Launch event for the Web – Register of fees in the FBiH

As is abundantly apparent from this report, we achieved major successes and had a major impact in reshaping how fees and charges are levied and imposed in BiH and on boosting the transparency that the business community requires.

Strengthening the capacity for enhanced reporting between the FBiH Tax Administration and FBiH Ministry of Finance

As part of our earlier work on the development of the FBiH register of fees and charges, the FBiH Finance Ministry enquired if a component of this work could include real time or close to real time reports of the actual payment of fees and charges that were to be included in the register. When work commenced on this, it transpired to be a logical step to expand this to include reports, at a close to real time basis, of all direct revenues levied across the FBiH.

The Ministry of Finance was also strongly interested in having an application to majorly speed up the time by which it obtained reports of revenues received from the Tax Administration. The then existing procedure was slow and formal. The Ministry sent an official request, sometimes to “speed things up” by fax, to the Tax Administration. It would take one month or more to receive the reply and revenue collection data.

The application, now called “the Reporting Tool”, provides the Ministry of Finance with a suite of pre-designed forms (which they can amend) for different revenue types. All nine forms cover all revenues charged, including fees and charges, across the FBiH. Revenue collection data is real time or close to real time (previous day) for most revenue types. For certain fees which are allocated and shared out between different levels of government of between government and agencies of government, a few more days is required for full verification.

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This proved not to just be a radical step in generation of real time data and the ability to detect the occurrence of revenue trends, potential declines and similar significantly earlier than before, it also highlighted numerous deficiencies across the FBiH in the correct application of the FBiH Law on Treasury. Many municipal and cantonal, at times even some FBiH level fees were being paid into incorrect bank accounts. Revenues paid into incorrect accounts cannot be tracked.

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4. Problems / Obstacles Encountered During Implementation

Appeal Against Contract Award

Due to an appeal in the award of USAID FAR to Finit Consulting, the planned commencement day of September 7, 2014 was delayed by three months to December 7, 2014. At the time of writing of this report, this perhaps seems a little distant. This however did have an impact on start up momentum and for a first time USAID contractor, was unnerving and less than ideal. Fortunately, we received the formal go-ahead three months later than scheduled and commenced activities on December 7, 2014.

Political / Election Impact, delays in Establishment of Governments

December 2014, following the go ahead to commence activities, we were delayed in securing Memorandums of Understanding (MOU) with our key counterparts. This was due to national elections taking place in October 2014. The FBiH Government was not established until May 2015 which meant we were not able to conclude a formal MOU with the FBiH until July 2015. Our MOUs with the Brcko and RS Governments were concluded in the spring of 2015.

The 2018 general elections also impacted upon us, especially within the FBiH and State levels. Even as we ceased our activities in March 2020, the new FBiH Government, based on the 2018 election mandate had still not been formed, leaving us working with effectively a technical government. While more technical type activities generally progress, those requiring clear political will and initiative were somewhat delayed; the main impact being on the draft FBiH Law on the Register of Fees and Charges in the FBiH (see above). Additionally, the delayed formation of the BiH Council of Ministers (December 23rd, 2019) also meant that further positive steps towards fiscal harmonization were delayed. Things only started to finally move forward on December 27, 2019 by the newly established BiH Fiscal Council adopting the Global Fiscal Framework for the forthcoming three- year period.

For those familiar with BiH, the inherent constitutional framework of the FBiH, with significant decentralization and allocation of competencies between the FBiH, Cantonal and Municipal Level often militates against major progress and reform. This served to work against us in attempts to simply employers’ payment of payroll taxes and contributions as multi levels of governments wanted to receive their own revenues directly rather than allow this to be done by a simplified system. Our reform achievements in the area of fees and charges, a significant policy success, took root and generated results much faster in the RS and Brcko than the FBiH.

Resistance to transparency and accountability of public revenue usage

A significant part of our work focused on boosting transparency of use of public revenues, through the implementation and roll out of treasury systems to the Budget Management Information System (BMIS) introduced to all ten FBiH Cantons.

In treasury, we brought 42 FBiH municipalities into compliance with the FBiH Treasury Law. Forty-two additional institutions also gained modern IT based systems. However, despite all of our outreach efforts, this still left 16 FBiH municipalities without no effective, IT based treasury system. Some of these were unable to accept the system due to low resources (some smaller municipalities have just one employee and could not devote necessary time). Others clearly were resistant due to a desire to avoid scrutiny and transparency. We had, at the earlier part of our activities, agreed with Public Administration Reform Coordinator’s Office (PARCO) to assist with the roll out of treasury into many of these outstanding municipalities. This did not go head due to PARCO’s own and ongoing failure to implement tendering processes following domestic public procurement rules.

In the RS, the Government, Ministry of Finance and Ministry of Health and Social Protection all expressed strong support at the outset for our targeting of their Entity level health institutions for inclusion into the treasury system. By the close of our activities, four out of twenty of these had been included and would likely have remained at just one if it was not due to our ongoing lobbying and coordination with the World Bank and other

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International Community players in this sector. Numerous “reasons” were cited by RS officials for not further bringing the system into use with emphasis placed on the current debts (arrears) of many health institutions. The reality was and remains that these institutions have and will continue to accrue and increase debts and arrears until stricter financial controls are introduced. The inclusion of all entity level institutions into the TS would have required the RS Government to recognize and include these debts into their financial statements. Full introduction and activation of treasury would also remove rent seeking and financial manipulation of public resources. As noted above, the RS health sector is the only remaining part of RS public expenditure that is outside its treasury system.

By a somewhat pleasant contrast, the introduction and roll out of the BMIS system to all ten FBiH Cantons did not pose such resistance. The problems and issues encountered with our counterparts were more standard of a major IT implementation and system change, when an issue concerning software source code been resolved.

Obtaining BMIS type source code from similar type USAID Budget Management Intervention in Serbia

While BMIS implementation was highly successful, it was somewhat delayed by between six to nine months due to delays in determining the availability of available BMIS source code and perhaps a somewhat stunted dialogue between USAID’s Missions to BiH and Serbia. During the implementation of the tendering and open procurement process for the BMIS software, it became apparent from one of our short-listed bidders that USAID had recently financed the development of a BMIS type software in Serbia under its Business Enabling Project (BEP). In view of this, and in order to follow USAID’s requirements, we requested that the Serbian source code be made available in order to reduce the BiH procurement costs and avoid duplication of expense and effort.

After a protracted process of meetings and communication entered directly between USAID’s BiH and Serbian Missions, this source code was not made available which at one stage appeared to threaten whether BMIS in BiH could go ahead. Fortunately, with assistance from USAID BiH’s Contracting Officer / OAA, we were able to arrive at a solution. After a partial re-run of the tendering process, this involved our preferred subcontractor candidate and subsequent subcontractor to offer a reduction in the development and implementation price to reflect “deemed provision” of the source code.

Debt Management Software (non) Procurement

This issue is in more detailed elaborated in above (Objective A.3). There it is noted that UNCTAD’s DMFAS software solution was determined and agreed by all four Finance Ministries to be the most optimal by application, support, sustainability and by price. It is also noted that at the time the SOW of this activity was under design and solicitation, the presumption appears to have been made that BiH’s World Bank classification of “lower middle-income status” would remain. It was the change of this in 2014 to “upper-middle income” country status that required UNCTAD to place a US$400,000 price tag on this software.

This change of status was unfortunately a game changer and meant that funding for DMFAS would have to be found externally. The initial approved budget did not envisage this type of expenditure and there was consequently no capacity for this.

IT Staffing Resources in Key Counterparts

Both the FBiH and RS Tax Administration endured significant IT staff retention and recruitment issues throughout the time of the activity. While significant successes were achieved with excellent results, even more could have been achieved had their IT human resource capacities been better. It should also be stressed that IT resource issues are not exclusive to BiH.

Bilateral Agreement for Provision of Technical and Related Assistance between the United States of America and Bosnia and Herzegovina (Bilateral Agreement)

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We, USAID FAR’s implementer, Finit Consulting), are the first ever local BiH company / legal entity to implement a USAID assistance contract in BiH. This generated certain issues and continues to pose some challenges when seeking to apply the provisions of the Bilateral Agreement between the USA and BiH. Some domestic authorities were unwilling to recognize that due to certain statements made in the preamble to the Bilateral Agreement, that the tax provisions (e.g. exemption from withholding tax when payments are made to outside of BiH) applied to a local company. USAID became to an extent involved back in 2015 and 2016. We successfully worked with the then Contracting Office, Neil Price to develop processes and a mechanism by which most of these implications were defacto annulled. We were also advised by USAID that as this is an agreement between the USA and BiH, this should be resolved at this level. We are not aware that any further progress or conclusions were reached between the USA and BiH.

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5. Lessons Learned, Findings, Comments and Recommendations

Including RS Health Sector in the RS Treasury System

The issues we encountered when undertaking this are also referred to in Section 4 above. The key lesson that we would recommend is taken note of should there be any future major treasury system roll out would be before commencement of implementation, even if high level political support appears high, is to assess the current level of debts and financial robustness or otherwise of the institutions into which treasury is earmarked for implementation. This would be useful in two ways; 1) institutions with the most critical financial position could have treasury implemented later 2) the evaluation would facilitate countering arguments against roll-out including those based on unsubstantiated claims of debt and arrear levels.

Improved Fiscal Communication and Coordination

Securing long term success, usage and sustainability of IT interventions and solutions clearly depends on their functionality, uptake by the end users and affordable ongoing maintenance, development, and support. However, we believe we achieved further significant benefits due to our work across BiH due to the increased communication and cooperation, at the working and civil servant level.

The introduction of the BMIS system into all ten FBiH Cantons necessitated regular meetings of representatives of Cantonal Finance Ministries and the FBiH Finance Ministry to focus on its implementation. As observed above, this stimulated many positive side effects of shared learning and. We also developed an online database for sharing expertise, knowledge and issues encountered by Ministries when using the BMIS application which was widely used. The FBiH Finance Ministry directly expressed satisfaction about this positive outcome. Again, as noted earlier, it was not mandatory and nor could it be under the FBiH and Cantonal Constitutions. Gaining the respect and securing a deep understanding of our counterparts’ requirements enabled this positive outcome.

In the area of fiscal reporting harmonization, while political impasse and delays in establishing the Council of Ministers meant that the Rule Book for the Advisory Group to the Fiscal Council was not adopted, also led to enhanced cooperation at advisor level. We believe that the benefits of our activities here will become more apparent during 2020 and beyond.

Governmental Institutions, Co-financing and their Expectations

It remains extremely difficult and problematic for counterparts (governments, their institutions) to co-share financing with donor projects and interventions. The underlying and prevailing view by numerous officials and civil servants appears to be that international assistance projects are a useful way to receive donations. Additionally, joint procurement and financing is extremely difficult to achieve. Governments and their institutions must follow stipulated public procurement processes which cannot be made to dovetail and coincide with the procurement processes necessarily required by USAID’s Implementing Partners.

When there is willingness from counterparts to participate (e.g. an institution indicates it could procure some IT hardware), the public procurement processes take a long time and must be already included in that institution’s budget. At their fastest. domestic institutions usually require between one year to fifteen months to realize and execute a relatively simple procurement.

We overcame issues of this nature as far as possible. A key example of this is the ongoing maintenance of the BMIS system in all ten FBiH Cantons. Using the BMIS working group as leverage, we succeeded in persuading the FBiH Finance Ministry to Finance the maintenance and support of this system for its own system and that of the ten cantons.

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The decentralized and dispersed nature of BiH also militated against and form of domestic resources being found for UNCTAD’s DMFAS system for debt management (see above discussion on the range of issues that were faced). The timing, logistics and securing agreement between even just four governments (BiH, FBiH, RS and BD) for the purchase of DMFAS remained unfeasible and would have diverted the time and resources of the activity away from those many other areas where progress was made.

Activities are much more efficient when procurement contributions and participation (beyond reviewing the technical specifications of the IP’s proposed procurement). We also adjusted our procurement processes to review and evaluate existing (predominantly IT) infrastructures and targeted procurement accordingly (e.g. additional storage and disk space for Tax Administrations and Ministries which boosted institutional capacity to adopt necessary reform measures).

Absence of domestic political will and reduced International Community Influence

Some of these issues are already touched on above. Nevertheless, it is worth noting that the time needed for implementing election results has become more protracted due to ongoing high levels of political instability, especially in the FBiH, certain cantons (recent example Sarajevo Canton) and the BiH level. Attaining political “buy in” is rendered even more problematic when you simply do not know if the official or minister in position will be there next week or month.

This is arguably partially due to the relative decline in international community influence and less direct engagement in bringing political parties together as previously happened when the Office of the High Representative and its Steering Board Ambassadors Group derived from the Peace Implementation Council had a more pronounced presence. However, in areas where the US Embassy was taking a direct interest, for example its participation at the International Community’s Health Development Partner’s Cooperation Group, we as the IP were not directly alerted to this. Our CoP joined this group as a result of our own initiatives and was then able to capitalize on increased pressure and more coordination about expanding the adoption of the treasury system in RS level health institutions. In summary, the lesson to be learned here is for USAID to alert all its IPS to areas where both it and the US Embassy are engaged. Synergies and progress were achieved when this link was forged.

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6. Overall Monitoring and Evaluation Successes and Results (Quantitative Evaluation)

FAR developed a comprehensive M&E Plan throughout the implementation period, tracking outputs, outcomes, and impact indicators for each objective. FAR anticipates results across four activities (activity 4 has 3 sub-activities). Activities are focused on fiscal discipline, which entails a comprehensive set of initiatives tackling coordination between the different levels of the BiH governments, and additional work with governmental institutions such as the tax administrations. The main activity tasks were:

A.1 Assistance for improved intergovernmental fiscal coordination A.2 Strengthening of the FBIH Treasury System (TS) and introduction of the Health Sector to TS of Republic of Srpska A.3 Strengthening of the Public Debt Management A.4 Increased compliance and improved business environment A.4.1 Reducing tax evasion A.4.2 Business environment A.4.3 Business environment - Elimination of nuisance taxes

The tables below show the baseline, targets, and actual results achieved throughout the life of the Activity per each indicator.

A.1 Assistance for improved intergovernmental fiscal coordination Fiscal Reporting Harmonization

Table 1: Difference in coverage in consolidate execution of general government budget in GFF vs. IMF data – target (T) and achieved (A)

LIFE OF FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 ACTIVITY INDICATOR NAME NE NE

BASELI T A T A T A T A T A T A 1.-1 Difference in coverage in consolidate execution of general government budget in 2,37% / / / / / / 0% / 0% / 0% / GFF vs. IMF data

Given protracted delays in the establishment of the BiH Council of Ministers, amendments to the Fiscal Council's Rulebook which was to define the scope of reporting were not adopted, and our recommendations for reporting harmonization as well as consolidation methodologies were not implemented by the time of cessation of activities. Consequently, this indicator currently cannot be calculated.

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Table 2: Number of recommendations related to fiscal reporting harmonization – adopted and submitted by FAR

LIFE OF FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 ACTIVITY INDICATOR NAME

BASELINE BASELINE T A T A T A T A T A T A

1.1-1 Number of adopted recommendations 0 0 0 0 0 5 0 8 2 1 0 14 2 related to fiscal reporting harmonization 1.1.1-1 Number of recommendations related to fiscal reporting harmonization that are 0 0 0 14 14 / / / / / / 14 14 submitted by FAR

Chart 1: Number of targeted (T) and achieved (A) recommendations related to fiscal reporting harmonization that are submitted by FAR Table 2 refers to the indicator regarding fiscal reporting harmonization. 1.1.1-1 Number of recommendations related to fiscal reporting Regarding “Number of recommendations related to fiscal reporting harmonization that are submitted by FAR harmonization that are submitted by FAR” the overall baseline was 0, the 16 target was 14, and the result was 14. FAR prepared Report on the current 14 12 status of fiscal reporting across BiH report with recommendations related 10 to fiscal reporting. This report was forwarded to all relevant ministries of 8 6 Finance (FBiH, RS, BD, and State) in 2016. FAR further prepared the 4 lobbying strategy and action plan. 2 0 Chart 1 presents the achieved results. TATATATATATA FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 LIFE OF ACTIVITY

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Regarding “Number of adopted recommendations related to fiscal reporting harmonization that are submitted by FAR” the overall baseline was 0, the target was 14, and the result was 2. Two recommendations have been implemented in the FBIH and RS in 2018. These are the adoption of rulebooks enabling the publishing of fiscal data in line with GFS 2014 and ESA 2010 methodologies. Chart 2 presents the achieved results.

Chart 2: Number of targeted (T) and achieved (A) adopted recommendations related to fiscal reporting harmonization

1.1-1 Number of adopted recommendations related to fiscal reporting harmonization 16 14 12 10 8 6 4 2 0 TATATATATATA

FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 LIFE OF ACTIVITY

This indicator was below targeted due to challenges in the BiH political scene that has lasted close to one year following the 2018 general elections, progress in this area has been restricted. The absence of the formation of a new BiH Council of Ministers meant that a new BiH Fiscal Council could not be established.

During all that period, we maintained contact at relevant assistant ministerial and advisory levels to help facilitate the rapid adoption of the revised rulebook for the Advisory Group to the Fiscal Council in the event of positive political developments. In addition to this, we developed the strategy to harmonize the accounting practices used across the Federation of Bosnia and Herzegovina and initiated steps to bring these closer in line. The impact of this would be better and more accurate consolidated reports.

Despite a small number of recommendations adopted, the quality of the document which contains consolidated fiscal data, the Global Fiscal Framework (GFF), has improved due to FAR as it now contains budget execution data for the previous year. Also, entities have adopted the form of execution in line with GFS methodology. For the first time since the establishment of the BiH Fiscal Council, data from actual budget execution will be available to compare with planned targets.

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Fiscal modelling – microsimulation and aggregate revenue forecasting models

Modify / create microsimulation and aggregate revenue forecasting models, train Ministries of Finance (FBiH, RS, BD, BiH, Sarajevo Canton) staff on their use

Table 3: Capability to independently use models (microsimulation and aggregate revenue forecasting models): targeted (T) and achieved (A) number of points

LIFE OF FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 ACTIVITY INDICATOR NAME T A T A T A T A T A T A2 BASELINE TOTAL: / / 200 171 170 50 140 197 140 291 650 709 1.1.1-2 Capability to independently use 70 models (microsimulation and aggregate M*: 70 / / 200 171 170 50 / 113 / 29 370 363 revenue forecasting models) E**: 0 / / / / / / 140 83 140 262 280 346 *Microsimulation model **Aggregate revenue forecasting model

Table 3 refers to the capability to independently use models (microsimulation and aggregate revenue forecasting models). The overall baseline was 70 points, the target was 650 and the actual result was 708 points, which is higher than expected. The Chart 3 visualizes results achieved in the area of aggregate revenue forecasting. Chart 4 presents results achieved in the microsimulation modeling and finally, in Chart 5 we can see the overall result.

2 Covers data results for period of December 2014 to March 2020

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Chart 3: Capability to independently use aggregate revenue forecasting models, Chart 4: Capability to independently use microsimulation models, targeted (T) and achieved (A) number of points targeted (T) and achieved (A) number of points

1.1.1-2 Capability to independently use models 1.1.1-2 Capability to independently use microsimulation aggregate revenue forecasting models model 400 400 350 350 300 300 250 250 200 200 150 150 100 100 50 50 - - TATATATATATA TATATATATATA FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 LIFE OF FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 LIFE OF ACTIVITY ACTIVITY

Chart 5: Capability to independently use models (microsimulation and aggregate revenue forecasting models) –targeted (T) and achieved (A) number of points

1.1.1-2 Capability to independently use models (microsimulation and aggregate revenue forecasting models) 800 700 600 500 400 300 200 100 0 TATATATATATA FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 LIFE OF ACTIVITY

FAR Final Report 42 September 7, 2014 - March 7, 2020

The success of these training sessions was measured by the capability of MoF’s personnel to independently use models. The capability to independently use microsimulation and aggregate revenue forecasting models were further determined by a qualitative method, by using a questionnaire (testing) that evaluated the MoFs’ personnel knowledge at the beginning and the end of the training.

The target was 70% scored at the questionnaire (testing): meets most of the performance criteria for all models. To present baseline and targets, FAR has assigned points which most institutions exceed which can be seen in Table 4 below.

Table 4: Targeted and achieved results in all models (in points)

Models Score Target (in points) Result (in points)

Microsimulations PIT and SSC RS 70 94 Microsimulations PIT and SSC FBIH 70 85 Microsimulations PIT and SSC BD 70 77 Microsimulation social benefits RS 10 14 Microsimulation social benefits FBIH 10 / Microsimulation social benefits BD 10 14 Microsimulation CIT RS 20 27 Microsimulation CIT FBIH 20 29 Microsimulation CIT BD 20 23 Microsimulation State 70 / Aggregate revenue forecasting RS 70 100 Aggregate revenue forecasting FBIH 70 83 Aggregate revenue forecasting BD 70 90 Aggregate revenue forecasting State 70 72 Total (Microsimulations) 370 363 Total (Aggregate revenue forecasting) 280 346 Total (All models) 650 709

It is important to emphasize that the social benefits microsimulation model in FBIH has been developed and presented but the training was not concluded. Consequently, in this case, there are no testing and scoring results. Microsimulation modelling was not carried out at the State as a Memorandum of Understanding between the USAID and the BiH State level government was not concluded. Additionally, microsimulation models for Sarajevo Canton (microsimulation model for property related taxation – property tax, real estate transfer: sales, gifts and inheritance, microsimulation model for communal charges and creation of formula for real estate valuation) were developed, but since they are subsequently included in FAR’s contract, these are not included in the MEL plan.

FAR Final Report 43 September 7, 2014 - March 7, 2020

Results presented in Table 4 above are shown in Charts 6 and 7, where Chart 6 presents results achieved in the area of microsimulation modeling by types of models and institutions. Chart 7 does the same, but in the area of aggregate revenue forecasting.

Chart 6: Targeted and achieved results in microsimulation models for all evaluated counterparts (in points)

Targeted and achieved results in microsimulation model 100 80 60 40 20 0 PIT and SSC RS PIT and SSC PIT and SSC Social benefits Social benefits Social benefits CIT RS CIT FBIH CIT BD State FBIH BD RS FBIH BD

Target (in points) Result (in points)

Chart 7: Targeted and achieved results in econometric i.e. aggregate revenue forecasting for all evaluated counterparts (in points)

Targeted and achieved results in econometric forecasting 120 100 80 60 40 20 0 Econometric forecasting RS Econometric forecasting FBIH Econometric forecasting BD Econometric forecasting State

Target (in points) Result (in points)

FAR Final Report 44 September 7, 2014 - March 7, 2020

Objective A.2: Strengthening of the FBIH Treasury System

Treasury System (TS) Introduction into FBiH Municipalities

Table 5: Targeted (T) and achieved (A) percentage of FBiH municipalities with modern IT treasury information system

LIFE OF FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 ACTIVITY INDICATOR NAME

BASELINE T A T A T A T A T A T A 1.2-1 Percentage of FBiH municipalities with modern IT treasury information 24,05% / / / 28% 75% 63% 100% 71% 100% 77% 100% 77% system

Table 5 refers to indicator “Percentage of FBiH municipalities with modern IT treasury information system”. Before the project started, out of 79 municipalities in the FBiH only 19 (24.05%) had treasury information system in place which was the baseline for this indicator. Target was 100% i.e. FAR had planned to introduce/conduct upgrades to other 60 municipalities in FBIH to create full coverage of the government / public sector treasury systems.

In total, FAR completed upgrades/implementation in an additional 42 FBiH municipalities. Three were completed in FY 2016, twenty-eight in FY 2017, six in FY 2018, and five in FY 2019. These are:

FAR Final Report 45 September 7, 2014 - March 7, 2020

1. Banovići 16. Jablanica 31. Srebrenik 2. Bosanska Krupa 17. Kalesija 32. Stolac 3. Bosanski 18. Kiseljak 33. Teocak Petrovac 19. Konjic 34. Tomislavgrad 4. Bosansko 20. Kreševo 35. Trnovo Grahovo 21. Kupres 36. Usora 5. Čelić 22. Livno 37. Vareš 6. Doboj Jug 23. Maglaj 38. Velika 7. Doboj-Istok 24. Mostar Kladuša 8. Dobretići 25. Neum 39. Vitez 9. Domaljevac- 26. Odžak 40. Vogošća Samac 27. Olovo 41. Zavidovići 10. Drvar 28. Pale 42. Živinice 11. Foča (FBiH) FBiH 12. Fojnica 29. Prozor- 13. Goražde Rama 14. Gradačac 30. Sapna 15. Hadžići

Map 1: Municipalities in the FBiH – successfully introduced treasury systems

FAR Final Report 46 September 7, 2014 - March 7, 2020

FAR provided one year of user and maintenance support to all these municipalities. Training on the use of the systems was provided with follow up reinforcement sessions. More than 190 municipal financial officers received full training on the rolled-out systems.

More details about encountered problems in implementation of this activity is provided in narrative part of the final report.

The number of municipalities with modern IT treasury information system has been prominently increased since the start of the project. Starting from 24.05% to 77.02% coverage was increased by 52% which significantly enhanced the transparency of the spending of municipal public revenues.

The Chart 8 shows the results achieved in the area of coverage of FBIH municipalities with modern IT treasury information system.

Chart 8: Targeted (T) and achieved (A) percentage of FBiH municipalities with modern IT treasury information system

1.2-1 Percentage of FBiH municipalities with modern IT treasury information system 120% 100% 80% 60% 40% 20% 0% TATATATATATA FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 LIFE OF ACTIVITY

FAR Final Report 4 7 September 7, 2014 - March 7, 2020 September 7, 2014 March 7, 2020

Including RS Health Sector in the RS Treasury System

Table 6: Targeted (T) and achieved (A) percentage of RS health sector institutions included in treasury information system in RS LIFE OF FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 ACTIVITY INDICATOR NAME

BASELINE T A T A T A T A T A T A 1.2-2 Percentage of RS health sector institutions included in treasury 0% / / / 26% 3% 100% 3% 100% 8%3 100% 8% information system in RS

Table 6 refers to indicator “Percentage of RS health sector institutions included in treasury information system in RS”. The overall baseline was 0 considering that not one health institution in the RS was using treasury systems. FAR’s target was to introduce the treasury information system in all RS health care institutions (19 hospitals and 56 health centers) and RS Health Insurance Fund as a vital component of health care financing. The result was 7.9%, i.e. 6 out of 76. Two TS pilots were successfully launched in the Gradiska Hospital and the RS Dentistry Institute in Banja Luka utilizing the test version of the treasury SUFI system in 2018. These two pilot operations have been pivotal in determining how operations should interact and function between the RS Health Insurance Fund and the RS level Healthcare Institutions (hospitals and other specialist care sites). Four additional institutions have successfully begun their financial operations through the treasury system: Institute for Forensic Medicine, Institute for Transfusion Medicine, as well as Health Centers in Derventa and Bratunac in 2020. Health Center Prnjavor is next to be included considering that several conditions have been fulfilled.

Chart 9 shows the results achieved in the area of coverage of RS health sector institutions with a modern IT treasury information system.

FAR Final Report 48 September 7, 2014 - March 7, 2020

Chart 9: Targeted (T) and achieved (A) percentage of RS health sector institutions included in treasury information system in RS

1.2-2 Percentage of RS health sector institutions included in treasury information system in RS 120% 100% 80% 60% 40% 20% 0% TATATATATATA FY 2015 FY 2016 FY 2017 FY 2018 FY 2019*[1] LIFE OF ACTIVITY

Training on the use of the systems was provided to 47 health care financial officers.

We have completed all technical requirements and ensure that all donated hardware had been distributed to all relevant end user locations (hospitals and specialist health care institutions so that all institutions were ready to go live. The RS Government stated that there would be a phased approach to the full inclusion of its institutions into the system, starting with the RS Dentistry Institute in Banja Luka. More details are provided in the narrative part of the Final Report.

Treasury System in FBiH and in RS

Table 7: Targeted (T) and achieved (A) number of institutions newly included in Treasury Information System (TIS) and number of institutions receiving TIS upgrades

LIFE OF FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 ACTIVITY INDICATOR NAME T A T A T A T A T A4 T A BASELINE BASELINE

1.2.1-1 Number of institutions newly 0 0 0 0 3 60 28 76 8 / 95 136 48 included in Treasury Information System FI* 0 0 0 0 20 0 76 2 / 6 96 8 (TIS) and number of institutions receiving TIS upgrades UG** 0 0 0 3 40 28 0 6 / 3 40 40

4 Includes data results for period of October 2019 to March 2020 *Number of institutions receiving full implementation **Number of institutions receiving upgrades

FAR Final Report 49 September 7, 2014 - March 7, 2020

Table 7 refers to indicator: “Number of institutions newly included in Treasury Information System (TIS) and number of institutions receiving TIS upgrades”. This indicator refers to the two previous one. The overall baseline was 0 considering that it measures only institutions assisted by FAR and the overall target was 136. i.e.: 96 institutions receiving full implementation, 40 institutions receiving upgrades. The actual overall result was 48, or, 8 institutions received full implementation, and 40 received upgrades which is lower than expected but all preconditions for further implementation of the treasury information system in RS are completed.

The number of institutions newly included in the Treasury Information System (TIS) and the number of institutions receiving TIS upgrades refers to the number of the FBiH municipalities and in RS Health Fund and other RS health institutions which have been provided with the treasury information system and the number of institutions receiving TIS upgrades by the FAR assistance. Newly included institutions are in FBiH those municipalities that didn’t have introduced treasury information system and in RS the Health Fund and other RS health institutions. Municipalities in FBIH which needed only software upgrade received TIS upgrades and/or additional training.

As mentioned above, FAR completed upgrades in additional forty FBiH municipalities. Two received full implementation of TIS. In RS, FAR introduced TIS in 6 health care institutions. Further implementation depended on PARCO as explained in two previous indicators.

Chart 10 visualizes results achieved regarding the number of institutions included in TIS.

Chart 10: Number of targeted (T) and achieved (A) institutions included in Treasury Information System (TIS) (full implementation and upgrade)

1.2.1-1 Number of institutions newly included in Treasury Information System (TIS) and number of institutions receiving TIS upgrades 160 140 120 100 80 60 40 20 0 TATATATATATA FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 LIFE OF ACTIVITY

FAR Final Report 50 September 7, 2014 - March 7, 2020

Budget Management Information System (BMIS) introduction in FBiH Cantons

Table 8: Targeted (T) and achieved (A) percentage of FBiH cantons included in FBiH IT budget system

LIFE OF FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 ACTIVITY INDICATOR NAME

BASELINE T A T A T A T A T A T A

1.2-3 Percentage of FBiH cantons included 0% / / / 100% 100% 100% 100% 100% 100% 100% 100% in FBiH IT budget system

Table 8 refers to the indicator “Percentage of FBIH cantons included in FBiH IT budget system. The overall baseline was 0, the target was 100 and the actual result was 100 as expected. Budget Management Information Software (BMIS) was introduced by 30 September 2017 in all ten FBiH Cantons representing a 100% coverage. Chart 11 presents the overall result.

Chart 11: Targeted (T) and achieved (A) percentage of FBiH cantons included in FBiH IT budget system)

1.2-3 Percentage of FBiH cantons included in FBiH IT budget system

120% 100% 80% 60% 40% 20% 0% TATATATATATA FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 LIFE OF ACTIVITY

FAR Final Report 51 September 7, 2014 - March 7, 2020

USAID FAR trained more than 300 cantonal civil servants from various institutions in the use of the BMIS system. Training was provided on-site across all ten cantons during implementation and was significantly reinforced by follow-up training during 2019. This gave a major boost to improving financial discipline and efficiency in budget preparation.

Objective A.3: Strengthening of the Public Debt Management (PDM)

Table 9: Targeted (T) and achieved (A) progress introduction of IT system for debt management

LIFE OF FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 ACTIVITY INDICATOR NAME

BASELINE T A T A T A T A T A T A

1.3-1 Progress introduction of IT system for debt management in State and Entity 0 1 0 1 1* 2** 1* 3*** 3*** 3*** 1* Finance Ministries, on a scale from 1-3 TOTAL 0 0 2 2 2 0 0 0 4 2 1.3.1-1 Number of documents related to FBiH 0 0 2 2 0 0 0 0 2 2 debt management software processes produced RS 0 0 0 0 1 manual 0 0 0 1 manual 0 BD 0 0 0 0 1 manual 0 0 0 1 manual 0 * Stage 1: Analysis completed ** Stage 2: Procurement documents obtained *** Stage 3: Software installation

Table 9 relates to indicators regarding Public Debt Mana and shows the baseline, targets and actual results achieved throughout the life of the Activity.

Regarding “Progress introduction of IT system for debt management in State and Entity Finance Ministries, on a scale from 1-3 where stage 1 is analysis completed, stage 2 is procurement documents obtained, stage 3 is a software installation, the baseline was 0 and the overall target was 3. FAR achieved target at stage 1, analysis completed. FAR did an extensive analysis to determine and agree with four governments, FBiH, RS, BD and State upon the most optimal IT based solution for public debt management. They all agreed upon UNCTAD’s DMFAS system due to affordability and compatibility. Furthermore, they also agreed upon the principles of debt data exchanged to enable an accurate and consolidated picture of BiH’s debt levels to be created. The final deliverable is an extensive “Analysis of Debt Management Software Solutions” produced in 2016.

FAR Final Report 52 September 7, 2014 - March 7, 2020

Further activates were stopped during 2017 due to the procurement issue explained in detail in section Objective A.3: Strengthening of the Public Debt Management (PDM) of this document). There were no further activities in this area following approved contract modification.

Regarding “Number of documents related to debt management software processes produced” the overall baseline was 0 and target 4. The result was 2. FAR produced two documents related to debt management for the FMoF: “Business Continuity Plan” and “Ethics Code of Conduct”. Having appropriate procedures in place is the first crucial step towards full PDM implementation and software installation at all government levels.

Unfortunately, as said above, further activates were stopped during 2017 due to the procurement issue. (Explained in detail in section Objective A.3: Strengthening of the Public Debt Management (PDM) of this document)

Objective A.4: Increased compliance and improved business environment

Integration of online gaming tracking software with TAFADRIS – Audit and inspection software Table 10: Targeted (T) and achieved (A) results from the activities in the area of games of chance

LIFE OF FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 ACTIVITY INDICATOR NAME

BASELINE T A T A T A T A T A T A

2.1-1 Change in revenues from direct tax 0 0 KM 0 0 0 0 20 mil 0 20 mil 0 20 mil 0 60 mil revenue collected from games of chance 2.1.1-1 Number of audit cases initiated by project intervention by connecting gaming 0 0 0 0 0 27 0 27 0 27 0 81 0 and audit software

Table 10 relates to indicators regarding games of chance.

Regarding “Change in revenues from direct tax revenue collected from games of chance”, the overall baseline was 0 and the target was 60 million while in “Number of audit cases initiated by project intervention by connecting gaming and audit software” the overall baseline was 0 and target was 81.

Unfortunately, due to the uncertainty of Law on Games of Chance implementation TA FBiH was unable to adhere to the planned implementation schedule.

FAR Final Report 53 September 7, 2014 - March 7, 2020

In 2018 we conducted a review of the proposed amendments to the FBiH Law on Games of Chance and determined that relevant IT integration into ADRIS systems can go ahead even while the outcome of these amendments remained uncertain. We completed the first version of functional requirements and delivered it to the FBiH TA for comments.

All planned work for integration of games of chance into the TAFADRIS system has been completed at the end of 2019. Therefore, only one year after it was launched we are able to measure its effects.

The same is with the number of audit cases initiated by the project intervention.

Development of the Single Register of Business Bank Accounts in the FBiH

Table 11: Targeted (T) and achieved (A) total amount of forced collection of company debt in (mil.KM) and number of companies in the single register of business accounts

LIFE OF FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 ACTIVITY INDICATOR NAME

BASELINE T A T A T A T A T A T A

2.1-2 Total amount of forced collection of 2015: 0 0 0 0 121 mil 173,8 mil 123.3 mil 190,3 mil 125,7 mil 55.1 mil 370 mil 419,3 mil 119,7 mil company debt 2.1.1-2 Number of companies in the 0 0 0 0 0 30,002 98,897 30,002 110, 408 30,002 118,447 30,002 118,447 registry that has connected bank accounts

Table 11 shows the baseline, targets and actual results achieved throughout the life of the Activity.

Regarding “Total amount of forced collection of company debt” the overall baseline was 119,7 million BAM, the target was 370 million BAM and the actual result was 419,3 million BAM which is higher than expected

In 2017, forced tax collections increased significantly to more than 173 million Bosnian marks (KM), according to the FBiH Tax Administration. This was a 32 percent increase from 2016, the year before the single register’s launch. The Single Registry of Business Accounts developed and implemented by FAR in May 2017 compiles all bank accounts for all companies operating in FBiH. This system provided a significant boost to old tax debts and forced collection procedures.

In 2018, forced collection again increased significantly to more than 190 million Bosnian marks (KM). This was 54.36 percent increase from our target.

In 2019 forced collection totaled lower than expected, however, cumulative forced collection since the start of the tracking period resulted higher than set target. The reason for the lower result is the change in TA’s methodology.

FAR Final Report 54 September 7, 2014 - March 7, 2020

Chart 12 shows results regarding the total amount of forced collection of company debt.

Chart 12: Targeted (T) and achieved (A) total amount of forced collection of company debt in (mil.KM)

2.1-2 Total amount of forced collection of company debt in mil. KM 450 400 350 300 250 200 150 100 50 0 TATATATATATA

FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 LIFE OF ACTIVITY

Indicator “Number of companies in the registry that has connected bank accounts” measured number of companies that have connected bank accounts in this Single Registry of Business Accounts in the FBIH. The overall baseline was 0, the target was 30,002 and the actual result was 118, 447which is higher than expected.

In 2017, by the 1st of October, there were 98,897 companies in the register that has connected bank accounts.

At the end of FY 2019 there were 118,447 companies in the register that has connected bank accounts - an increase of 20% within a two-year period.

Chart 13 shows results regarding the number of companies in the registry that has connected bank accounts.

FAR Final Report 55 September 7, 2014 - March 7, 2020

Chart 13: Targeted (T) and achieved (A) number of companies in the registry that has connected bank accounts

2.1.1-2 Number of companies in the registry that has connected bank accounts 140

120

100 80

Thousands 60 40 20 0 TATATATATATA

FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 LIFE OF ACTIVITY

Objective A.4.2. Business environment

Public Revenues (Payroll) Payment Simplification in FBiH Table 12: Targeted (T) and achieved (A) results in the area of simplified payroll procedures

LIFE OF FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 ACTIVITY INDICATOR NAME

BASELINE T A T A T A T A T A T A

2.2-2 Amount of cost savings for businesses due to simplified payroll 0 KM 0 0 0 0 0 4 mil 13.2 mil 17.2 mil procedures 2.2.1-1 Number of minimum required 9 / / / / / 5 1 1 monthly payment slips for payroll in FBiH

FAR Final Report 56 September 7, 2014 - March 7, 2020

Table 12 refers to indicators related to payment simplification showing the baseline and targets.

USAID formally withdrew this from the SOW in spring 2018 and more on this is explained in section Public Revenues (Payroll) Payment Simplification in FBiH of this report.

Objective A.4.3. Business environment – Elimination of Nuisance Taxes

Table 13: Targeted (T) and achieved (A) results in the area elimination/reduction of fees

LIFE OF FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 ACTIVITY INDICATOR NAME

BASELINE T A T A T A T A T A T A

TOTAL: 0 KM / / / / 11.7 mil / 18.6 mil 87.1 mil 19.1 mil 87.1 mil 49.4 mil

2.2.-3 Amount of cost savings arising FBiH / / / / 0 / 2 mil 64.3 mil 2 mil 64.3 mil 4 mil from elimination/reduction of fees RS / / / / 11.7 mil / 16.6 mil 22.3 mil 17.1 mil 22.3 mil 45.4 mil BD / / / / 0 / 0 0.5 mil 0 0.5 mil 0

TOTAL: 0 0 0 0 12 1 9 46 3 4 25 51

2.2.1-3 Number of para-fiscal fees FBiH 0 0 0 3 0 4 1 3 0 10 1 eliminated/reduced RS 0 0 0 7 1 5 45 0 4 12 50

BD 0 0 0 2 0 0 0 0 0 2 0

Table 13 refers to indicators regarding the elimination/reduction of fees.

Indicator „Number of para-fiscal fees eliminated/reduced “listed those eliminated by FAR assistance while „Amount of cost savings arising from elimination/reduction of fees “measures savings arising from those eliminated/reduced fees in FBiH, RS and BD. The overall baseline for the Number of para-fiscal fees 0 while the target was 25 i.e. 10 in FBiH, 12 in RS, and 2 in BD. The result was 51 i.e. 1 in FBiH, 50 in RS and 0 in BD, which is higher than expected.

Chart 14 below shows results achieved regarding the number of para-fiscal fees eliminated/reduced per year.

FAR Final Report 57 September 7, 2014 - March 7, 2020

Chart 14: Targeted (T) and achieved (A) number of para-fiscal fees eliminated/reduced

2.2.1-3 Number of para-fiscal fees eliminated/reduced 60 50 40 30 20 10 0 TATATATATATA FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 LIFE OF ACTIVITY

For the “Amount of cost savings arising from elimination/reduction of fees” the overall baseline was 0 and target was 87.1 million BAM i.e. 64.3 in FBIH, 22.3 in RS and 0,5 in BD. The result was: 49.4 million BAM, i.e.: 4 million BAM in FBIH, 45.4 million BAM in RS and 0 BAM in BD which is lower than expected.

Chart 15 shows results achieved regarding amounts of cost savings arising from elimination/reduction of fees per year. Chart 15: Targeted (T) and achieved (A) amount of cost savings arising from elimination/reduction of fees 2.2.-3 Amount of cost savings arising from elimination/reduction of fees 100 80 60 Millions 40 20 0 TATATATATATA FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 LIFE OF ACTIVITY

FAR Final Report 58 September 7, 2014 - March 7, 2020

Special contribution for solidarity in RS has been eliminated on January 1, 2017. Savings of 11,668,666 KM were calculated for the full 2017 calendar year.

In 2018, following the adoption of the rule books and the locking of the register of fees which brought the overall law fully into force, RS Ministry of Finance eliminated 45 fees. These fees were previously not adopted by law and either had to be adopted into law or face abolition. This created a reduction in fees and charges imposed on both citizens and businesses of more than KM 5 million per year. Our work with the Sarajevo Canton Ministry of Finance led to reductions in charges (signage fees) that saved businesses in Sarajevo Canton 2 million KM per year.

Further, in 2019, in RS under court fees 4 tariffs have been eliminated which generated an additional 519,000KM of savings.

In total, over the life of the project 51 fees were eliminated, 1 in FBiH and 50 in RS. Elimination of these 51 fees generated savings in total of 49,387,666 KM.

This is slightly below the target but it is important to note that our approach changed for the benefit of the long-term results. This means that simple elimination and reduction of fees or charges would not have long time effect when they could be easily reintroduced or replaced. The only way to regulate this area is through the establishment of the Law. In this way, a transparent and financially responsible procedure for establishing, amending and abolishing fees and charges is established.

The adoption of the law began the process of introducing transparency and introducing a stable basis for future financial planning. The Law has already been adopted in RS and BD. This now means that for a fee, tax, or charge to be levied in the RS or BD, it now must be based on law and not just a Ministry or municipal decision, etc. Any new draft law which proposes a fee, charge, or tax to be adopted must go through a detailed review process. A fee or charge must be assessed against a set of criteria (equivalence, service provided, etc.).

Establishment of registers of fees in the FBIH, RS and BD

Table 14: Targeted (T) and achieved (A) Number of Registers of para-fiscal fees established in BiH

LIFE OF FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 ACTIVITY INDICATOR NAME

BASELINE T A T A T A T A T A T A

2015 0 0 3 0 / 0 / 3 / 3 3 3 TOTAL: 1 2.2.1-2 Number of Registers of para-fiscal fees FBiH 1 0 0 1 1 1 1 established in BiH RS 1 0 0 1 1 1 1 BD 1 0 0 1 1 1 1

FAR Final Report 59 September 7, 2014 - March 7, 2020

Table 14 refers to the indicator „Number of Registers of para-fiscal fees established in BiH“.

The overall baseline was 1, the target was 3 and the actual result was 3 registers of para-fiscal fees established in the FBiH, RS, and BD.

Chart 16 presents the overall results.

Chart 16: Targeted (T) and achieved (A) Number of Registers of para-fiscal fees established in BiH

2.2.1-2 Number of Registers of para-fiscal fees established in BiH 4 3 3 2 2 1 1 0 TATATATATATA FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 LIFE OF ACTIVITY

Further, FAR developed web-based registers which include all fees and charges for the RS, Brcko District, and FBiH which are interactive and available online.

FAR Final Report 60 September 7, 2014 - March 7, 2020

Objective A.4.2. Business Environment Online Annual Statement, Electronic Archive (E-Archive), and Reporting Tool

Table 15: Targeted (T) and achieved (A) E-solutions cost and time savings

LIFE OF FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 INDICATOR ACTIVITY NAME

BASELINE T A T A T A T A T A T A

TOTAL: 0 0 0 2.3 mil 2.4 mil 2.4 mil 2.6 mil 2.5 mil 2.8 mil 2.5 mil 2.3 mil 9.7 mil 10 mil 2.3-1 Amount of cost TA Online statement 0 0 2 mil 2.3 mil 2 mil 2.4 mil 2 mil 2.2 mil 2 mil 2.2 mil 8 mil 9.2 mil Savings resulting from adoption of E-solutions by MoF Reporting tool 0 0 0.3 mil 0 0.3 mil 0 0.3 mil 0 0.3 mil 0 1 mil 0 Tax Administrations and TA E-Archiving Ministry of Finance Management System 0 0 0.1 mil 0.1 mil 0.2 mil 0.1 mil 0.2 mil 0.6 mil 0.2 mil 0.05 mil 0.7 mil 0.8 mil RS TOTAL: 0 0 0 252 35 281 93 295 283 295 58 1124 468

2.3.1-1 Time savings for TA Online statement 0 0 12 6 12 23 12 28 12 28 46 85 Tax Administrations and MoF Reporting tool 0 0 Ministry of Finance for 197 0 197 0 197 0 197 0 790 0 providing e-services TA E-Archiving Management System 0 0 43 28 72 70 87 255 87 30 289 383 RS

Table 15 relates to E- solutions cost and time savings. Savings are generated from Tax Administration Online Statement and MoF Reporting tool in FBiH and TA RS E-Archiving Management System.

Regarding the indicator “Amount of cost savings resulting from adoption of E-solutions by Tax Administrations and Ministry of Finance” the overall baseline was 9.7 million. The Total amount of cost savings resulting from the adoption of E-solutions by Tax Administrations and Ministry of Finance is 10,026,406 KM and it will

FAR Final Report 61 September 7, 2014 - March 7, 2020 only continue to grow. 9,201,355 savings is from Annual Online Statement for FBIH TA and 825,051 KM savings is from E-archive in RS TA. Target for Reporting tool wasn’t achieved because it hasn’t been operational yet.

Besides cost savings, those e-services generated savings in time for TA employees in FBIH and RS. The overall baseline for “Time savings for Tax Administrations and Ministry of Finance for providing e-services” was 1,124.25 working months. The overall result was of 468.22 which is 39 years that they would need for all the work. 85.30 working months, i.e. 7,10 years savings in time is for FBIH TA from Annual Online Statement and 382.92, i.e. 32 years is from E-archive in RS TA.

Target is below due to, as said above, the Reporting Tool hasn’t been operational. No, when it is in place it will generate significant time savings over a period of time.

Chart 17 below shows the annual amount of cost savings resulting from the adoption of E-solutions by Tax Administrations and Ministry of Finance and Chart 18 pictures annual time savings for Tax Administrations and Ministry of Finance for providing e-services (in months).

Chart 17: Targeted (T) and achieved (A) amount of cost Savings resulting from adoption of E- Chart 18: Targeted (T) and achieved (A) time savings for Tax Administrations and Ministry of solutions by Tax Administrations and Ministry of Finance Finance for providing e-services (in months)

2.3-1 Amount of cost Savings resulting from adoption of E-solutions by Tax 2.3.1-1 Time savings for Tax Administrations and Ministry of Finance for Administrations and Ministry of Finance providing e-services 12 1200

10 1000 Millions 8 800

6 600

4 400

2 200

0 0 TATATATATATA TATATATATATA FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 LIFE OF FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 LIFE OF ACTIVITY ACTIVITY

FAR Final Report 62 September 7, 2014 - March 7, 2020

E-Archive

Table 16: Number of E-Documents in E-Archive

LIFE OF FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 ACTIVITY INDICATOR NAME

BASELINE T A T A T A T A T A T A

TOTAL: 0 0 0 0.5 mil 0.3 mil 1.2 mil 0.7 mil 2.1 mil 2.6 mil 3 mil 0.3 mil 6.8 mil 4 mil

Property tax forms: 0 0 0 0.5 mil 0.3 mil 0.6 mil 0.7 mil 0.8 mil 2.6 mil 0.9 mil 0.3 mil 2.7 mil 3.9 mil 2.3.1-2 Number of E-Documents in E- Archive UCS-Forms: 0 0 0 0 0 0.6 mil 0 1.2 mil 0 1.8 mil 0 3.6 mil 0

E-Receipts: 0 0 0 0 0 0 0 0.1 mil 0 0.3 mil 0 0.5 mil 0

Table 16 relates to indicator “Number of E-Documents in E-Archive” The overall baseline was 0, the target was 6.8 million, the result was 4 million which is slightly below the target.

By the end of activities, 3,981,116 of documents that had been previously paper archived had been digitized and the number of paper documents requiring e- archiving significantly fell due to the successful digitization of these processes. Archiving procedures started later than planned due to legal issues with rulebook. FAR also confronted with performance issues with the TA RS information system which is currently overloaded. Consequently, FAR was prevented to run by the schedule and reach planned goals. Regarding UCS-Forms: technical part has been completed, however, to consider this form as legally completed and valid there must be legal changes implemented. E-Receipts hasn’t started due to legal issues.

Chart 19 shows results achieved regarding the number of archived documents.

FAR Final Report 63 September 7, 2014 - March 7, 2020

Chart 19: Targeted (T) and achieved (A) number of E-Documents in E-Archive

2.3.1-2 Number of E-Documents in E-Archive 8000000 7000000 6000000 5000000 4000000 3000000 2000000 1000000 0 TATATATATATA FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 LIFE OF ACTIVITY

FAR Final Report 64 September 7, 2014 - March 7, 2020