FAST TRACK Municipal Fiscal Reform in Central and Eastern Europe and the Former Soviet Union

Edited by George M. Guess Fast Track Municipal Fiscal Reform in Central and Eastern Europe and the Former Soviet Union Fast Track Municipal Fiscal Reform in Central and Eastern Europe and the Former Soviet Union

E d i t e d b y GEORGE M. GUESS

Local Government and Public Service Reform Initiative LOCAL GOVERNMENT AND PUBLIC SERVICE REFORM INITIATIVE OPEN SOCIETY INSTITUTE–BUDAPEST

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First published in 2007 by Local Government and Public Service Reform Initiative, Open Society Institute–Budapest © OSI/LGI, 2007

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For information about other LGI publications, please contact LGI. A catalog is also available onlin: http://lgi.osi.hu/publications.php. Copies of the book can be ordered by e-mail or post from LGI. Copy editor: Brad Fox Cover design: Tom Bass Printed in Budapest, Hungary, 2007 Design & Layout by Createch Ltd. Community Budget Reforms in Armenia: Introducing a New Outlook on Budgets

Suren Poghosyan

ABSTRACT

The paper will assess budget reforms at the local government level inArmenia. Compared to many post-socialist countries, Armenia’s attempts to reform its public ﬁnancial management system have been sees as successful. However, reforms at the local government level are signiﬁcantly less advanced than those at the central level. A more contemporary model of budgeting—such as is currently used by the central government—is required for local communities to adequately represent their needs and use the budget document as way of communicate with a wider audience. Analysis of the current situation suggests that the proposed reforms are feasible, sustainable, and timely.

1. EXECUTIVE SUMMARY

Over the last decade Armenia implemented noticeable structural reforms at the local government level, including decentralizing administration and finance. However the local budgeting system has not been sufficiently reformed and is not in keeping with countrywide reform efforts. Moreover, budget reforms at the central government level have advanced much further than at the local level, creating a noticeable gap between budget systems. The limited nature of local budgets is the result of the Soviet budgeting- legacycom bined with the central government’s tardiness in introducing contemporary budgeting models at the local level, even while the same reforms were introduced at the central level.

149 FAST TRACK • MUNICIPAL FISCAL REFORM IN CEE AND THE FSU

Introduction of a program budgeting system should be simpler at the local level due to its smaller size and reduced complexity. This paper analyzes current attempts to initiate budgeting reforms and the capacity of local governments to introduce and manage such reforms, as well as the extent of the central government’s role in the overall organization of reforms. Despite the collapse of the Soviet system, local governments still seek central leadership in organizing reforms. Several aspects of strategic planning and budget formulation processes have been considered to assess the capacity of local governments to introduce a results-oriented system. Although local government officials’ appear to have the capacity to introduce new planning methodologies, the central government has a vital role in successfully completing reforms—both in stimulating local governments to implement reforms and to ensure equivalent progress in all communities. Also, the country is still in transition—many institutional and structural changes are being implemented at the same time. This makes it even more complicated for local governments to initiate and invest resources into specific budget reforms themselves. This paper will assess existing capacities of local governments, while paying dueat- tention to the central government as the key player in synchronizing and sequencing reforms in all areas. The paper will also emphasize the significance of the reforms in budget planning—the beginning of the budget cycle—although comprehensive changes will be required to link it with the rest of the cycle. Good planning eases all subsequent steps in the budget cycle—delivery, monitoring, reporting, and auditing. The central government’s experience in performing budget reforms is key. Sig- nificant capacity and implementation constraints appeared during the realization of parallel reforms at many segments of the budget cycle. Hence, stakeholders suggest introducing reforms during the planning period 1–2 budget cycles ahead of reforms to other segments of the budget cycle. Demand for information on results of ministerial budgets increased amongst final users of the central government budget only after this information had been monitored for several years. Overall, local communities have sufficient capacity to initiate reforms; however, there is a need for the central government to provide leadership and ensure a commensurate increase in the capacity of local government employees (the supply side of reforms) and public awareness (the demand side). This paper analyzes various options and provides recommendation. Foremost among these, it is stressed that the central government must update legislation, facilitate public discussions, and provide a general methodology and training for local government employees. The central government’s experience in reforms provides an obvious advantage in efficiently introducing reforms at the local level.

150 COMMUNITY BUDGET REFORMS IN ARMENIA: INTRODUCING A NEW OUTLOOK ON BUDGETS

2. INTRODUCTION In recent years the Armenian central government has gradually introduced contemporary techniques (more decentralized and delegated mandates) in local administrations. Greater autonomy and delegation of responsibilities has been accompanied by increased ﬁnancial resources. These resources have been provided through “equalization subsidies” (see Figure 1), by allowing communities to manage local tax collection, and by increasing local discretion on expenditures. Over the past few years, local revenues and expenditures have been growing at nearly twice the rate of those of the central government.

Figure 1. Local Government Budget Dynamics (million USD)

0 1999 2000 2001 2002 2003 2004

Total LG Budget Revenues Total LG Budget Expenditures Transfer to LG

Source: Annual Statistical Reports (1999–2005).

However, although communities in Armenia are given considerable autonomy in terms of local budgeting and decision making, outdated notions of budgeting and the legacy of central planning still have a strong impact on the overall performance and eﬀectiveness of local budgets. The budgets of local governments fulﬁll only one out of the GFOA’s four roles for budget documents (as operations guides, see Table 1). This is mostly due to the continuing legacy of centralized control.

151 FAST TRACK • MUNICIPAL FISCAL REFORM IN CEE AND THE FSU

Table 1. The Four Functions of Budgets

Function Description

1. Policy statement To scrutinize and assess the policy implications of the budgets 2. Financial plan To provide budget timelines, i.e., presenting current year expenditures in dynamics with future expenditure plans 3. Communications tool To communicate government intentions with beneficiaries and their representatives, e.g., community councils, media, NGOs, etc., rendering the monitoring and auditing processes more performance-related 4. Operations guide To act as an operational manual to some budget users, e.g., the treasury, community employees, etc.

Current budget users receive budget-related information in a format useful for a narrow group of users—the financial officers primarily responsible for budgetary management and auditing. Other budget users, such as politicians, the media, NGOs, thinktanks, etc. must contend with an esoteric document more concerned with inputs than with outputs. The current document can be used to ascertain analytical ratios and inputs for comparative analysis and scrutiny. In some cases, details on inputs provide significant information for decision making. However, local budget information will definitely benefit from the inclusion of output-related information, as this is the format that politicians and policy makers use when communicating with citizens. Because output information is lacking, local governments must base their budgetary documentation on inputs even though they cannot be analyzed or used by anyone unacquainted with the intricacies of the local budgetary process. Beyond mere capacity, other reasons blocking PFM reforms include: • Absence of performance measurements: Significant portions of local budgets are used for local government personnel programs. Without proper capacity building and pressure from beneficiaries, local government heads tend to avoid accountability in this area. Absence of performance measurement for a certain “apparatus” is justified by external factors, such as legislation, central government policies, etc. and backed-up by presentation of detailed information on costing assumptions of inputs consumed by the “apparatus.” This approach avoids addressing impacts on service provision for citizens. • Inflexibility of expenditure prioritization: A significant portion of community budgets are funded through an “equalization subsidy” system through which the central government covers delegated services. • Bureaucratic impediments: The inputs-based layout of budget documents leads to simplified budget formulation and execution.

152 COMMUNITY BUDGET REFORMS IN ARMENIA: INTRODUCING A NEW OUTLOOK ON BUDGETS

• Accountability evasion: Accurate execution of inputs (regardless of what they have been used for) allows local government oﬃcials to avoid accountability to both citizens and control/supervision authorities.

2.1 The Policy Issue

Although the central government has provided more autonomy to communities, it appears that most of local governments did not expect or were not ready to absorb and effectively utilize such a radical increase in authority. The central government also did not provide adequate training and capacity building. Almost no supply-driven reforms were introduced at the community level. In the wake of the soviet collapse, citizens did not provide pressure for reforms, either. Consequently, local governments have simply replicated some the highly controlled, inputs-based budgeting techniques then in use by the central government (some of these outdated techniques are still in use, although reforms have already been initiated). The core of the problem is the budget layout. Currently, local governments still only present detailed information on inputs. This is also partially based on lack of information from the central government on the changed roles and responsibilities of local governments, lack of attention from the donor community,1 as well as lack of local capacity to properly plan and design budgets. Moreover, in many cases, local governments initiate policy-based activities with small (residual) funds, as there is less flexibility on budget allocations than they would like. However, as socioeconomic development gradually increases, pressure on local authorities to present more valuable information increases as well. Although still in early stages, however, there are signals of increasing pressure to present information on outputs in budgets. It is becoming clearer to the local authorities that there are now different users with different informational needs. If local government officers are interested in the clear presentation of inputs for their operational needs, citizens are more interested in outputs and outcomes of the process (see Figure 2). If local government reforms do not progress in common with central reforms, there is a high risk of incompatible budgeting systems (both between communities and vertically). Another considerable benefit is the increased citizen participation local reforms may lead to. If pressure from citizens is absent, there is less rationale for government to decentralize. If decentralization takes place without alternative methods of control (increased public participation, performance monitoring, or outputs- based ex post control) budgets may become even less effective and accountable. This is what has been observed in the education sector (see box, below), illustrating how inappropriate planning can allow reforms to stray from their original purpose.

153 FAST TRACK • MUNICIPAL FISCAL REFORM IN CEE AND THE FSU

Figure 2. The Budgeting Process and Users of Budgetary Information

Technocrats (e.g., Treasury Staff of local governments Citizens and community Citizens and community and ﬁnancial ofﬁcers of local are interested in budget leaders are (should be) leaders are (should be) governments) are interested management interested in outputs interested in outcomes in information on inputs

Inputs/Resources The process Outputs/Services Outcomes/Results

(by which inputs are transformed into outputs)

Analysis/Feedback

(by which the quality of outputs and the impact of those to outcomes form a basis for better planning of inputs and outputs in the next budget cycles)

External and internal auditors, budget and strategic planners are interested in analysis

A balance of power between central and local governments must be achieved. Some policy considerations include the following: • Does the general environment support or impede the proposed reforms? • How can budget document reforms facilitate overall local budgeting reforms? • How can local reforms be integrated into reforms at the central level? • What are the major ways for central government to intervene in local reforms? • What is the optimal mix for reforms (capacity building, legislative improvements, etc.)?

The hypothesis underlying this paper is that the introduction of elements of performance budgeting culture at the community level is needed now; it will promote the use of local budgets as a way to communicate with the public and thereby promote budget democracy in Armenia.

154 COMMUNITY BUDGET REFORMS IN ARMENIA: INTRODUCING A NEW OUTLOOK ON BUDGETS

Box 1. Reforms in the Education Sector

Starting in 2001, the rate of decentralization of state-owned enterprises increased, a process which had signiﬁcant effects on Armenian schools. Starting in 2003, schools were granted a “state non-commercial enterprise” (SNCE) status. Previously, schools were treated as ordinary budget agencies with detailed ex ante and ex post expenditure control. After the reforms, they received block grants (registered as a single line purchase of services based on per student calculations with minor variations for special regions and size of schools). Without proper alternative control mechanisms such as quality monitoring, auditing, etc., school administrators received unprecedented authority over spending lines. These reforms were initially supported by the international community, but this support soon dried up as poor results became apparent. Two years later, control mechanisms were introduced through a special agency as- signed to monitor education quality. However, this agency is still troubled by capacity and administrative issues.

2.1 The Methodology

During research, the following activities were performed: • Review of the current budgetary system in Armenia both at central and local government levels (legislation, including recent amendments to the Constitu- tion and other documentation such as manuals, methodological instructions, decrees, and other regulatory materials on budgetary system) • analysis of relevant information on donor projects, trends, and objectives • meetings, interviews, and discussions with oﬃcials, including the Ministry of Finance, mayors, and representatives of donor organizations and NGOs • active participation in a series of town-hall meetings in various communities discussing policy strategies, expenditure priorities, and other issues • review and analysis of budget-related documentation in representative communities (representing diﬀerent regions, community sizes, urban versus rural status, etc.) including budget messages, budget decrees, cost spreadsheets, strategic plans, etc.2

155 FAST TRACK • MUNICIPAL FISCAL REFORM IN CEE AND THE FSU

3. PEM REFORMS IN ARMENIA

3.1 The Current Environment for Budget Reforms

As mentioned before, the government of Armenia introduced reforms in public expenditure management in the mid-1990s and has continued to develop them to a significant extent. Such progress has been achieved in almost all aspects of the PEM and has been widely accepted both internally and by the international community as one of the most successful cases among former socialist countries. Strong and consist- ent support from international financial institutions (IFIs) has played a significant role in the reform process. After the collapse of the Soviet PEM system, in line with the overall drop in the aggregate role of government finances in the economy, the Armenian public financial management (PFM) system experienced significant institutional degradation. This was a period when a centralized expenditure management system based on GosBank vanished, not to be replaced until the end of the 1990s. Significant problems include: • decrease in fiscal discipline • an increasing number of cases of fraud among the spending bodies • lack of reliability and predictability of the budget • drops in revenue • non-transparent decision making, e.g., an unprecedented imbalance between funding dependant on the political weight of specific heads of budgetary agencies. • lack of public participation in decision making and lack of performance information.

Naturally, after the collapse of the previous system, PFM reforms in Armenia were aimed at achieving the following changes in the system: • Budget documentation should gradually begin to fulfill the four GFOA criteria (policy, planning, operations, and communications), significantly expanding its role as a policy document for decision makers and citizens. • Financial and non-financial information should be integrated in the budget. • The budget should provide sufficient and suitable information in a format that allows politicians and citizens to participate in decision making. • The budget documentation supplies indicators on quantity and, where applicable and useful, on quality and timeliness. The indicators must be well developed to enable effective monitoring, reporting, and program evaluation. • There is a framework for internal and external reporting on planned and executed performance, e.g., ex ante and ex post accountability reporting requirements.

156 COMMUNITY BUDGET REFORMS IN ARMENIA: INTRODUCING A NEW OUTLOOK ON BUDGETS

Starting in the mid-1990s, all governments began to contribute to the positive changes that Armenia is now experiencing. In particular, strengthened ﬁscal control began to show positive results by the end of the decade. Progress has been achieved by introducing a strong treasury system with signiﬁcant ex ante and ex post control mechanisms in place. By introduction and institutionalization of the MTEF (Medium-Term Expenditure Framework) process from 2003 to 2005,3 the government and Parliament achieved more predictability, transparency, and other structural improvements to the strategic phase of the budgeting process. Then, by introducing the PRSP (Poverty Reduction Strategy Paper) as a cross-sector strategy document with high-level political commitment to implement proposed reforms, spending agencies achieved more political engagement and predictability in sector reforms and expenditure commitments. Institutional reforms, particularly in clarifying roles and responsibilities in line with the dividing of political and professional wings of the government, have been achieved by comprehensive changes to the government system and introduction of civil service. Since early 2000, budget documentation and decision-making practice started to absorb, process and then present budget performance information. Reforms on introducing program budgeting concepts were initiated with the support from donor community.

3.2 PFM Reforms and Challenges at the Local Level

As mentioned above, Armenia has already introduced noticeable decentralization both in administrative and financial arrangements of local governments. However, the budgeting system has not been appropriately reformed and is not in keeping with overall reform patterns. Moreover, budget reforms at the central government level have extended to a more advanced degree, thus creating a significant gap between budget systems at the community and central levels.4 Central reforms continue to progress with significant inputs from the donor community and with a significant commitment from the central government. Local government reforms in budgeting been piloted in a few communities, but there is no nation-wide reform strategy currently being implemented. This is especially inappropriate as it should be simpler and faster to achieve success in budget reforms at the community level for the following reasons: • less complicated budget relations (simpler formats, executions system, etc.) • narrower range of services • direct target beneficiaries • more visible links in the “inputs-process-outputs-outcomes-impact” chain

157 FAST TRACK • MUNICIPAL FISCAL REFORM IN CEE AND THE FSU

• simpler monitoring and auditing systems • fewer staﬀ • clear distinction between mandatory and discretionary services, etc.

However, the following weaknesses suggest that the community-level reforms mentioned could encompass additional constraints that would make progress slower than at the center: • insuﬃcient and highly varying capacity of local oﬃcials • numerous communities (930) • the central government and donor community do not, at the moment, possess enough capacity and resources to support all communities.

Even so, there is a general consensus that the need for budget reforms at the community level is now high. Recent research and analysis also indicate the need for the budgetary system to enable the budget as a tool for communication. In the city of Gavar, a regional center, 81.1 percent of the population indicated the need for increased transparency and accountability (ABAP 2003: 13). Citizens gave these issues higher priority than others such as capital investments in particular areas, the proportional decrease of staﬀ salary in the municipal budget, and increased tax administration. In order to address these issues, 12 communities, cities, and villages from diﬀerent regions and with varying populations (see Table 2) were investigated. A consensus on the inaccessibility of budget documents was notable. Members of civil society expressed similar frustrations. The investigation intended to determine impediments to budget accessibility—lack of capacity, absence of reforms (continuation of the Soviet system), or improper management.

Table 2. List of Communities Assessed

Community Type Region Population

Abovyan city Kotayk 61,900 Artashar village Armavir 1,050 Aparan city Aragatsotn 10,200 Ashtarak city Aragatsotn 29,700 Charentsavan city Kotayk 31,000 Metsamor village Armavir 1,300 Echmiatsin city Armavir 56,400 Arzni village Kotayk 3,500

158 COMMUNITY BUDGET REFORMS IN ARMENIA: INTRODUCING A NEW OUTLOOK ON BUDGETS

Community Type Region Population

Ujan village Aragatsotn 3,000 Hrazdan city Kotayk 59,500 Artik city Shirak 24,000 Getap village Shirak 900 TOTAL 282,450 (12 communities)

Box 2. The Case of Ijevan—Implementing Reforms

A few years ago, budgeting in Ijevan was no different than in any other community. That changed when the city was selected as a pilot project for reforms backed by UNDP and the Urban Institute. The qualities of the reform are outlined here:

• The budget draft is developed with participation, assistance, and guidance from local working groups consisting of 10–15 members from different sectors.

• Discussions are based on performance information.

• The draft budget is published and widely disseminated. – booklets are citizen-friendly (2.5% coverage of the population) – strategic priorities are presented – priority programs are evaluated based on multifactor assessment (see Appendix D) – performance information is included in the budget (program format is used, unlike other Armenian communities) – changes from previous years are explicitly shown – the budget is based on sector strategy papers adopted by the city council (on tourism, capital investments, 3-year strategic plan, industry, economic development, etc.).

• Televised budget discussions and hearings are organized with public participation, where the public and different political party representatives argue with local government ofﬁcials on priorities, effectiveness, and performance.

• The budget execution report is openly discussed.

By looking at strategic plans, it became apparent that in most cases there is suﬃ- cient capacity to design budget programs using information that enables the budget to perform its role as a communicative tool. Naturally, there is pressure on local governments to initiate budget reforms as there are many beneﬁciaries who require greater

159 FAST TRACK • MUNICIPAL FISCAL REFORM IN CEE AND THE FSU efficiency from local government staff (reduced bureaucracy, better cost effectiveness in service delivery, etc.). However, there is evidence that local governments behave more actively in reforming the budget layout if appropriate pressure is created externally. In broad terms, it is useful and effective for local governments to reflect on the increasing external demand from citizens to receive clear information on how local budgets are spent. Stakeholders want to make sure that reforms will promote transparency and accountability in local budgets. Thus, there is pressure from both ends—government officials and the population at large. This can create the necessary momentum for local government officials to initiate budget reforms. Conclusions based on assessment of internal documentation, similar reforms in other countries, legislation, interviews with officials, and off-site analysis of strategic plans and budgets are presented in detail below.5 In Table 3, several aspects of the strategic plans and budget design are analyzed to identify areas where the capacity of strategic plan (SP) and budget (B) designers is not the main impediment, but where challenges relate to administrative and management reforms.

Table 3. Comparison of Formats of Strategic Plans and Budgets in Selected Communities

Format related SP B

Demographic and other related general information 12 11 Program format used 11 0 SWOT/Risk analysis 11 0 Comprehensiveness 1 12 User friendly 7 0

None of the communities presented budget programs with information on objectives, goals, activities, and performance measures. It is not surprising that strategic plans are more user-friendly than budgets. This is explained by the fact that budget formats are replicated from centrally driven formats with detailed information on types of expenditures and functional orientation. Budgets are more comprehensive (covering all budget expenditures of the community), whereas strategic plans are mostly used for capital projects or other signiﬁcant budget allotments. The next step was to analyze assessment of strategic priorities and the prioritization process as a whole. As indicated in Table 3, although strategic priorities were presented in all the strategic plans reviewed, not all budgets reﬂect them. Even fewer budgets explicitly showed

160 COMMUNITY BUDGET REFORMS IN ARMENIA: INTRODUCING A NEW OUTLOOK ON BUDGETS the relevance of strategic priorities published in 3-year strategic plans to their annual activities adopted by community councils.

Table 4. Assessment of Strategic Priorities

Strategic priorities SP B

Strategic priorities presented 12 7 Strategic priorities justified 8 0 Strategies linked to programs 8 4

Table 5. Presentation of Information on Costing Assumptions/Drivers

Budget/costing presentation SP B

Costing methodology/details presented 0 12 Economic classification (inputs) 0 11 Functional classification 0 11 Program classification 11 0

All reviewed communities presented details on cost drivers (by economic item). The same is true for other classifications of budgets. Only one out of twelve communities presented some limited information on programs in budget documentation. And finally, available information on performance was analyzed. Again, strategic plans are far more advanced in this regard than budget formats (see Table 6). Outcomes, outputs, as well as performance measures and other useful information have been presented in a majority of the strategic plans, where budgets lack this. However, it is clear that some capacity building is required for better identification of measurable indicators. As a reflection of this, SMART6 rules were not properly kept in half of the cases surveyed. Another problematic issue is the absence of any measurable indication of performance of the staff of local governments. No clear identification of services delivered was indicated and no clear separation of ownership actions vs. services themselves. Thus, a citizen receives information on some capital expenditures without properly understanding whether the beneficiary of that expenditure is the general popu- lous (e.g., roads or bridges constructed) or a local government body (even assuming that such capital expenditure is needed for better delivery of services later).

161 FAST TRACK • MUNICIPAL FISCAL REFORM IN CEE AND THE FSU

Table 6. Information on Performance

Performance information SP B Outcomes presented 8 0 Outputs/activities specified 11 2 Quantity indicators 9 6 Quality indicators 2 0 Timeliness indicators 9 0 SMART rules 6 4 Resources identified 7 12 Performance of “maintenance programs” 0 0 (general services of the community leader and staff)

4. POLICY RECOMMENDATIONS AND CONCLUSIONS

4.1 Policy Options

Three options are identiﬁed within the framework of this policy paper:

Option 1: Status Quo. The central government does not initiate reforms and waits for existing processes to mature to the point where they create pressure on community leaders to present a communication-enabled budget format.

Option 2: Bottom Up. The central government limits its role to the creation of a legislative basisto perform reforms, but communities are responsible for their leadership. Reforms are independent from central reforms currently in place.

Option 3: Top-Down or centrally-driven reforms. The central government initiates and manages reforms and gradually increases the momentum for reforms based on current documentation. The central government begins by developing a reform strategy to assess feasibility and timeliness of reforms.

162 COMMUNITY BUDGET REFORMS IN ARMENIA: INTRODUCING A NEW OUTLOOK ON BUDGETS

Table 7. analyzes each option.

Table 7. Policy Options for Local Government Budget Reforms

Status quo Bottom up Centrally-driven reforms

1. No significant financial 1. Reforms take place in 1. Existing experience and implications (demands the each community at a time capacity at the center on least resources); central when they have matured. similar reforms (ongoing government waits until 2. After reforms at the reforms). more financial resources center are performed, 2. Strong alignment with are available to perform communities will be central government reforms. able to plan and execute budget reforms, enabling PROs reforms based on greater better coordination experience. and consolidation of information and formats. 3. Central government is able to call for donor assistance. 1. No active reforms take 1. Lower technical capacity 1. Too expensive for the place creating a gap, with to perform reforms government to implement increasing demand for independently the reforms without reforms. 2. Imbalance in external assistance.

CONs methodology of reforms 2. Requires preparation. 3. The central government’s reform process may take too long.

Centrally-driven reforms are preferable not only for the reasons stated in the table. Due to the Soviet legacy, local governments in Armenia respond well to pressure from the central government. Momentum from the center tends to create results more quickly than pressure from the community itself. The impetus to avoid incompatibility is of utmost importance as well, as its negative eﬀects might outweigh the positive eﬀects of the reform. Moreover, it is worth delaying reforms for some period rather than pushing communities to implement reforms in an independent and uncoordinated way. Hence, we draw the following overall conclusions: • The proposed budget reforms can be widely initiated as the existing- environ ment provides substantial foundation for such changes. • Reforms should begin with the planning stage. Other stages should be introduced later. For example, performance-based budgeting was introduced at the Ministry of Labor and Social Issues despite skepticism and misunderstanding of the value and importance of the new budget formats. After introduction of

163 FAST TRACK • MUNICIPAL FISCAL REFORM IN CEE AND THE FSU

performance information in the Annual Budget Law (OBRA 2005: 607), the ministry set up an internal and external monitoring and reporting system. As a result, a performance monitoring report was developed and presented to the National Assembly as an integral part of the Annual Budget Execution Report, where the accent was shifted from presentation of purely financial information to information on the ministry’s by individual budget program (MOF 2006). • Local governments should not initiate any type of reforms that relax inputs- control mechanisms unless alternative control systems are matured. This is particularly important considering the significant amount of fraud in Armenian a decade ago. Hence, the central government needs to initiate the institutional development of alternative control mechanisms by increasing the capacity and functionality of monitoring, reporting, and auditing systems. This can lead to a situation when local governments would be required to work with a dual control mechanism until the output system is mature. • Lack of capacity without support from the central government and other communities can significantly decrease the speed, quality, and integrity of reforms. On other hand, communities are open to follow centrally driven methodologies and leadership in putting reforms in place. Integration of central and local reforms minimizes risks of asymmetrical speed and quality of reforms. It also serves to harmonize methodologies used by individual communities, reducing the risk of an abundance of incompatibly formatted plans and reports. • To achieve these goals, the central government must balance interventions, such as legislation changes, development of a central methodology, with technical assistance and local capacity building.

4.2 Recommendations for Centrally-driven Reforms

1) Drawing on previous experience, the central government—with the Ministry of Finance in a leading role—is to develop a nation-wide strategy for reforms with high-level approval. The strategy must outline and describe the following: a) the sequence of technical reforms b) a list of communities of the appropriate size and with the necessary capacity to lead local participation in reforms c) a timetable for implementation of reforms, with speciﬁc deadlines for legislative amendments, institutional arrangements, and the establishment of a responsible agency to develop methodological guidelines, manuals, etc. for local governments d) the role of the donor community.

164 COMMUNITY BUDGET REFORMS IN ARMENIA: INTRODUCING A NEW OUTLOOK ON BUDGETS

2) The central government may then lead a public awareness campaign to introduce the basic concepts of reform and explain its benefits to the public. This might include wide dissemination of budget execution reports and discussions involving thinktanks, NGOs, and the media. In addition, more specialized discussions could take place between government officials, members of parliament, staff of standing commit- tees, and other stakeholders on technical aspects of reform (including international best practice findings, use of costing models and norms, monitoring and reporting frameworks, the role of auditors, etc.).

3) The central government may then call for assistance from the donor community and NGO sector, in the following two-step process: a) Use what is already available. There are several ongoing projects in Armenia that could potentially support reforms at the community level. These include the Armenian Regional Development Project (performance-based approaches to regional development), the Project to Support the Development of Pro- gram Budgeting in Armenia (operating at the central government level), and the UNDP project providing assistance to communities piloting performance budgeting reforms piloting. b) Enlist new donor support. Many donors and NGOs support projects such as the reforms being proposed here, such as USAID, the UN, EC, GFOA, etc.

4) Budget system legislation must be amended to support program-based formats in community budgeting.

5) With a proper balance between carrot and stick, the central administration should promote leadership through additional ﬁnancing, administrative, and technical support, while simultaneously applying pressure on communities that implement reforms slowly.

6. After relevant legislation has been amended and supporting documents are available, the responsible agency can develop and provide guidelines, instructions, pro-for- mas, etc., as well as enlist consultants, if necessary. Although there are already some documents to support reforms, such as the Manual on Community Budgeting (Muradyan 2004), they must be adapted to the community level.

7. Monitoring and auditing systems can be activated, as speciﬁed by the strategy document.

165 FAST TRACK • MUNICIPAL FISCAL REFORM IN CEE AND THE FSU 2005 (May) Sixth MTEF 2006–2008 the budget Before All SBAs Almost full Yes Yes Yes ownership Full Yes 2004 (June) Before the budget Before Yes Yes Yes Good Fifth MTEF 2005–2007 All SBAs Almost full Yes 2003 (July) Before the budget Before Fourth MTEF Fourth 2004–2006 Almost all SBAs Almost full Yes Yes Yes Satisfactory Yes Table A.1. Table Third MTEF 2003–2005 2002 MFE, some ministries Parallel to budget process Parallel consultants, Local private Yes Partially Partially good Not Partially No MTEF Reforms—Making the Process Institutional the Process MTEF Reforms—Making Second MTEF 2001–2003 2001 After the budget MFE, donors No No No No No No First MTEF 2000–2002 2000 After the budget Donors Yes No No No No No Nature of the Nature product Issued in Issued Authors Adopted MTEF process covered Period decision making Linkage with budget management and ownership Tool for strategic Tool Transparency Comprehensiveness APPENDIX A

166 COMMUNITY BUDGET REFORMS IN ARMENIA: INTRODUCING A NEW OUTLOOK ON BUDGETS term reforms Sustaining long- Implementation Approval Table B.1. Table National Level National Design Community Level Maturity Matrix of the Policy Process in PFM Reforms Process of the Policy Matrix Maturity Putting reforms on the political agenda Strategic prioritization Strategic formulation Budget and delivery execution Budget and reporting monitoring Budget Audit Strategic prioritization Strategic formulation Budget and delivery execution Budget and monitoring Budget reporting Audit APPENDIX B

167 FAST TRACK • MUNICIPAL FISCAL REFORM IN CEE AND THE FSU

B 1 0 0 1 0 0 0 0 Getap 1 1 1 0 1 1 1 1 SP

B 1 0 0 1 0 0 0 0 Artik 1 1 1 0 1 1 1 1 SP

B 1 0 0 1 0 1 0 0 Hrazdan 1 1 1 0 0 1 0 0 SP

1 0 0 1 0 1 0 2 Ujan SP B 1 1 1 0 1 1 1 1

B 1 0 0 1 0 1 0 0

Arzni 1 1 0 0 0 1 0 0 SP

B 1 0 0 1 0 1 0 1 Echmatsin 1 1 1 0 0 1 0 0 SP

B 1 0 0 1 0 0 0 0 Metsamor 1 0 1 0 0 1 1 1 SP

B 1 0 0 1 0 1 0 1 Charentsavan 1 1 1 1 1 1 1 1 SP

B 1 0 0 1 0 1 0 0 Ashtarak 1 1 1 0 0 1 0 1 SP

B 1 0 0 1 0 0 0 0 Aparan Table C.1. Table 1 1 1 0 1 1 1 1 SP Format related Format Strategic priorities Strategic

B 0 0 0 1 0 0 0 1 Artashar 1 1 1 0 1 1 1 1 SP

B 1 0 0 1 0 1 0 1 Abovyan 1 1 1 0 1 1 1 0 SP

B 0 0 0 7 0 4 TOTAL 11 12 1 7 8 8 SP 12 11 11 12 Comparative Analysis of Strategic Planning and Budget Reforms Reforms and Budget Planning Analysis of Strategic Comparative

from a Performance-based Budgeting Perspective at the Community Level Perspective Budgeting a Performance-based from

Demographic and other related general and other related Demographic information Programs format used format Programs analysis SWOT/Risk Comprehensiveness friendly User justified priorities Strategic linked to programs Strategies Strategic priorities presented priorities Strategic APPENDIX C

168 COMMUNITY BUDGET REFORMS IN ARMENIA: INTRODUCING A NEW OUTLOOK ON BUDGETS

1 1 1 0 0 0 0 0 0 0 1 0 Getap 0 0 0 1 1 1 1 0 1 0 0 0 0.49

23.54

1 1 1 1 0 0 1 0 0 0 1 0 Artik 0 0 0 1 1 1 1 0 1 1 1 0

1 1 1 0 0 0 1 0 0 0 1 0 Hrazdan 0 0 0 1 0 1 0 0 1 0 1 0

Mean Probability

1 1 1 0 0 0 0 0 0 0 1 0 Ujan 0 0 0 1 1 1 1 0 1 1 1 0

1 0 0 0 0 0 0 0 0 0 1 0 Arzni 0.90 24.22 0 0 0 1 0 1 1 0 1 1 0 0

1 1 1 0 0 0 1 0 0 1 1 0 Echmatsin 0 0 0 1 1 0 0 0 0 0 1 0

1 1 1 0 0 0 0 0 0 0 1 0 Metsamor Std. Dev. Std. Minimum 0 0 0 0 0 1 1 0 1 0 0 0

1 1 1 0 0 1 1 0 0 1 1 0 Charentsavan 0 0 0 1 1 1 1 1 0 0 0 0 17.1 61.9

1 1 1 0 0 0 1 0 0 1 1 0 Ashtarak 0 0 0 1 0 1 0 0 0 0 0 0

1 1 1 0 0 0 0 0 0 0 1 0 Aparan 0 0 0 1 1 1 1 0 1 1 1 0 Median Maximum

1 1 1 0 0 0 0 0 0 0 1 0 Artashar Performance information Performance Budget/costing presentation Budget/costing 0 0 0 1 1 1 1 0 1 1 1 0

1 1 1 0 0 1 1 0 0 1 1 0 Abovyan 0 0 0 1 1 1 1 1 1 1 1 0

1 0 2 6 0 0 4 0 TOTAL 12 11 11 12 0 0 0 8 9 2 9 6 7 0 11 11 Descriptive population statistics for the Descriptive selected communities (in thousands)

Strategic Plan Strategic Budget

Costing methodology/detailsCosting presented SP B Economic classification (inputs) Economic classification Functional classification Program specified Outputs/activities indicators Quantity indicators Quality indicators Timeliness kept SMART identified Resources programs” of “maintenance Performance Outcomes presented Outcomes

169 FAST TRACK • MUNICIPAL FISCAL REFORM IN CEE AND THE FSU 28,000 50,000 24,000 80,000 55,000 amount Required 110,000 180,000 120,000 47 46 45 44 43 40 37 37 Total Total points 8 9 5 6 5 5 5 5 ability Sustain- 6 4 8 9 8 3 6 5 Urgency 9 6 8 8 8 8 6 6 Pro- tourism 4 8 5 3 2 3 3 5 Pro- poor Table D.1. Table 2 5 5 3 2 5 5 5 Job creation 9 5 6 8 9 8 6 4 ment Environ- Extract from the Ijevan City Budget Prioritization Table Table Prioritization City Budget the Ijevan from Extract 9 9 8 7 9 8 6 7 Bene- ﬁciaries for the dance school Construction of a new fountain on Melikbekyan street Construction of a hall of the coverage Increase services by waste removal 50% to 80%) 30% (from construction Road of (full renovation) street Metaghagorc construction Road of (full renovation) Abovyan, Independence, streets Valance and Completion of a movie (for 500 seats) theatre Construction of a church of Renovation 5 kindergarten no. 1 2 3 4 5 6 7 8

APPENDIX D

170 COMMUNITY BUDGET REFORMS IN ARMENIA: INTRODUCING A NEW OUTLOOK ON BUDGETS

30,000 50,000 70,000 10,000 amount Required 240,000 35 30 29 27 20 Total Total points 4 7 5 4 4 ability Sustain- 5 8 5 5 4 Urgency 6 2 3 3 1 Pro- tourism 3 5 5 3 4 Pro- poor 2 1 1 2 3 Job creation 8 4 4 5 1 ment Environ- 7 3 6 5 3 Bene- ﬁciaries to 60%) system (50% of tubes within 3 years) replaced 20% to 40% within 3 years) Renovation of streets of streets Renovation lights system (increase 30% from coverage of 30% roofs Renovate of city buildings (increase of the percentage buildings with new roofs 10% to 40% within from ) 3 years and Replacement of sewage renovation Asphalting of roads from increased (coverage Replace/renovate of 9-floor elevators buildings (increase of operational coverage within 2 years elevators 50% to 100%) from The full list consists of 83 activities. More detailed information on process management, performance measures, and 9 10 11 12 13

methodology for assessment are discussed in local working groups. discussed in local working methodology for assessment are

171 FAST TRACK • MUNICIPAL FISCAL REFORM IN CEE AND THE FSU

REFERENCES

Armenian Budget Analysis Project (ABAP). 2003. Review of Conceptual Issues and Problems in Gavar and Sevan. Yerevan: EDRC (Oxfam, DFID). Armenian Ministry of Finance (MOF). 2006. Report on 2005 Annual Budget Execution. Yerevan: MOF. Bennett, R. 1997. Local Government in Post Socialist Cities. Discussion Paper no. 2. Budapest: LGI—OSI. Bouvier, M. 2005. “The Budget Face of the Paris Riots.” In IBP Bimonthly News- letter 30. Castillo, J. 2005. “Participatory Budgeting in the Dominican Republic: Fundación Solidaridad.” In IBP Bimonthly Newsletter 30. GFOA. 2005. Local Self-Government in Armenia: Development Imperatives. Yerevan: GFOA. Diamond, J. 2003. From Program to Performance Budgeting: The Challenge for Emerging Market Economies. New York: IMF. Guess, G.M. 2001. “Decentralization and Municipal Budgeting in Four Balkan States.” Journal of Public Budgeting, Accounting and Financial Management 13(3): 397–436. Horváth, T. 2000. Decentralization: Experiments and Reforms. Budapest: LGI—OSI. IBP. 2005. “Participatory Budgeting Spreading Globally.” In IBP Bimonthly News- letter 30. Losaberidze, D. et al. 2005. The Process of Decentralization in the South Caucasus. Budapest: LGI—OSI. Malajovich, L. 2005. “Argentina, Chile, Guatemala, Mexico, and Peru: Budget Trends for 2006.” In IBP Bimonthly Newsletter 30. Muradyan, A. 2004. Manual on Community Budgeting. Yerevan: GFOA. OECD. 2002. OECD Journal on Budgeting: Governance 1 (4). Roberts J., 2003. Managing Public Expenditure for Development Results and Poverty Reduction. Working Paper 203. London: ODI. Rose, A. 2003. Results Oriented Budget Practice in OECD Countries. London: ODI. Sarraf, F. 2005. Integration of Recurrent and Capital “Development” Budgets: Issues, Prob- lems, Country Experiences, and the Way Forward. New York: World Bank.

172 COMMUNITY BUDGET REFORMS IN ARMENIA: INTRODUCING A NEW OUTLOOK ON BUDGETS

Swianiewicz, P. 2003. Foundations of Fiscal Decentralization: Benchmarking Guide for Countries in Transition. Budapest: LGI—OSI.

Legislation Cited

Law on the 2005 Annual Budget. Oﬃcial Bulletin 3/375, 2005. Law on State Non-commercial Enterprises. Oﬃcial Bulletin 37/169, 2001.

ENDNOTES

1 PFM reforms were at the core of IFIs support for the central government, however, support for local governments began more recently. 2 See Appendix C. 3 In fact, the ﬁrst MTEFs were developed by the end of 1990s. However, they did not outline an integrated course of action for the budgeting process (see Appen- dix A). 4 See Appendix B. 5 Information by community is presented in Appendix C. 6 SMART—Speciﬁc, Measurable, Attainable, Realistic, and Tangible.

173