FISCAL SECTOR REFORM ACTIVITY IN AND HERZEGOVINA ANALYSIS OF THE EXISTING STATUS OF TREASURY SYSTEMS IN FBIH VERSION 1.0

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

December, 2015

This report is made possible by the support of the American People through the United States Agency for International Development (USAID). The contents of this report is the sole responsibility of Finit Consulting and do not necessarily reflect the views of USAID or the United States Government.

FISCAL SECTOR REFORM ACTIVITY IN ANALYSIS OF THE EXISTING STATUS OF TREASURY SYSTEMS IN FBIH

USAID CONTRACT NO.: AID-168-C-14-00001

DISCLAIMER:

The author’s views expressed in this publication do not necessarily reflect the views of the United States Agency for International Development or the United States Government.

CONTENTS

1 ABBREVATIONS ...... 1 2 INTRODUCTION ...... 2 3 EXECUTIVE SUMMARY ...... 3 4 LEGAL BASE ...... 4 5 EXISTING SOFTWARE SOLUTION IN FBIH AND POTENTIAL IMPROVEMENTS ...... 5

TREASURY SYSTEM IN THE FBIH ...... 5 Network and System Architecture of the FBIH Treasury System ...... 5 Maintenance ...... 6 Other Software in the FBiH Ministry of Finance...... 6 Communication between TS and BMIS ...... 6 Communication with Cantons ...... 6 Potential Improvements ...... 7 TREASURY SYSTEMS IN FBIH CANTONS ...... 7 Network and System Architecture of the Cantonal Treasury System ...... 7 Maintenance ...... 8 Other software in Cantonal Ministries of Finance ...... 9 Communication with Municipalities ...... 9 Potential Improvements ...... 9 TREASURY SYSTEMS IN FBIH MUNICIPALITIES ...... 11 Status by municipality ...... 11 Functionality of the existing treasury software ...... 12 Maintenance ...... 13 Communication with Cantons ...... 13 Potential Improvements ...... 13 6 THE CENTRALIZED TREASURY SOLUTION IN FBIH ...... 15 7 CONCLUSIONS AND FURTHER STEPS ...... 17 8 ANNEX 1: SURVEY RESPONSES FROM MUNICIPALITIES IN FB&H ...... 18 9 ANNEX 1: EXCEL SHEET FOR DATA EXCHANGE BETWEEN TS AND BMIS IN FBIH ...... 22

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1 ABBREVATIONS

BD Brcko District BIH Bosnia and Herzegovina BMIS Budget Management Information System CABOM Casino and Betting Online Management CBBH Central Bank of Bosnia and Herzegovina CCI Center of Civil Initiatives DB Database EBF Extra Budgetary Fund EC European Commission E-FILING Electronic filing for tax declaration ELMO Enabling Labor Mobility Activity in Bosnia and Herzegovina EU European Union EUROMOD Tax-benefit microsimulation model for the European Union FAQ Frequently Asked Questions FAR Fiscal Sector Reform Activity in Bosnia and Herzegovina FBIH Federation of Bosnia and Herzegovina FC Fiscal Council FMoF Federal Ministry of Finance GFA GFA Consulting Group Germany GOLD Growth Oriented Local Development in Bosnia and Herzegovina HFRS Health Fund of RS IB Implementation Board for Payment Simplification IMF International Monetary Fund IT Information technology ITA Indirect Taxation Authority MAU Macroeconomic Analysis Unit at the Governing Board of ITA 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 PB Payment Bureau TS Treasury System EBS Oracle E-business Suite VPN Virtual Private Network RAS Revenue Allocation System AR Accounts Receivable STA Single Treasury Account

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2 INTRODUCTION

The first steps in introducing the treasury system in FBiH reaches back in 2000 when, with the help of USAID and US Treasury, the existing Payment Bureau (PB) was dismantled. The process of introducing treasury operations in B&H followed immediately after.

Again with the help of USAID, a Treasury System (TS) was introduced in two entities. In both entities, the Oracle-based treasury software was implemented. After this stage, the RS rolled out the same solution to the municipalities in RS, while in FBiH the same solution was deployed in 10 cantons. After that, there were no big, state or entity level sponsored activities in this area.

Since the municipalities in FBiH were not included in the projects mentioned above, and as laws obliged them, they looked for the treasury software solution on their own. This approach, without leadership or governance from higher levels, led to the existing, pretty chaotic situation in the FBiH municipalities in regards to the treasury systems. Although obliged by the law, many municipalities did not introduce a treasury system; some introduced one of the 6 or 7 existing solutions on the market, but without integration and automatic data exchange with the higher government’s levels. USAID GAP projects helped to introduce the treasury software to 19 municipalities in FBiH.

Since the TS is playing a crucial role in executing budgets and public administration spending, it is crucial that all FBiH municipalities and their users are properly integrated into TS. Having in mind that municipalities’ budgets represent the significant part of the FBiH budget, the need is, even more, urgent.

This document describes the current situation in FBiH regarding TS and suggests potential actions that would improve the situation. It will serve as a basis for planning interventions that FAR project will make in the FBiH TSs area.

The document is based on the publicly available information regarding TSs, IPA 2011 and meetings with Treasury departments of FBiH MoF and several cantonal MoFs. The FAR project did not visit all the municipalities in FBiH, but, together with Association of Municipalities and Cities in FBiH, conducted a survey to gather the necessary information. The document will be updated as further information is obtained.

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3 EXECUTIVE SUMMARY

In FBiH, unlike RS, there was no centralized approach to implement the centralized treasury system in all budgetary institutions. The FBiH Law on Treasury required all government institutions (entity, cantons, municipalities, cities, extra-budgetary funds) to have a treasury system. However, we have a different situation at each government level, and, furthermore, there are significant differences between municipalities.

The entity treasury system is built with the help of USAID and US Treasury. The FBiH upgraded the hardware and software several times, and they have proper maintenance. At the moment, they are in the process of upgrading hardware and software. In general, their TS is in a good shape.

The cantonal TS is implemented as a centralized solution hosted in the FBiH MoF. Former USAID project introduced it. However, the system was not maintained properly. The last hardware and software upgrade was made in 2007. As a result, the system is very slow, and user satisfaction is not at a high level. The cantons are trying to agree how to finance the system upgrade, but it is not clear at the moment if they will manage to make an agreement. The approximate cost of upgrading hardware and software is 550.000 KM.

The most diverse situation are in the FBiH municipalities. Approximately, one quarter of municipalities in FBiH have the treasury system implemented and functional. Almost one half of municipalities did not started the process at all. The rest started the process but they need additional help with procedures or hardware and software. The estimated time for implementation in a municipality where activities have not started is one year. Estimated cost per municipality, depending on its size and current status, is between 10.000 and 30.000 KM.

Extra-budgetary funds at this moment are not included in the treasury system.

The project activities will focus on municipalities that are not included in the treasury system at all. This will help them to comply with the FBiH Law on Treasury, significantly improve the reporting to cantons and achieve full vertical reporting integration (from municipalities, trough cantons, to FBiH MoF). Furthermore, introducing the treasury system where it does not exist (when compared to upgrading existing system), will contribute the most to the removal of slow and non-transparent spending and reporting process.

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4 LEGAL BASE

The current Law on the Treasury in FBiH is enacted in 2003 (Official Gazette 19/03) and it was amended in 2007 (Official Gazette 79/07). The law mandated that each organization unit within FBiH MoF, cantonal ministries of finance, municipalities, cities and extra-budgetary funds must be included in the treasury system.

However, despite the fact that the Law requires, many institutions are still outside the treasury system.

In March 2014, the FBiH government adopted the Draft Law on Treasury in FBiH. Second public discussion about the law was held on October 10th, 2015. The Law is adopted in March 2016. In the new Law there are no differences regarding which institutions must be included in the treasury.

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5 EXISTING SOFTWARE SOLUTION IN FBIH AND POTENTIAL IMPROVEMENTS

In the FBiH, treasury systems are introduced on the entity level, all ten cantons and in some of the municipalities. The TSs on the entity and cantonal level are based on Oracle Treasury software and are integrated, meaning that they are exchanging the data electronically.

TSs on municipality level are not integrated with upper government level (cantons). Although most of the software solutions support the creation of the reports in the prescribed format, they are not sent automatically to cantons.

The image below gives an overview of the treasury systems in FBiH:

TREASURY SYSTEM IN THE FBIH

NETWORK AND SYSTEM ARCHITECTURE OF THE FBIH TREASURY SYSTEM

The FBiH TS was installed in the FBiH MoF approximately 12 years ago. The latest server upgrade was done in 2010 when the existing server was replaced by two new servers (separate database and application server). At that time the Oracle database version 11g R2 was installed and Oracle EBS 11.5.10.2.

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The FBiH MoF applied for funds within IPA 2011 project and got a new hardware, including VPN hub expansion, servers, storage, routers, switches, printers, projectors and work stations. This project was delayed for several years, but the new hardware finally arrived, and it is in the process of installation. Among other systems, this equipment will be used for the FBiH TS. The TS will be installed on the new physical server, without virtualization.

A long time ago, the FBiH MoF planned the upgrade to the latest version: Oracle EBS 12. The funds were planned in the budget but never used since new hardware was not available. Now, when the hardware is in place, the procurement is planned for 2016.

The server room in the FBiH MoF is not in the best condition, and location within the building is not optimal. The Ministry planned funds in 2016 for moving the server room to another part of the building. This includes construction works to build the server room according to required quality standards. Moving to the new server room is expected in 2016.

The FBiH TS is used by users within the building and also by other FBiH budgetary institutions. These institutions are connected to the system via VPN.

The FBiH MoF can support up to 750 VPN connections at the time. Those connections are used by FBiH budgetary institutions, but also by cantons. The cantons connected via VPN are using the cantonal TS (see description below), PIMIS, a once the Budget Managements Information System (BMIS) is deployed to cantons, it will be also used via VPN.

MAINTENANCE

The TS is maintained by Ping, a company from . MoF also has a fairly capable local IT team that can provide basic support. There are no significant issues with system maintenance.

OTHER SOFTWARE IN THE FBIH MINISTRY OF FINANCE

Beside the TS, there are several other IT systems within the FBiH MoF. The bigger systems are System for budgeting purposes (BMIS) and System for the Management of Public Investments (PIMIS). Payroll for FBiH treasury users is also a relatively big system.

Beside those systems, there are also several smaller applications, usually based on MS Access or similar solutions. Those include application for public debt (to be replaced by DMFAS in 2016), tracking of court cases, guarantees for old savings, debt to war veterans, etc.

COMMUNICATION BETWEEN TS AND BMIS

The FBiH MoF uses BMIS for the purpose of planning and adopting the budget, and Oracle TS for budget execution. Although separate applications, two system can exchange information using the Excel format.

Approved budget can be exported from BMIS and imported in the TS. Vice-verse, the budget execution can be exported from the Oracle TS and imported into BMIS. Those data exchange require manual intervention. However, since it is happening only once or twice per year (after the budget is adopted and eventually amended), there is no need for further automation of this process.

The format of the Excel file used for data exchange is in the Annex 2 of this document.

COMMUNICATION WITH CANTONS

The FBiH MoF has a network connection (VPN or Frame Relay) to all cantons. This connection is used for accessing to cantonal TS (hosted in FBiH MoF), PIMIS application and in future will be used for BMIS, when deployed to cantonal level.

Regarding the TS, there are no communication problems, since the cantonal TS is physically located in the FBiH MoF server room. FBiH MoF can gather necessary data automatically. Still there is a place for improvement in the way how the data is used.

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POTENTIAL IMPROVEMENTS Upgrade of the existing FBiH TS server

Servers that are running the FBiH TS are five years old and should be replaced. The FBiH MoF obtained the necessary hardware through IPA 2011 program. The hardware just arrived, and upgrade is in the process. Upgrading the system to Oracle 12 version

The FBiH TS would also benefit from upgrading to new version of database and Oracle EBS. The FBiH MoF planned the necessary funds in their budget and the public procurement for the upgrade services will happen in 2016. Adding new modules to the FBiH TS

Currently, the Oracle EBS in FBiH MoF does not use fixed assets module, payroll module, and inventory modules. Payroll exists as a separate application. Fixed assets and inventory are not something that is urgently needed for MoF. There are no analyzes of the estimated costs and time required for implementation of those modules. TREASURY SYSTEMS IN FBIH CANTONS

NETWORK AND SYSTEM ARCHITECTURE OF THE CANTONAL TREASURY SYSTEM

All ten cantons are using the single TS system based on the Oracle E-business Suite (EBS). Currently, the latest version of Oracle 11 is installed. The system is installed on the single 32-bit server in the FBiH MoF. This server was installed in 2007.

Although they are using the same system, all cantons have their own set of books, and they are working independently. Cantons cannot access any data other than their own. There is no data exchange between cantons. Also, the FBiH MoF cannot alter cantonal data. They have only read-only access for reporting purposes. Even this read-only access is not realized to the full potential and reports based on cantonal data can be improved.

Despite the fact that there is room for improvement in data exchange with FBiH level, we can say that the vertical integration with upper level exists. Unfortunately, there is no integration with the lower government level – data exchange with municipalities is non-existing.

Even they are using the single system, cantons can configure and upgrade significantly functionality of their part of the system. In practice, if a canton decides to purchase and implement an additional module, the module is installed on the server, but it is enabled and connected to the main book only for the canton that decided to implement it.

There are no servers in cantons – only work stations that are connected to the server in the FBiH MoF. After the system had been introduced in 2007, the cantons were connected using Frame Relay – a dedicated connection between the cantonal and FBiH Ministry of Finance. Now, some of the cantons moved to VPN (Virtual Private Network) – a tunneled connection that uses the public Internet. The Frame Relay connection is superior from the security point of view, as it does not require access to the public internet. However, it is very expensive (several thousand KM per month) and very slow compared to today’s internet connections. Therefore, the trend is that cantons are moving from Frame Relay to VPN – most of them have already switched. VPN connection is only slightly less secure, and it is for an order of magnitude, or even more, cheaper.

At this moment, only Tuzlanski canton, Posavski canton, Bosansko-podrinjski canton and Zapadno- hercegovački canton are left on the Frame Relay, while Tuzlanski and Bosansko-podrinjski canton are in the process of switching.

The biggest disadvantage of VPN is that actually users’ computers need to be connected to the internet. This, itself, does not represent a risk for the TS, but it exposes the computer to the viruses and ads from the internet. This can significantly slower the computer performance and, subsequently, TS performance on the local computer. Another problem that some cantons (especially canton Sarajevo) experience with

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VPN is that they do not have a sufficient number of VPN licenses. VPN connection requires a license for active connections (so-called “slot”). Each open connection occupies a slot. When VPN solutions are purchased, they are usually priced by slots. When all slots are occupied, the new user cannot connect while one of the existing connections is not terminated. For example, canton Sarajevo has 15 VPN licenses, and they estimate their needs to 30 licenses.

The hardware used for work stations varies greatly between cantons. Recently there were no purchases intended solely for the treasury system. Cantons used their budget to purchase computers and there are cantons where equipment is new and sufficient. In some other cases, work stations computers are old and require replacement. There were expectations that hardware from IPA funds will be distributed to canton, but according to current information from FBiH MoF this is not likely to happen.

Each canton, in addition to cantonal MoF, has one or more budgetary institutions that are directly connected to the system. Usually, those are cantonal institutions with large number of employees. In most cases, these include the cantonal ministry of education, the cantonal ministry of police, etc. is the only canton where the university is fully integrated into the TS. Other cantonal institutions, which are not directly connected the system, bring their papers to the cantonal ministry of finance where they are processed.

The number of EBS licenses (users that are using the TS directly from their computer) significantly varies between cantons. Big cantons can have 200 licenses and more while smaller ones can have approximately 20 licenses. This includes users in other cantonal institutions that are directly connected to the system.

The key problem with the existing solution is performance. Usual server lifespan is 3 to 5 years. The current server that is used for cantonal TS is eight years old and should have been replaced a long time ago. This old server significantly impacts the performances and, sometimes, slows the system down to the level where it is not usable. There are examples of standard reports that require several hours for rendering. For larger operations, users sometimes initiate operation at the end of the day and see results in the morning – which is problematic in general, and especially if an error occurred and the operation needs to be repeated.

This is something that was not happening when the system was introduced. It is exclusively the consequence of old server that cannot cope with the new system versions and growing number of users.

The cantons hoped that this server could be replaced within IPA 2011 project, but, most likely this is not going to happen. FBiH MoF, as end beneficiary of the IPA 2011 fund is not able to dedicate a physical server for this purpose. They can provide a virtual server, but that would require additional licenses required when virtualization is used. The estimated price of additional licenses is 500.000 USD, and this option is ruled out.

Alternatively, when the FBiH MoF finalizes the installation of hardware from IPA 2011 program and migrates existing application, they would be able to “donate” two existing server, to be used for cantonal TS. In this case, the cantonal TS application would be moved from old server purchased in 2007 to ones that are three years old. Even they are not new, they are much better than existing ones, and this could improve the situation. Most likely, in this case, the application would require an upgrade (see section below on server upgrade).

MAINTENANCE

All cantons are paying the maintenance of the TS to Oracle Bosnia and Herzegovina. The maintenance price is relatively high – between 3.000 and 10.000 KM per month, for each canton. This includes functional and technical support, but not installing the new versions of the software. In practice, this means that cantons are paying for maintenance of their TS instance on the server in FBiH MoF and work stations in cantons.

Several issues negatively impact the maintenance process. Any upgrade, even simple ones like adding more user licenses, is subject to the Law on Public Procurement. This process is notoriously slow, and sometimes, when appeal takes place, can take years. Until now, Oracle Bosnia and Herzegovina manage to win most of the upgrade and maintenance tenders.

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The second problem is that for any major upgrade, like a new version of the software, all ten cantons need to agree and to pay jointly. This is a slow, and sometimes impossible process. In the last couple of years, no upgrades were made. Recently, cantons tried to upgrade the system to Oracle 12. – Canton Sarajevo led this process, but it was not successful.

The cantons, in general, have a fair relationship with Oracle regarding maintenance. However, they understand that the Oracle maintenance is very expensive and that they are paying a lot. Also, several locally employed people left Oracle recently, and that affects the knowledge and response time. There were cases where for some small tasks, like adding a printer, Oracle Croatia was involved.

The conclusion is that the current system is old, not up to the current tasks and very expensive for maintenance. Cantons paid between 10 and 12 million KM only for maintenance of TS in last 12 years, without any significant upgrade. They feel locked in the current system and forced to pay high maintenance fees. Change of TS is a very expensive process that required coordination of all 10 cantons. It is unlikely that cantons will initiate the system change in near future. They will continue to pay the maintenance fee to keep the system running, without radical changes.

OTHER SOFTWARE IN CANTONAL MINISTRIES OF FINANCE

Beside the TS, each canton has one or more other software applications.

Each cantons runs the RAS (Revenue Allocation System) software. This is an Oracle based application that processes payment information from the banks that holds canton’s deposit accounts and allocates the payment to municipalities and other users according to pre-defined rules. The data from the RAS system is imported in the TS, which sometimes can be slow due to TS unresponsiveness.

This system is also quite old but works relatively well. In December 2015, as part of IPA 2011, all cantons received a server to replace the old one. This will improve the existing systems. In most cases, RAS system is maintained by HERA, a company from . The cantons are quite happy with cooperation with HERA. Annual maintenance price is several thousand KM.

Most of the cantons are using a payroll system implemented by Ocean, a company from . This system is in use for years, and it has been adapted to canton’s needs. It supports data export to TS.

Beside software mentioned here, many cantons developed or purchased additional software for their particular needs. In some cases, data from additional software can be imported into TS.

COMMUNICATION WITH MUNICIPALITIES

The communication of the cantonal TS with lower government level is the critical issue of the FBIH TS. Even when municipalities have the treasury system installed, there is no automatic data exchange.

All municipalities are submitting data to their respective cantons in Excel files prescribed by the FBiH MoF and in paper copy. This process causes many data entry errors and delays in reporting process. Missing communication and data exchange between cantons and municipalities are the single biggest obstacle to the vertical integration of the treasury system in FBiH.

POTENTIAL IMPROVEMENTS

There are several areas for improvements in the existing cantonal TS. They are explained below, ordered by urgency and the positive impact they would make. Upgrade of the existing cantonal server for TS in the FBiH MoF

Existing server in the FBiH MoF that hosts the cantonal TS is the weakest point of the whole system. It is an 8-year old server that should have been replaced a long time ago. Replacing this server with new one would immediately bring significant performance improvement.

The estimated cost of the new server that meets all requirements is 50.000 KM.

Moving the software from the old system to new one is a possible, but a tricky process. The main issue is that existing server and software are 32-bit while all new servers are 64-bit. This would require upgrading

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the Oracle EBS and database to a new version (preferable, but with additional costs – see below), or running 32-bit code on 64-bit using virtualization or similar technique.

Technically, Oracle EBS can work in the virtual environment, but it is slower, and it significantly complicates the support process. Oracle support team does not address problems that occur on virtualized server if the same problem cannot be reproduced in the physical environment. This is something that significantly increases the support response time for any issue.

Additionally, moving the existing application to the new server is not stipulated by the current maintenance contract with Oracle BiH. Oracle BiH hinted that they would do the work to keep the good relationship with cantons. However, this is a risk. The worst case scenario is that the separate procurement for migration services is required according to the Law on Public Procurement. Upgrading the system to Oracle 12 version

Currently, the system runs the latest version of Oracle 11 EBS and version 9 of the Oracle database. Official support for this version expired, and extended support will expire soon.

The estimated cost of the upgrade to version 12 (latest) is 500.000 KM. This includes an update of the operating system, database, and Oracle EBS. This would bring significant performance benefits to end users. Connection to the budgeting system

Currently, no existing IT system supports the creation and adopting the cantonal budget. However, the process of introducing the budget management information system (BMIS) started and it is expected to be finalized at the beginning of 2017. When BMIS is in place, it would be a significant improvement to enable export of the adopted budget from BMIS and import in the existing treasury software.

The key requirements are that BMIS is capable of exporting data in a simple Excel, text or XML file. The data structure must be in line with rulebooks that define standards and codes for treasury systems in FBiH.

Since the same BMIS system will be used in all cantons, the same import procedures could be used. The implementation of the import module can take up to 4 months, and the approximate cost is 60.000 KM.

Implementing the Accounts Receivable (AR) module

Currently, only the basic functionality of this modules exists in the system, and it is not connected to the general ledger. Therefore, most cantons do not use it.

The full implementation of this module could be very useful for cantons since it would be able to monitor receivables in the real time. Zeničko-dobojski canton decided to implement this module on their own by adding new functionality and connecting it to the main book. The start date for using this module is January 2016. Unsko-sanski canton also plans to introduce this feature.

No new user licenses are required for this module, suppose that existing users will use it. The estimated implementation price is 10.000 KM per canton, with the presumption that there are no significant differences in implementation between cantons. Implementing the Fixed Assets module

Currently, all cantons track fixed assets in Excel or dedicated software. The Oracle EBS has a very powerful module for fixed assets. Assets can be tracked as inventory, by their bookkeeping value, or both. Using the Oracle EBS fixed assets module that is integrated with TS would save the time needed for tracking and data entry. The module allows simple data migration from existing software, using Excel spreadsheets.

Estimated price for the introduction of Fixed Assets module for all cantons is 300.000 KM. Estimated implementation duration is six months, with the premise that there are no significant differences in implementation between cantons. Implementing this module could be challenging in the cantonal police department, since they have many different types of fixed assets and usually not a well-developed policy how to record it.

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No new user licenses are required, if only existing users will use this module. Introducing faster internet connections and additional VPN licenses

Some cantons could benefit from a faster internet connection and additional VPN licenses for connection to the FBiH MoF. However, those are operational costs that should be planned in each canton and purchased locally. One VPN license for canton or other institutions costs 300 USD (one-off cost). Additional trainings

The existing TS was introduced more than ten years. Although the end-user training was delivered at a time, in some cantons there is a need for new trainings. Some of the staff that received the training left ministries, and many new employees came that did not receive the training for using the system. Including extra-budgetary funds in the TS

Some cantonal MoFs expressed an interest in including the cantonal extra-budgetary funds (health funds and employment institutes) in the TS. Although this makes sense and would result in more fiscal discipline, this is not realistic at the moment for several reasons.

First, a strong political will need to exist in the canton for such move. This would, also, require law changes, and potentially even cantonal constitution changes. Unfortunately, there is often resistance in the local government to the introduction of new system, especially if they will bring more transparency and financial control.

Another big reason against inclusion of the extra-budgetary funds in the TS is the current status of the TS system itself. As explained above, the system is already slow and needs significant upgrading to be in good condition. Adding more big institutions like extra-budgetary funds would further slow the system. At the same time, it would be very hard to convince funds to join the system that is very slow at the moment and expensive for maintenance. Implementing Payroll and Inventory module

There is a possibility to implement payroll and inventory module to Oracle EBS. However, currently this is not a priority and cantons did not express interest for this.

All cantons are already using the payroll system (most of the cantons are using Ocean’s software) which is customized to their needs and migration would be a slow and painful process. The inventory module is not particularly interesting for the administrative organization. The only potential beneficiary would be the cantonal police department who would be able to track their inventory. TREASURY SYSTEMS IN FBIH MUNICIPALITIES

There was no single, government sponsored project for implementation of TS in FBiH municipalities. On the other side, the law mandated that all municipalities must have a treasury system. The decision if, and which system to implement, was made by each municipality. As a result, we have a very fragmented situation with dozens of disconnected, stand-alone treasury software.

The single biggest initiative to introduce a treasury software to municipalities in FBiH was initiated by USAID GAP project, where the treasury system was introduced in 19 municipalities. Even those installations are stand-alone and without data exchange with higher governments levels.

Practically, as many municipalities do not have treasury software at all, and other have a software that is not connected with other treasury systems, we cannot speak about “treasury system in FBiH municipalities”, but only about different treasury software in different municipalities.

STATUS BY MUNICIPALITY

19 municipalities have fully implemented the TS while 36 municipalities did not start the process at all. Four municipalities are currently in progress of introduction of the treasury system.

20 municipalities started the process but did not fully implemented the system. In most cases municipalities that initiated the process need help with rulebooks or implementation acts, or someone that

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will consult them how to execute properly the process. In few cases, there is a lack of money for treasury software or hardware required.

Below is a list of municipalities together with current status, based on the questionnaire. Annex 1 provides more detailed information about each municipality. Original questionnaires are available in the project archive.

Number of Status Municipalities Municipalities

Busovača, , Centar, Čapljina, Ilidža, Ilijaš, , Ključ, TS fully , Ljubuški, Novi Grad Sarajevo, , Novo 19 implemented Sarajevo, Sarajevo Stari Grad, Travnik, , , Zenica, Žepče

In progress 4 Bihać, Bužim, Goražde, Tešanj

Banovići, , , Breza, , Started the -Istok, Doboj-Jug, , Gračanica, Gradačac, process, but 20 Hadžići, , , , , Orašje, Pale FBiH, help is needed , Usora, Velika Kladuša

Bosansko Grahovo, Čelić, Čitluk, Dobretići, Domaljevac-Šamac, , Foča (FBiH), , Glamoč, Gornji Vakuf-Uskoplje, , Jablanica, , , , Kreševo, , No action taken 36 , Mostar, , Odžak, Posušje, Prozor-Rama, Ravno , , , , , Široki Brijeg, Teočak, Trnovo, Vareš, , Vogošća, Zavidovići, Živinice

In addition to the questionnaire, based on information from the companies that implemented treasury systems in BiH, we found that following municipalities have the treasury system installed: Bugojno, Bužim, Čapljina, Ilidža, Ilijaš, Jablanica, Kakanj, Ključ, Visoko, Vitez. Furthermore, the following municipalities have the software ready but need help with rulebooks and procedures: Breza, Čelić, Domaljevac - Šamac, Drvar, Maglaj, Mostar, Prozor-Rama, Živinice.

It is worth to mention that in some municipalities there is a lack of political will for implementing the treasury system or any other system that brings more transparency. The treasury system introduces a fiscal discipline, control of all funds, a structured process for paying external vendors, and therefore, there is less space for manipulation.

FUNCTIONALITY OF THE EXISTING TREASURY SOFTWARE

There are many different treasury systems implemented in FBiH municipalities, and they have different modules. Municipalities often purchased modules that they need the most or that they were able to finance.

Also, many municipalities decided to implement some modules that are specific for them and probably are not used in other municipalities. They paid for the custom development of those modules. Examples of those are a system for record and track rent of municipality’s offices or land, a module for monitoring fees for extracting natural resources, etc.

Below are the key modules that should exist in most of the software solutions installed in the FBiH municipalities:

 General ledger – contains the whole chart of account as defined by MoF, and allows manual posts of journal entries  Budgeting – enables municipality to enter, at least, the final approved budget  Payroll/Personnel – module that calculated the employees’ salaries

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 Accounts Payable – module for generating invoices and tracking payments for services rendered by municipality  Procurement / Purchase Orders – a key module for treasury systems that enables creation and execution of purchase orders, recording received invoices and track payments and budget execution

Some of the municipalities also have the following modules:

 Fixed Asset Management – module to track fixed assets and record changes in their values.  Cash Receipts – enables municipalities to receive and manage cash payments  Small inventory – module for managing small inventory, like office paper, cartridges, etc.

MAINTENANCE

Most of the municipalities that have a treasury system in place also have the maintenance contract with the company who implemented the system. In general, the municipalities are happy with the level of support they are receiving.

Typical annual maintenance price is 20% of the implementation price, and depending on the municipality size it can be between 3.000 and 20.000 KM annually. This maintenance include the upgrade to new software version.

COMMUNICATION WITH CANTONS

There is no automatic data exchange with the cantonal treasury system. This is the single biggest shortcoming of the existing treasury system in FBiH, as the missing part to achieve the full vertical integration.

The municipalities are obliged to report to their respective cantons. Since the systems between municipalities and cantons are not connected, they are creating reporting in predefined Excel templates.

The treasury software in some municipalities allows data export in this predefined format while some municipalities fill those templates manually. The Excel files are sent to canton via email and in paper copy via post. Cantons then consolidate the data for all their municipalities and reports to the FBiH level.

The manual data entry and manual consolidation are obvious points in the process that leads to data entry errors and delays. This prevents the FBiH MoF to have correct information about the budget promptly. The fact that municipality budgets represent a significant portion of the FBiH adds importance to this issue.

POTENTIAL IMPROVEMENTS Introducing a treasury software to municipalities that does not have one

The obvious place for improvement is the introduction of the treasury software in municipalities that does not have one. This would help the municipalities to fulfill the legal obligation of having the Treasury software and would significantly improve the quality of the data they are sending to cantons.

The estimated price of installing a treasury software in municipalities in FBiH is between 10,000 and 40,000 KM per municipality, depending on the size of the municipality and number of users and existing IT systems.

Unfortunately, software is not the only part of the implementation process. There is a number of actions that need to be performed, and several procedures/rulebooks adopted. Below is the list of activities that must be performed:

 Decision on commencement of activities related to introduction of TS  Creation and adoption of implementation plan for municipality (activities, tasks, deadlines)  Education about treasury and preparation  Amendment of the Rulebook on Organization and Job Classification  Establishment of the organizational unit of treasury  Installing of hardware and software

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 User training  Establishment of register of budget users  Handbook on cash-office business activities  Instruction on procedures for procurement of goods and performing of services and procedures for invoice-bill  Handbook on processing of transactions in the Treasury on the basis of changes of permanent funds  Instruction on procedures for payment of revenues, revenues on providing public services, grants and donations  Rulebook on procedures on use of revenues gained by performing main activity of budget user  Handbook on processing transactions from internal business relations of budget users  Book of Rules on manner of submission of documentation, centralized calculation and payment of salaries and charges to employees  Book of Rules on circulation of financial documentation in Financial service of municipality  Handbook on production and execution of budget from Single Treasury Account (STA)  Budget proposal (on STA principles)  Adopted budget  Decision on commencement of functioning of the Treasury and establishment of STA  Decision on cancellation of accounts and sub-accounts of budget users  Decision on authorization for signing of payment orders from STA  Book of Rules on security and protection of informatics equipment and data  Production of balance sheets of budget users  Closure of accounts of budget users  Commencement of functioning of the Treasury

Typical implementation of TS in municipality takes about a year. Connection to the budgeting system

Currently, there is no common IT system in municipalities that supports the creation and adoption of the municipal budget. In its action plan, PARCO planned to introduce a budget management information system (BMIS) in the FBiH municipalities. When completed, export from BMIS to municipality treasury system would be a very useful feature.

The key requirements are that BMIS is capable of exporting data in a simple Excel, text or XML file. The data structure must be in line with rulebooks that define standards and codes for treasury systems in FBiH. When the same codes and data enumeration is used, the import process should be relatively easy, both from technical and data manipulation side.

This data import from BMIS to the treasury software needs to be implemented by the company that maintains the treasury system. This should not be too complex, and each municipality should be able to agree on this with the vendor who maintains the TS.

On the other way, BMIS should be able import the data form the TS about the budget execution.

Improving existing treasury software in municipalities

Certainly, there is room for improvements of the existing treasury system in municipalities. However, since each municipality introduced and customized the system for their own purposes, it is impossible to generalize the areas for improvement.

A separate analysis of the existing treasury software and real needs would need to be carried out separately for each municipality. Then, together with the vendor who made the software, it would be possible to estimate the cost and implementation time for potential improvements. This analysis is outside the scope of this document.

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6 THE CENTRALIZED TREASURY SOLUTION IN FBIH

From the technical and operational point of view, a centralized treasury system would be the best solution for budgetary institutions in FBiH. The similar solution is applied in the RS. The key characteristic of the centralized solutions are:

 The system (hardware and software) is located in the central location, most often in the Ministry of Finance  All users (FBiH’s, cantonal’s and municipalities’) are accessing the central system via VPN. They need only internet connection and browser. Sometimes, users need a client application that is provided together with the software  The system is maintained centrally, which makes updates and application of the laws change easier  Only one institution is in charge of the maintenance and dealing with an external vendor

Below is the diagram of potential integrated system:

Implementation of the centralized solution in FBiH would have several benefits:

 The centralized treasury system would cover all institutions, including ones that, for different reasons, are not in the treasury system now. This would overcome the current reasons why some of the municipalities are not in the system: lack of funds for hardware or software , missing procedures, lack of political will  The reporting would be significantly improved. As all data would be in the same system, there is no need for manual data entry or manual data exchange. All reports would be available in one place for users who has proper permissions. That would greatly improve the data quality.

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 Tracking of budget execution would be much better since the data could be monitored in real-time  All changes to the system, whether improvements or required by the law, would be implemented faster, on the single place  It will be easier to negotiate the implementation price and maintenance cost with vendor and price would be lower compared to sum of maintenance price for all cantons and municipalities  It would be easier to include extra-budgetary funds, cities and other institutions that, according to the law, should be in the treasury system, but are not

The rough price estimation for the introduction of this centralized system is between 3 and 5 million KM (an Oracle based solution). The price also includes technical help to municipalities to adopt necessary rulebooks and procedures.

Unfortunately, there are significant obstacles that would prevent or significantly slow down the introduction of the centralized treasury solution:

 Unlike in RS, the legal framework (namely the Law on Treasury) in FBiH does not mandate the centralized system. Adopting a law where all budgetary institution are required to use the centralized treasury solution would be very hard, or even impossible, because of the complex structure of FBiH. According to the FBiH constitution, some of the institutions that should be in the treasury system, like extra-budgetary funds, are in the cantonal jurisdiction. Therefore, it is questionable if the FBiH can adopt a law that would force municipalities and cantonal extra- budgetary funds to use the centralized system. Even, if passing the law is possible than the strong political will is needed to overcome the opposition of the lower government levels to the TS introduction. The further analysis is required.  The centralized treasury system would have the functionality that is required by law, and potentially some other modules that are used in all budgetary institutions. As described above, many cantons and municipalities already developed a custom modules that serve their needs and that are integrated with their TS. Since the custom modules (e.g. tracking of offices rented by the municipality, or fees for usage of national resources) could not be part of the central solution, those institutions would practically be forced to abandon their investment and the better solution they have paid for and to use the solution that offers less functionality. Alternatively, they could keep using the existing system and pay the current vendor to build a module for data export to the centralized system. This would require additional costs for them and force them to use two separate systems, instead of one they are using now.  There is a potential problem with financing the implementation and the maintenance of a central solution. If the FBiH MoF agree to pay the implementation and maintenance cost on their own, significant savings would be achieved compared to current status. However, this is not certain. Currently, the centralized cantonal treasury system is located in the FBiH MoF, but they don’t want to participate in the system maintenance costs. Maintenance is paid by cantons. Even with ten cantons, it is very hard to reach an agreement how to pay for the maintenance and for the upgrade of the existing system. Bad financial situations in some cantons and lack of will for reaching an agreement about upgrading are the main reasons why the cantonal treasury system is in such a weak state. Expecting ten cantons, 79 municipalities, and several other budgetary institutions to agree on sharing the implementation and maintenance cost and to pay for it in a timely manner is not realistic.

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7 CONCLUSIONS AND FURTHER STEPS

From the technical and operational point of view, the centralized TS that would include FBiH, all cantons, all municipalities and other budgetary institutions would be the best approach. If agreed with all institutions, significant improvements in reporting and cost savings would be achieved.

However, the obstacles to the introduction of the centralized TS are too big, and such system is too expensive to be funded from the project budget.

Improving cantonal TS by purchasing a new server and upgrading a database and an application version would be very useful and would give cantons some breathing space in next three years. However, most probably, the same situation would happen again in future if cantons do not come to the sustainable agreement on financing the maintenance. Furthermore, this would cost more than it is planned in the project budget for this component.

The project activities will focus on the institutions, mostly municipalities, which are not included in the treasury system at all. Introducing the treasury system to municipalities that don’t have one, and, by that, enabling the vertical reporting from lowers government level in FBiH (municipality) to highest level (FBiH MoF) will be the primary focus.

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8 ANNEX 1: SURVEY RESPONSES FROM MUNICIPALITIES IN FB&H

Together with Association of Municipalities and Cities in FBiH, FAR created a questionnaire about the status of the treasury system in FBiH municipalities. Municipalities are asked to return the completed questionnaire, which was used as a basis for gathering necessary information about TS status.

Municipality TS implemented Comment

Banovići Partially The software is ready, few procedures are missing Bihać In progress Currently, TS is in the implementation phase Bosanska Krupa Partially The decision is made, software is ready, few more activities left (most notably, the change in the job classification rulebook) Bosanski Petrovac Partially Few rulebooks and treasury department are missing Bosansko No TS is not implemented and there were no Grahovo significant activities towards the TS introduction Breza Partially More education is needed Bugojno Partially The decision is made, software is ready, few more activities left (most notably, the change in the job classification rulebook). Mayor support is needed at the moment Busovača Yes TS is in place and fully functional Bužim In progress The process started, some rulebooks are created and process stopped. Cazin Yes TS is in place and fully functional Centar Yes TS is in place and fully functional Čapljina Yes TS is in place and fully functional Čelić No TS is not implemented and there were no significant activities towards the TS introduction Čitluk No TS is not implemented and there were no significant activities towards the TS introduction Doboj-Istok Partially Rulebooks and procedural changes are needed Doboj-Jug Partially More education is needed Dobretići No TS is not implemented and there were no significant activities towards the TS introduction Domaljevac- No TS is not implemented and there were no Šamac significant activities towards the TS introduction Donji Vakuf Partially The treasury software exists and decision is made, however few rulebooks are missing for full implementation Drvar No TS is not implemented and there were no significant activities towards the TS introduction Foča (FBiH) No TS is not implemented and there were no significant activities towards the TS introduction Fojnica No TS is not implemented and there were no significant activities towards the TS introduction

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Municipality TS implemented Comment

Glamoč No TS is not implemented and there were no significant activities towards the TS introduction Goražde In progress TS in being implemented, should be finalized in 2016 Gornji Vakuf- No The municipality Council adopted a decission on Uskoplje TS implementation. No actions were taken. Gračanica Partially Rulebooks needs update Gradačac Partially Some steps are implemented, but more guidance is needed to complete the process. Grude No TS is not implemented and there were no significant activities towards the TS introduction Hadžići Partially Deposit account opened, but no further steps are made Ilidža Yes More education is needed Ilijaš Yes TS is in place and fully functional Jablanica No No significant actions taked, other than decission on forminf the registry of budgetary users Jajce Partially Need training, treasury departments and few rulebooks Kakanj Yes Only one budgetary user is included. More education is needed. Kalesija No TS is not implemented and there were no significant activities towards the TS introduction Kiseljak No TS is not implemented and there were no significant activities towards the TS introduction Kladanj No TS is not implemented and there were no significant activities towards the TS introduction Ključ Yes TS is in place and fully functional Konjic Partially The decision on treasury implementation is made, software is almost ready, but they need more education and help with procedures Kreševo No TS is not implemented and there were no significant activities towards the TS introduction Kupres No TS is not implemented and there were no significant activities towards the TS introduction Livno Partially Most of the procedures and rulebooks are ready, they need software upgrade Lukavac Yes TS is in place Ljubuški Yes TS is in place and fully functional Maglaj No Some required documentation is prepared, but never adopted Mostar No Some required documentation is prepared, but never adopted Neum No The decission on TS implementation is adopted. No actions were taken. Novi Grad Yes TS is in place and fully functional Sarajevo

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Municipality TS implemented Comment

Novi Travnik Yes TS is in place and fully functional Yes TS is in place and fully functional Odžak No TS is not implemented and there were no significant activities towards the TS introduction Olovo Partially Software is mostly ready, help with procedures is needed Orašje Partially Most procedures completed, they need a help with software implementation Pale FBiH Partially Some steps are implemented, they need new hardware Posušje No TS is not implemented and there were no significant activities towards the TS introduction. The municipality is not ready Prozor-Rama No TS is not implemented and there were no significant activities towards the TS introduction Ravno No TS is not implemented and there were no significant activities towards the TS introduction Sanski Most No TS is not implemented and there were no significant activities towards the TS introduction Sapna No TS is not implemented and there were no significant activities towards the TS introduction Sarajevo Stari Yes TS is in place and fully functional Grad Srebrenik No TS is not implemented and there were no significant activities towards the TS introduction Stolac No TS is not implemented and there were no significant activities towards the TS introduction Široki Brijeg No TS is not implemented and there were no significant activities towards the TS introduction Teočak No TS is not implemented and there were no significant activities towards the TS introduction Tešanj In progress TS implementation in progress Tomislavgrad Partially Software is ready, they need few more procedural steps Travnik Yes TS is in place and fully functional Trnovo No TS is not implemented and there were no significant activities towards the TS introduction Tuzla Yes TS is in place and fully functional Usora Partially The municipality is almost ready (need small software intervention). The problem is with local communities and their bank accounts Vareš No TS is not implemented and there were no significant activities towards the TS introduction Velika Kladuša Partially They need help with rulebooks and documentation. Software is ready. Visoko Yes TS is implemented

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Municipality TS implemented Comment

Vitez No Registry of budget users is missing and system and is not fully utilized Vogošća No TS is not implemented and there were no significant activities towards the TS introduction Zavidovići No TS is not implemented and there were no significant activities towards the TS introduction Zenica Yes TS is in place and fully functional Žepče Yes TS is in place and fully functional Živinice No Other that opening a deposit account, TS is not implemented and there were no significant activities towards the TS introduction

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9 ANNEX 1: EXCEL SHEET FOR DATA EXCHANGE BETWEEN TS AND BMIS IN FBIH

BUDŽET PRIJEDLOG BUDŽETA 2015 2014 Ekonomski Opis Izvor kod ekonomskog 10 Izvor Izvor Budž Izvršenje Izvor 30 koda Sredstv 20 40 et budžeta Namjens UKUPNO Indeks % a Vlastiti Donacij 2014 za 2016 ki prihod budžet prihod e a 1 2 3 4 5 6 7 8 9 10=9/3

PRIHODI OD 71 0 35.000 0 0 60.000 0 60.000 * POREZA

719 Ostali porezi 0 35.000 0 0 60.000 0 60.000 *

7191 Ostali porezi 0 35.000 0 0 60.000 0 60.000 *

Poseban porez na plaću za zaštitu od 719114 prirodnih i drugih 0 32.000 0 0 55.000 0 55.000 * nesreća (ZAOSTALE OBAVEZE) Poseban porez za zaštitu od prirodnih i drugih nesreća po osnovu ugovora 719115 o djelu i 0 3.000 0 0 5.000 0 5.000 * povremenih i privremenih poslova (Zaostale obaveze)

NEPOREZNI 19.950.6 275.00 47.826.4 48.101.4 72 0 0 0 * PRIHODI 09 0 18 18

Prihodi od poduzetničkih aktivnosti i 2.219.00 29.377.9 29.377.9 721 imovine i 0 0 0 0 * 0 98 98 prihodi od pozitivnih kursnih razlika Ostali prihodi od 2.219.00 29.377.9 29.377.9 7212 0 0 0 0 * imovine 0 98 98 Prihodi od 721211 kamate za 0 1.000 0 0 1.000 0 1.000 * depozite u banci Prihodi od GSM 27.200.3 27.200.3 721214 0 0 0 0 0 * licence 00 00 Prihodi ostvareni 2.218.00 2.176.69 2.176.69 721231 od prometa 0 0 0 0 * 0 8 8 Lutrije BiH

Naknade i takse i prihodi od 17.731.6 275.00 18.448.4 18.723.4 722 0 0 0 * pružanja javnih 09 0 20 20 usluga

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Administrativne 6.000.61 6.000.30 6.000.30 7221 0 0 0 0 * takse 8 0 0 Putničke takse - naknade za 6.000.61 6.000.30 6.000.30 722113 unapređenje 0 0 0 0 * 8 0 0 avioprometa u Federaciji BiH Ostale 2.351.00 2.651.20 2.651.20 7224 budžetske 0 0 0 0 * 0 0 0 naknade i takse Naknada za 2.026.00 2.326.20 2.326.20 722451 opće korisne 0 0 0 0 * 0 0 0 funkcije šuma Naknada za 722454 korištenje 0 265.000 0 0 265.000 0 265.000 * državnih šuma Naknada u postupku promjene 722455 namjene 0 60.000 0 0 60.000 0 60.000 * šumskog zemljišta (krčenje šuma) Naknade i takse po Federalnim 7.971.17 8.957.92 8.957.92 7225 0 0 0 0 * zakonima i 3 0 0 drugim propisima Naknade po osnovi tehničkih pregleda 722518 0 150.000 0 0 175.000 0 175.000 * građevina i po osnovu stručnih ispita Naknada za korištenje opće 2.580.00 3.331.30 3.331.30 722541 korisnih funkcija 0 0 0 0 * 0 0 0 šuma (zaostale obaveze) Sredstva za proširenu biološku 722542 0 70.000 0 0 70.000 0 70.000 * reprodukciju šuma (zaostale obaveze) Posebna naknada za zaštitu od prirodnih i drugih 4.130.00 4.400.00 4.400.00 722581 0 0 0 0 * nesreća gdje je 0 0 0 osnovica zbirni iznos neto plaće za isplatu Posebna naknada za zaštitu od prirodnih i dr. nesreća gdje je osnovica zbirni 722582 iznos neto prim. 0 94.620 0 0 91.620 0 91.620 * po osnovu dr. samostalne djelat.i povremenog samostalnog rada. Naknada iz funkcionalne premije 722584 osiguranja od 0 0 0 0 40.000 0 40.000 * autoodgovornosti za vatrogasne jedinice

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Naknade za 722591 polaganje 0 221.860 0 0 150.000 0 150.000 * stručnih ispita Federalna naknada od izdanih licenci, 722597 uvjerenja, 0 724.693 0 0 700.000 0 700.000 * certifikata i ostalih stručnih publikacija Prihodi od pružanja javnih usluga (Prihodi od vlastitih 1.407.91 275.00 1.114.00 7226 0 0 839.000 0 * djelatnosti 8 0 0 korisnika budžeta i vlastiti prihodi) Prihodi od 722612 pružanja usluga 0 301.500 0 0 0 0 0 0 pravnim licima Prihodi od 722613 pružanja usluga 0 839.151 0 0 839.000 0 839.000 * drugima Prihodi od pružanja usluga 722621 0 14.700 0 0 0 0 0 0 drugim nivoima vlasti Vlastiti prihodi 275.00 722631 budžetskih 0 252.567 0 0 0 275.000 * 0 korisnika Neplanirane 7227 0 900 0 0 0 0 0 0 uplate-prihodi Ostale 722791 neplanirane 0 900 0 0 0 0 0 0 uplate

TEKUĆI TRANSFERI 73 0 0 0 0 600.000 0 600.000 * (TRANSFERI I DONACIJE)

733 Donacije 0 0 0 0 600.000 0 600.000 *

7331 Donacije 0 0 0 0 600.000 0 600.000 *

Donacije od 733112 0 0 0 0 600.000 0 600.000 * pravnih lica

19.985.6 275.00 48.486.4 48.761.4 UKUPNI PRIHODI 0 0 0 * 09 0 18 18

SVEUKUPNI 19.985.6 275.00 48.486.4 48.761.4 PRIHODI,PRIMICI,FINANSIRA 0 0 0 * 09 0 18 18 NJE

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