Yerevan City: Public Expenditure and Financial Accountability (PEFA) Performance Review Yerevan, October 2013 Yerevan City: Public Expenditure and Financial Accountability (PEFA) Performance Review Yerevan, October 2013 CURRENCY AND EXCHANGE RATES Currency unit = Armenian Dram (AMD) US$ 1 = AMD 414 Euro 1 = AMD 543 GOVERNMENT FISCAL YEAR (FY) 1 January – 31 December PEFA ASSESSMENT PERIOD FY 2010, FY 2011, FY 2012 2 Yerevan City: Public Expenditure and Financial Accountability (PEFA) Performance Review Contents Acronyms and Abbreviations 5 Foreword and acknowledgements 7 Summary 8 1 Introduction 16 1.1 Objective of the PFM-PR 16 1.2 Process of preparing the PFM-PR 16 1.3 Methodology 17 1.4 Scope of the assessment 18 2 Background information 19 2.1 Economic Context, Development and Reforms 19 2.1.1 Country context 19 2.1.2 City of Yerevan 20 2.2 Description of budgetary outcomes 20 2.2.1 Fiscal performance 20 2.2.2 Allocation of resources 21 2.3 Overall Government reform program 22 2.3.1 Overall Government reform program 22 2.4 Legal and institutional framework for PFM 24 2.4.1 The legal framework for PFM 24 2.4.2 The institutional framework for PFM 25 3 Assessment of PFM Systems, processes and institutions 32 3.1 HLG-1 - Predictability of Transfers from a Higher Level of Government 32 3.2 Budget credibility 36 3.2.1 PI-1 Aggregate expenditure out-turn compared to original approved budget 36 3.2.2 PI-2 Composition of expenditure out-turn compared to original approved budget 37 3.2.3 PI-3 Aggregate revenue out-turn compared to original approved budget 38 3.2.4 PI-4 Stock and monitoring of expenditure payment arrears 40 3.3 Comprehensiveness and transparency 42 3.3.1 PI-5 Classification of the budget 42 3.3.2 PI-6 Comprehensiveness of information included in budget documentation 44 3.3.3 PI-7 Extent of unreported government operations 45 3.3.4 PI-8 Transparency of inter-governmental fiscal relations 47 3.3.5 PI-9 Oversight of aggregate fiscal risk from other public sector entities 47 3.3.6 PI-10 Public access to key fiscal information 51 3.4 Policy-based budgeting 57 3.4.1 PI-11 Orderliness and participation in the annual budget process 57 3.4.2 PI-12 Multi-year perspective in fiscal planning, expenditure policy and budgeting 59 3.5 Predictability and control in budget execution 61 3.5.1 PI-13 - Transparency of taxpayer responsibilities and obligations 61 3.5.2 PI-14 Effectiveness of measures for taxpayer registration and tax assessment 64 3.5.3 PI-15 Effectiveness in collection of tax payments 67 3.5.4 PI-16 Predictability in the availability of funds for commitment of expenditures 69 Yerevan City: Public Expenditure and Financial Accountability (PEFA) Performance Review 3 3.5.5 PI-17 Recording and management of cash balances, debt and guarantees 72 3.5.6 PI-18 Effectiveness of payroll controls 72 3.5.7 PI-19 Competition, value for money and controls in procurement 76 3.5.8 PI-20 Effectiveness of internal controls for non-salary expenditure 87 3.5.9 PI-21 Effectiveness of internal audit 89 3.6 Accounting, recording and reporting 92 3.6.1 PI-22 Timeliness and regularity of accounts reconciliation 92 3.6.2 PI-23 Availability of information on resources received by service delivery units 94 3.6.3 PI-24 Quality and timeliness of in-year budget reports 96 3.6.4 PI-25 Quality and timeliness of annual financial statements 99 3.7 External scrutiny and audit 100 3.7.1 PI-26 Scope, nature and follow-up of external audit 100 3.7.2 PI-27 Legislative scrutiny of the annual budget law 103 3.7.3 PI-28 Legislative scrutiny of external audit reports 107 4 Government Reform Process 110 4.1 Current approach to PFM reforms 110 4.2 Recent and ongoing reforms 110 4.3 Forward looking perspective on institutional factors supporting PFM reforms 112 Annexes Annex 1: Sub-national government in Armenia 114 Annex 2: PFM Performance Measurement Framework Indicators Summary 120 Annex 3: Sources of information and evidence 132 Annex 4: List of Stakeholders Interviewed 148 Annex 5: Files for calculating HLG-1, PI-1 and PI-2 152 Annex 6: Timetable for the assessment process 161 Annex 7: Organisational chart of Financial Department at Yerevan Municipality 162 Annex 8: Disclosure of Quality Assurance Mechanism 163 4 Yerevan City: Public Expenditure and Financial Accountability (PEFA) Performance Review Acronyms and Abbreviations AD Administrative District ADB Asian Development Bank AGA Autonomous Government Agencies AMD Armenian Drams CBA Central Bank of Armenia CC State Committee for Real Estate Cadastre CG Central Government COC Chamber of Control CNCO Community Non-commercial Organization COFOG Classification of the Functions of Government DD Development and Investment Programs Department EC European Community FD Financial Department at Yerevan Municipality FY Fiscal Year GDP Gross Domestic Product GFS Government Financial Statistics HLG Higher Level Government IA Internal Audit IMF International Monetary Fund JSC Joint Stock Company LLC Limited Liability Company MDA Ministries Departments and Agencies MTEF Medium Term Expenditure Framework MOF Ministry of Finance MOFE Ministry of Finance and Economy MTA Ministry of Territorial Administration NGO Non-Governmental Organisation OD Organisational Department at Yerevan Municipality PD Procurement Department at Yerevan Municipality PE Public Enterprise PEFA Public Expenditure and Financial Accountability PFM Public Financial Management PMF Performance Measurement Framework PSC Procurement Support Centre RA Republic of Armenia Yerevan City: Public Expenditure and Financial Accountability (PEFA) Performance Review 5 RC State Revenue Committee RD Revenue Accounting and Taxation Department at Yerevan Municipality SAFE Strengthening Accountability and the Fiduciary Environment SCFE Standing Commission on Financial-Credit, Economic Issues SD Supervision Department at Yerevan Municipality SMD Staff Management Division at Yerevan Municipality SECO State Secretariat for Economic Affairs (Switzerland) SNCO State Non-commercial Organization SN Sub-National SNG Sub-National Government TIN Tax Identification Number TSA Treasury Single Account TTL Task Team Leader WB World Bank YM Yerevan Municipality 6 Yerevan City: Public Expenditure and Financial Accountability (PEFA) Performance Review Foreword and acknowledgements The present PEFA evaluation of the City of Yerevan is based on field work in January through June 2013 carried out by Arman Vatyan (TTL World Bank), Andrew Mackie (PFM Consultant), Karen Brutyan (Fieldwork Coordinator), Vahan Sirunyan and Sergey Shahnazaryan (Local Consultants). Paul Harnett (PFM Consultant) delivered the introductory training workshop in January 2013. The information provided in this report is drawn mainly from official documents and communications as well as from working sessions with qualified counterparts in Yerevan Municipality and other government bodies. The Municipality confirmed the Report as final on September 2013. The authors are particularly grateful to the City authorities at Yerevan Municipality and other government bodies who provided a great deal of the information for the report and have been constantly available and accessible during the field work. Mr Vahe Nikoyan (Deputy Mayor) was the Chair of the Sub-National Government Steering Committee which coordinated the PEFA work and has shown a great commitment and involvement in the exercise. Yerevan City: Public Expenditure and Financial Accountability (PEFA) Performance Review 7 Summary This Public Expenditure and Financial Accountability (PEFA) performance review assessment is the first assessment both for Yerevan Municipality and for any community in Armenia. The main objectives of the current assessment are set a baseline for PFM performance in the Municipality and provide input into its PFM reform strategy which will be developed later in 2013. The assessment follows the PEFA Framework methodology and supporting guidelines and clarifications to the Framework. No deviations from the methodology were made. This report presents the indicator-led assessment of the functioning of the PFM systems in YM which will allow subsequent assessments measures the progress achieved by on-going reforms. Following the philosophy of the PEFA framework this performance review report does not comment on policy and capacity issues, nor does it include any specific recommendations for PFM improvements. This section of the report provides an integrated assessment and a summary of the main performance changes in the functioning of the PFM systems in Yerevan against the six core dimensions of PFM performance in the performance Measurement Framework, and the extent to which this performance may impact upon the achievement of the three main objectives/outputs of a sound PFM namely aggregate fiscal discipline, strategic allocation of resources and efficient service delivery. I. Integrated Assessment of PFM Performance Predictability of Transfers from a Higher Level of Government The funds provided to the Yerevan community through the RA Government transfer or revenue sharing arrangements comprise a significant proportion of the total revenues of the Yerevan Municipality budget for 2010-2012 (more than 60 percent). For each of the last three years transfers over-performed budget estimates and allocations arrived on a timely basis. For 2011-2012 allocations in the form of targeted government transfers to the Yerevan budget showed significant positive variances from the original budget, due mainly to increases in central government (CG) allocations in non- conditional grants and to a number of sectors. A. Credibility of the budget Lower-than-budgeted revenue receipts contributed to negative expenditure deviations in each of the three fiscal years (2010-2012). The principal reason for the underperformance was the late receipt or cancellation of donor funding, which are transfers from CG. The unpredictable nature of funding from donor projects was the main reason for the significant deviations across categories in all three years. Domestic revenue out-turn in Yerevan budget over 2010-2012 underperformed by 96.6%, 93.5% and 81.0% respectively.