Public Expenditure and Financial Accountability Federal Democratic Republic of Ethiopia (The City of Addis Ababa) Performance Assessment Report Final Report December 2, 2019 Funded by European Union Ethiopia PEFA Assessment 2018 The City of Addis Ababa Report No: AUS0001398 © 2020 The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved This work is a product of the staff of The World Bank. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. 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PEFA Secretariat December 3, 2019 Ethiopia PEFA Assessment 2018 The City of Addis Ababa TABLE OF CONTENTS ACRONYMS AND ABBREVIATIONS .................................................................................... 1 EXECUTIVE SUMMARY ...................................................................................................... 5 1. INTRODUCTION ........................................................................................................ 10 1.1 Background ................................................................................................................................. 10 1.2 Rationale and purpose ................................................................................................................ 10 1.3 Assessment management, oversight, and quality assurance ..................................................... 10 1.4 Assessment methodology ........................................................................................................... 12 2. CITY GOVERNMENT BACKGROUND INFORMATION ................................................... 16 2.1 City government economic situation .......................................................................................... 16 2.2 Fiscal and budgetary trends ........................................................................................................ 17 2.3 Legal and regulatory arrangements for PFM .............................................................................. 18 2.4 Institutional arrangements for PFM ........................................................................................... 23 2.5 Institutional arrangements for the health and education sectors.............................................. 26 2.6 Other important features of PFM and its operating environment ............................................. 29 3. ASSESSMENT OF PFM PERFORMANCE ....................................................................... 30 HLG-1 Transfers from a higher-level government ............................................................................. 30 HLG-1.1 Outturn of transfer from higher-level government ......................................................... 30 HLG-1.2 Earmarked grants outturn ................................................................................................ 30 HLG-1.3 Timeliness of transfer from higher-level government ..................................................... 30 PILLAR I. Budget reliability ................................................................................................................. 30 PI-1 Aggregate expenditure outturn .............................................................................................. 30 PI-2 Expenditure composition outturn ........................................................................................... 31 PI-3. Revenue outturn .................................................................................................................... 32 PILLAR II. Transparency of public finances ........................................................................................ 34 PI-4 Budget classification................................................................................................................ 34 PI-5 Budget documentation ........................................................................................................... 34 PI-6 City government operations outside financial reports ........................................................... 35 PI-7 Transfers to subnational governments ................................................................................... 36 PI-8 Performance information for service delivery ........................................................................ 38 PI-9 Public access to fiscal information .......................................................................................... 40 PILLAR III. Management of assets and liabilities ............................................................................... 42 PI-10 Fiscal risk reporting ............................................................................................................... 42 PI-11 Public investment management ........................................................................................... 43 PI-12 Public asset management ..................................................................................................... 46 PI-13 Debt management ................................................................................................................ 48 PILLAR IV. Policy-based fiscal strategy and budgeting ...................................................................... 49 PI-14 Macroeconomic and fiscal forecasting ................................................................................. 49 PI-15 Fiscal strategy ........................................................................................................................ 50 PI-16 Medium-term perspective in expenditure budgeting .......................................................... 51 PI-17 Budget preparation process .................................................................................................. 54 Ethiopia PEFA Assessment 2018 The City of Addis Ababa PI-18 Legislative scrutiny of budgets .............................................................................................. 56 PILLAR V: Predictability and control in budget execution ................................................................. 59 PI-19 Revenue administration ........................................................................................................ 59 PI-20 Accounting for revenue ......................................................................................................... 63 PI-21 Predictability of in-year resource allocation ......................................................................... 64 PI-22 Expenditure arrears ............................................................................................................... 65 PI-23 Payroll controls...................................................................................................................... 66 PI-24 Procurement ......................................................................................................................... 68 PI-25 Internal controls on non-salary expenditure ........................................................................ 73 PI-26 Internal audit ......................................................................................................................... 75 PILLAR VI. Accounting and reporting ................................................................................................. 77 PI-27 Financial data integrity .......................................................................................................... 77 PI-28 In-year budget reports .......................................................................................................... 79 PI-29 Annual financial reports ........................................................................................................ 80 PILLAR VII. External scrutiny and audit .............................................................................................. 82 PI-30: External audit ....................................................................................................................... 82 PI-31 Legislative scrutiny of audit reports ...................................................................................... 87 4. CONCLUSIONS OF THE ANALYSIS OF PFM SYSTEMS ..................................................