Albania 2006

Notes
According to the Ministry of Finance, the difference between budgeted and actual expenditures (excluding debt service payments and foreign financed expenditure) was as follows: - 2002: 7.38% - 2003: 6.08% - 2004: 1.27% (p. 6)

Notes
The variance in expenditure composition by administrative basis exceeded the overall deviation in primary expenditure by more than 10 percentage points in two out of the last three fiscal years: - 2002: 10.5% - 2003: 11.1% - 2004: 8.5% (p. 7-8)

Notes
Total revenue collection as a percentage of the original approved revenue budget was as follows for each of the last three fiscal years: - 2002: 94.4% - 2003: 93.7% - 2004: 95.1% (p. 8)

Notes
Little payment arrears exist in salaries and social insurance. But no monitoring is in place for contract-related arrears due to lack of commitment control. (p. 9)

Notes
"Following the current structure of the National Government of Albania, there are over 2000 spending units and over 300 local institutions. The new system also merges current 14 functions into 10 high level functions (and 69 sub-functional level), which is in conformity with COFOG standard. Budget includes administrative, economic, and functional classification of expenditures. Functional classification is in conformity with COFOG standard and sub-functional levels. Program classifier is located under sub- function. Yet, recording transactions with new classification system is yet to be tested. (p. 10-11)"

Notes
"The 2005 budget documentation satisfies 3 of the requirements for information from the 9 listed by PEFA. Benchmarks satisfied in the annual budget documentation: - Macro-economic assumptions, including at least estimates of aggregate growth, inflation and exchange rate; - Fiscal deficit, defined according to GFS or other internationally recognized standard; - Deficit financing, describing anticipated composition. Benchmarks not satisfied in the annual budget documentation: - Debt stock, including details at least for the beginning of the current year; - Financial Assets, including details at least for the beginning of the current year; - Prior year’s budget outturn, presented in the same format as the budget proposal; - Current year’s budget (either the revised budget or the estimated outturn), presented in the same format as the budget proposal; - Summarized budget data for both revenue and expenditure according to the main heads of the classifications used (ref. PI-5), including data for the current and previous year; - Explanation of budget implications of new policy initiatives, with estimates of the budgetary impact of all major revenue policy changes and/or some major changes to expenditure programs. (p. 11-12)"

Notes
Albania has only two extra budgetary funds; Social Insurance and Health Insurance. Both of them are fully incorporated into annual budget and end-of-year financial statement. (p. 12)

Notes
While extra budgetary funds are appropriately accounted for, donor-financed projects are very poorly recorded, resulting in data inconsistency and poor planning. Foreign financing figures are seriously underestimated in the Treasury accounts. Both poor recording by the Government and poor coordination by donors have been attributed for. (p. 12)

Notes
Mechanism for conditional grants, which consist of 75% of total local revenue in 2003, still keeps the features inherited from the old command economy of non- transparency, being unpredictable and depending basically on the bargaining (bureaucratic and political) powers between local authorities and line ministries. The unconditional grant, which consist only about 10% of local government revenue in 2003, was initiated with a provisional formula for distribution based on differential local needs and is evolving toward a true equalization transfer. Nevertheless, the determination of the size of the unconditional grant is not yet transparent and predicable. (p. 13)

Notes
Sub-national governments are informed of their allocation from transfers from central government only in February of fiscal year. The Annual Budget approved by the Parliament only has aggregate amount to be transferred to all Sub-national governments without allocation to specific Sub-national governments. This in fact seriously undermines planning and executing capacity of Sub-national governments. (p. 13)

Notes
By March, each local government submits to the Ministry of Finance the final statement of accounts, which are integrated into the national budget’s final statement of accounts presented to the Council of Ministers and Parliament for approval. In addition, each local government submits quarterly spending reports to the Ministry of Finance. Fiscal information on Sub0national governments has consistent format (e.g., functional and economical classification) that allow timely consolidation. (p. 13)

Notes
AGAs and PEs submit financial statements to Ministry of Economy Trade and Energy annually. The public enterprises are required by the Law on the Commercial Companies, amended in 1995, to send audited financial statements to the Ministry. In addition, for the PEs with more than 20 million lek (ALL) in capital there is the requirement to appoint two auditors. For the AGA there is no such requirement; the only obligation is to submit to the Ministry the annual financial statements, which are checked for their accuracy by an appointed specialist within the Ministry. (p. 14)

Notes
At this point, no Sub-national governments are allowed to generate fiscal liabilities without central government consent. Only exception made is to Tirana Municipalities, where Council of Europe Bank made a credit agreement with central government and central government made an on-lending to Tirana. (p. 14)

Notes
"The government makes available to the public information on 4 of the 6 listed types. These information elements are available to the public: - Annual budget documentation: A complete set of documents can be obtained by the public through appropriate means when it is submitted to the legislature; - Year-end financial statements: The statements are made available to the public through appropriate means within six months of completed audit; - External audit reports: All reports on central government consolidated operations are made available to the public through appropriate means within six months of completed audit; - Contract awards: Award of all contracts with value above approx. USD 100,000 equiv. are published at least quarterly through appropriate means. Information elements not publicly available: - In-year budget execution reports; - Resources available to primary service units: Information is publicized through appropriate means at least annually, or available upon request, for primary service units with national coverage in at least two sectors (such as elementary schools or primary health clinics). (p. 15-16)"

Notes
There have been notable improvements in budget formulation in recent years, particularly with the Medium Term Budget Program (MTBP). The budget calendar has been revised in 2005 with more streamlined process between MTBP and annual budgeting. However, it is deemed to be overly complicated given the limited capacity in the government. Due to the general election in 2005, budget formulation process for 2006 budget was interrupted and draft budget proposals from line ministries, which were submitted before election, were revised to reflect the changed government programs. (p. 16)

Notes
A detailed budget circular (Budget Preparation Instruction Part A and Part B) existed since the inception of the Medium Term Budget Program and was revised in 2005. Under this circular, political stakeholders including Council of Ministers and Parliament are involved at the earlier stage of annual budgeting, starting with macro-forecasting approval. Also, sector ceiling approved by Council of Ministers are reflected in the Instruction Part B with which line ministries prepare their budget request. For the first time, the responsibility of preparing investment budget is transferred to Ministry of Finance from MoE to ensure complementarities between recurrent and investment budgets. However, this new circular is yet to be exercised only in 2006, when 2007 Budget is to be prepared. In 2005, due to general election during the summer, budget preparation process was interrupted and failed to follow the instruction given by the circular. (p. 16)

Notes
For the last three years, the Parliament has approved the budget before the start of fiscal year according to legal mandate (November 20th). (p. 17)

Notes
Albania has introduced the Medium Term Budget Program (MTBP) since 2001. It includes macroeconomic and revenue forecasting and three year forecasts by economic, functional and administrative classification and they are revised on a rolling annual basis. However, links between multi-year estimates and subsequent setting of annual budget ceilings are not clear; nor Ministry of Finance and line ministries strictly adhere to the ceiling from MTBP in annual budget preparation and little explanation is provided for differences. (p. 17)

Notes
The government rather relies on analysis provided by IFIs such as World Bank and IMF. For instance, the last Debt Sustainability Analysis was conducted in 2005 jointly with World Bank and a local research institute, and presented to the government. However, the government does not have capacity to conduct its own debt sustainability analysis and IMF Poverty Reduction and Growth Facility program aims to build capacity by 2008. (p. 17)

Notes
Four ministries, MoAF, MoT, MoLSA and MoH, have developed sector ‘expenditure’ strategies and other ministries are expected to prepare their strategy by 2006. However, the linkage between sector strategy and actual resource allocation is not clear. (p. 17)

Notes
One of the major steps taken to integrate recurrent and investment budgets is to transfer responsibility of investment budget preparation from Ministry of Economy to Ministry of Finance in 2005. The budget circular for investment project has a column to calculate recurrent cost implication; however, most of these columns are left blank. In fact, investment projects in Albania are extremely fragmented (more than 1,600 projects in 2006 budget, only 100 projects are above US$ 1 million) and many of domestically financed projects are in fact maintenance-type interventions. In terms of linkage between investment decision and sector strategies, only 4 ministries have their investment decision based on sector strategies, with rough recurrent cost implication included. (p. 17-18)

Notes
Fiscal statistics on expenditure and revenues are compiled and made public on the internet on a quarterly basis. These statistics show a trend for the revenue and expenditure based on actual figures from previous fiscal years and they are the basis for the budget institutions forecasts. A cash flow forecast is prepared by the Treasury Department of Ministry of Finance on a quarterly basis. (p. 20)

Notes
Until 2005, the 36 local branches of the Treasury set two-monthly spending ceilings for the Budget Institutions based on the annual budget and implementation plan. Based on this bi-monthly ceiling but subject to cash availability, the Ministry of Finance informs line ministries of the resource available every two months (usually before the end of first week). However, this means that reliable information about cash availability for budget institutions is not available beyond the two-month ceilings set by the Ministry of Finance. Also a comparison between the allotments and actual spending shows that the two monthly allotments do not effectively limit the overall spending, which tend to increase during the fiscal year and accelerate further during last two months of the year. On the other hand, the central unit of the Treasury, the Debt and Treasury Department of the Ministry of Finance, receives daily information on revenue and expenditure amounts administered by the commercial banks. Reports on collected revenues from the tax and customs administrations are received monthly and reconciled with the amounts cleared with the Bank of Albania from the commercial banks. (p. 20)

Notes
Subject to the Ministry of Finance’s approval, budget institutions may reallocate appropriations between different expenditure items and such reallocations (sometimes referred to as virements) are frequent. This large number of virement requirement is said to distract time and resource from already thinly spread capacity of Ministry of Finance. In terms of transparency of virement decisions, guideline for obtaining the Ministry of Finance approval is set out in the annual budget circular. However, there are quite a number of incidences where line ministries requested virements to Ministry of Finance, without having authority to reject it on the basis of economic analysis, had to accept them as long as it meets administrative procedures. (p. 20)

Notes
Fiscal data is considered of fairly high standard, but minor reconciliation problems occur. The IMF has reported that the coverage of external government debt could be improved and that there have been some irregularities in the presentation of and recording of old external arrears. (p. 21)

Notes
A close-of- business cash position of the treasury single account (TSA) is made available to the Treasury from the Bank of Albania on a daily basis. Payments related to state budget appropriations are executed through sub-accounts to the TSA in the Bank of Albania. Revenue and payments are made through the private banks, while agreements between the banks, the Bank of Albania and the Treasury ensures that all accounts are cleared and balances transferred to the TSA in the Bank of Albania at the end of each day. Reconciliation between the transaction data available from the Treasury’s financial accounting system and the cash balance at the Bank of Albania are done monthly. Extra-Budgetary Funds (EBFs) including Health Insurance Fund have their own banking arrangement outside the TSA. (p. 21)

Notes
All state guarantees are reported to and recorded by the Debt Management unit of the Ministry of Finance. (p. 21)

Notes
Databases of personnel records are maintained by the individual budget institution and there are no direct links between personnel record databases and payroll as of June 2006. Payroll is not yet executed through the Treasury system and is managed by ministries and spending agencies. Reconciliations between information in timesheets and the budget execution data, which are received from the Treasury are performed by finance officers of individual budget institutions on a monthly basis. (p. 22)

Notes
Updates of personnel records, including payroll are done manually in paper records or “books” at the level of budget institutions. Payroll is updated on a bi-weekly basis and personnel record is updated every time there is a change in personnel. (p. 22)

Notes
The records provide an audit trail of the changes made, which are authorized by the budget institutions’ finance offices. The procedures for making changes in personnel and payroll records are determined by the Law on the Status of the Civil Servant (No. 8249/1999) for civil servants –1,100 people out of 120,000 public employees– and the rest of public employees are managed by labour code and a number of related implementing government decrees. (p. 22)

Notes
In addition to the controls performed by the budget institutions’ finance offices, the internal audit unit (IAU) of line ministries, the Ministry of Finance’s General Directorate for Internal Audit (GDIA), and the Supreme State Audit (SSA) has audited the budget institutions’ payroll management on an annual basis. The IAUs of some budget institutions perform 100 percent checks on payroll transactions. (p. 22)

Notes
The percentage of contracts awarded through open tendering is approximately 38 percent of the total number of public contracts awarded in a year (due to insufficient statistics, this data is taken from the Annual Reports of the Public Procurement Agency for years 2003 and 2004) but the accuracy of procurement-related information is not sufficient. (p. 23)

Notes
There exists clear overuse of the direct procurement method, which fails to ensure transparency and effective use of public funds. Although the public procurement law establishes open tendering as the preferred procurement method, the gap and unclear legislative regulations, in fact, easily permit the use of direct procurement and rules that define criteria of exceptions are missing. Public Procurement Agency (PPA) that has the authority to accept or reject the requests for direct procurement has rejected approximately 60-70 percent of total requests, largely due to the insufficient information and grounds for use of that method. This would be interpreted that requests are not justified. (p. 23)

Notes
There is a complaint review mechanism in place, which is performed by Public Procurement Agency (PPA), but it is ineffective to carry out this task. As mandated by the Public Procurement Law, PPA is the highest administrative body for review of complaints. If parties are not happy with the decision given by PPA, they bring the case to whichever Court has jurisdiction over the case. PPA has a conflict of interest in carrying out this task, as they have legislative and executive functions simultaneously. Furthermore, there are no records in PPA of how many complaints were reviewed, or what the result was. The only information is about the cases adjudicated in Courts. However, no accurate data is available and the team could not asses the effectiveness of the system. Another feature of the system is the shortened period for filing a complaint, which restricts the time for lodging complaints. (p. 23-24)

Notes
There are no commitment controls for individual payments or contracts at the level of the Treasury. Whereas bi-monthly spending ceilings are issued by the Treasury to the Budget Institutions, available data suggest they do not effectively limit the individual Budget Institutions spending to actual cash availability. (p. 24)

Notes
Basic regulations for processing transactions and approving contracts exist but comprehensive written procedures, including detailed job descriptions, are generally lacking in the budget institutions. At the level of the Treasury, procedures for controls and release of all types of non-salary expenditure do exist and are followed. However, ineffective procurement regulations tie the hands of the budget institutions and results in reallocations made during the year. (p. 24)

Notes
Compliance with rules appear to be fairly high, but the overspending compared to allotments suggest that simplified procedures are used occasionally. (p. 24)

Notes
Internal audit in the Albanian public sector is at an early stage of development. Since the adoption of the Law on public sector internal audit (Law No. 9009/2003) all budget institutions with a budget of more than Lek (ALL) 50 million have been required to have in place Internal Audit Units (IAUs), whereas other budget institutions may be audited by the IAUs of the line ministry they are reporting to. The independence of IAUs is formally ensured through the provisions of the mandatory internal audit manual and the law on internal audit: a manual, reflecting the approach promoted through the application of the International Standards for the Professional Practice of Internal Audit (ISPPIA), has been developed and its use is mandatory for all IAUs. In the manual it is specified that the “General Directorate of Internal Audit and the internal audit units in the public sector shall be functionally and organizationally independent from the audited entity.” This implies, among other things, that the IAU of a particular entity “report directly to the principal director of the public entity and through him to the General Director” of the Ministry of Finance’s General Directorate of Internal Auditing. However, most auditors are not sufficiently trained to apply the manual’s methodologies to focus on systemic issues. Instead, they still tend to focus narrowly on compliance issues. (p. 25)

Notes
In accordance with procedures laid down in the internal audit manual, Internal Audit Units (IAUs) produce summary reports to the heads of the Budget Institutions on a monthly, quarterly and yearly basis. The IAU of the Ministry of Finance presents an annual report to the Council of Ministers on the internal audits performed, and the major findings and recommendations. (p. 26)

Notes
The procedures for following up on recommendations of other Internal Audit Units are not harmonized across the government and there are no formal requirements for the Council of Ministers to take actions on the recommendations of this report. The internal auditors are reporting on the implementation of their recommendations in a somewhat complicated spreadsheet. (p. 26)

Notes
The consolidated financial statements on accrual basis have since 2001 been produced by the accounting department in MoF based on manual forms filled in by the spending units. All cash transactions pass through the treasury systems; however, only the ministries and other agencies have detailed information on assets and liabilities and Ministry of Finance does not compile them into one nation-wide database. This information must be combined in an integrated system. The Treasury reconciles the account balance of the treasury single account (TSA) in the Bank of Albania with the consolidated records of the treasury system on a monthly basis. (p. 26-27)

Notes
Suspense accounts are not frequently used but when they are detailed information on the nature and the timing of these accounts must be send to the Ministry of Finance along with the financial statements. Normally, these accounts are cleared within a period of two to three months. If no information is sent about these accounts, there is a unit within the accounting department which follows up with the subjects for completing the information. In addition, in the regulation no 19 dated 24.12.2003 “On the Preparation of the Financial Statements” there are not specific rules for advances, especially regarding the time limit for closing this accounts and the requirement for additional information about the nature of the advances. (p. 27)

Notes
In Albania, funds for primary schools and health institutions are managed from the local treasury and reported as a part of the consolidated accounting information to the respective line ministry (education and health) every month. Payments initiated by local government and executed by treasury offices are registered, but the records of the Treasury do not allow the tracking of payments for individual schools or health clinics. Receipts of in-kind resources are verified locally, but no consolidated data is provided to central authorities for reconciliation. (p. 27-28)

Notes
The classification of in-year budget execution reports does allow for comparison between budgeted and actual amounts as per economic and organizational classification. Budget institutions do in some cases also maintain records of commitments, but there is no central reporting or monitoring of commitments such as major contracts closed by individual budget institutions. (p. 28)

Notes
Budget execution reports for in-year periods are prepared quarterly and are issued within 6 weeks of the end of the quarter. (p. 28)

Notes
Some inaccuracies in the budget execution data are likely due to the quality of, and inherent risks associated with, manual bookkeeping. However, data issues are typically recognized and reconciled by the Ministry of Finance and do not compromise overall consistency/usefulness of financial reporting. (p. 28)

Notes
The Council of Ministers submits a report to Parliament containing the consolidated state accounts for the preceding fiscal year. The Council of Ministers report comprises complete information on revenues, expenditures and financial assets and liabilities. (p. 29)

Notes
Within six months of the end of the fiscal year (before July 1), the Council of Ministers report is provided to the State Audit Institute (SAI) at the same time as it is submitted to Parliament. (p. 29)

Notes
The financial statements contained in the Council of Ministers report do not comply with IPSAS but they are in compliance with the public accounting plan (approved with Council of Ministers decision no. 248/1998) based on the general principles and standards for accounting for annual accounts established in the 1993 Law on Accounting. (p. 29)

Notes
The State Audit Institute (SAI) is responsible for annual audit of the execution of the state budget and submits a report each year in October to Parliament on its findings and recommendations. The Supreme State Audit’s annual audits cover all central government entities. They cover a wide range of audit types including legality; regularity and performance audit (as defined by the INTOSAI Auditing Standards) and generally adhere to auditing standards, focusing on significant and systemic issues. (p. 29-30)

Notes
Audit reports from the Supreme State Audit are typically submitted to the legislature in October, which is within four months after it has received the consolidated government accounts from the Ministry of Finance (accounts submitted in July). (p. 30)

Notes
For the first time ever, in 2005 Parliament adopted a formal resolution in reaction to the Supreme State Audit (SSA)’s annual report on the Government’s budget execution for the fiscal year 2004. Whereas the State Audit Institute (SAI) systematically follow-up on the implementation of past recommendations, the auditees (Government bodies) are in many cases not sufficiently responsive and fail to respond within the statutory 20 days after having received the SSA report. Within the last 1-2 years the SAI has however noted a general improvement in responsiveness: from 2003 to 2004 the SAI registered an improvement in the implementation of audit recommendations from approximately 50 percent to about 70 percent. While the concrete impact of the SSA’s recommendations of the Government’s financial management practices still appear to be limited. (p. 30)

Notes
Parliament’s review covers fiscal policies, a Medium Term Budget Program (MTBP) as well as details of expenditure and revenue. However, the legislative budget review process hardly looks at medium term priorities; rather focuses on those of the coming year. (p. 31)

Notes
There exists a clear procedure for legislative budget review, which includes review by specialized committees such as education and health, and public hearing. However, the negotiation between parliament and executive government is conducted in a rather ad-hoc manner. (p. 31)

Notes
The statutory timetable set out in the Organic Budget Law on “Preparation and Execution of the State Budget of the Republic of Albania” allows 45 days for parliamentary and public debate on the Budget. (p. 31)

Notes
Whereas rules for in-year budget adjustments exist, they do allow extensive administrative reallocation. Currently, appropriation by the parliament is done at the level of program and reallocation at project level, which is below program level, is done with Ministry of Finance approval and the degree of project level in-year reallocation has been quite extensive. Reallocation of program requires approval of council of ministers. Finally, the in-year reallocation has not caused expansion of total expenditure but been done with trade-off with other projects and programs. (p. 31)

Notes
The Parliament’s scrutiny of the Government’s annual budget execution is based on Supreme State Audit’s report on the budget execution and its opinion on the Report of the Council of Ministers for the past financial year. The report is submitted in August/September and approved by Parliament in October of that year. (p. 32)

Notes
In-depth hearings on the keys findings in the reports of the Supreme State Audit take place occasionally, but typically only include Ministry of Finance officials. (p. 32)

Notes
It is noted that Parliament does occasionally recommend action, and that 50-70 percent of recommendations are acted upon by the Government. (p. 32)

Notes
There are only two donors in Albania that provide budget support: one is the ongoing balance of payment support from EU and the other is World Bank's three overty Reduction Support Credits (PRSCs) and one Financial Sector Adjustment Credit (FSAC) since 2002. The second tranche of the FSAC was delayed for a year due to delays in the insurance sector reform, but the PRSC planned in 2003 was increased with the same amount. Normally, the exact amount was not agreed before the budget proposal was submitted to parliament. (p. 33)

Notes
The in-year schedule has not been agreed before the beginning of the fiscal year. (p. 33)

Notes
Budget estimates for donor supported projects are made by budget entities as an integral part of the budget formulation process. The completeness has not been analyzed but is it believed that a considerable deviation (40%–50%) between budget and actual expenditures on foreign financed projects have been the case for the past years. (p. 33-34)

Notes
Information on frequency and coverage of actual disbursement has also not been made. A comparison of information from the Development Assistance Committee (DAC) with budget execution data from earlier years and an analysis of information provided by the Ministry of Economy compared with treasury data suggests that the coverage would be between 50% and 70%. (p. 34)

Notes
The use of national procedures for the management of aid is very limited. Less than 50% of aid funds to central government are managed through national procedures. (p. 34)