74286 Romania Functional Review PUBLIC FINANCE SECTOR Final Report [Type a quote from the document or the summary of an interesting point. You [ [ [ [ [ [ can position the text box anywhere in the document. Use the Text Box Tools tab T T T T T T October 15, 2010 to change the formatting of the pull quote text box.] y y y y y y p p p p p p e e e e e e a a a a a a q q q q q q u u u u u u o o o o o o t t t t t t e e e e e e f f f f f f r r r r r r o o o o o o mmm m m m t t t t t t h h h h h h e e e e e e d d d d d d o o o o o o c c c c c c u u u u u u The World Bank mmm m m m Europe and Central Asia Region e e e e e e n n n n n n t t t t t t o o o o o o Table of Contents EXECUTIVE SUMMARY ........................................................................................................................... i I. INTRODUCTION ................................................................................................................................ 1 II. OBJECTIVE, SCOPE AND METHODOLOGY OF THE FUNCTIONAL REVIEW ....................... 1 Objective of the Review............................................................................................................................ 1 Scope of the Review ................................................................................................................................. 2 Principles Guiding the Review ................................................................................................................. 2 Data Sources ............................................................................................................................................. 3 Structure of the Review ............................................................................................................................ 3 III. ORGANIZATIONAL REVIEW ...................................................................................................... 4 Assignment of Functions .......................................................................................................................... 4 Organizational Structure ........................................................................................................................... 6 Size of the Public Finance Administration ............................................................................................... 9 Allocation of Human Resources across Functions.................................................................................. 10 IV. REVIEW OF CORE FUNCTIONS AND CAPABILITIES .......................................................... 13 Budget Formulation ................................................................................................................................ 13 Budget Execution and Treasury Functions ............................................................................................. 26 Coordination of EU Structural and Cohesion Funds............................................................................... 36 Revenue Administration ......................................................................................................................... 40 Management of Information Technology ............................................................................................... 46 Human Resource Management and Internal Communications ............................................................... 54 V. MANAGING CHANGE ..................................................................................................................... 57 ANNEXES .................................................................................................................................................. 59 Figures Figure 1 Re-Balancing the Public Finance Function .................................................................................... ii Figure 2 Core Reform Areas ......................................................................................................................... ii Figure 3 Organizational Structure of the MoPF............................................................................................ 7 Figure 4 Distribution of MoPF Staff across Functional Areas ................................................................... 10 Figure 6 Fiscal Position .............................................................................................................................. 14 Figure 7 Deviation between Budget and Out-turns..................................................................................... 14 Figure 8 Proposed Organizational Structure of Directorate General for Fiscal Policy ............................... 16 Figure 9 Monthly release of funds and TSA ............................................................................................... 28 Figure 10 Proposed Organizational Structure of Treasury Function at Headquarters ................................ 34 Figure 11 EU Fund Absorption Rates in EU10 Countries (end of 2009) ................................................... 36 Figure 12 Disbursement and Contracting Rates across Operational Programs ......................................... 38 Figure 13 Taxpayer Segmentation .............................................................................................................. 41 Figure 14 Current MOPF Application Portfolio ......................................................................................... 47 Figure 15 Staff Survey Results 1 ................................................................................................................ 55 Figure 16 Staff Survey Results 2 ................................................................................................................ 55 Tables Table 1 Functions of Ministries of Finance – Romania and International Comparison ............................... 4 Table 2 Organization of Ministries of Finance – Romania and International Comparison .......................... 8 Table 3 Size of Core Public Finance Staff – Romania and International Comparison ................................. 9 Table 4 Deviations across Expenditure Items ............................................................................................. 15 Table 5 Financial Performance across Operational Programs (as of end of 2009) ..................................... 37 Table 6 Workload distribution across regional tax offices ......................................................................... 45 Table 7 High Level Functional Gap Analysis ............................................................................................. 49 Table 8 Electronic Signatures in EU Member States .................................................................................. 50 Table 9 Prioritization of Reform Measures................................................................................................. 58 Boxes Box 1 Performance Management of State Owned Enterprises ................................................................... 12 Box 2: International Experience in Ensuring Independent and Professional Revenue Forecasts .............. 17 Box 3: International Experience in Top-Down Budgeting ......................................................................... 19 Box 4: International Experience in Fiscal Impact Assessment of New Legislation ................................... 21 Box 5: International Experience in Spending Reviews............................................................................... 24 Box 6 Treasury General Ledger – Functionalities and Country Examples................................................. 33 Box 7 Reorganization of Federal Cash Offices in Germany....................................................................... 35 Box 8 Actions to improve absorptive capacity in selected EU 10 Countries ............................................. 39 Box 9 International Experience - Tax Administration Reforms ................................................................. 46 Box 10 IT Modernization in France and Germany ..................................................................................... 53 Annexes Annex 1 Action Matrix ............................................................................................................................... 60 Annex 2 Comparative Review of Organizational Structures of Ministry of Finance ................................. 67 Annex 3 Options for organizational structures ........................................................................................... 70 Annex 4 Linking Performance with Budget Allocations –Issues and International Comparisons ............. 71 Annex 5 Job Descriptions for Budget Analysts.......................................................................................... 77 Annex 6 Proposed Indicative Integrated Planning & Budget Calendar ...................................................... 79 Annex 7 Questionnaire Staff Survey Ministry of Public Finance............................................................... 82 Annex 8 Partial Lists of Persons Met.......................................................................................................... 84 Acronyms ANAF National Agency for Fiscal Administration BPGD Budget Programming General Directorate CHU Central Harmonization Unit CoA Chart of Accounts DG Directorate General EC European Commission ESA European System of Accounts FBS Fiscal Budget Strategy FRL Fiscal Responsibility Law GFS Government Financial Statistics GSG General Secretariat of Government HNWI High Net Wealth Individuals IMF International Monetary Fund IPSAS International Public Sector Accounting Standards LTD Large Taxpayer Department MAFPGD Macro-economic Analysis and Financial Policy General Directorate MoPF Ministry of Public Finance OP Operational Program PEIR Public Expenditure and Institutional Review PIAMGD Public Institutions Accounting Methodology General Directorate PIFC Public Internal Financial Control SOE State-owned Enterprise TPAGD Treasury and Public Accounting General Directorate TPDGD Treasury and Public Debt General Directorate TRANSPOND Real Time Clearing System TREZOR Treasury information system TSA Treasury Single Account PREFACE This functional review is commissioned by the Ministry of Public Finance of Romania as part of a Functional Review Project financed by the EU and the Government of Romania. The report was prepared by a core team led by Sebastian Eckardt and comprising David Shand, Daniel Tommasi, Ken Torp, and Joop van Lunteren with input from Bogdan Constantinescu, Catalin Pauna, Cem Dener, Clelia Rontoyanni, and Munawar Sultan Khwaja. Aileen Morse, Luisita Guanlao, Denisa Popescu, and Steven Reichenbach prepared an enterprise architecture review of the MOPF that constitutes the basis of the section on information technology. Raluca Marina Banioti, Ana Otilia Nutu, Andreea Silvia Florescu and Molyneau R. DuBelle provided logistical support. The team would like to express its gratitude to government officials of the Ministry of Public Finance (MOPF) and various government agencies of the Romanian Government for their constructive collaboration. The team in particular would like to thank Minister of Finance, Mr. Gheorghe Ialomitianu, Mr. Sorin Blejnar, President of ANAF as well as State Secretary Gheorghe Gherghina and State Secretary Bogdan Drăgoi at MOPF for their effective leadership of the functional review process. The team would like to thank Mr. Octavian Deaconu, Director of International Cooperation, Ms. Mihaela Nedelcu, Public Manager, Public Policy Unit, MOPF, and Mr. Gabriel Popa, Public Manager, General Secretariat of the Government for the excellent support in facilitating the meetings in Bucharest. In addition, the team is indebted to the numerous staff of the MOPF, ANAF, Ministry of Agriculture, Ministry of Education, Ministry of Communication and Information Society that took the time to meet with the team. A partial list of persons met during the mission is attached in Annex 1. The team worked in close consultation with Mr. Bernard Myers (Task Team Leader of the Functional Review Project) and under guidance from Mr. William Dorotinsky (Sector Manager, Public Sector and Institutional Reform, Europe and Central Asia Region) and Mr. François Rantura (Country Manager, Romania). The report was peer reviewed by Holger van Eden (IMF FAD), Michael Engelschalk (IFC), Jim Brumby (Acting Director, PRMPS, World Bank), Richard Allen (World Bank), Andrew Bird (Independent PFM Consultant) and Sorin Ionita (Romanian Academic Society). EXECUTIVE SUMMARY Objective and Context The objective of this review is to analyze the public finance and revenue administration function across the Government of Romania and to identify opportunities for enhancements in strategy, processes and organization. The review provides a strategic, medium term vision for the development of the public finance function while being responsive to immediate problems and challenges. The current fiscal adjustment has reinforced the importance of strong fiscal institutions and public financial management systems. The Government is in the midst of implementing fiscal austerity measures and maintaining the current fiscal adjustment path will be required to achieve its 3 percent budget deficit target by 2012, especially in light of the slow pace of economic recovery. Beyond these acute consolidation pressures, effective and efficient use of scarce public resources, including of EU funds, is a prerequisite not only for economic recovery but also for achieving national policy priorities and economic convergence with other EU member states. Romania has already taken important steps to improve public financial management but progress has been uneven. There are best practices alongside unreformed areas. Framework legislation for budget management has been in place since the organic budget law 500 was passed in 2003. The legal framework has more recently been reinforced, especially with regard to macro-fiscal discipline, through the new Fiscal Responsibility Law (FRL). The transposition of Aquis requirements into national law resulted in changes in the internal control environment, most importantly the establishment of internal audit units across the Government. An efficient electronic payment system and a comprehensive treasury single account have been created to support the execution of the budget. Reforms have also been initiated in budget formulation, including attempts at implementing program budgeting, but these are complex endeavors and further attention is warranted to make the budget process a more effective tool for resource allocation and spending efficiency. Financial and management reporting during budget execution also needs further development to supply timely and reliable financial data for informed budget management. Finally, major initiatives reforming revenue administration and unifying tax and social security contributions collection in the National Agency for Fiscal Administration (ANAF) have been taken. However, major challenges remain, in particular, with regard to revenue collection performance and facilitating voluntary tax compliance. Notwithstanding past achievements, there is room for further strengthening of the public finance function, especially in continuing to shift its focus and capabilities from transaction related control to more policy and efficiency oriented tasks. The Ministry of Public Finance (MoPF), ANAF and financial management units in line ministries still dedicate much of their time and resources to transaction related control and compliance functions, which limits their ability to provide wider policy analysis, monitor fiscal impact, manage the macro-fiscal position and risks and improve performance and efficiency in revenue collection and public spending (Figure 1). Measures could be taken to rebalance the public finance function towards a more policy and performance oriented role, including streamlining of core business processes, realignment of staff and skills sets, and IT investments to further automate routine tasks (such as transaction processing) thereby liberating time for more analytic and performance- oriented activities, both within MOPF and the line ministries. i Figure 1 Re-Balancing the Public Finance Function Priority Reform Areas and Recommendations In consultations with the MoPF, the functional review has identified specific reform opportunities that could further improve the public finance function. The review identified the following eight reform areas that directly address current performance challenges: 1) Improve Budget Credibility and Macro Fiscal Discipline, 2) Strengthen Policy Based Expenditure Prioritization, 3) Further Modernize Budget Execution Functions, 4) Accelerate EU Structural and Cohesion Fund Absorption 5) Modernize Revenue Administration, 6) Strengthen the MOPF organizational structure 7) Introduce more Strategic Management of IT Resources to support Automation and Information Management and 8) Introduce more Strategic HR Management and Corporate Communications. The proposed reform program proposes 21 reform measures to address these priorities. Indicative sequencing for each of the measures is provided below (Short Term= 1 year; Medium Term 2-3 years; Long Term=4-5 years). The proposed actions are also categorized by expected impact based on three criteria: 1) The potential impact, or benefit, of addressing the problem, 2) The potential cost of addressing the problem and 3) The cost of not addressing the problem. Critical impact reforms tackle key binding constraints. High impact reforms are important but often reflect areas where progress is already underway. Enabling reforms are important but will only achieve significant impact if implemented in conjunction with other reforms. Figure 2 Core Reform Areas Improve Budget Strengthen Further Accelerate EU Modernization Credibility and Policy Based Modernize Structural and of Revenue Macro Fiscal Expenditure Budget Cohesion Fund Administration Discipline Prioritization Execution and Absorption Treasury Functions Strengthen the MOPF Organizational Structure Introduce more Strategic Management of IT Resources to Enable Automation and Better Financial Information Management Introduce more Strategic HR Management and Corporate Communications ii Reform Area 1: Improve Budget Credibility and Macro Fiscal Discipline Romania’s budget has lacked credibility, thereby undermining macro-fiscal discipline. The actual budget, as implemented, deviates significantly from the original budget both in terms of the fiscal aggregates and composition of the budget. The causes of deviations are unrealistic revenue estimates, substantial supplemental budgets and in-year expenditure increases often due to spending mandates created by laws adopted outside the budget process without adequate consideration of their fiscal impact. The lack of budget credibility has undermined fiscal transparency and predictability and has contributed to the rise of fiscal imbalances. The FRL has established stronger requirements for aggregate fiscal discipline, including commitment to medium term macro-fiscal targets and review of the forecasts by the newly established, independent Fiscal Council. Reform Options 1.1 Institutionalize Prudent Revenue Estimation: Use best technical Short Term Critical revenue estimates and insulate revenue estimation from all non- Impact technical revision. Enhance independence and status of the MOPF Macro-Fiscal Unit by subordinating it directly to Minister. Implement the provision of FRL for the Minister of Public Finance to attest to the accuracy and completeness of the information provided in the Budget Policy Strategy. Promote external validation and contestability by increased transparency and independent review of Macro Fiscal Framework by Fiscal Council (as mandated by FRL). 1.2 Institutionalize Top Down Budgeting: Institutionalize a Cabinet Short Critical level Ministerial Finance Committee Process as part of the budget Term/Medium Impact process to create collectively binding commitments to ceilings Term aligned with Government priorities. Integrate the Budget Policy Strategy (FRL requirement) with the budget process and ensure consistent fiscal targets. Preserve the MOPF‟s right to unilaterally adjust spending requests of Line Ministries if submissions exceed ceilings. Allow Line Ministries to allocate resources within the ceiling. 1.3 Monitor and Control Fiscal Impact of New Legislation: Enforce Medium Term High requirement for legislative proposals which are submitted to Cabinet Impact to contain a fiscal impact assessment prepared by MoPF. Authorize Fiscal Council to initiate and publish independent fiscal impact estimates for legislation as it deems necessary and especially if fiscal neutrality may be violated. Reform Area 2: Strengthen Policy Based Expenditure Prioritization The current budget process is predominantly concerned with costing of inputs with limited attention to prioritization and spending efficiency. Consequently, the ongoing fiscal retrenchment has largely relied on input based across-the-board cuts, for example of civil services wages, rather than targeted cuts in non-Reform Area spending programs. Improving prioritization and targeting of spending will enable Romania to sustain the results of the fiscal consolidation and -once the economy recovers - finance new initiatives in a fiscally responsible manner. Reform Options: 2.1 Refocus Budget Dialogue on Policy and Efficiency Issues: Medium – High Institutionalize Strategic Budget Phase (in conjunction with Top Down Long Term Impact iii Budgeting) to drive expenditure re-prioritization. Require sector ministries to separate baseline budgeting (funding required to continue existing policies based on previous year‟s forward estimates) New initiatives should be justified and at least partially financed from identified efficiency savings in the line ministry‟s baseline budget (thereby allowing line ministries to re-allocate across programs them and to retain part of the efficiency savings). Conduct periodic spending reviews to identify efficiency gains and low value programs. Redevelop ministry strategic plans on a program basis and strengthen link between these plans and the budget. 2.2 Build Capacity for Budget Analysis in the Budget Department: Medium – High Review and adjust the job descriptions and associated qualification Long Term Impact requirements of the positions in the Budget Department to encompass the tasks associated with budget analysis Conduct a training needs assessment and provide training program to both MOPF and sector ministries on budget analysis, including specific sectoral issues. 2.3 Synchronize Budget Calendar: Harmonize the budget calendar of Law Short Term Enabling 500 and FRL. Integrate strategic planning and budgeting processes. Reform Area 3: Further Modernize Budget Execution Performance across core budget execution functions, including cash management, payment, accounting and reporting services is uneven. Transactional banking services for processing of revenue receipts and payments and a comprehensive Treasury Single Account (TSA) are very well developed. However transaction processing remains labor intensive and further development of automated services is the logical next step in improving efficiency. Reporting and accounting functions have well developed policies, including a unified budget classification and Chart of Accounts, but the current reporting systems and processes heavily rely on manual intervention for collection, verification and validation of financial information, limiting timely operational reporting and analysis. Financial information, other than aggregate cash balances, has to be obtained from about 14,000 individual spending units on a monthly and quarterly basis. The consequent lack of reliable, timely and detailed revenue, expenditure and commitment data for budget planning, monitoring, expenditure control, and reporting negatively impacts on budget management. Budget releases (Budget Credit Openings) are based on imperfect information and largely driven by cash availability rather than cash needs, undermining line ministry financial operations. Organizationally, core budget execution functions (credit opening, payment processing, accounting and reporting) appear fragmented which is also reflected in a lack of integration in the stand alone IT systems supporting these closely related functions (also refer to Reform Area 6). Reform Options: 3.1 Further Streamline Transactional Banking Services: Clarify the Short- High regulatory framework for electronic authorization of transactions Medium Impact (eSignature requirements). Expand the use of eBanking services, term including roll out of e-Account Statement pilot (short term), automation of credit opening procedures, and electronic submission of payment orders. Further automate verification and controls in transaction processing. (medium term) 3.2 Improve financial reporting capabilities: Expand the functionality of Short/Med Critical the computerized Treasury General Ledger that accounts for all financial ium/Long Impact transactions related to budget, commitments, and cash by integrating the Term accounting and reporting system with the payment system. Develop iv interfaces to transfer approved budget to the treasury data base and to record commitments in the central treasury data base. Automate Reporting Function from TG/L. 3.3 Integrate Budget Execution Functions: Create budget execution Medium Enabling department responsible for credit openings, transactional banking Term services, accounting and reporting. Further strengthen the interface with the debt and cash management department. Once operational processes have been modernized and automated, evaluate the business needs for extensive territorial branch network. 3.4 Further Improve Debt Management Functions: Enhance cash Medium High planning by establish cash management committee and recording of Term short cash plans of spending units. Improve Institutional Framework and Infrastructure for Market Participation. Enhance Risk Management Function of Debt Management Department (State Treasury). Automate debt service payment procedures. Reform Area 4: Coordinating the EU Structural and Cohesion Funds Increased absorption of EU funding is a key Government and MOPF priority. Increasing absorption rates will require concerted and systematic efforts. While the MoPF is only one of many relevant players, as the coordinating authority for EU structural funds, it is expected to play a key role in leading this effort. Absorption is adversely affected by a number of constraints at the level of beneficiaries and managing authorities. Liquidity constraints in the financial sector have worsened lending conditions and access to funds for pre- and co-financing of projects, in particular for private sector beneficiaries but also for local governments. The Government is trying to address this problem through a guarantee fund. A second set of issues relates to the administrative capacity to process, appraise and approve project proposals. This concerns the staffing, skills and processes in managing authorities and authorizing agencies. Lastly, investments in raising awareness among potential beneficiaries about the opportunities available through structural funds and enabling them to design and prepare sound project applications could help improve quantity and quality of applications. Reform Options: 4.1 Enhance Financing Capacity: Enable strategic re-allocation of co- Short Term High financing shares to disbursing programs and projects. Strengthen the link Impact between EU programming framework, namely the operational programs and budget allocations, as part of the annual budget process. 4.2 Enhance Administrative Capacity: The Government needs to fully Short Term High implement the ordinance to prioritize staffing allocations, including Impact transfers of staff, related to the implementation of EU programs. Specific efforts are required with regard to the Ministry of Transport, the managing authority for the transport OP, including an immediate staffing needs analysis. Project approval procedures need to be streamlined to prioritize large and important projects, with a particular focus on the Ministry of Transport. Reform Area 5: Modernize Revenue Administration The fiscal crisis has brought renewed attention to raising revenue administration performance while minimizing collection costs and reducing compliance costs for taxpayers. Major organizational initiatives have been taken to unify the collection of tax and social security under a single v organization, National Agency for Fiscal Administration (ANAF), and to introduce taxpayer segmentation. Risk-based audit selection, e-filing and e-payment have also been launched, but the use of these services remains limited. Despite these measures, major challenges still remain, in particular, in improving the performance of the revenue collection system and facilitating voluntary tax compliance. In 2009 revenue collection decreased considerably and the tax/GDP ratio dropped to 26.5 percent. An extensive network of territorial offices contributes to increased tax collection costs draining a large amount of resources for routine processes while diverting focus away from core audit and compliance functions. The compliance burden on taxpayers is also high: the World Bank Group‟s Doing Business 2010 Report ranks Romania only 149th with regard to the ease of paying taxes, with the number of annual tax payments totaling 113 – one of the main reasons for the low ranking1. Reform Options: 5.1 Strengthen Compliance Policy: Further advance tax payer Short – High segmentation and review the thresholds for large and medium sized Medium Impact taxpayers. Institution-wide risk management should be developed Term deploying resources according the level of risk involved and amount of revenue at stake. In the large taxpayer segment compliance should be encouraged through specialized taxpayer services and more frequent audits. In the medium size taxpayer segment compliance costs should be reduced and computerized risk management should be developed. For small private and business taxpayers the main objective will be to reduce the need for direct contact with the tax administration and to enhance voluntary compliance. Further development of the High Net Wealth Individuals segment should also be pursued. A training program for new staff members and existing staff will need to complement organizational and procedural reforms. 5.2 Reduce Administrative Costs: Reduce number of separate tax Medium- High payments. (Short Term). Modernize business processes with further Long Term Impact automation. Promote e-filing and reduce face-to-face interaction with tax payers. Improve computerized risk based audit selection and case management to better direct audit resources. (Medium Term) Consolidate territorial organization. (Long Term) 5.3 Reduce Compliance Costs: Restructure the returns filing which would Medium- High require a smaller number of returns. Promote e-filing and restructure the Long Term Impact payments system to make cash payments largely redundant. Improve tax payer services. Reform Area 6: Strengthen the MOPF Organizational Structure Romania has created a relatively lean and functionally focused Ministry of Public Finance. Further consolidation of the organizational structure together with a re-alignment of human resources to strategic priorities is desirable to achieve higher efficiency and to strengthen support to core areas. All major functions currently performed by the MoPF can logically be subsumed under the rubric of public financial management and, as such, are appropriately located in the MoPF. The current assignment of functions provides for a focused span of control while avoiding fragmentation of core public finance functions across separate entities. Building around this strong core set of functions, some adjustments in responsibilities could be undertaken to further strengthen the public finance focus of the 1 Romania ranks 182th out of 183 countries analyzed with regard to the number of tax payments required; only Ukraine requires more tax payments than Romania. vi Ministry. With 35 top-level operational units the highest level of non-political line management of the MOPF seems fragmented. A more consolidated line management structure would be conducive to streamlined operations. Reform Options 5.4 Consolidate first tier management structure of the MOPF: Organize Short- Enabling first tier management structure around the core public finance functions. Medium term Reform Area 7: More Strategic Management of IT Resources to Support Automation and Business Intelligence The public finance IT environment is fragmented and based on disparate, stand-alone applications that support major business processes. Existing applications for budget formulation, payment processing, accounting and reporting are not well integrated and data cannot be seamlessly shared across functional boundaries. In addition, critical financial information is held separately at the county level treasuries (for example credit openings) or at the level of budget holders (for example detailed accounting data). Apart from aggregate reporting on cash disbursements, no other fiscal data is readily available across all counties. A lack of end-to-end automated processes creates the need for extensive manual intervention. Decision making on IT investments and management is fragmented and largely driven by ad hoc requests responding to particular problems as they arise. Reform Options: 7.1 Strengthen IT Governance: Establish IT governance board, comprised Short Term Enabling of the IT department and key business units as the main decision making body to guide IT investment and management. A comprehensive and detailed IT Audit is recommended to assess the MoPF's information systems, practices and operations. Develop IT strategy and (costed) investment plan aligned with Ministry strategic plan. 7.2 Integrated Financial Management Information System: Introduce Medium - Enabling efficient, computerized data exchange mechanisms between related sub- Long Term systems across the expenditure management cycle, most importantly between the budget, treasury and reporting system. Centralize treasury data base and create general ledger to record all stages of the transaction processing from appropriations, opening of budget credits, commitment, purchase, payment request, reconciliation of bank statements, and accounting of expenditure. Build Operational Data Store and then Data Warehouse as central repository for all financial data records. Pursue business process simplification for selected processes within MoPF. 7.3 Modernize IT Support to ANAF: Migrate to integrated shared IT Medium - Enabling environment supporting major business processes, including taxpayer Long Term registration, e-filing, declarations, audit case management, etc. Reform Area 8: HR Management, Corporate Strategy, and Communications The public finance function at all levels is staffed with highly educated and dedicated professional staff. However, staffing patterns across the organization have not changed to meet changing workloads, partially due to rigidities in civil service rules. The compensation system at the MoPF is largely perceived to lack fairness and transparency. Numerous bonuses, that are unequally distributed across the organization account for about 30 percent of the Ministry‟s wage bill. However, vii this is being overhauled with the implementation of the Unified Pay Law. As in all public institutions, the fiscal austerity program, the hiring freeze, pay cuts and the need to downsize have put considerable pressure on the MOPF as an organization and HR management is severely challenged by these external conditions. While a strategic plan has been elaborated, less attention has been given to effectively communicating the overall strategic direction of the Ministry internally and externally with other stakeholders. Only about half of surveyed MOPF staff felt they were well informed about the strategic direction of the MOPF. Reform Options: 8.1 Enhance strategic, forward looking HR Management: Develop a HR Short Term Enabling strategy aligned to the MOPF strategic plan supporting the business objectives of the MOPF. Strengthen appraisal and performance management systems. 8.2 Strengthen corporate communication: Dedicate modest resources to Short Term Enabling allow for more continuous internal communication, either in the external communication division or the public policy unit. Use MOPF intranet to communicate key corporate priorities. Increase frequency of direct communication between leadership and staff through regular town hall meetings, etc. Managing Change The eight priority reform areas require varying commitment levels, timing and resources. Realistically, not all can be done at once. Many of the proposed reforms are long term and complex in nature. It is estimated that implementation of an initial reform program would require about 5 years. Further work is needed to develop a Government-owned, long-term and actionable road map that sequences changes in strategy, processes, organization, and systems. The roadmap should combine larger strategic efforts, such as the introduction of a computerized Treasury general ledger, with near-term foundational “quick win� initiatives, such as a commitment recording capability in the treasury system. The roadmap should also identify clear milestones, responsibilities and investment needs. Resource requirements are significant, both financially and in terms of staff and leadership attention needed to move this forward. While a detailed costing is beyond the scope of this exercise, implementation of the proposed change program would likely require investments of approximately US$ 100-140 Million2 over a period of 5-7 years, mostly to finance modernization of the IT environment within MOPF and ANAF and training. Finally, the multitude of technological and procedural change envisaged in the modernization program will need a systematic change management approach, dedicated staff and continuous engagement by the executive leadership of the MOPF and ANAF. 2 This is a very rough estimate of costs associated with IT investments in the tax administration and expenditure management systems. The cost estimate would have to be refined with more detailed technical specifications and investment need assessment. The IMF FAD estimated the costs of comprehensive tax administration reforms at about US$ 100 Million consistent with the project costing of an earlier IBRD project that was prepared with NAFA in 2007/08. The average costs for the implementation of Integrated Financial Management Information Systems in the Europe Central Asia region between 2000 and 2010 was roughly US$ 16 Million (except the Russian Treasury Development Project, which is exceptionally large) depending on project scope and complexity. The costs of these systems have been declining and more recently designed projects were estimated in the range of USD 10-12 Million Moldova, Kyrgyz, Tajikistan and Georgia. A larger FMIS solution was estimated to cost around $55m in Ukraine (to be based on one of the commercial packages). For the purposes of this review, it is assumed that the implementation of an IFMIS (based on one of the commercial packages) would require about US$ 40 as a preliminary estimate. viii I. INTRODUCTION 1. In the wake of the global economic crisis, the Government of Romania is facing substantial fiscal challenges but also unique opportunities to deepen and accelerate reforms. The Government is in the midst of implementing severe fiscal austerity measures to contain the deficit in a difficult economic environment. Maintaining the current fiscal adjustment path will be required to achieve the 3 percent budget deficit target by 2012. Beyond these acute consolidation pressures, effective and efficient use of scarce public resources, including of EU funds, is required not only to underpin economic recovery but also to achieve the medium term policy objective of economic convergence with other EU member states. 2. These current fiscal challenges have reinforced the importance of strong fiscal institutions and public finance management systems. The Government has recently adopted a new Fiscal Responsibility Law to strengthen the institutional foundation for more responsible fiscal policy making. If properly implemented, the FRL will trigger profound changes to the way public finances are managed. The law reinforces a multi-annual budget planning process through a fiscal budgetary strategy, strengthens the authority of the Ministry of Public Finance (MoPF) to impose fiscal discipline, and establishes a Fiscal Council to provide an additional layer of independent review and external scrutiny of fiscal policy. With the legal framework in place, a key priority is now to adapt core public financial management processes to the new requirements. 3. The expanding demand on the public finance management function will have to be met while a significant down-sizing in the civil service, including in the MoPF and the National Agency for Fiscal Administration (ANAF), is underway. While demand on core areas of public financial management is growing with the current fiscal policy challenges and the implementation of the Fiscal Responsibility Law, the Government-wide 25 percent wage cuts, hiring freeze and the anticipated reduction in the size of the civil service are affecting the MoPF like any other public sector organization. These pressures will inevitably affect staff morale and performance which must be restored to achieve a high-performing MoPF. They also make strategic and more efficient management of MoPF internal resources critical to ensure that core parts of the Ministry have adequate resources to address growing functional needs and to respond to Government priorities. II. OBJECTIVE, SCOPE AND METHODOLOGY OF THE FUNCTIONAL REVIEW Objective of the Review 4. The objective of the functional review is to analyze the current structure and operations of the public finance management function and to provide reform options for improvements in processes, organization, and systems to enable the Government to respond more effectively to current challenges. The review seeks to provide a strategic, medium term vision for the development of the public finance function. In the absence of a clearly articulated strategic direction, reacting to immediate problems with a short-time horizon seems rather unlikely to result in sustainable and significant improvements in public finance performance. The review suggests actions in several areas, including streamlining of core business processes, realignment of staff and skills sets with core functional needs, and investments in IT systems to enable further automation of routine tasks (such as transaction processing) and enhance financial information management and business intelligence functions. 1 Scope of the Review 5. The functional review provides a focused assessment of core public financial management functions and capabilities of the Government of Romania. The review has two parts: First, it reviews the current assignment of functions and organizational structure of the MoPF and its relationship with other parts of the Government. Then, it examines four core functions in more detail: 1) Budget Formulation, including macro-fiscal policy and expenditure programming, 2) Budget execution, including payment processing, debt and cash management, accounting and reporting, and 3) Revenue Administration 4) Coordination of EU Structural Funds. In addition, two MOPF corporate services 5) Human Resource Management and 6) Information Technology are included in the review because of their significant role in enabling a high performance public finance function. Principles Guiding the Review 6. It is essential for the public finance function and related business processes to be structured in a way that promotes the achievement of core public finance objectives. Public finance management shapes and regulates the policy and process of generating and allocating public resources for carrying out government functions. It is commonly expected to serve three objectives: i) Preserving Macro-fiscal discipline, e.g. reconciling demands for spending with the available resource envelope, ii) Strategic allocation of resources, e.g. aligning spending to Government priorities, assuming they are articulated somewhere, iii) Facilitating operational efficiency, e.g. providing incentives for productivity increases and better service delivery. 7. While fiscal governance arrangements vary across countries along with their specific political, institutional and legal traditions, some general principles can be identified:  Fiscal discipline can be enhanced by procedures that give a strong role to the prime minister or finance minister (supported by the cabinet), limit parliamentary amendment powers, establish medium term expenditure limits, anchor fiscal policies in fiscal rules, enforce strict execution of the budget law, and provide a greater level of budget transparency.  Strategic allocation of resources can be enhanced by a centralized challenge function performed by the finance minister supported by a strong budget department, by a medium term expenditure framework, clearly articulated policy priorities, by use of performance information and regular spending reviews aimed to identify non-priority programs.  Operational efficiency can be enhanced by increased managerial flexibility to deploy resources to achieve objectives combined with strong accountability mechanisms that comprehensively and transparently monitor and enforce budget decisions. There is extensive evidence both qualitative and increasingly quantitative that has shown that these institutional processes and mechanisms tend to be associated with better fiscal outcomes. 8. These principles together with practical examples and comparisons with good practices in other EU member states and OECD countries will provide strategic reference points for the following review of the public finance function in Romania. Throughout the report, good practice examples of the outlined principles will be drawn upon to illustrate proven strategies to improve public finance management. 2 Data Sources 9. The review employed a number of approaches to collect data used to analyze the current performance of the public finance function. The review combined the following principal qualitative and quantitative sources of information: a) Expert discussions with management and staff in the MOPF, ANAF, the Court of Accounts, the Parliament and selected line ministries b) MOPF staff survey which was conducted as part of the functional review allowing MOPF staff to respond anonymously, and give feedback on a few basic questions related to the MOPF management, processes, and general ministry operations. 324 respondents participated in staff survey (about 23 percent of total MOPF staff). c) Client survey which was sent to the financial management units in all 60 primary budget holders to gain a client perspective on key services provided by the MOPF. 13 Line Ministries responded (21 percent of all primary budget holders). d) Document reviews, including of the Law 500 on Public Finance, the FRL, the MOPF strategic plan, existing TA reports by the IMF, the World Bank, etc. e) Documentation of international experience in selected functional areas, particularly from other EU member states, to draw on proven strategies to improve public finance management. f) Available quantitative data, including fiscal data, HR data, etc. Structure of the Review 10. The Report is organized as follows. In addition to this introduction, there are three principal sections: III) Organizational Review of the Public Finance Function (IV) Review of Core Functions and Capabilities, including Budget Formulation, Budget Execution, Revenue Administration, Coordination of EU Structural and Cohesion Funds, IT Management and Human Resource Managements; and V) Change Management. 3 III. ORGANIZATIONAL REVIEW 11. Romania has a relatively lean and functionally focused Ministry of Public Finance to serve as the backbone of its fiscal governance arrangements. The MoPF with its current functional responsibilities and structure is the result of a number of re-organizations. In 2003 the tax administration functions and local treasury operations were moved to the Agency for Fiscal Administration (ANAF) which is a semi-independent agency subordinated to the MOPF. Non-fiscal economic policy and regulatory functions were transferred to a separate Ministry of Economy, Commerce and Business Environment. These changes have provided the MOPF with a much more solid foundation for carrying out its core functions. However, there is still scope for further enhancements that will increase the effectiveness and efficiency of the MoPF. Assignment of Functions 12. All major functions currently performed by the MoPF belong in the area of public financial management and, as such, are appropriately located in the MoPF. These, most importantly, include 1) Budget formulation, including macro-fiscal policy and expenditure programming, 2) Budget execution, including payment processing, cash and debt management, accounting and reporting, 3) tax policy and 4) regulatory and policy functions concerning internal audit and control 5) Coordination of EU Structural and Cohesion Funds, and 6) regulatory and control functions related to public financial management systems, including on internal controls, internal audit, public private partnerships, and procurement. The current assignment of functions provides for a focused mandate and span of control while avoiding fragmentation of core public finance functions across separate entities. The assignment of functions and the MOPF‟s role in public financial management resemble that of other Ministries of Finance in the EU. Table 1 Functions of Ministries of Finance – Romania and International Comparison Function France Germany United Romania Kingdom Macro-fiscal forecasting and analysis OM CM3 CM CM/SA Fiscal policy formulation OM CM CM CM Budget preparation CM CM CM CM Treasury Operations CM CM/SA OM4 CM/SA Accounting policy CM CM CM CM Internal Audit Policies CM CM CM CM Preventive Financial Control n.a. n.a. n.a. CM Cash Management CM CM/SA SA CM Debt management OM/SA SA SA CM International finance and liaison with OM CM CM CM international organizations Coordination EU Structural and Cohesion Funds OM OM5 OM6 CM Tax policy OM CM CM CM Tax administration CM OM7 SA8 SA 3 While the Federal Economics Ministry is in the lead for macro-analysis and forecasting, there is an obligation to come to a consensus with the ministries of finance and labor. 4 In practice, this function is largely devolved to line ministries. 5 In Germany with the exception of very few federal programs the implementation of EU structural and cohesion funds is the responsibility of the states. 6 Department of Trade and Industry, Regional European Funds Directorate. 4 Customs administration CM SA SA SA Intergovernmental fiscal relations CM CM CM SA Regulation of financial institutions OM OM OM9 OM Management of public assets and oversight of SA/OM CM CM n.a. SOE Note: CM=Central Ministry, SA=Subordinated Agency, OM=Other Ministry, n.a.=not available. Source: Based on Richard Allen and Peter W. Kohnert, Anatomy of a Finance Ministry, 2010, unpublished draft. Bundesministerium der Finanzen, Her Majesty‟s Treasury, Ministère du Budget, des Comptes publics et de la Réforme de l'État. 13. Building around this strong core set of functions some adjustments in the responsibilities could be undertaken to further strengthen the public finance focus of the Ministry. While the analysis suggests that no major reassignment of functions across ministry boundaries is warranted, some functions could be strengthened: Core Public Finance Functions that are currently not assigned to MOPF:  The MOPF mandate regarding oversight of State owned enterprises is limited. While the budgets of all state-owned enterprises (SOEs) are presented by the relevant sector ministry to MOPF for approval, it is not clear whether these approvals are based on any overall policy of financial targets.10 The exercise of ownership rights is the responsibility of the respective line ministries, e.g. the Ministry of Transport, etc. The issue of SOE oversight is important in Romania given the size of its public enterprise sector. There are about 200 SOEs, including major ones covering railways, mining, electricity, gas and the postal service. Loss making SOEs drain budget resources. The financial situation of loss making public enterprises may also create contingent liabilities for the budget, for example, through the accumulation of arrears to the budget and to private suppliers. In the medium term the MoPF could play a more direct role in managing the state‟s assets, particularly its stakes in SOEs, and monitor associated liabilities. Romania could improve the state‟s oversight of SOEs by centralizing this function in a single Government body, which could be either a dedicated unit in the MoPF or a specialized agency subordinated to the Ministry. Centralized oversight of SOEs is the foremost good practice recommended in the OECD Guidelines on Corporate Governance of SOEs.11 This body would be responsible for developing Government policy regarding the state‟s ownership function, including by reviewing how SOEs contribute to public policy objectives, exercise oversight to ensure that SOEs‟ are managed efficiently and in accordance with their defined functions, and provide consolidated reporting on SOE‟s financial and non-financial performance. This function would enable the Government to have a more accurate picture of the asset, liabilities, and performance of SOEs. It woud help to ensure that the state maximizes its utility as an owner of SOEs, while minimizing potential fiscal risks emanating from SOEs and reducing inefficient expenditure in SOE subsidies that are not necessary to provide essential public services. 7 In Germany the tax administration is subordinated to state Governments. 8 H.M. Revenue and Customs was formed in 2005 as an integrated revenue authority, following the merger of the Inland Revenue and H.M. Customs and Excise Departments. 9 The Financial Services Agency is the main regulator of financial institutions in the U.K.; in addition both H.M. Treasury and the Bank of England have significant powers in this area. 10 This function is handled by a small directorate of asset management which also exercises the MOPF role of sector or parent ministry in relation to 3 enterprises – the state bank, the state lottery and the state mint. 11 OECD, 2005, Guidelines on Corporate Governance of State-Owned Enterprises; see also OECD, 2010, Accountability and Transparency: A Guide for State Ownership. 5 Functions that could be transferred to a subordinated agency:  It is noteworthy that among the ministries of finance reviewed here, Romania is the only country where debt management remains part of the core Ministry. In Germany, France and the UK the debt management function has been transferred to agencies (France: Agence France Trésor, Germany: Finanzagentur, UK: Debt Management Office) allowing among other things for more flexible remuneration needed to attract high caliber financial talent to this function Authority of the MOPF in Government 14. Finally, while its functions provide the MoPF with many levers to support sound finance management, it is important that these functions are reinforced by sufficient authority. It needs to be recognized that financial management is not just a “technical� exercise. It is, even more than other parts of the public administration, subject to political processes and pressures. For the Ministry of Public Finance to play the role of the steward of state finances it has to be enabled to withstand political pressures that naturally arise in the distribution of public funds. To achieve this, in many countries the Minister enjoys a position of primus inter pares within cabinet. For example, the German federal budget code provides the Minister of Finance with the right to veto Government decisions on financial grounds, even against a cabinet majority. In other countries, like Slovakia or Bulgaria the Minister of Finance serves ex officio as the deputy prime minister. Such a formal reinforcement of the authority of the Minister, and by extension the Ministry, does not currently exist in Romania. Organizational Structure 15. Consistent with prevailing administrative structures in Romania, the MoPF is led by two levels of politically appointed leadership. Below the Minister, MoPF‟s portfolio is divided into three functional areas, each headed by politically appointed state secretaries. In addition, there are corporate services which report to the secretary general, the highest ranked civil servant in the ministry, and some functions report directly to the Minister. The portfolios of state secretaries are clustered around broad functions: i) Budget formulation and execution related functions, ii) Tax policy and iii) Debt Management and EU Structural Fund Coordination. While the number of political appointees is similar to other European countries, which had an average of 3.4 political appointees (Annex 2), their role in managing the ministry differs from practices elsewhere, an issue that will be analyzed in more detail in the following paragraphs. 6 Figure 3 Organizational Structure of the MoPF SUBORDINATED AGENCIES: MINISTER 1. 2. NATIONAL AGENCY FOR FISCAL ADMINISTRATION LAND RESTITUTION AGENCY 3. NATIONAL FORECASTING COMMISSION MINISTRY'S COLLEGE MINISTER'S OFFICE GENERAL INSPECTION PUBLIC POLICY UNIT CORPS OF ADVISORS FOR EU AFFAIRS UNIT FOR COORDINATION AND CHECKING OF GENERAL DIRECTORATE PUBLIC PROCUREMENT FOR LEGAL ISSUES GENERAL DIRECTORATE CENTRAL UNIT FOR DIRECTORATE FOR FOR IT ISSUES HARMONIZATION OF INTERNAL PUBLIC AUDIT INTERNAL PUBLIC AUDIT CLASSIFIED INFORMATION DIRECTORATE FOR MACROECONOMIC ANALYSIS AND FINANCIAL POLICIES SECRETARY OF STATE SECRETARY OF STATE SECRETARY OF STATE GENERAL SECRETARY GENERAL DIRECTORATE FOR DIRECTORATE FOR LEGISLATION SYNTHESIS OF BUDGET POLICIES GOVERNING DIRECT TAXATION AUTHORITY FOR THE GENERAL DIRECTORATE COORDINATION OF FOR HR MANAGEMENT STRUCTURAL INSTRUMENTS DIRECTORATE FOR LEGISLATION GENERAL DIRECTORATE FOR DEPARTMENT OF GOVERNING VAT EX-ISPA BUDGETARY PROGRAMMING COMMUNICATION, PUBLIC MANAGEMENT AUTHORITY RELATIONS, MEDIA AND TRANSPARENCY DIRECTORATE FOR LEGISLATION GENERAL DIRECTORATE FOR GOVERNING EXCISE DUTIES CENTRAL UNIT FOR THE ACCOUNTING METHODOLOGY COORDINATION OF PPPs DIRECTORATE FOR INTERNAL BUDGETS AND ACCOUNTING DIRECTORATE FOR LEGISLATION GOVERNING THE CODE GENERAL DIRECTORATE OF TAX PROCEDURE OFFICE FOR PHARE PAYMENTS AND CONTRACTS GENERAL DIRECTORATE FOR TREASURY AND PUBLIC ACCOUNTING FOR INVESTMENT, PUBLIC PROCUREMENT AND GENERAL DIRECTORATE FOR INTERNAL SERVICES ECOFIN PREPARATION GENERAL DIRECTORATE FOR DIRECTORATE FOR LEGISLATION AND COMMUNITY ASSISTANCE TREASURY AND PUBLIC DEBTS CENTRAL UNIT FOR AND REGULATIONS IN THE FIELD OF STATE-OWNED ASSETS THE HARMONIZATION OF DIRECTORATE FOR LIAISON WITH FINANCIAL MANAGEMENT THE PARLIAMENT, TRADE UNIONS DIRECTORATE FOR STATE AID, AND CONTROL SYSTEMS AND EMPLOYERS' ASSOCIATIONS UNFAIR AND REGULATED PRICES AUTHORITY FOR GENERAL DIRECTORATE CERTIFICATION AND PAYMENT FOR THE MANAGEMENT OF SPECIFICALLY- REGULATED AREAS DIRECTORATE FOR SCHENGEN Legend AND POST-ACCESSION PROGRAM Politically Appointed Career Civil Service 16. Romania’s administrative system lacks a high level non-political management structure overseeing operational management, akin of the permanent secretaries in the UK or Germany. While there is a secretary general position, its role and responsibility is focused on administering the Ministry. Unlike the permanent secretaries in the UK or Germany, in Romania this position lacks line management functions and oversight over operational units. The politically appointed state secretaries appear to perform fully operational line management functions. This feature has important effects on the management of ministries, where potential for political influence on operational management is deeper than in administrations that have senior level of management staffed with independent career civil servants that serve as chief executives to the department. A sample of European countries averaged five such senior management officials below the politically appointed leadership (Annex 2). For example, in the UK the Permanent Secretary performs the role of a chief executive of the Ministry and he is supported 7 by 5 Managing directors that oversee the main departments of the Treasury. A similar tiered senior management structure exists in Germany. Table 2 Organization of Ministries of Finance – Romania and International Comparison France Germany United Kingdom12 Romania Politically 2 Ministers Minister Minister (Chancellor Minister Appointed 2 Parliamentary State of the Exchequer) 3 State Secretaries Leadership Secretaries 5 junior ministers Senior Management 1 General Secretary 3 (Permanent) State 1 Permanent 1 General Secretary Secretaries Secretary Top Level 17 Operational Units 9 Director Generals 5 Managing Directors 34 Operational Units Operational Management Management board Cabinet meeting Senior Management Treasury Board13 Ministry‟s College Committee Main General Secretariat Administrative Permanent see Directorates/Groups Public Finance services Secretary‟s Group14 Budget Fiscal policy Public services and Figure 3 Customs and Excises Budget growth State Modernization Customs and excises Budget, tax and Inspectorate General Tax policy welfare Anti Fraud Relations to federal International and states finance Financial markets Macroeconomic and Management of real fiscal policy assets, Privatization European affairs Subordinate n.a. Federal customs H.M. Revenue and see agencies administration Customs Federal office for Debt Management Figure 3 central services Office Federal Central Office of Government Agency for Taxes Commerce Center for IT services Others15 Source: Based on Richard Allen and Peter W. Kohnert, Anatomy of a Finance Ministry, 2010, unpublished draft. Bundesministerium der Finanzen, Her Majesty‟s Treasury, Ministère du Budget, des Comptes publics et de la Réforme de l'État. 17. Consequently, the highest level of non-political line management and the departmental structure of the MOPF are fragmented. Below the secretary level, the first layer of non-political management comprises the heads of the first tier operational units. There are a total of 35 such first tier operational units. Other European MOFs averaged about eight major top-level operational departments (Annex 2). While MoPF‟s organizational structure is impacted by restrictions in the public administration regulations, including staffing norms for types of administrative units, such as directorates general and directorates, some organizational streamlining may be desirable not only to realize efficiency gains through consolidation, but also to strengthen the management structure of the Ministry. 12 These figures are derived from the Annual Reports of H.M. Treasury and H.M. Revenue and Customs for 2008-9. 13 Comprises the Permanent Secretary, Managing Directors, Director of Human Resources and Finance, CEO of the Office of Government Commerce, and four Non-Executive Directors 14 Comprises strategy and communications, finance and procurement, corporate services, internal audit, and legal services 15 These comprise various agencies that are organized in the form of limited liability companies and are not included in the federal budget. They are responsible for a broad range of tasks including the management of real estate, issues related to German unification, postal services and telecommunications; and borrowing and debt management. 8 Size of the Public Finance Administration 18. The overall size of the core Ministry is broadly commensurate with its functions, although some efficiency gains are possible. The Ministry currently comprises 1,867 authorized positions, of which only 1,432 are filled. In particular, the number of authorized positions far exceeds those of other (larger) European countries. 16 A comparison of the number filled positions also suggests that efficiency gains are possible, in particular with further automation of business processes. Using other EU member states as benchmarks a MOPF with around 1,000-1,200 would appear attainable without threatening its core capabilities. Some opportunities in this regard are suggested below. Table 3 Size of Core Public Finance Staff – Romania and International Comparison France Germany United Romania Kingdom Number of Staff Core Ministry 99117 1 ,339 1,240 1,432 (Occupied Positions) Number of Staff Revenue 94,38418 111,988 19 89,000 25,394 Administration Number of Staff Treasury Operations 51,86720 1,000 n.a. 5,139 Other Subordinated PF Agencies n.a. 1,110 330 n.a. Total Number of Staff in Public 146,858 114,098 90,570 32,013 Finance Function (CM+SA) PF Staff/ 1,000 Population 2.4 1.4 1.5 1.5 Population 61,414,062 82,110,097 62,277,097 21,513,622 Source: Bundesministerium der Finanzen, Her Majesty‟s Treasury, Ministère du Budget, des Comptes Publics et de la Réforme de l'État. 19. Operational tasks related to budget execution and revenue administration have been transferred to a subordinated agency (ANAF) which employs most of the public finance staff and maintains a wide branch network across the country. Such a separation of policy formulation and implementation tasks has advantages in terms of creating greater accountability and more focused organizational arrangements. It is found across EU countries, for example Sweden and the UK, although some countries, like France and Spain, have so far retained both functions in the central ministry. In terms of size, these operational units vary greatly across countries driven by the size of the client base they serve, i.e., number of tax payers, size and complexity of the budget and number of spending units. ANAF, not surprisingly, is the smallest among the countries included here: It has 34,027 authorized positions of which 30,533 are currently filled, including about 25,000 staff working in revenue administration and more than 5,000 staff in the regional treasury offices. Efficiency measures, such as public finance officials per population suggest that the overall size of the public finance administration is in the same range as that of other European countries. 16 While there are some economies of scale in the management of a countries public finance system, smaller countries tend to have smaller MOFs, for example: Sweden (Population: 9 Million, MoF: 470 staff), Finland (Population: 5.2 Million, MoF: 420 staff), Norway (Population: 4.6 Million, MoF: about 300 staff). 17 Staff other than Direction générale des finances publiques and Direction générale des douanes et droits indirects. 18 Staff in Direction générale des douanes et droits indirects and Direction générale des Impôts, including the state pension administration Le Service des retraites de l'État (SRE). 19 Of which 34,310 are in customs and the remainder in tax administration. In Germany, only the customs administration is a federal agency, sub-ordinated to the Federal Ministry of Finance whereas taxes, including those apportioned to the federal budget, are collected by agencies under the jurisdiction of the states, subordinated to state ministries of finance. 20 Staff in Direction générale de la comptabilité publique. 9 Allocation of Human Resources across Functions 20. The MOPF, like other public organizations in Romania, is under pressure to deliver its services with increasing efficiency, requiring that the allocation of its human resources be determined on the basis of strategic priorities. There is an acute need to downsize the public administration in the short term to contribute to the fiscal consolidation targets. Untargeted budget cuts could endanger the functioning of expenditure management and revenue collection in the short run. The following section offers some observations to inform this short term agenda and to support a more efficient allocation of human resources in the context of a medium term strategic view of the Ministry‟s operational and staffing needs. Figure 4 Distribution of MoPF Staff across Functional Areas Debt Management, Fiscal Policy, 1.4% Budget Formulation, 8.2% 9.6% Revenue Policy, 7.5% Budget Execution, 6.7% Others, 6.2% PFM Policies and Controls, 14.1% Pre-Accession Programs, 12.4% Management Coordination of EU and Mangement Funds and Payment Support, 3.9% Corporate Certification, 10.6% Services, 20.7% Source: MOPF. World Bank Staff Estimates. 21. The allocation of staff does not appear to be fully aligned to current needs. Like in any organization, the distribution of staff across MOPF is, at least to some extent, a result of organizational history rather than a reflection of current needs. A realignment of human resources to strategic priorities is desirable to achieve more efficiency and to strengthen support to core areas. The following observations are made in this regard:  There are obvious areas that face declining business needs, allowing for a rebalancing of staffing levels. For example, about 12 percent of the Ministry‟s staff is employed by the units managing the EU pre-accession funds, an area that will wind down over the coming years.21 Equally, the Central Harmonization Unit (CHU) for internal financial control which performs ex ante financial control in 26 line ministries will phase out by 2011. Together these units account for about 200 staff or 15 percent of the total staff of MOPF.  The staff resources allocated to the fiscal policy area seem limited, given the importance of this function. Currently, 41 staff are working on macro-economic policy. While this seems to be adequate staffing for the current function performed in this area, the role and functions of this unit 21 Staff with experience in EU procedures may be absorbed in the unit responsible for post accession EU funds where demand is on a steep ascending trend. 10 could be strengthened to include fiscal impact analysis, fiscal risk monitoring and analysis and oversight of SOEs.  There may be room for efficiency gains in streamlining the corporate support services . At about 20 percent, the administrative overhead of the ministry is sizeable. The largest corporate services unit is the procurement unit which has 110 staff serving MOPF. This is a sensitive area as other line functions depend on efficient performance of this unit and understaffing may create bottlenecks for the functioning of procurement. However, the Ministry may explore ways to simplify procedures and processes which could allow for a significant reduction in this unit. Other corporate services, IT most importantly, may have to be staffed up, as adequate IT support and management will become even more critical as the Ministry modernizes its operations.  More reliance on information technology to automate routine tasks could free up resources to be deployed for higher value analytical services. Large numbers of MOPF and ANAF employees continue to perform essentially clerical tasks, including manual verification of transactions. For example, regularly scheduled debt service payments (internal or external) are labor intensive; the process is paper based, requiring multiple levels of approvals within the MoPF. In the core Ministry, transaction-intense areas with manual processes include, inter alia, the debt management department (in particular the back office function) and the budget execution area (particularly the reporting process). In ANAF, potential gains from automation are even more significant given its largely transaction related functions. The review of core functions, namely budget execution and revenue administration will address this issue in more detail.  In addition to possible adjustments in the distribution of staff, skill renewal is required to enable staff to respond to changing business needs. The increasingly complex tasks performed by the MOPF require a broad range of technical, analytical and managerial skills. In some areas capacity development should be a key focus to support change in the functional processes. For example, this review suggests that capacity to carry out more policy oriented budget analysis is critical to keep pace with the demands of a modern budget function. Reform Options: Assignment of Functions 22. The analysis suggests that no major reassignment of functions across ministry boundaries is warranted. Some options for minor adjustments to strengthen the focus of the MoPF around core public finance functions include:  Strengthening of SOE oversight function. A financial performance framework should be developed to cover all public enterprises. MOPF should take the lead in the development of this framework, in consultation with the Ministry of Economy and relevant sector ministries.  Consider creation of debt management agency as a long term strategic goal. 11 Box 1 Performance Management of State Owned Enterprises France: The French Government Shareholding Agency (Agence des participations de l'Etat), an agency subordinated to the treasury department in the Ministry of Economy oversees the SOE sector in France. Acting as an interface between companies and the Government as a shareholder, the APE looks after the following aspects: Monthly reporting implementation, Regular financial book meetings and preparation of important milestones, Audit reviews, special oversight of capital operations. New Zealand: The New Zealand Crown Ownership Monitoring Unit (COMU). This unit operates as a unit of the New Zealand Treasury (Ministry of Finance). Under the State Owned Enterprise Act 1986 the Minister of Finance and the Minister of State Owned Enterprises are the joint shareholders in all public enterprises. Enterprises are required by the law to operate on as a successful business and have full responsibility for decisions on resource use, and for pricing and marketing of the goods and services they produce. Thus they have full managerial autonomy and operate at “arms length� from the government. An annual statement of corporate intent (SCI) covering financial and other performance targets is negotiated with each enterprise. Ministers may issue directives to enterprises but such directives must be published. COMU assists the ministers in these negotiations, monitors the performance of enterprises during the year and advises ministers on the appointment of board members. Organizational Structure 23. A consolidation of the first tier management structure could be considered to enable more streamlined operations and better coordination across functionally related areas. There is no one right way or international best practice to structure a ministry of finance that can be copied with universally positive results. Rather, the organizational structure will evolve with MOPF objectives and reflecting the uniqueness of its history and national context, as well as specific requirements realted to the management and control of EU funds. Several options exist for the structure and portfolio of directorate generals and their allocation across different secretaries of state. Based on discussions with MOPF leadership options for a consolidation of the senior line management structure with fewer first tier organizational units structured around core public finance functions include the following (some options for organizational structures are included in Annex 3):  Creation of a DG Budget Formulation, overseeing units for budget synthesis, budgetary relations with the EU and expenditure programming, monitoring of budget execution  Creation of a DG Budget Execution and Public Accounting, overseeing units for the treasury operations oversight, budget execution monitoring and cash release (credit opening), the accounting methodology and financial reporting functions, corporate accounting  Creation of a DG Revenue Policy and Legislation, combining the existing directorates related to tax legislation, administration, customs and excises  Creation of a DG European Affairs, combining the departments for ECOFIN relations, Post Accession and Schengen. Allocation of Human Resources 24. The following recommendations are offered:  Permanently reduce the number of authorized positions of the core MOPF to the current staffing level, i.e., around 1,400, as a first step in consolidating the staffing level of the MOPF.  If further cuts are needed that could be targeted to areas that face declining business needs and/or do not constitute core public finance areas such as EU pre-accession programs, preventive financial control.  Review workload and processing with a view to streamlining corporate services, in particular in the procurement unit. 12  Further automate transaction processing, in particular in the debt management department (back office function), the budget execution function.  Areas with potentially increasing staffing needs include fiscal policy formulation and macro- economic analysis, Information Technology, and EU structural fund coordination. IV. REVIEW OF CORE FUNCTIONS AND CAPABILITIES Budget Formulation 25. Romania’s has a strong legal framework for budget formulation, but it will be important that the recent changes introduced by the FRL are effectively implemented. The legal framework is established by the Law 500 on public finances which was passed in 2002 and has recently been complemented by the new Fiscal Responsibility Law. Despite minor inconsistencies between the laws, which are discussed in more detail below, the legal framework clearly defines the budget calendar, related procedures and the role of the main players involved, including the MoPF, Line Ministries, Parliament and a newly established Fiscal Council. Procedural and institutional changes introduced by the FRL, most notably the preparation of Fiscal Strategy with binding spending and deficit commitments and the establishment of the independent Fiscal Council to provide external scrutiny, do have the potential to strengthen the foundations for prudent fiscal management. However, it appears too early to assess whether these changes are a success or even if they have been fully implemented. It will be important to gradually adapt actual practice to the new requirements. Organizational arrangements, roles and responsibilities for budget preparation 26. Within MoPF there are three core units involved in budget preparation: The Macro-economic Analysis and Financial Policy General Directorate (MAFPGD), which is responsible for macro-fiscal planning, most importantly the preparation of revenue estimates. The DG also prepares the convergence report for the EC.  The Directorate General for Budget Synthesis which is responsible for determining aggregate allocations across different government functions and organizations. This DG has been charged with leading the preparation of the Fiscal Budgetary Strategy required under the FRL. As discussed below it manages the cash releases and therefore plays a key role in budget execution and cash planning in addition to its functions in expenditure programming and budget preparation.  The Directorate General for Expenditure Programming which is responsible for compiling, reviewing and reconciling budget requests from line ministries. It is organized along portfolio lines with directorates assigned to economic, social and administrative sectors, and a separate directorate overseeing capital expenditure. The two latter Directorates-General report to the State Secretary responsible for budget management. The MAFPGD currently reports to the Minister. Budget Credibility and Macro-Fiscal Discipline 27. The MoPF is responsible for the preparation of the Macro-Fiscal Framework and plays a key role in setting the overall fiscal policy of the Government. The macro-fiscal framework is built on official four-year (t+3) macro-economic projections, including GDP, sectoral demand, inflation, unemployment, wage growth, external balances and exchange and interest rates, which are provided to the MoPF by the National Forecasting Commission, an agency subordinated to the MoPF. Individual tax and non-tax revenues are projected from GDP-based estimates of major taxes with inputs from the ANAF. In 13 conjunction with a deficit target, the revenue projections establish the overall resource envelope available for budgetary expenditures. These are prepared by the Macro-Economic Analysis unit which is technically strong, not only in terms of forecasting but also in terms of analyzing the overall macro- economic environment and identifying available fiscal policy choices. The unit, for example, prepares the Convergence report to the EC which contains detailed policy and risk analysis which could inform the annual budget process. The framework is typically calibrated against IMF, EC and World Bank benchmarks, especially during the current IMF/EC adjustment program. 28. Establishing control over consolidated balances remains a key priority. While cyclical in nature the current fiscal crisis has structural roots. Romania's economy boomed in the run-up to its EU accession in 2007, but high growth rates were associated with rising fiscal imbalances which deteriorated as the economy weakened with the onset of the global economic crisis in 2008/09. The years before the crisis saw a pro-cyclical expansion of expenditures that exceeded increases in revenue despite the robust economic growth of those years. Government spending doubled between 2005 and 2008 in nominal terms, bringing the Government‟s share of GDP to 37 percent, up from 32.2 percent in 2005. This not only undermined the Government‟s fiscal position but also contributed to the overheating of the economy. A public sector wage hike combined with an expansion of public sector employment contributed to mounting expenditures. The wage bill accounts for 23 percent of Government expenditures, among the highest in Europe, equal to approximately 9% of GDP. As a result, Romania entered the crisis with an already high fiscal deficit of 4.8 percent of GDP which deteriorated further during the crisis and continues to be under pressure in view of the slow economic recovery. Figure 5 Fiscal Position 50 0 39.2 39.4 35.4 37 -0.6 -0.7 -0.8 40 -2 32.2 32.3 -2.1 Percent of GDP Percent of GDP 30 -4 -3.1 -3.3 31.4 31.6 32.3 32.2 31.8 31.3 -4.3 20 -6 -4.8 -5.4 Consolidated Government Expenditure Fiscal Balance 10 -8 -6.9 Consolidated Government Revenue Structural Fiscal Balance -7.4 -8.1 0 -10 2005 2006 2007 2008 2009 2010 2005 2006 2007 2008 2009 2010 Source: IMF. World Bank. Figure 6 Deviation between Budget and Out-turns 2006 2007 2008 10.0% 6.5% Deviation Revenue (%) 5.0% 2.5% Deviation Primary Expenditures (%) 0.0% -5.0% -10.0% -5.9% -7.7% -15.0% -10.7% -20.0% -17.0% 14 Source: MOF. World Bank. 29. Prudent Macro-Fiscal Management has been undermined by weak budget credibility. Romania‟s actual budget, as implemented deviates significantly from the original budget both in terms of the fiscal aggregates and composition of the budget, meaning the approved budget is not a credible document. The causes of deviations are unrealistic revenue and expenditure estimates, substantial supplemental budgets (e.g. five in 2008, four in 2009), which are often due to spending mandates created by laws adopted outside the budget process with insufficient attention to their fiscal implications. The deviations cover a wide range of expenditure items (Table 4). In turn, the lack of budget credibility has undermined fiscal transparency and predictability and it has contributed to the rise of fiscal imbalances as the fiscal position tends to deteriorate during the execution of the budget. Table 4 Deviations across Expenditure Items 2006 2007 2008 Functional Public authorities 33.3 -3.7 -3.4 Defense -7.1 -28.6 -23.1 Public Order 4.2 0.0 4.2 Education 8.1 -19.2 -25.0 Health 6.1 -5.1 -15.6 Social assistance, pensions 2.1 0.0 -5.0 Environment -25.0 0.0 0.0 Industry 50.0 0.0 0.0 Agriculture 0.0 -27.3 -50.0 Transport, Communication 20.0 11.1 2.6 Economic Goods and services -3.1 -16.4 -19.8 Wages 45.5 28.1 29.2 Capital spending 34.4 0.0 -29.7 Subsidies 10.0 30.8 0.0 30. Fiscal profligacy is a result of institutional weaknesses in the budget system, in particular the absence of a strong top down budget process. The budget process, at least prior to the introduction of the new legal framework, has been largely driven by demands for spending, as opposed to resource availability. While technically sound, revenue estimation has reportedly been subject to upward political pressures to allow for artificial increases in the available resource envelope. The estimate is also used as a revenue target for the ANAF and as such it is deliberately optimistic. Line ministry budget requests did not typically comply with the ceilings issued by MoPF based on the available resource envelope. Instead, line ministry‟s budget requests would often exceed affordable spending limits. This practice would not only result in time-consuming negotiations between MoPF and line ministries about funding levels, but trigger further upward revisions of aggregate expenditures to accommodate requests. A notional medium- term expenditure framework is included in the budget documents but the forward estimates do not constitute binding expenditure limits and are not reconciled with the estimates used during the annual budget process. Consequently, the actual budget remains a strictly annual affair only weakly related to a medium term fiscal outlook. In the absence of a credible medium term budget strategy to guide annual budget decisions, fiscal policy will continue to deviate from the medium term sustainable path. 31. As many of these weaknesses in the institutional framework have been addressed by the FRL, it is now essential that it be strictly implemented. While fiscal policy is currently anchored in the 15 IMF/EC-supported adjustment program, which provides an additional external constraint, it is vital to build domestic institutional checks to ensure that macro-fiscal discipline is maintained beyond the current circumstances. The FRL has established stronger centralized requirements for aggregate fiscal discipline, including commitments to medium term macro fiscal targets that are endorsed by both the executive and Parliament. It also strengthened external validation through the establishment of a functionally independent Fiscal Council. These provisions are highly appropriate and enforcing them will be critical, but not easy. Ensuring that the FRL is adhered to will require firm commitment from the highest levels of government including the Prime Minister, Cabinet, and Parliament, not just the Minister of Finance. Reform Options: 1.1 Institutionalize Prudent Revenue Estimation: 32. Realistic revenue forecasting is the lynch pin of credible budgeting. While unforeseen fluctuations are always possible, especially given the current macro-economic volatility, it is essential that the revenue forecasts are prudent, technically sound and independent from political interference. These principles are reflected in the financial responsibility laws of a number of countries, which in some cases also remove the Minister of Finance from any involvement in the macroeconomic and fiscal forecasts. Box 1 below provides some examples. 33. The fiscal policy formulation function should be strengthened. The macro-economic DG in the MoPF has strong technical capabilities to prepare sound forecasts and also to advise the Ministry and Government more broadly on the appropriate fiscal policy stance and emerging fiscal risks. To strengthen fiscal policy formulation, the Directorate General for Fiscal Policy could be subordinated directly to Minister. Finally, the FRL requirement for the Fiscal Budget Strategy (FBS) to include a statement signed by the Prime Minister and Minister of Finance attesting to the fairness and completeness of the information included in the FBS should strengthen the Minister‟s ability to resist pressures to increase revenue estimates to an unrealistic level. Figure 7 Proposed Organizational Structure of Directorate General for Fiscal Policy Directorate General Fiscal Policy Macro-Economic Forecasting and Fiscal Risk Analysis and Fiscal Impact Analysis SOE Oversight Policy Research Monitoring 34. External validation and contestability of the macro-fiscal framework can provide an important check. The requirement in the FRL for the independent Fiscal Council to analyze and comment on the official macro-economic and budget forecasts addresses this concern. It is important that the Fiscal Council have adequate technical staff, separate from the MOPF to carry out this task. It would also be desirable to publish revenue forecasts together with underlying assumptions (economic growth, interest and exchange rate, etc.) including comparisons with independent market estimates and those provided by the National Bank and IMF. Finally, quarterly public reporting of updated forecasts incorporating sensitivity and fiscal risk analysis could further increase transparency and contestability, thereby strengthening the validity of the macro-fiscal projections. 16 Box 2: International Experience in Ensuring Independent and Professional Revenue Forecasts Different approaches exist to ensuring prudent revenue estimates. Some countries, like the Netherlands, Austria, Slovenia, Belgium, Canada, Chile rely on external (in some cases consensus) estimates for their budget. In others, like New Zealand, Germany and the UK, the Government remains responsible for the preparation of the estimates but there are high degrees of external validation and contestability. New Zealand: The FRL requires the Treasury (MOF) to prepare regular three year economic and fiscal forecasts using its best professional judgment. These forecasts are included in key public documents such as the Budget Policy Statement (BPS) which is published before each budget and the Fiscal Strategy Report (FSR) which is published along with the budget and with the pre-election update published generally four to six weeks before each general election. The Minister of Finance may not influence these forecasts. However the Minister affirms that all government policy measures have been communicated to the Treasury and the Secretary of Treasury affirms that Treasury has used its best professional judgment in preparing the documents. Austria: All major economic assumptions used in the budget process are prepared by the independent Institute for Economic Research. The institute is funded by the federal and state governments and by the business and trade union sectors and functionally independent from the Government. Chile: The Minister of Finance appoints two expert panels who prepare the economic forecasts on which the budget is based. The first panel comprises 14 expert economists and their separate forecasts are averaged after the two “extremes� are discarded. The second panel is solely concerned with forecasti ng the price of copper, which given the importance of copper production in the Chilean economy has major budgetary implications. This panel, which also includes industry representatives, operates in a similar way to the first panel. Canada: Department of Finance officials meet with the chief economists of major banks and private sector economic forecasting firms to agree on a set of economic assumptions used for projecting fiscal aggregates over a five year period, based on existing policy assumptions. The DoF makes two adjustments to the private sector estimates: 1) a safety margin for fiscal prudence is build into the assumptions, meaning the assumptions are adjusted downwards, based on a risk analysis in regard to major assumptions GDP and interest rate and 2) an annual contingency reserve is programmed to provide an extra measure of back-up against errors in the economic forecasts. United Kingdom: The Finance Act 1998 requires the National Audit Office to examine and report on conventions and assumptions underlying the treasury’s fiscal projections, to ensure that the assumptions used are reasonable and prudent. The examination includes a three-year rolling review of the assumptions previously audited. Following the recent election, the UK Government assigned forecasting responsibility to the newly established Office of Budget Responsibility which is separate from the treasury but part of the Government. 1.2 Institutionalize Top Down Budget Process 35. Strengthening the top-down elements of the budget process can help to achieve aggregate fiscal control and to drive expenditure prioritization. Top-down budgeting essentially divides the budget process into to a number of discreet and sequenced decision points. First, a binding decision is established on the available resource envelope. This decision is taken based on fiscal aggregates that are consistent with macro-economic stability regardless of sectoral spending needs. Second, once the aggregate expenditure level is determined broad strategic, inter-sectoral allocations are decided and translated into (multiannual) ceilings for individual sectors. These decisions are informed by Government policy priorities, as well as by the cost of existing policy commitments which will constrain the room for re-prioritization in any given year. Finally, detailed decisions about allocation between different programs and activities are determined (by the line ministries) within the established sectoral ceilings. It is clear that under such a system the budget preparation is driven by what is fiscally affordable with allocative decisions at each decision point being constrained by previously established expenditure limits. This 17 requires that the decisions made are respected and adhered to by all players involved in the budgeting exercise. Examples of well established top-down processes are given in Box 2. 36. A robust cabinet level decision-making process reinforced by a strong MoPF is required to make the top-down budget process work in practice. The FRL and Fiscal Budget Strategy (FBS) aim to reinforce the top-down elements of the budget process. Both the determination of the overall spending limit and the allocation of any available fiscal space (or indeed spending cuts) need to be supported by a collective commitment by a politically strong alliance of players in the budget process to adhere to agreed decisions. A structured process of cabinet or sub-cabinet meetings can help to facilitate a collective bargaining process that formalizes the decision points in the budget process. The Swedish budget retreat provides a good example of such a coordinating mechanism (Box 2). 37. Top-down budgeting would also require the MoPF to have the authority to enforce fiscally responsible decisions. This is needed, for example, if budget requests exceed the ceilings issued by MOPF. The FRL provides that MOPF may reject and unilaterally adjust any budget requests submitted by sector ministries which are not in accordance with the FBS. Enforcing this provision, together with realistic and credible budget ceilings, will be crucial to making the intended top-down budget process work in practice. 18 Box 3: International Experience in Top-Down Budgeting Sweden: Sweden undertook significant fiscal governance reforms during the major consolidation effort after a financial crisis in 1993 caused the Government deficit to exceed than 12% of GDP. Today Sweden is widely considered to have one of the strongest fiscal governance systems in Europe with impressive results: Between 1998 and the onset of the recent crisis in 2009, the Swedish government run surpluses every year, except for 2003 and 2004. Sweden’s annual budget is anchored in a medium term framework with firm, nominal spending limits for 3 years (current budget year and two out-years). Every year the overall expenditure limit for the third year and allocations for 27 expenditure areas are collectively decided based on a proposal by the Minister of Finance during a two day cabinet budget retreat, which takes place in mid March. Changes to sectoral expenditure ceilings need to be accommodated within the aggregate spending limit and have to be agreed upon by all Cabinet members, including those that absorb compensatory cuts. Canada: At the height of the Canadian debt crisis in 1994, the country had a budget deficit of around 9 per cent of GDP. The following year, the Government unveiled what became known as the "bloodbath budget", in which departmental spending was reduced by an average of 20 per cent. By 1997 the deficit had been eradicated. However, health and education budgets were slashed and thousands in the public sector lost their jobs. In this process Canada transformed the way spending rounds were carried out. With the prime minister's support, the treasury board issued target cuts for each department. Departments in turn proposed how to achieve these cuts and a committee of four senior ministers reviewed the claims of each department before their budgets are agreed. South Korea: Budget reforms in South Korea were initiated in 2004. While the financial crisis in the late 1990s triggered the initial impetus to reform public finances, fiscal reforms in Korea were driven by longer term concerns, namely the need to realize the fiscal space needed to manage rising social spending requirements. The reform put heavy emphasis on introducing top down budgeting elements and a medium term expenditure framework to rationalize the allocation process. This included instituting the issuance of ceilings to line ministries at the beginning of the annual budgeting process to align budgeting closer to both fiscal realities and government priorities. Previously, line ministries submitted their budget requests without regard to and which typically resulted in requests of about 30% above the previous year and 4-5 times higher than what was affordable within the increments in the resource envelop. The introduction of ceilings has brought budget requests to more realistic levels. Netherlands: The Dutch system combines elements of top-down budgeting with bottom-up budgeting. Medium Term fiscal policy is set in the coalition agreement closed at the beginning of a Government term. It contains i) binding four year expenditure limits that are determined (by the independent Netherlands Bureau of Economic Policy Analysis, the so called Tinbergen Institute) and ii) indicative spending allocations for the main budget accounts. These initial limits are set in real terms and translated into nominal terms at the beginning of the fiscal year. Concurrently, Line Ministries submit the Policy Letters to the Ministry of Finance containing baseline funding requests for the continuation of existing policies, policy priorities for the next year and request for funding of new initiatives. These requests are reconciled by the MOF with the fiscal plan of the coalition agreement. The MOF determines whether room for new initiatives is available or if expenditure cuts are needed and prepares a Framework Letter that is submitted to Cabinet in April. The Cabinet discussion culminates in binding decision on expenditure limits for the 25 budget chapters which are communicated to Line Ministries in early May in the Letters of Total. Within these ceilings Line Ministries prepare the detailed budget plans which are submitted back to MOF in June. 1.3 Monitor and Control Fiscal Impact of Legislation 38. Legislation with significant budgetary implications is routinely passed outside the budget process and its impact needs to be monitored and managed to protect fiscal sustainability. Such legislation, for example covering wage or pension increases has in the past undermined responsible budgetary management. This issue is not unique to Romania. A recent OECD report cites that about 80 19 percent of public resources are typically committed outside the budget process. However, it is important that the legislative process gives due consideration to affordability and fiscal impact. 39. The existing framework for fiscal impact assessment of new legislation should be enforced in practice. Romania has a formalized system for providing fiscal impact analysis as part of the substantiation note that is attached to all legislation initiated by the Government, but these have not effectively constrained fiscally unsustainable legislation from being passed, in some cases initiated by the legislature. The fiscal impact analysis should be focused on the budgetary implications as opposed to broader regulatory impact assessments which would also consider boarder economic costs associated with legislation. The FRL also provides that Parliament may not change the FBS to increase the level of expenditures in the consolidated budget nor to increase the level of the deficit. A number of steps could be taken to consistently implement the existing provisions.  First, the Government General Secretariat (which is subject to a separate functional review) should ensure that only compliant draft legislation is tabled in Cabinet meetings.  Second, the MoPF should assign the budget department and the Macro-fiscal analysis unit with the review of draft legislation before sign off. Efficient review procedures should be established that identify legislation with major fiscal impact (with a specific threshold value) which would require more comprehensive and detailed costing analysis. Legislation with minor fiscal impact should not be subjected to the same rigorous analysis to avoid clogging the system. Initial preparation of detailed costing could be made the responsibility of the initiating institution, with external support as needed; but it should be reviewed and approved by the MoPF.  Third, in addition to costing the substantiation note should also be required to identify financing sources or off-setting expenditure cuts to comply with the fiscal neutrality condition.  Fourth, the fiscal impact analysis should be made publicly available through appropriate means, for example the MOPF or GSG website.  Fifth, the Minister of Public Finance should be assigned formal veto power to suspend any legislation that does not comply with the fiscal neutrality clause of the FRL. This does not constitute an infringement of legislative powers because the legal grounds for such veto power are provided by the FRL, which allows the MOPF to over-ride other laws that trigger budgetary expenditures inconsistent with the FBS, and a veto right would merely formalize this provision.  Fifth, the Parliament should change its internal rules and procedures to make them consistent with the new FRL provisions 20 Box 4: International Experience in Fiscal Impact Assessment of New Legislation Canada: Canada has well developed procedure to estimate the fiscal impact of new regulatory initiatives. The process is based on the 1986 Regulatory Process Action Plan. The procedure is based on a layered system with different requirements for high and low impact legislation. The initiating institution is responsible for the preparation of the analysis and the treasury board ensures compliance and provides technical guidance and advice (http://www.tbs-sct.gc.ca/ri-qr/index-eng.asp). Germany: The costing of new legislation is required under the general government rules of procedure since 1996 (further revised in 2000). The costing requires the quantification of i) budgetary costs, including direct costs (e.g. increased entitlements) and administrative costs and ii) compliance costs for citizens and businesses. The preparation of cost estimates is the responsibility of the initiating institution, but they are reviewed by a designated entity in the Federal Ministry of Finance. The ultimate decision rests with the Cabinet. US: To assist the Budget Committees and the Congress with enforcement of the budget resolution, the non- partisan Congressional Budget Office (CBO) analyzes the spending or revenue effects of specific legislative proposals. It prepares cost estimates of pending legislation and tracks the progress of such legislation in a scorekeeping system. CBO's cost estimates and scorekeeping system show how individual legislative proposals would change spending or revenue levels under current law and help to determine whether those budget effects are consistent with the targets in the Congress's most recent budget resolution. As required by the Unfunded Mandates Reform Act of 1995, CBO includes in cost estimates an assessment of whether legislation contains federal mandates and provides an estimate of the costs imposed by those mandates on state, local, and tribal governments and the private sector. In 2009, CBO completed approximately 480 federal cost estimates as well as about 420 estimates of the impact of legislation on state and local governments, including the identification of any unfunded mandates contained in such legislation, and about 420 estimates of the impact of any unfunded mandates on the private sector. United Kingdom: In 1998 the UK established the Regulatory Impact Unit in the Cabinet Office responsible for carrying out impact assessments for proposed legislation. The system has since undergone some restructuring to streamline procedures and the unit has been renamed to Impact Assessment unit. Costing is now only required for legislation with an expected fiscal impact exceeding a threshold value of 5 Million Pounds. Strategic Expenditure Prioritization 40. With revenues expected to remain below pre-crisis levels for some time, it is critical to improve prioritization and targeting of spending to sustain the consolidation effort while ensuring adequate funding for key Government priorities. A recent public expenditure review carried out by the World Bank indicates that there is significant room for expenditure realignment and rationalization to eliminate low priority spending in order to generate savings that can be directed to priority, high-return investments to boost productivity and competitiveness, and to targeted social assistance. It notes an oversized and inefficient public administration, an un-restructured public enterprise sector draining considerable resources and weak links between spending increases and outcomes in the education, health and transport sectors. It identifies a number of opportunities for reprioritizing expenditures, as summarized below:  In the education sector, there is scope to increase class sizes (that declined in view of a shrinking student population) and thus reduce the number of teachers, consolidate schools, and thereby to reduce capital and recurrent expenditure.  In the health sector, recurrent spending is high, accounting for almost half of the Government goods and services expenses. Spending is biased towards hospitals at the expense of preventive and primary care and there is scope for increased user charging. 21  In the transport sector, there are many uneconomic or unnecessarily large capital projects and large subsidies to rail companies which could be reduced.  In the agriculture sector, funds should be reoriented to support medium sized farms and rural infrastructure. Significant savings could be achieved by phasing out several national programs which do not improve farmers‟ welfare nor the competitiveness of the agriculture sector.  The public pension system is financially unsustainable and has excessively generous provisions for retirement age, indexation of pensions and special conditions granted to certain privileged groups.  The capital project portfolio is weakly prioritized and “overloaded� with inadequately funded projects. 41. The budget preparation process is largely focused on costing of inputs and has had limited impact in supporting strategic reprioritization. The budgetary dialogue between MOPF and sector ministries has been about perceived funding requirements for salaries and operating expenditures, rather than on how this funding might reflect government policies and priorities, in other words “performance�. Past attempts to link performance with the budget through a program based budget approach have had limited success. MOPF‟s role in reviewing and assessing budget submissions is hampered by insufficient technical capacity to challenge line ministries, and limitations in the information submitted, including the lack of feasibility studies for investment projects. While the annual budget law includes an annex with information on ministry objectives and associated performance indicators, the use of this information in formulating budget allocations is limited. Since 2006 all ministries have formally prepared strategic plans, under government directives managed by GSG. But it appears that they have not been used to determine expenditure priorities, partly because they are finalized only in June, too late to affect the budget allocation process and also because many are unaffordable, lack internal prioritization, are not based on any analysis or evaluation of policies and contain poor quality indicators. Demand from the Minister of Public Finance and Cabinet for policy oriented budget analysis and advice appears to have been limited, reflecting the lack of focus on policies and prioritization at the centre of government (see functional review on the Centre of Government). This has resulted in a MOFP whose budget arm lacks policy analysis and expenditure evaluation skills. Moreover, discussions with staff of the budget directorate general of MOFP indicate that some staff do not consider a “challenge function� to sector mini stry expenditures an appropriate role for the budget department. 42. The FRL will require the nature of the budgetary dialogue to change. The FBS is required to explain “the expenditure priorities and the substantiation of such expenditures in detail, includi ng an explanation of the way in which the government intends to improve its policy, efficiency and effectiveness�. In addition, the public investment program is required to “include priorities and their substantiation�. Thus, the new FRL clearly requires that expenditure prioritization issues be addressed in the FBS. 43. The first FBS presented in June 2010 set out fiscal targets for the 3 years up to 2013 and outlined the fiscal consolidation program needed to achieve these. To achieve the fiscal targets, the FBS confirms the general 25 percent reduction in civil service wages and the 15 percent reduction in public pensions which had to be repealed due to a ruling of the constitutional court. It also includes further reform plans of the public pension system included in a new draft pension law, a strategy for the rationalization of hospitals and increased user charging for hospital services. Beyond this it does not appear that the strategies for achieving these fiscal targets have been determined, and indeed the FBS, perhaps reflecting the strong involvement of sector ministries in its preparation appears to envisage increased activity and expenditures in a number of areas for which no offsetting savings appear to be identified. This confirms the need for an in-depth analysis of sector ministry expenditures. 22 Reform Options: 2.1 Refocus Budget Dialogue on Policy and Efficiency Issues: 44. Building on the 2011 FBS, further expenditure prioritization and rationalization should be pursued and a budget process should adopted to regularize such efforts. Improving expenditure prioritization in Romania could be supported by a number of steps, many of which have already been stipulated in the FRL:  First, the FBS should be used not only as a tool to instill fiscal discipline but also to align aggregate expenditure allocation to Government priorities. The top-down budget process outlined in the previous section will be conducive to achieving this objective, but it needs to be driven from the political level through a robust cabinet level decision making process, for example by reinstituting the Cabinet Strategic Planning Committee.  Second, the review of the capital budget currently underway should be used to underpin a rationalization of the project portfolio. Building on this, portfolio management should be strengthened with the MoPF budget department performing an important review function to ensure affordability of approved project over a multi-year period and to avoid renewed overcrowding of the project portfolio. In this context utilization of EU funds for capital financing should be considered as appropriate with a priority given to provision of co-financing.  Third, line ministry budget requests should contain a separation of baseline funding required to continue existing policies (based on previous year‟s forward estimate) and funding requests related to new initiatives. Line ministries should also be required to identify options for savings and efficiency gains in the baseline allocation while being allowed to retain at least some of these savings to finance new initiatives.  Fourth, periodically, more systematic and thorough baseline reviews could be conducted to help identify savings that can be reallocated to priority programs. (Box 4 provides international examples of such reviews). Such spending reviews could be initiated for the 2012 budget, building on the analysis of the World Bank‟s PEIR. The process should be led by the budget directorates-general of MOPF with the active involvement of CGS and of sector ministries and agencies.  Fifth, the development of budget requests and their link to policy priorities could be reinforced through an invigoration of the sector ministry plans, recognizing that prime responsibility for good expenditure prioritization rests with sector ministries, with MOFP exercising a “challenge� function. This redevelopment of strategic plans will require management both by GSG and MOPF. 23 Box 5: International Experience in Spending Reviews Some countries have made regular selected reviews part of their budget procedures, where programs, including baseline allocations- are thoroughly reviewed once every few years, others perform comprehensive reviews on a more ad hoc or need basis. Spending reviews are often led by the Ministry of Finance in terms of the overall methodology and guidelines but rely heavily on the line ministries themselves since they have a superior understanding of their own operations. Canada: The Expenditure Management System, implemented in 2007, is the framework for developing and implementing the government's spending plans, and encompasses a number of elements and activities (e.g. planning, evaluation, etc.) that guide decisions on the allocation of resources. Its various elements provide the information necessary to support the development of spending plans, the Government's priority setting process. A key pillar of this system is strategic reviews of key spending programs. All institutions receiving central appropriations are required to periodically (4-year cycle) undertake a strategic review covering 100 percent of their direct program spending and operating costs of their major statutory programs. Through these reviews organizations are required to identify reallocation options totaling 5% from their lowest-priority, lowest- performing program spending. Organizations can identify more potential savings in order to provide a greater range of options. New Zealand: The new government elected in November 2008 has undertaken two major initiatives. First, line by line expenditure reviews were carried out by chief executives of each ministry and agency, feeding into the May 2009 budget. These reviews were aimed at identifying savings that could be freed up for the 2009 budget. The review aims to identify programs that are inconsistent with the new government’s priorities and should be discontinued, programs and expenditures that are not effective or efficient and areas where performance information is insufficient to make judgments about efficiency and effectiveness. The reviews were undertaken by chief executives and then provided to their minister for consideration. A panel of chief executives also reviewed the completed reviews to ensure that they meet the requirements laid down by Cabinet. These were then reviewed by the Minister of Finance and considered by the Cabinet Committee on Expenditure Control. As a result the 2009 budget saw some significant reallocations of expenditure particularly to major infrastructure expenditure and the health and justice sectors, and away from the education sector. Second, a system of in- depth spending reviews to examine the efficiency and effectiveness of expenditures in particular sectors has been developed. Such reviews are resource intensive and time consuming so they will be carried out as rolling reviews over a 3-4 year time period. Initially a limited number will be undertaken. It is intended to proceed cautiously and adapt procedures as lessons are learned. Each review is expected to take 3-6 months to complete. United Kingdom: Regular Spending Reviews were introduced in 1999 and are carried out very 2-3 years. They focus on high level government priorities and lead to three-year expenditure plans for each ministry’s contribution to these priorities. Each ministry’s Public Service Agreement contains measurable targets for a range of government objectives, focusing on outcomes. Performance information forms part of the spending review negotiations and ministries but there is no automatic link between performance and resource allocation. In view of unsustainable deficits and mounting debt pressures, the newly elected Government has begun a major fiscal consolidation effort employing a comprehensive review of the spending program.  Fifth, it is important to cultivate demand by decision makers, including the Minister of Finance, Line Ministers and Cabinet for policy oriented budget analysis from the MoPF budget department and financial management units in line ministries. This could be facilitated by redefining the specific products and services the budget department delivers to assist the decision making during the annual budget process, for example budget memoranda for each major budget account Budget department to support decision making during the annual budget process. Such memoranda should analyze the sector challenges, policy objectives, and performance track record (both financial and non-financial). Recommendations regarding spending increases and cuts should be based on this analysis.  Finally, once meaningful strategic plans are developed, Romania should, as recommended by the IMF, move to introduce a performance oriented budgeting system, drawing on the experiences of 24 other countries in the region and international experiences.22 It should be stressed that introducing performance based budgeting is a medium to long term task requiring at least 3 years for full implementation. This will require a consistent design and specification of programs and changes to the budget classification and chart of accounts. Annex 3 Options for organizational structures The organizational structures presented here express illustrations of the underlying principle to create a more streamlined line management structure with fewer to level operational units. Not all aspects of the proposed options may be feasible, especially in the short run. Any reorganization should be driven by specific objectives, such as improving coordination in functionally related areas. 22 See World Bank, Performance Based Budgeting; Beyond Rhetoric, PREM Note 78, February 2003 and OECD, 2007, Performance Budgeting in OECD Countries, Chapter 1 25  Annex 4 to this Report provides a more detailed elaboration of these issues along with a number of country examples. 2.2. Build Capacity in the Budget Department and financial management units in line ministries to carry out budget analysis 45. While the budget department is well staffed with about 13023 currently occupied positions (out of total of 190), it will need to expand the capacity of the staff in order to commence and sustain a strategic prioritization approach to the budget. Job descriptions and skills sets of staff in both the budget department and financial management units in line ministries would have to be adjusted to the demands of a more policy oriented budget preparation function. Generally, the work of budget analysts would need to encompass problem identification and resolution; compilation and analysis of program and budgetary information gathered from a variety of sources; technical and substantive review of budgetary data, preparation of associated documentation, reports, letters, memoranda, and the like; liaison functions within and outside of the MOPF; identification and evaluation of alternative programmatic ways of achieving strategic objectives; representation of MOPF at varying levels of government. Budget analysts would routinely provide and justify recommendations that involve multi- million RON decisions. A number of steps could be undertaken to expand the capacity of the budget department:  Review and adjust the job description and associated qualification requirement of the positions in the budget department and financial management units in line ministries to encompass the tasks associated with budget analysis (exemplary job descriptions for a budget analyst (at both Junior and Senior level) are provided in Annex 5)  Conduct a training needs assessment and provide a training program on budget analysis, including specific sectoral issues. MOPF budget staff as well as budget and planning staff in sector ministries would be guided by such technical assistance and receive training in expenditure analysis issues, for example from an organization such as the Centre of Excellence in Finance, based in Ljubliana. 2.3 Synchronize the planning and budgeting calendar 46. The established calendars for the Fiscal Budget Strategy (required by the FRL), the annual budget (Law 500), and the strategic plans (various Government Directives) of all the ministries are not coordinated or synchronized in a way that will produce resource allocation that is more consistent with national priorities. Currently:  The FRL of 2010 requires the Government to deliver a three-year Fiscal Budget Strategy to the Parliament by May 30 of each year.  The Public Finance Law (#500) of 2002 requires the MOPF to deliver medium-term objectives and expenditure envelopes to the Government by May 1 and to deliver a draft budget law to the Government by September 30. In turn, the government is required to present the budget to Parliament by October 15.  Each line ministry is required to produce a Strategic Plan (under Government Directives 1807 of 2006 and 158 of 2008.) that in past practice was due by July 1 of each year. 23 78 occupied positions/117 authorized positions in the expenditure programming department and 51 occupied positions /70 authorized positions in the budget synthesis department. 26 47. An integrated strategic planning and budget calendar could support top-down budgeting, described in the previous section and better link the budget process to the strategic planning exercise. The strategic plans were typically not produced until July and are too late to drive the budget process both in terms of the three-year objectives and expenditure ceilings that are due to the Government on May 1 and the budget proposals that spending agencies are required to deliver to the MOPF by June 15. Furthermore, there is substantial overlap and duplication between the FBS and the existing budget process. For example, the FBS which is due to Parliament by May 30 includes spending priorities in a three-year timeframe as does the document that Law 500 requires the MOPF to send to the Government on May 1. Further, it can be seen from the timetable above that the government has only 15 days to consider the draft budget submitted by MOFP before sending the final proposed budget to Parliament. This is clearly insufficient time for considered collective decision making by Cabinet on its detailed policies and priorities, even given that the government has previously considered the FBS. A draft annotated integrated budget and planning calendar is included in Annex 6. The following key adjustments to the timetable should be considered.  The timelines for the provision of ministry strategic plans should be changed so that they are available to feed into the development of the FBS  The budget timetable should be changed to allow at least one month for collective Cabinet consideration of the proposed budget. Budget Execution and Treasury Functions 48. The Treasury’s role as a provider of cash management, payment, accounting and reporting services to government institutions is a significant enabler of efficient Government operations, transparency and accountability to the public. Budget execution systems should be aimed at ensuring efficient budget implementation, in accord with the policies stated in the budget and in compliance with budgetary authorizations. They should also be able to respond to possible changes in the macroeconomic environment without disturbing budget management, in particular without generating arrears and creating inefficiencies. 49. Romania’s budget execution system suits the basic requirements for sound public expenditure management but performance across core budget execution functions is uneven. Transactional banking services associated with the operation of bank accounts for the purpose of processing of revenue receipts and payments and a comprehensive TSA are well developed, although with more than 5,000 staff employed in territorial treasury offices transaction processing remains labor intensive and further automation of payment services is the logical next step. Reporting and accounting functions have well developed policies, including a unified budget classification and Chart of Accounts. But the current reporting systems and processes heavily rely on manual intervention for collection, verification and validation of financial information, limiting timely operational reporting and analysis. Financial information, other than aggregate cash balances, has to be obtained from about 14,000 individual spending units on a monthly and quarterly basis. The consequent lack of reliable, timely and detailed revenue, expenditure and commitment data for budget planning, monitoring, expenditure control, and reporting negatively impacts on budget management. Budget releases (Budget Credit Openings) are based on imperfect information and largely driven by cash availability rather than cash needs, undermining line ministry financial operations. Organizationally, core budget execution functions (credit opening, payment processing, accounting and reporting) appear fragmented which is also reflected in a lack of integration in the IT support provided to these closely related functions. 50. The legal framework for budget execution is stipulated in Law 500 on Public Finance. Structurally, Romania‟s budget execution system resembles other continental European countries. There is a three-level system of credit holders (ordinateurs) which are state institutions that plan for, receive and 27 spend budget funds. At the central Government Level there are 75 primary credit holders with about 9000 subordinated secondary and tertiary credit holders. The primary ordinateur is the Minister or Head of Agency, who typically internally delegates public finance functions to the secretary general. In addition, there are about 3,200 local government credit holders, e.g., mayors, which hold autonomously approved budgets, but use the services of the central treasury for budget execution. Each of these entities has designated financial management staff responsible for committing funds and authorizing spending within the allocated budget credit and for properly accounting for transactions in accordance with the prevailing CoA. Organizational arrangements, roles and responsibilities for budget execution 51. The main activities of the MOPF in budget execution include: (i) in-year financial planning and release of funds; (ii) debt management; (iii) payment processing; (iv) accounting and reporting; (v) financial control; and (vi) support to internal audit. Functions related to budget execution are carried out by different general directorates:  The Treasury and Public Accounting General Directorate (TPAGD) supervises the payment system and line ministries accounts. This department also oversees the 309 Treasury branch offices, which simultaneously report to financial directorate of the counties (judet) of the National Agency for Tax Administration (ANAF). This directorate general reports to the state secretary responsible for budget management.  The Public Institutions Accounting Methodology General Directorate (PIAMGD) issues accounting standards, manages the CoA and also prepares monthly, quarterly and annual financial reports. This directorate general reports to the state secretary responsible for budget management.  The Budget Programming General Directorate (BPGD) manages the cash releases and therefore plays a key role in budget execution and cash planning in addition to its functions in expenditure programming and budget preparation. This directorate general reports to the state secretary responsible for budget management.  Financial control and internal audit within line agencies are supported by the Central Harmonization Unit (CHU) for financial management and control and the CHU for internal audit. Such an organization is similar to the Public Internal Financial Control (PIFC) model promoted by the European Commission.  The Treasury and Public Debt General Directorate (TPDGD) is responsible for cash planning and manages domestic and external debt. The department is organized in a front, middle and back office following established principles for the organization of debt management operations. This directorate general reports to the state secretary responsible for debt management. Allotment procedure 52. After the approval of the annual budget law, the main spending authorities ( ordonatori) draft quarterly budget implementation plans which are reviewed by the BPGD and approved by the minister of Finance. The main spending authorities include ministers, heads of other public authorities and specialized agencies and chiefs of autonomous public entities. Once the quarterly budget implementation plans is approved, the main spending authorities distribute the approved budgetary credits for their own budget and for their subordinated public entities or units, whose managers are secondary or tertiary spending authorities. Then, the secondary spending authorities distribute the approved budgetary credits for their own budget and their subordinate tertiary spending authorities. To ensure prudent budget execution, the main spending authorities are required to allocate in their budget implementation plan 10% of approved funding to a reserve, with the exception of personnel expenditures and funds related to external liabilities, which are entirely distributed. This reserve is distributed during the second half of the year. 28 Cash releases Cash is released through monthly “credit opening� (deschidere de credit). Main spending authorities present each month several requests to the BPGD for cash releases, which should be in line with the quarterly spending limit. These requests are accompanied by a note presenting the operations that will be financed. After reviewing these requests, the BPGD authorizes the “credit openings�, which release cash to main spending authorities and partly to secondary spending authorities. These “credit openings� are recorded in the Treasury payment system by the TPAGD. Then, the authorized cash releases are distributed in cascade fashion within the line ministries or other main spending units. This process is manual and relies on postal mail for distribution of credit openings to regional offices (Figure 8 illustrates the process for releasing cash). 53. The BPGD exercises a tight control over credit releases, through the combination of quarterly cash limits and monthly credit opening. Such controls may help keeping cash under control, when the budget is not based on realistic revenue estimates. However, they create time-consuming procedures, in particular since the workflow is paper based and operated manually. More importantly, it may affect negatively expenditure management at the lowest administrative level. When the distribution of “credit openings� within a line ministry is badly organized, they are distributed with some delays. This risks generating arrears if the cash releases do not take into account the payment schedule related to existing commitments. Figure 8 Monthly release of funds and TSA Monthly release of funds Ministry of Finance Budget Programming Issues credit opening - DG CO- (BPDG) Revenues (ANAF ) Agency for tax administration Treasury Treasury and Public Registers CO Single Borrowing (TPDDG) Treasury and Account DG (TPADG) Account Public Debt DG Spending authorities (ordonatori) Main Request Use or transmit CO Secondary Request Use or Payment order transmit CO Ordonantare Tertiary Request Use CO Payment processing 54. Banking services to the Government are provided by the Treasury branch offices network comprising 309 local offices staffed with about 5 000 persons. The treasury network provides financial services functions to the government by processing both expenditure and revenue cash transactions. Accounts of central and local government entities are kept with the Treasury. Payments are made to these accounts through the Treasury information system (TREZOR) within one day. The 14,000 budget credit holders and other legal and natural persons that conduct financial transactions with Government 29 (taxpayers and contractors) have about 25 milllion accounts with the treasury. Annually, the treasury network processes in the range 120 million transactions, a majority being tax payments. 55. While a majority of payments are settled electronically with limited manual intervention, payment orders from spending units are received in paper form. Spending authorities have to bring payment orders (ordonantare) to the Treasury branch offices. This procedure is not only cumbersome, but also necessitates an extensive physical presence of the treasury across the country. Up to now, problems related to the legal authorization for electronic signature prevent the automation of the transmission of payment orders from spending authorities to Treasury branch offices and other applications of electronic processing. At the Treasury branch offices, the payment orders are generally scanned (a payment order includes a bar code) or manually processed to be registered in the Treasury data base. The system records the payment at the aggregate functional (chapter) and economic (article) level and an automatic control is performed by the system to assure that sufficient credit opening is available. Upon receipt of the payment order, the front office performs manual verifications, including of the signature (against specimen), and against a 10 day cash plan. The transaction is then validated and accounted by the back office of the regional treasury office. Payments between accounts in the same location are fully automated, whereas cross-county payments and payments to external banks are settled daily through the level 1 treasury office in Bucharest through its direct access to the Real Time Clearing System (TRANSPOND). The treasury issues monthly account statements to all 12,000 spending units and other clients. Cash and debt management 56. A modern for cash and debt management function has been established and further steps to improve this function are on the agenda. The Treasury and Public Debt General Directorate (TPDGD) is structured around front office, middle office and back office functions in line with best practice in debt management. Unlike the other European countries reviewed as benchmarks in this functional review, this entity remains within the MOPF. In Germany, France and the UK the debt management function has been transferred to agencies, allowing among other things for more flexible remuneration needed to attract high caliber financial talent to this function. 57. Treasury and Public Debt General Directorate (TPDGD) is responsible for the TSA, cash planning and liquidity management. A robust and comprehensive TSA is in place. Financial reports covering the expenditure cycle are produced and there are effective compliance controls, at least for the central government. The TSA is comprehensive, covering both expenditures of about 9000 central and 3200 local government spending units and all major tax and non-tax revenue receipts. The only exception is a number of self financed entities, such as universities and hospitals, which retain revenue from user charges and transactions in foreign currency. TPDGD prepares cash flow estimates and short term borrowing plans to ensure that cash is available to make payments. It prepares cash flow estimates on the basis of data such as the quarterly spending limits, cash release decisions and monthly revenue forecasts prepared by Macro-economic Analysis and Financial Policy General Directorate (MAFPGD). To ensure that the cash plans are based on realistic assumptions, it may correct these forecasts based on past financial records. It has developed methods to prepare in-year and in-months forecasts. However, the main decisions concerning cash outflows are taken by other departments, according to the processes reviewed above. While line ministries submit 10-day operational cash plans to the local treasury offices, these lack accuracy, are paper based and not readily accessible for consolidated cash flow forecasting purposes. 58. Efficiency of the back office function of the TPDGD could be improved through process simplification and automation. TPDGD prepares for each debt servicing payment a request for credit opening and a payment order (ordonantare), which are transmitted to the TPAGD, which is the Treasury branch office for debt servicing. These requests/orders are accompanied by an explanatory note. They are 30 processed manually and paper based. As with other requests and orders of line ministries, they are submitted to both a preventive and a delegated control (see below), despite the fact that debt service payments are compulsory. This has resulted in a fairly large staffing structure with currently 120 positions compared to 35 in Agence France Trésor in France, about 90 in the UK Debt Management (which has mandates beyond debt managemet, including fund management of public sector funds) and 180 in the Finanzagentur in Germany ( which also has mandates beyond debt management, including fund management of public sector funds). Accounting and Reporting 59. Romania has made great strides in adopting its budget classification and accounting methodologies to international standards. Main, secondary and tertiary spending authorities of the State budget and other government entities keep their accounts using the modified accrual accounting method. There is a unified chart of accounts for the central and local government units. The government has already implemented, from 2003 to 2009, 18 International Public Sector Accounting Standards (IPSAS) accrual accounting standards among a total of currently 31 standards. The budget expenditure classification system allows reporting according to the international standards (ESA 95 and GFSM2001). It includes an administrative (organizational), a functional and an economic classification. There is currently no program segment either in the budget classification or in the CoA. 60. Quarterly and annual financial statements are prepared by all 14,000 spending units and consolidated by MoPF. The financial statements include reports on budget execution which shows : (i) the commitment authorization; (ii) the initial payment budgetary credit; (iii) the revised budgetary credit; (iv) the budgetary commitments (reservation of the budgetary credit for a specific use); (v) the legal commitments; (vi) the payments; (vii) the verified expenditures including unpaid expenditures ( cheltuieli effective); a balance sheet that shows assets and liabilities. In parallel, the Treasury Information System is able to produce aggregate budget execution reports on a cash basis, nearly in real time. 61. The reporting process is labor intensive and time consuming. For the State budget financial statements are verified and consolidated by main spending authorities for their subordinated secondary and tertiary spending units. Then, they are centralized by the Public Institutions Accounting Methodology General Directorate (PIAMGD) through a dedicated software application. Similarly, local authorities‟ reports are consolidated by the judet (county) public finance departments, which are divisions of the ANAF. A detailed process analysis showed that for the quarterly reporting process for one tertiary ordinator, around six actors consult 17 systems which involve around 20 high-level steps, including several manual reconciliations. Based on estimates provided during the visits, it is estimated that it took each budget holder around 15 to 30 days to prepare this report depending on the complexity of the organization. For the Secondary and Tertiary Budget Holder, more time is needed to ensure data quality and perform required consolidation. 62. More effective budget management and cash planning would require a shorter reporting period for commitments and reporting the payment schedule associated to the commitments. Quarterly reports are transmitted to the PIAMGD within 45 to 60 days from the end of the quarter under review, meaning consolidated information on commitments made the first month of a quarter is only available 3.5 to 4 months after the end of that month. This poses problems. Absent information on commitments, in-year spending cuts are based on cash disbursements and have sometimes affected funds already committed leading to arrears. Reporting commitments in a timely manner together with sanctions for over-committing and off-budget commitments will contribute to improved fiscal discipline. 31 Budget execution financial controls 63. The internal control environment is structured after the Public Internal Financial Control framework, in compliance with EU requirements. The Law No 500 on Public Finance defines four stages of budget execution (commitment, verification, payment order and payment) and stresses the principle of separation of duties. There is a system of preventive (ex ante) financial control performed by:  internal financial controllers who perform ex ante financial control of all expenditure transactions (commitments, cash opening and payment order–ordonantare) in all ministries and main spending units  “delegated� financial controllers who belong to the staff of the MOF CHU for Financial Management and Control in 29 line ministries or primary spending units. They perform financial controls on transactions above a certain amount, which are generally in the range of 30,000 to 50,000 RON (8,700 to 14,500 USD). These transactions are submitted to a “double visa� system, consisting of both the visa of the internal “preventive� financial controller and the visa of the MOF “delegated� financial controller. 64. The “double visa� system increases the paperwork and risks undermining the accountability of line ministries since their transactions are verified ex ante by a MOF controller. The MOF intends to phase out its delegated financial controls within line ministries by December 2012. After this date, only financial controllers reporting to line ministers will make preventive controls. This desirable measure may need further actions to strengthen internal control within line ministries. Line ministries are preparing a work program for this purpose. The CHU for Financial Management and Control will have to review and monitor these work programs. Internal audit and inspectorate 65. The CHU for internal audit prepares the internal audit methodology, carries out training activities and participates in audits involving several ministries. Each main spending authority and all public institutions with a budget of more than € 100,000 have set up an internal audit unit. There are about 3000 audit units of which 2000 at the local government level. The average number of auditors per unit is low (1.3 at the local government level). This hampers the effectiveness of internal audit. There is, however, a pilot project to group ten internal units of local governments into one center for operational purposes. The development of internal audit in Romania is recent and support of the CHU for internal audit is crucial. 66. There are also inspection bodies including the MOF financial inspectorate, line ministries and a control body that reports to the Prime Minister. The MOF financial inspectorate covers only the MOF and its subordinate agencies. However, the MOF is considering extending the scope of its activities to all spending authorities. There is a risk of duplication of efforts with other inspection/control bodies. It will be preferable to focus the efforts on improving the effectiveness of the existing bodies. Reform Options: 3.1 Further streamline Transactional Banking Services 67. Treasury services could be developed further to keep pace with IT-enabled banking services.  A key precondition for further use of IT-enabled services is clarification of the regulatory framework for the use of e-Signatures and other solutions to ensure secure transactions, an issue also discussed in the IT section of this review. A pragmatic but legally sound solution should be brought about swiftly. It may be advisable to provide a layered system of different requirements 32 (e.g. simple e-signature, secure e-signature, and qualified e-signature in line with the respective EU directive) based on risks associated with transactions.  Roll out electronic issuance of account statements provided the above clarification of the e- signature requirement is accomplished.  Allow for electronic submission of payment orders by spending authorities to the Treasury local offices. Undertake actions immediately, to implement the electronic signature for electronic transmission of payment orders (ordonantare) to Treasury offices.  Automate the credit opening procedures in conjunction with the introduction of an integrated financial management information system (see next recommendation). Automation of the related business processes could be achieved on a common ERP platform covering the MOPF core operations with interfaces to decentralized systems in line ministries. 3.2 Further Develop Computerized Treasury General Ledger 68. Information timeliness and accuracy is urgently needed to support improved financial analysis and decision-making and to comply with new requirements stated in the FRL. The reporting process could be streamlined through the development of a well-designed treasury general ledger module to enhance more transparent reporting through inclusion of information on commitments, accrued assets and liabilities utilizing integrated enterprise planning IT solutions. Actions could include:  In the short term, consider recording commitments in the treasury data base. Contract amounts (for commitment control) and payment schedules (for cash planning) could be registered with the first payment allowing for more timely reporting through queries to the treasury database.  In the longer run, the implementation of a full fledged integrated financial management information system would respond to informational requirements of effective budget management. A computerized general treasury ledger would address the central accounting and reporting functions and processes associated with budget execution, accountability, and cash/other asset management. This includes the collection and dissemination of financial management and accounting information from and to agencies managing expenditure transactions. 33 Box 6 Treasury General Ledger – Functionalities and Country Examples The Treasury Ledger System includes a set of summary control accounts maintaining budget authority and actual spending against authority and handles all posting and report generation from this database. It would have the ability to create transactions, distribute authority (appropriations, apportionments and allocations), record all transaction details as appropriate and consolidate and disseminate information as necessary. Create authority and create transactions  Distribute appropriation and commitment authorizations to spending ministries  Distribute funds allocations to spending ministries  Process electronic transfer of payment Record transactions  Record initial budgets, as approved by the legislature  Record expenditures against commitments and funds allocations (e.g. due to purchase orders or other payments)  Record revenue and other receipts against appropriate account heads  Capture and maintain records throughout the year such as: initial and revised budgets; budget transfers for a typical spending unit; commitments incurred by spending units against approved limits and appropriations; funds allocations against appropriations and any subsequent changes Consolidate and disseminate transaction information and reports  Print consolidated payment instructions for action by the banking system  Consolidate data from all ministries and regional offices as necessary  The system would facilitate/support easy retrieval of data in system databases in a variety of formats  The system would also have good reporting capabilities and be able to produce commonly required accounting and management reports Country Examples: Many countries have implemented general ledger systems. Some examples are presented below: Australia. The Accrual Information Management System (AIMS) is the central budgeting and reporting system. The spending agencies have their own management systems and post every month accounting summaries in the AIMS. The two key outputs of AIMS are the production of the Budget documentation, including the Appropriation Bills, and the production of monthly and annual financial reports. France. Payment orders and all cash transactions go through the treasury system without exception. A budget execution system centralizes data on commitments and payment orders. Both systems are linked with spending agencies. Spain. All government transactions are processed through the system, which registers up to six different stages: budget allocation, commitment, verification (actual expenditures), payment request, payment order and payment. Budget preparation (with several rounds of interaction) also goes through the system. The system performs accounting and reporting functions. Electronic links are being established with all spending units. United States. The General Ledger System registers expenditure at different stages in the budget cycle. Spending agencies have their own management systems that are linked to the general ledger and must comply with its standards. For budget preparation there is a separate system. Source: OECD Handbook Managing Public Expenditure A Reference Book for Transition Countries. World Bank Treasury Reference Model. 3.3 Streamlining the organizational arrangements 69. Some organizational realignment may be conducive to better coordination among core treasury functions that are currently assigned to different general directorates. While segregation of an integrated debt and cash management function and other budget execution functions is found in other 34 countries, payment execution, accounting and reporting functions are often organizationally integrated into a treasury department. The following organizational realignment may strengthen the coordination among budget execution related functions:  The Budget Programming General Directorate should focus on budget preparation and revision. While it has an important role in monitoring budget execution and in managing virements and out of season budget requests.  A unified treasury department could be created responsible for payment processing, accounting and reporting. This department would oversee the operation of the regional branch offices, monitor and analyze disbursements and commitments and prepare monthly cash outflow plans. These plans would be used to define monthly cash limits for payments within a treasury single account and they would also inform the overall cash planning conducted by the cash and debt management department. The department would also be responsible for issuing accounting policies and consolidate quarterly and annual financial reports, together with any ad hoc reports. The business of the department would be supported by an integrated financial management information system. Figure 9 Proposed Organizational Structure of Treasury Function at Headquarters Directorate General Treasury & Public Accounting Budget Execution Accounting & Financial Reporting Operations Support & Execution Monitoring & Accounting Financial Reporting Oversight Cash Release Methodology Territorial Territorial Territorial Treasury Treasury Treasury Offices Monthly Cash Outflow Plans Directorate General Offices Offices Cash & Debt Management  The number of Treasury branch offices (309) could be consolidated with advances in electronic transaction processing (see Box 6). Determining the optimal size of the Treasury network will require taking into account elements such as the size of geographical area served by these offices, variations in transactions workload, the implementation of the registration of commitment transactions suggested above and the new functions that could be assigned to the Treasury branch offices, such as the review of local governments budgets. Therefore, a specific review should be undertaken to identify the actions that can be considered to streamline the Treasury branch offices network. Such an action should be coordinated with the reorganization of the about 400 ANAF local offices which is discussed later in this report. 35 Box 7 Reorganization of Federal Cash Offices in Germany Germany established a centralized payment system in conjunction with the introduction of a treasury single account in 1969. With the exception of the Federal Ministry of Defense (which initially maintained its own payment operations), the Federal Cash Offices (Bundeskassen) assumed responsibility for making and receiving all payments related to the federal budget. Organizationally, the federal cash offices are part of the customs administration and report directly to the head of the locally responsible federal finance office. Technically, they are subordinated to the Federal Ministry of Finance. The TSA is operated at the Central Bank and all payments are affected through this account (and its sub-accounts). Budget holders may maintain limited imprest accounts to execute cash payments. The use of modern IT enabled payment methods has resulted in a restructuring of the cash office operations. In 2000 there were 17 federal cash offices with 1,505 staff. In addition there were 11 cash offices responsible for payments related to the Federal Ministry of Defense employing 512 staff. A gradual restructuring was initiated in 2000 to i) merge the cash offices of the Federal Ministry of Defense ii) to centralize operations in fewer locations. The territorial network was reduced to 4 federal cash offices responsible for all payment transactions, including those of the Federal Ministry of Defense employing about 1000 staff. In addition to the savings related to the reduction in staff, the reduction in locations meant lower operating costs. Further efficiency gains are expected with the further development of the IT environment employed in the cash offices and in particular with the increased use of enterprise resource planning solutions at the level of budget users. 3.4 Further Improve Debt Management Functions: 70. Building on the successful establishment of a modern debt management function further steps could be undertaken to improve liquidity management.  Most importantly, cash planning could be enhanced by establishing cash management committee, comprised of the Macro-economic unit, the budget execution unit, ANAF and the debt management unit. Regular bi-weekly jour fixe could underpin short term projections of cash needs. With advances in the Financial Management Information System, payments schedules and short cash forecasts of spending units could be captured from spending units and made available for consolidated cash outflow planning.  The institutional Framework and infrastructure for direct market participation of the state treasury could be enhanced. This could include upgrade of the primary market auction system and make it electronic via a platform to be decided upon. Clarify regulatory framework to allow e-auctioning. In the longer run, the state treasury should also be enabled to directly trade in secondary market (use repos and buy backs).  The Risk Management Function of Debt Management Department (State Treasury) could be strengthened. The capacity of the Middle Office to perform financial market monitoring and analysis would need to be expanded. Better risk analysis could provide the basis for active risk management through debt portfolio management and hedging of market risks.  Automate debt service payment procedures. A simplification of the business process for debt service payments could be considered, possibly including bulk approvals for legally binding payments in accordance with loan agreements and elimination of preventive internal control requirement for those payments. An end to end electronic payment processing for debt service payments could be developed. 36 Coordination of EU Structural and Cohesion Funds 71. Romania is programmed to receive substantial funding from the European structural and cohesion funds. For the current programming cycle 2007-2013, Romania is allocated about EUR 19.2 Billion. Together with the domestic co-financing, public expenditures will amount to EUR 23 Billion, equal, at an annual rate, to more than 2 percent of GDP or 6 percent of public expenditures. This is roughly double the transfers received under the pre-accession programs, PHARE and ISPA). These funds represent critical resources for the country both for short term recovery from the economic crisis and long term convergence to EU income levels. EU funds assume even more importance, as domestic revenues are under pressure and access to financing remains restricted. Procedures for the use of structural funds require programmed funds to be used within a maximum of 3 years after the year of commitment ("n +3" rule), and funds are automatically de-committed if no payment application has been received by the end of the third year following that of the budgetary commitments. Figure 10 EU Fund Absorption Rates in EU10 Countries (end of 2009) Slovenia 35 18 Lithuania 41 17 Latvia 38 13 Estonia 44 12 Hungary 39 10 Czech Republic 25 Contracted Ratio 8 Poland 23 7 Absorption Slovakia 27 5 Bulgaria 23 4 Romania 16 3 0 10 20 30 40 50 Percent Paid/Programmed Expenditure Source: KPMG EU Fund in Central and Eastern Europe Progress Report 2007-2009. 72. Absorption of EU structural funds is the lowest among EU 10 countries. Most new member states faced initial bottlenecks in the implementation of structural funds and the youngest member states, Bulgaria and Romania are no exception. As of July 2010, about EUR 7.9 Billion, financing for more than 3,200 individual projects of both local authorities and private companies, were contracted but only EUR 0.9 Billion paid out. On a time proportionate basis24, the contracting rate equals 38 percent (end of 2009) and absorption 6 percent. Without acceleration in fund absorption, the n+3 rule could result in decommitment of initial funds by the end of 2011.25 This imposes a potentially large opportunity cost in foregone investment and may undercut future funding levels which assume absorption of EU funds. 73. Absorptive capacity seems to face constraints across the entire project cycle. The low contracting ratio suggests problems in the project preparation, appraisal and approval stages. Once approved and contracted, disbursement performance, measured by the ratio of disbursed to contracted funds, lags behind the EU 10 average. By the end of 2009 Romania had paid out 19 percent of the contracted funds, compared to 30 percent for the EU 10 average. This suggests that the rate of project implementation, procurement and processing of payment applications needs to be improved. 24 Time proportionate contracting and absorption rates assume a leveled absorption pattern over the programming cycle. 25 A decision by the Council of the European Union suspended the n+2/n+3 rule for funds committed in 2007. 37 Table 5 Financial Performance across Operational Programs (as of end of 2009) Programme Contracted Disbursed Contracting Disbursement Absorptio dEU Ratio Ratio n Ratio Contributio n Operational Program A B C B/A C/B C/A Technical Assistance 170 28 1 16% 4% 0.59% Administrative 208 41 1 20% 2% 0.48% Capacity Increase in Economic 2554 542 120 21% 22% 4.70% Competitiveness Human Resources 3476 643 67 18% 10% 1.93% Development Regional 3726 1166 185 31% 16% 4.97% Environment 4512 1037 182 23% 18% 4.03% Transport 4566 206 31 5% 15% 0.68% Average 19% 12% 2% Source: KPMG EU Fund in Central and Eastern Europe Progress Report 2007-2009. 74. Romania’s programming framework is relatively complex, reflecting the complexity of its economic development challenges. The current programming framework has seven Operational Programs (OP): Transport (EUR 4.5 billion), Environment (EUR 4.5 billion), Regional development (EUR 3.7 billion) Human resources (EUR 3.4 billion), Economic competitiveness (EUR 2.5 billion), Development of administrative capacity (EUR 208 million), and Technical assistance (EUR 170 million). The complexity of the programming framework affects the number of institutions involved in the management. For each OP, there is a designated managing authority and a single certification body. The number of OPs in Romania is not excessive in comparison to the other EU10 countries. The average number of OPs is 9. But it is noteworthy that the top four performers among EU 10 countries are all small countries that have considerably less complex programming frameworks. Slovenia, Estonia and Latvia have only three operational programs, and Lithuania has four. While the design of the programming framework is driven by multiple considerations, including the number of eligible NUTS regions and policy objectives, administrative design should be taken into consideration and fund management can be improved by streamlining the programming framework, allowing for a higher degree of concentration of administrative capacity and specialization. 75. Contracting and absorption ratios vary across OPs with the transport program, the largest of the OPs, lagging the most. Contracting ratios vary between 30 percent in the regional program and 3 percent in the transport program. Equally, disbursements to beneficiaries stand at 5.7 in the regional OP and only 0.6 percent in the transport program. The contracting ratio in the transport OP is low compared to average contracting ratios of 23 percent in the transport sector across EU 10 countries, suggesting particular bottlenecks in this sector in Romania. Delays seem to occur primarily in the approval and contracting of projects, most likely due to the complexity and longer preparation and approval processes required. Once contracted, downstream processes in the transport sector related to the reimbursement of expenditures seem to be working reasonably well, at least with the current (low) transaction load. In contrast, the low disbursement ratios (ratio of payment against contracted amounts) in the technical assistance OP and administrative capacity OP, suggest problems related to downstream contract implementation and/or payment procedures. 38 Figure 11 Disbursement and Contracting Rates across Operational Programs 6 5 Disbursed Contracted Programmed Billion EURO 4 3 2 1 0 Technical Administrative Increase in Human Resources Regional Environment Transport Assistance Capacity Economic Development Competitiveness Operational Program 76. Absorption is adversely affected by a number of constraints at the level of beneficiaries, managing authorities. A first set of constraints relates to financing capacity. The tightening of liquidity after the financial crisis has worsened lending conditions and access to funds for pre- and co-financing of projects, in particular for private sector beneficiaries but also for local governments. The Government is trying to address this problem through a guarantee fund that can be accessed by local authorities, higher education and research institutes. The recent step by the Council of the European Union to make available EUR 278.4 Million for advance financing also helped ease liquidity. A second set of issues relates to the administrative capacity to process, appraise and approve project proposals. This concerns the staff numbers, capacity and processes in managing authorities. Lastly, investments in educating beneficiaries about the opportunities available through structural funds and enabling them to design and prepare sound project applications could help improve quantity and quality of applications. Reform Options 77. Increased absorption of EU funding is a key Government and MOPF priority. Increasing absorption rates will require concerted and systematic efforts. While the MoPF is only one of many relevant players, as the coordinating authority for EU structural funds, it is expected to play a key role in leading this effort. 4.1 Enhance Administrative Capacity 78. Initial steps have already been taken, including the enactment of an ordinance to prioritize recruitment for positions related to the implementation of EU programs, and paying additional remuneration to staff involved in EU structural funds absorption. But administrative capacity remains an impediment. Reinforcing these efforts the following actions should be considered:  Government should fully implement the ordinance to prioritize staffing allocations related to the implementation of EU programs.  Specific efforts should be made with regard to the Ministry of Transport, the managing authority for the transport OP, including an immediate staffing needs analysis.  The MOPF initiative to request actions plans from all managing authorities on how to address bottlenecks is very appropriate. Once approved, action plans should be used as a basis for monitoring their implementation. Regular Cabinet level progress updates should be considered together with GSG to provide the necessary political clout to assure timely implementation.  It may also be worthwhile to review the OPs with higher contracting and absorption rates to find out whether something could be learned that would help other OPs. 39  Finally, the low disbursement ratio under technical assistance and administrative capacity suggest bottlenecks in the implementation of approved projects which should be examined. However, given the small size of these OPs this may be accorded a lesser priority. Box 8 Actions to improve absorptive capacity in selected EU 10 Countries Estonia: Estonia’s Government focused primarily on simplifying procedures for the implementation of OPs. It also undertook a re-assessment of the programming framework in light of the changed economic environment and allocated funding among OPs to reflect changed priorities. Hungary: Hungary undertook a substantial reprogramming exercise to address post crisis economic recovery. The reprogramming also shifted resources from low disbursing to high disbursing OPs. Slovakia: Slovakia reviewed the business processes and service standards for the processing of project applications and payment applications. It also improved the guidelines and outreach during specific calls for proposals to resolve possible uncertainties in advance. It also established on e common set of co-financing rules for all OPs. Bulgaria: Bulgaria implemented a number of actions, akin of those being implemented in Romania, including simplification of processes and procedures related to the management of EU funded projects, establishment of Fund for Local Authorities and Governments to provide financial assistance to eligible local authorities and municipal enterprises, that would otherwise face liquidity constraints, to leverage funds from the EU structural and cohesion funds. The Government also restructured oversight by relocating the function of central coordination of EU funds management from the Ministry of Finance to the cabinet administration and by establishing a council for the management of EU funds to advise the Government on related policies. Czech Republic: The Czech Republic undertook specific actions to ease liquidity access for the private sector, including the establishment of joint working group between banks and municipalities to set out common procedures for the assessment of creditworthiness of project proposals. It also increased the number of calls for some of the OPs. 4.1 Enhance Financing Capacity 79. The Government has already begun to address financing constraints, but further actions in that direction should be considered, especially in regards to linking the EU structural funds more closely to the national budget :  As part of the 2010 budget preparation process (and beyond), MoPF should require all Line Ministries (public beneficiaries) to identify where EU structural funds could be accessed to finance capital and other outlays eligible under these programs and make sure co-financing for EU funded projects is prioritized. Especially for key strategic sectors (transport, energy, research and development, rural development) leveraging EU funds should become the main strategic thrust of the national budget. To reinforce this strategic focus, close coordination between coordinating authority and the budget department during the budget dialogue with the line ministries is essential.  Provide Medium Term Allocations for co-financing to increase resource predictability in the context of the development of comprehensive MTEF.  Monitor utilization of budgetary co-financing provided to public beneficiaries and allow for re- allocation to disbursing projects. 40 Revenue Administration 80. Revenue administration reform is a key priority of the Romanian Government. Major organizational initiatives have been taken in unifying the collection of tax and social security under a single organization, the National Agency for Fiscal Administration (ANAF), which also includes the Financial guard and Customs. ANAF headquarters is organized along functional lines and has developed a strategic planning process. Tax administration modernization is guided by the ANAF strategic plan 2009 – 2012. Taxpayer segmentation has been introduced for better compliance management, with the establishment of a directorate general for large taxpayers and special arrangements to manage taxation of medium-sized businesses. The large and medium taxpayer population has been expanded with 669 additional taxpayers moved to the LTD and more than 9,000 additional taxpayers moved to medium taxpayer offices. Risk-based audit selection and e-filing and e-payment have been introduced (although they have not really taken up) and a call center has been set up. A centralized printing facility to issue notices and reminder letters was established in July 2009. The efficiency of the refund system has been strengthened, and the total amount of delayed refund payments has decreased by 43.2% in 2009 compared to 2008. The communication and services function has been strengthened and the performance monitoring system has been expanded. 81. Despite these measures, major challenges still remain, in particular, with regard to improving the performance of the revenue collection system and facilitating voluntary tax compliance. During the recent financial crisis revenue performance has declined. In 2009 revenue collection decreased considerably26and the tax/GDP ratio dropped from 27.8% to 27.3%. The compliance burden on taxpayers is high: the Doing Business Paying Taxes 2010 Report ranks Romania only 149th with regard to the ease of paying taxes, with the number of annual tax payments totaling 113 – one of the main reasons for the low ranking.27 Tax arrears are growing rapidly, in particular arrears accumulated by large taxpayers which have increased by 70% since the start of 2009. VAT efficiency is decreasing noticeably. The ratio of gross VAT collection to GDP has fallen by almost 17% between the first quarter of FY 2009 and the first quarter of FY 200828. VAT collection for the first 6 months of 2010 are 3.6% less than for the same period in 2009. Organizational arrangements, roles and responsibilities for Revenue Administration 82. The National Agency for Fiscal Administration (ANAF) is responsible for all revenue administration functions. ANAF is responsible for the administration of all national tax revenues, including VAT, CIT and PIT as well as customs and social security contributions. ANAF has a total of 34,000 positions of which 30,000 are currently occupied. ANAF Headquarters in Bucharest has around 1,000 occupied positions. ANAF has a two tier territorial structure with regional offices in the 42 counties (Judets) and approx. 362 sub-county offices holding around 24,000 occupied positions for tax administration, SOE audit and treasury.29 Operational offices are organized functionally with departments for taxpayer registration and return filing, taxpayer information, enforced collection, treasury and audit. In addition, the customs administration is also subordinated to the President of ANAF. Customs with around 4,300 occupied positions also maintains offices in the 42 Judets and a local presence at a number of 26 Net collection decreased by 6.4% from 143,145 MLei to 133,915 MLei. 27 Romania ranks 182 th out of 183 countries analyzed with regard to the number of tax payments required; only Ukraine requires more tax payments than Romania. 28 Net VAT collection decreased from 40,873 MLei in 2008 to 34,322 MLei in 2009. 29 Apart from revenue collection and administration, financial audit of State Owned Enterprises (SOE), price control and treasury functions are also tasks of the regional and local ANAF offices. The treasury departments have a dual reporting line: both to the head of the local or regional office and a functional line to the treasury within the MoPF. The role of these local treasury offices is also discussed earlier in the budget execution section of this report. 41 locations inland and along the external EU borders with Moldovia and Ukraine. The financial guard, the third organization reporting to the President of ANAF, also has 42 Judet offices and a staff of nearly 1,400 occupied positions. Improving Compliance Management 83. Romania has begun to implement taxpayer segmentation to drive both the approach towards different taxpayer groups externally as well as the deployment of resources internally, but further refinements of this approach could improve efficiency. In line with practices in modern tax administration segmentation of the organization and compliance approach by size of tax payers is intended to direct more (human) resources to the small number of tax cases that really need professional attention because of amount of tax at stake, risk of fraud or other economic or strategic reasons. As shown in Figure 13 Romania presently has around 2.25 million active taxpayers of which -under current thresholds- about 2,000 are classified as Large Taxpayers, 250,000 as Medium Taxpayers, and the remainder as small taxpayers. An analysis of the revenue yield across the different segments suggests that some refinements to the classification could potentially enhance the targeting of resources and the compliance approach. Figure 12 Taxpayer Segmentation Large taxpayers (± 2.000) Medium size taxpayers (±250,000) Small taxpayers (±2 million) 84. Large Taxpayers currently account for under 40% of the total revenue which is low by international standards, where typically Large Taxpayer Offices (LTO’s) generate 50 to 70 % of total revenue. Further analysis should clarify to what extent this is due to the heavy emphasis on (partly) State Owned Enterprises (SOE‟s) in this segment, to the existing single threshold or to a lack of effectiveness in particular in the audit function. The threshold for medium size business taxpayers (Ron 6.7 million, € 1.6 m.) appears high, causing fairly large taxpayers to escape serious scrutiny. Compliance policy for the small taxpayer segment should involve such measures as: a. abolishing small and inefficient taxes and levies b. developing third party information flows c. providing taxpayer services and education d. diminishing the number of tax returns and payments e. facilitating e-filing Recently many tax administrations focus on High Net Wealth Individuals (HNWI)30. This will be beneficent to Romania also. HNWI increasingly, both through complex legal and business structures and 30 OECD Forum on Tax Administration, Meetings of January 2008 and May 2009. 42 through outright fraud, seem to evade taxation. The amounts of revenue at stake often are considerable. Highly professional intermediaries like tax consultants tend to be involved. This segment in many countries sets an example for society as a whole and also for that reason attracts attention. 85. Current compliance management across all segments continues to be heavily focused on a large number of audits and enforced collection activities which are costly to both ANAF and the taxpayer. While high risk, high revenue VAT refunds are prioritized for audit, overall risk analysis is still at a rudimentary level resulting in limited audit capacity being stretched across in inordinate number of cases. ANAF dissipates an unduly large amount of resources in following relatively small cases and in scrutinizing a large number of VAT refund claims without using risk management to focus mainly on risky claims. This is aggravated by the by the almost exclusive use of comprehensive audits or VAT refund audits31 and the limited variation in the types of audits according to risk and revenue at stake. 86. Equally, ANAFs investigative wing, the Financial Guard, performs a large number of investigations but only few are actually prosecuted. Criminal investigation and prosecution should be the ultimum remedium of tax administration. Most cases of underreporting can be handled by imposing administrative fines. The function of criminal tax cases is predominantly that of general and not special prevention meaning they serve as a deterrent for tax fraud rather than as an instrument to recover foregone tax revenue associated with the particular case. Good selection and preparation of cases is key to creating the necessary high profile publicity. Tax investigation in Romania is the responsibility of the financial guard. However out of several thousand cases per year only very few are prosecuted and in 2009 only three convictions were achieved.32 This indicates serious problems with either the selection of cases, or the quality of investigations and/ or arrangements with the public prosecutors. Reform Options: 5.1 Strengthen compliance policy 87. The thresholds for large and medium sized taxpayers could be reviewed. It should be determined whether the reason for the comparatively low yield in the large taxpayer bracket is partly due to the (level of the) current threshold. A multiple threshold (turnover, assets, number of staff) could be considered. Group relations should be taken into account. In the light of the fact that a recent addition of over 500 taxpayers has not resulted in a significant rise of Large Taxpayer Revenue also the effectiveness of current audit practices and the training level of audit staff should be reconsidered. In line with IMF recommendations the threshold for medium sized taxpayers should be lowered to the VAT registration threshold of € 35,00033 so as to categorize small business taxpayers as those not requested to register for VAT, which corresponds to international good practice. 88. In addition, a comprehensive compliance policy should be further developed to better target different types of risk, starting at the front-end drafting tax law in such a way that compliance risk is reduced, following up through taxpayer services and education, the use of third party information and finally through selective deployment of limited professional resources.  Selective, risk based audit and enforcement are key to effective compliance management and efficient use of limited resources. Institution-wide risk management should be developed 31 The preference for comprehensive audits seems to stem from the idea that the auditor is personally accountable and has liability with his private assets for the completeness and quality of his audit activity. 32 For example, while the Financial Guards sent about 5000 cases in 2009 to the prosecutor‟s office, only 3 resulted in conviction. A more targeted investigation on fewer cases would, in all likelihood, have resulted in more convictions and a greater deterrence to evasion. 33 Romania. Improving Tax Compliance and Further Reforms; Story, Burgess and Casey, 2010. 43 deploying resources according the level of risk involved and amount of revenue at stake. This would include the use of computerized audit selection and more flexibility in the type of audit with partial audits34 (like a VAT refund audit) depending on the risk assessment the tax administration has made.  The selection of cases for investigations should also be improved to reduce the number of investigations and improve the quality of the cases. Arrangements with public prosecutors could be discussed on the yearly number of cases to be submitted to them and the percentage they would actually bring to court.  In the large taxpayer segment compliance should be encouraged through specialized taxpayer services and increased effectiveness of the audit function, in particular through improved risk analysis and increased audit coverage. Development of audit methodology and permanent education of audit staff should be invested in. A certain amount of specialization within the LTO could be considered by creating specialized units for certain industries like the financial and insurance industry or in the case of Romania the oil industry. International co- operation and exchange of information can be especially useful in this segment.  The cornerstones of enhanced compliance management in the medium taxpayer segment are reduced compliance costs and computerized risk management directing audits towards those taxpayers where risk of fraud and amount of revenue at stake are significant. Simplification of the tax system and reduction of compliance costs is important for the medium business taxpayer segment to enhance voluntary compliance and to improve the business climate, thus generating economic growth and employment. Tax return procedures, for example, could be limited to one yearly for corporate income tax and quarterly returns for withholding taxes, social contributions and VAT for the majority of medium size business taxpayers, confining monthly returns only to those businesses with larger wages and turnover (say over € 100,000). The expansion of E-filing could contribute to reduced compliance costs. In addition, efforts of the tax administration for this segment should aim at enhancing third party information, improving (computerized) risk assessment and audit selection, diversifying types of audit, directing scarce professional resources to those cases that are significant both from a viewpoint of special as well as general prevention.  For small private and business taxpayers the main objective will be to reduce the need for direct contact with the tax administration and to enhance voluntary compliance. The handling of small taxpayers should absorb relatively little resources and should in due course be computerized completely. Revenue at stake per case is small and opportunities for underreporting can be reduced through the use of third party information. Although the 2005 changes in the personal income tax law (introduction of a flat income tax) allow over 90% of natural persons to stay outside the system, further simplification of the tax system could be considered. Also, the number of tax payments, together with the number of returns, should be reduced and cash payments should gradually be replaced by bank transfers. E-filing should be made easy and free of charge. For information and taxpayer services the internet should be made the preferred channel with call centers playing a supplementary role.  Abandoning the voluntary VAT registration below the € 35,000 threshold would discard close to 400,000 VAT filers and significantly reduce administrative costs. The desirability to do so should be seriously considered even if it might be argued that this would impose an additional burden on capital input for small businesses. We find from ANAF data that voluntary registration in 2009 added almost 400,000 VAT-filers with an average yearly turnover of € 6,200 receiving average yearly refunds of € 525 thus generating a negative VAT revenue of over € 200,000,000. Noting that around half of all VAT returns are negative this could also indicate that voluntary registration facilitates considerable VAT fraud. 34 Only part of the administration could be audited, related to one year or to several years and comprising all or only specified returns. Also selective audits could be done in reference to a specific piece of third party information. 44  Further development of the High Net Wealth Individuals segment should also be pursued. As a result of recent changes in the law ANAF now is able to use indirect methods to establish income and expenditures if the taxpayer does not provide requested information. The establishment of a special intelligence unit is foreseen for later this year. It could be considered to later on evolve this unit into an operational office for HNWI and related entities. Furthermore, a program and rules for voluntary disclosure could be considered.  The envisaged shift in the compliance management approach will require an alignment in human resources. Investing in an efficient training program for new staff members and existing staff will need to complement organizational and procedural reforms. In particular, there will be increasing need for experienced auditors and taxpayer service experts. Reducing Administrative Costs 89. A comparison of the administrative costs of the Romanian tax administration with OECD and a number of non-OECD countries presents a mixed picture. Benchmarked on total costs as a percentage of aggregate revenue Romania scored 0.91% in 2007, which puts it in the lower middle bracket although this comparison does not take into account that ANAF –unlike some of the comparator countries- is not responsible for the administration of taxes like Real Estate Tax, Inheritance Tax, Wealth Tax and Motor vehicle Tax, which tend to be more costly than PIT, CIT and VAT. Benchmarked on the number of the population per employee of the Tax Administration (713; 2007) Romania is average. The number of registered taxpayer per employee35, however, is quite low (256 taxpayer per emp.; 2007). The number of actual filers per employee (at 80 filer per employee), a more accurate reflection of the overall workload is significantly lower reflecting the flat PIT which reduces the number of returns filed by individual taxpayers. 1.40 Taxpayers per Tax Administration 1.20 Employee (in Thousands) 1.00 0.80 0.60 0.40 0.20 - Average N. Zealand Sweden Romania France Italy Ireland Finland Netherlands Bulgaria Estonia Portugal Poland Denmark Canada Turkey UK Slovak Rep. Korea Greece Slovenia Austria Hungary Germany Singapore Japan Cyprus Norway Latvia Switzerland Spain Australia Belgium Czech Rep. Malta 90. The extensive office network contributes to increased collection costs and results in significant imbalances in the allocation of resources across the organization. The current business model of ANAF heavily relies on direct contacts with taxpayers at the local tax office which undermines cost efficiency. As around 60% of total tax revenues are collected by the Large Taxpayer Department (LTD) and the Bucharest offices, the contribution of many of the local units to revenue collection is minimal. Moreover, there are significant imbalances between resources and workload between offices. Large, and especially the Bucharest offices are overextended while small offices in rural areas with less economic activity have much lower workloads and collect little revenue. This is shown in. 35 OECD 2008 mentions 6,5 million PIT filers for 2007. This is the potential number. The actual number of filers is close to 2 million. 45 Table 6 Workload distribution across regional tax offices Regional office # of tax filer per ANAF employee Amount of tax and social security revenue per ANAF employee (Million Lei) Bucharest 157.8 12.4 Cluj 105.1 5.3 Timis 92.8 5.4 Ilfov 83.7 9.7 Ialomita 31.1 2.2 Giurgiu 35.4 2.3 Source: ANAF. Reform Options: 91. Taxpayer services should be shifted from direct contact in local offices to (centralized) Call Centers and the internet. These channels are more cost effective and also allow for standardized information and quality control mechanisms. 92. The number of territorial offices could be consolidated, once an IT enabled service delivery model has been developed. In the longer run, offices at the county level would be sufficient, in conjunction with specialized offices for large and medium sized taxpayers. However a thorough downsizing of the number of local offices must be preceded by improving IT support and web-based taxpayer services and by facilitating e-filing. Further in-depth analysis should show where potential cost savings could be found. ANAF‟s business strategy should probably develop along the following lines:  develop an integrated IT platform that will support all core business functions:  registration  filing  audit selection  payments and collection  introduce and stimulate e-filing across the board  consolidate the field office organization  reduce the overall workforce and establish extensive retraining programs. Reducing Compliance Costs 93. High compliance costs in Romania are caused by a large number of tax returns and payments required for taxpayers under the existing procedures. In terms of the number of payments Romania ranks 182 out of 183 in the World Bank “Ease of Doing Business� Survey 2010. This has a negative impact on Romania‟s overall ranking in “Ease of Taxation� (149 out of 183). There ar e a number of reasons for the high number of tax returns and payments, including:  The current requirement for separate returns and payments for each PIT taxable transaction, for example rental income has undermined the advantages that are associated with the flat PIT rate which in principle would allow most of the individual taxpayers to stay outside the system  ANAF now also collects contributions for the three social security houses. Employers however, due to the different basis for withholding tax and each of the three contributions have in fact to calculate and file four separate returns. An effort to harmonize the basis for the four levies is underway. Although this is a difficult undertaking it is very important for cutting compliance costs to achieve this harmonized basis. 46 94. The impact of the large numbers of returns and payments is aggravated by the fact that most interactions take place through physical visits to tax offices for both returns filing and payments. While E-filing is possible for registered taxpayers, the costs associated with the required qualified electronic signature have discouraged the use of this channel. Reform Options: Reducing compliance costs is a priority since high compliance costs are damaging to business climate and discourage voluntary compliance. A number of actions could be taken to reduce compliance costs:  Stimulating e-filing is the first priority. Opening up e-filing for all taxpayers in 2011 at the latest should receive serious consideration, even if this would have to be implemented as a stand- alone option for the time being (in absence of integrated tax administration wide IT systems). The present system, which generates the paper based tax return form with a bar code could form the core of a temporary application, which could later be integrated into an overall architecture. Issuing online receipts for returns should be part of the concept, since the demand for certainty is one of the reasons taxpayers now file in person at the office.  Gradually abolishing cash payments at the tax offices should also have priority. Many modern tax administrations have abandoned cash payments because they are costly to both the taxpayer and the tax administration. They also create a security risk. A further move away from cash payments to bank transfers would thus be desirable. If commercial Banks which are used as intermediaries, charge transfer fees these could be borne by the tax administration. In addition, electronic payment service maybe offered directly by the treasury (an issue also discussed in the budget execution section of this report).  An effort to harmonize the basis for the four levies is underway. Although this is a difficult undertaking it is very important for cutting compliance costs to achieve this harmonized basis. Box 9 International Experience - Tax Administration Reforms Modern concepts of self assessment and use of risk based audit selection requires very few tax offices - one for large taxpayers and a few regional offices for medium tax payers; the old approach of territorial presence of tax offices has long been given up in many countries with the advances in IT and communications. Example: US has just 5 data processing centers for the whole country; Bulgaria has recently reduced the number of regional offices from 350 to 30 tax offices in synch with a modernization of processes and investments in IT. Equally, the Czech Republic is reducing the number of regional tax offices from 210 offices to 14. Management of Information Technology 95. Information technology is a critical enabler for a modernized MOPF. Along with changes in processes and procedures, strategic investments in information technology can be leveraged to yield internal efficiencies, cost reductions and performance improvements in the way MoPF operates. It would enable further automation of routine tasks, such as transaction processing, and enhance fast exchange and analysis of financial information needed for effective budget management and decision making. 47 Current Application Portfolio 96. MOPF has invested significant resources in the modernization of its IT environment. In the last few years, there have been major IT improvements financed by World Bank and EU programs. The technology platform at MoPF is relatively up to date given the major IT investments in mid-2005. All hardware is covered by appropriate support and maintenance arrangements. However, given funding issues, upgrades and equipment replacement are not programmed in the IT investment plan even as the assets are beyond their normal life expectancy. There are approx. 45,000 IBM PC compatible computers in use at the MoPF, using Microsoft Windows (especially Windows XP), Lotus Notes Client and Office applications. The MoPF possesses a significant server hardware infrastructure with approximately 800 servers with Intel and Power processors. The current network architecture uses a standard multi-zone configuration consisting of the following zones: DMZ, applications and database zone. The various systems in the zones are configured to be highly available using IBM's high availability cluster multiprocessing running AIX. Systems are themselves secured using Tivoli Access Manager. The network infrastructure is distributed over three levels: central level located in Bucharest, county level located in each county capital and local located in the country at local community level (LAN: all equipments connected, WAN: all 600 buildings connected, Security: firewalls, routers with encryption, smart cards). 97. The current IT infrastructure and systems are based on a large number of custom built applications that could be better integrated. Production systems exist to support major business processes, including budget preparation, payment processing and reporting. Most of these application systems have been developed in-house by DGTI staff and with support from software vendors (e.g. Oracle) and are thus customized to the requirements of the MoPF. The current IT systems are a combination of legacy systems supported by older technologies (e.g. Microsoft Visual FoxPro-based, Oracle 8i), and newly developed web-based applications available on the Intranet and Extranet supported by newer technologies (e.g., Oracle 10gR2, IBM WebSphere Application Server). Data bases are stored on a large number of client servers at county level treasuries or at the level of budget holders. The current strategy is to move from a Client/Server Distributed Database Architecture to a Web Applications Architecture with a centralized Oracle Database. This migration is currently underway. Figure 13 Current MOPF Application Portfolio 48 98. Data cannot be seamlessly shared across functional boundaries. This, together with uncertainties about the requirements related to e-Signatures (discussed below) has posed constraints to automation. There is a lack of end-to-end automated processes and manual intervention is required draining an inordinate amount of human resources to validate and reconcile information. It has also resulted in a lack of reliable and timely data on budgetary commitments and detailed budget execution. Apart from aggregate reporting on cash disbursements no other fiscal data is readily available across all counties. Functional Gap Analysis 99. The budget preparation module has the main functionalities required to support budget preparation. BUDGET-NG allows for the capturing and reconciliation of budget requests and, based on these, produces the consolidated budget documentation. BUDGET NG is not interfacing with the treasury application. 100. A core treasury application is in place. TREZOR is used for the processing of payments. Payment order processing is partially automated, with desktop applications used to generate payment orders with barcodes. The payment orders are taken by representatives of the budget holder to the local treasury, where quality controls and verifications are performed and payment is processed. Currently, the data associated with processing of the payment orders by local treasuries is captured in local databases and replicated daily at the center through batch files. Data is recorded at the highest level of the economic and functional classification. The payment information also contains a unique identifier (Taxpayer Identification Number) for the spending unit or tax payer (in case of tax payments). 101. The budget is controlled through budget credit openings which are processed manually. The related section on budget execution provides a detailed description and analysis of this process. Credit openings are registered centrally in CREDITE and then sent via postal mail to the designated local treasury offices which re-enter them into the local TREZOR databases. BUDGET-NG currently integrates with the CREDITE at the central level and automatically validates whether the credit opening is within the approved budget. At the same time, the credit openings system (CREDITE) is integrated at the central with treasury database to automatically verify that a payment order does not exceed the credit opening amount. The current transition to a centralized database architecture may address some of the manual processes mentioned above. 102. Financial and operational reporting functionalities are limited. While the Chart of Accounts and Budget Classification Structures, as well as accounting standards and methodologies are defined at the central level (MoPF Accounting Methodology Department, Budget Synthesis Department), the systems supporting budgeting and accounting operations of each public institution are decentralized. Each budget holder has its own financial management (accounting) system to record transactions. No standard accounting software package(s) has been defined (or certified) by MoPF. More importantly, accessing data from local systems of each public institution is addressed through one-time requests, replication and manual transmission processes. Current processes for producing consolidated financial reports ( monthly, quarterly, annually) entail collecting information at different levels in the current budget holders‟ hierarchy, with data quality control, aggregation and consolidation performed at multiple levels by different actors. The current processes involving verification, consolidation and aggregation are labor- and time-intensive. The supporting desktop-based application, DARSAM, is complex and difficult to use, especially for staff that are not computer literate. More importantly, since the data is consolidated upstream and stored in local systems of the tertiary, secondary and primary Budget Holders, detailed budget execution data is not stored centrally nor available for re-use. As such, analysis is limited to the summary level. Analysis at a lower level of aggregation is difficult to achieve at MoPF such as analysis of labor expenditures across public institutions. 49 103. Currently, there is no easy mechanism to conduct time-series and comprehensive analysis to identify trends in spending and revenue collection over time. Centralized data processing facilities do not exist, and data mining capacity is weak. A data warehouse is being implemented at MoPF but it primarily focuses on serving the needs of the tax administration. A high level gap analysis of the support these systems provide is shown below. Table 7 High Level Functional Gap Analysis Budget Preparation Support Core Systems Electronically receive and track budgetary appropriations at line item level, based on Y BUDGET-NG the Budget Code Classification. Support multi–year budgeting (budget year plus up to three years‟ Forward Estimates). P BUDGET-NG Transfer the approved budget data into the Treasury General Ledger (TSA). N Budget Authority Management Store the Annual Budget Appropriations by user-defined aggregates of the budget Y BUDGET-NG classification. Provide for changes in the Annual Budget Appropriations during the FY. P MODIF, CREDITE, manual Permit the primary budget user to request budget credit openings and ensure all P Manual required authorizations are obtained before quarterly/monthly credit openings become MODIF effective. CREDITE Commitment Management and Control Capture and manage commitment transaction records. N Perform automatic checks whether the proposed commitment is within the available N Annual Budget Appropriation and the MTEF envelope (for multi-year commitments). Payment Management Register payment orders submitted by Bus; the system should support different input P TREZOR-NG channels for payment requests, including manual and electronic. Some manual process Verify the amount against the credit opening established for the concerned BU. Y TREZOR-NG Automatically generate transfer orders and provide an interface with the TRANSFOND Y TREZOR-NG system (e.g., the Romanian RTGS) to draw down the TSA to make payment to the supplier through the clearing system. Store spending and receipt transactions with all the user defined data fields, including P TREZOR-NG in accordance with the prescribed chart of accounts. General Ledger (Accounting) Maintain budgets and actual accounting for all transactions in all business areas. N Automatically generate G/L postings, or budgetary account postings as appropriate at N the time of transaction processing. Maintain G/L with flexible Chart of Accounts structure capable of generating output N with respect to internal and external reporting requirements. Cash Management Record cash flows and balances of Treasury as reflected in the TSA. P TREZOR-NG Interface with other modules of the system to extract information regarding actual and N likely cash flows. Consolidate all the recorded information on cash flows in accordance with user-defined N 50 algorithms and classification details for user-defined periodic intervals. Reporting Generate standardized reports on budget commitments and cash expenditures and P DARSAM receipts broken down budgetary classification (CoA), and for user defined reporting periods (monthly, quarterly). Extract, sort, and sub-total information on ad hoc, user-defined basis for use as on- P DARSAM screen viewing, screen print, paper output or data file output. Provide drill-down capacity to facilitate investigation of amounts to progressively more N detailed levels. Historical Data Analysis Store and provide access to historical data records and allow reporting according to user N defined formats Note: Y: Supported. P Partially Supported. N: Minimal or no support. Security and Identity Access Management 104. Initiatives to automate current manual processes, such as debt service payments, are hindered by the need to have greater clarity on the use of electronic signatures. This requirement is essential in ensuring the integrity of transactions and preventing fraud. Identity and access management are in place and linked with the application systems, based on certificates issued by the MOPF. However, since the legal framework (Law on eSignatures) permits only qualified electronic signatures as the equivalent of written signatures MOPF has been reluctant to replace paper processes as the ultimate form of authorization with authentication methods that do not meet the requirements of qualified electronic signatures, which are costly. In order to enable automation and electronic processing of workflows in the Ministry, the legal requirements should be clarified in respective regulations. Secure (non-qualified) e- signatures, including through certificates issued by MOPF, should be considered as means for authentication and authorization especially where internal processes are concerned. As the need for an integrated information environment becomes more pressing, investments in Enterprise Identity Access Management capabilities that leverage existing capabilities for digital signatures will be needed to enable better audit, activity tracking and monitoring and non-repudiation functions at MoPF. Table 8 Electronic Signatures in EU Member States Types of signatures Legal equivalence to handwritten signatures Austria Two types are defined: "Basic" and "Secure" e- Secure e-signatures meet the requirements of signatures. Secure e-signatures are AES which in handwritten signatures, especially the requirements of addition: i) are based on a QC, ii) are created using written form as defined in Austrian Civil Code. A technical components and procedures which comply special law or agreement between the parties may with the security requirements as stipulated in the provide otherwise. Presumption of authenticity of Austrian regulation. private deeds signed with a secure e-signature.Secure e-signatures do not have the legal effects of handwritten signatures for: i) legal transactions in family and inheritance law requiring a written or other special form, ii) declarations Belgium Three types are defined: "Basic" as in the directive and AES based on a QC and created by a SSCD are advanced e-signature (responding to the same assimilated with handwritten signatures, irrespective requirements as in the directive). Implicit recognition of the fact that the signature has been put by a legal or of a higher level of signature (being the "qualified" natural person one: AES based on a QC and created by a SSCD). Denmark 3 types: "Basic" - AES (defined as in the directive). If law stipulates that electronic messages/documents The law implicitly recognizes a "higher level" of shall be provided with a signature this requirement is signature, the "qualified" e-signature: AES based on a met as long as a "Qualified" e-signature is used. In the 51 QC and created by a SSCD case of electronic messages/documents to or from public authorities, this rule applies unless special legislation provides otherwise Romania Three types: "Basic" / Extended e-signature (being When the written form is required as proof or validity equivalent to the AES of the directive) / Also, condition of a legal document in cases stipulated by provision for a higher level of signature ("Qualified"): law then: a document in electronic form shall satisfy to Extended e-sign based on QC and created by a SSCD. this condition provided that there is an extended e- signature attached to it which is based on a QC and created by a SSCD. Note: AES: Advanced Encryption Standard, QC: Qualified Certificates, SSCD: Secure Signature-Creation Device Source: Interdiciplinary Centre for Law and ICT, University of Leuven. IT Governance and Organization 105. There is a total of approximately 200 IT staff at MoPF/ANAF HQ and 800 IT staff in the territorial ANAF offices. Of the 200 IT staff at HQ, approximately 150 organizationally report to the Tax Administration IT Director General, and approximately 50 to the MoPF Director General – Information Technology. In the organizational structure, the 800 staff in the Territories report administratively to the local administration. As such, the central IT Department is not able to leverage these resources to distribute work that is heavily concentrated in the center. The IT Team at MoPF is responsible for the following core functions to ensure smooth operations of the systems, networks and database: hardware and software maintenance, network infrastructure support, application development, IT procurement, IT strategy and general principles. Given that the IT Department at MoPF used to be one group, rather than two separate directorates, IT supporting MoPF provide cross support to Tax Administration and vice versa. Both teams work closely and collaboratively to ensure smooth operations. 106. The level of IT staffing in MoPF has remained constant at around 200 36(both MOPF and ANAF) since the 1990s despite the increase in the level of automation. Consequently, IT staff are constantly multi-tasking, maintaining operational systems and developing new systems. In some areas, such as support for payment processing systems, there are no dedicated staff to support this function. 107. At the moment, there is no systematic mechanism for IT to engage with business to prioritize IT initiatives. Despite its limited resources, the IT team has taken strides to opportunistically modernize IT systems to address specific business requirements, but the IT investment process is not systematically linked with the business strategy. IT investments can be transformative for MOPF business and can profoundly affect the performance of MOPF. This necessitates a more strategic view of the management of IT assets and investments to assure responsiveness to business needs and to mitigate the more substantial operational risks associated with IT failures. It has been recognized across MOPF that the alignment between IT investments and business direction could be improved. ANAF IT Support 108. IT support available for ANAF operations is limited and fragmented. Centralized data processing facilities do not exist, and data mining capacity is weak. Data exchange between the tax administration IT system and other systems requires improvement, in particular with regard to automatic data transfer between tax and customs functions and the data exchange with property registers. Of particular concern is the low level of electronic filing of tax declarations. Apart from the limited availability of computers in the taxpayer population, this is primarily due to the requirement to obtain a costly electronic signature before a return can be submitted electronically. 36 As of September 2009, total filled /vacant positions for both MoPF and ANAF IT were 183/224 of which MoPF = 23/29 and ANAF = 160/195 (Source: Presentation on IT System of the Public Finance Ministry (PFM), Adrian Popescu, January 2009). For 2010, for ANAF only, the total filled /vacant positions are 149/197 (Source Organigram DGTI ANAF 2010).. 52 109. The communication between legislative staff in the MoPF, the department that designs the business processes and the IT department should be improved. There seems to be a lack of understanding that the introduction of new legislation or changes in present legislation require intensive communication between lawmakers and the administration at an early stage. Also it must be understood that changes take time to be implemented as well in existing IT applications as in newly developed systems. Reform Options: 7.1 Strengthen IT Governance 110. A comprehensive and detailed IT Audit is recommended to assess the MoPF's information systems, practices and operations. A detailed review is warranted to ensure high performance, optimal use of IT resources and alignment of IT investments with business priorities. It would be opportune to review the funding model, staffing levels, and distribution of functions between the IT staff at MoPF and its territories. 111. IT governance at multiple levels (strategic, tactical and program and project levels) is essential since limited IT resources are needed to support a modernization program and at the same time, to keep existing systems running. Impediments beyond the IT Department‟s control (cross- department issues, legislation, business processes, data definitions and standards) need to be addressed with senior management leadership and guidance.  A corporate IT Governance board should be established to bring together the main business units and the IT professionals.  An IT strategy with a costed investment plan should be prepared to guide investments.  The IT department could be organized with dedicated staff serving key departments in MOPF to ensure consistent and responsive service capabilities. 7.2 Integrate Financial Management Systems 112. The need for a more integrated IT system to support budget management is well recognized, but has not been implemented mainly due to financial constraints. While costly, over the medium term, the integration of expenditure management functions with a centralized data base and general ledger to record all stages of the transaction processing, including appropriations, opening of budget credits, commitment, purchase, payment request, reconciliation of bank statements, and accounting of expenditures, will provide solid returns. There are several technical options for modernizing MoPF Financial Management systems. These options range from augmenting existing systems, replacing a few components, introducing computerized data exchange mechanisms between related sub-systems across the expenditure management cycle, and investing in an integrated Public Financial Management system. Both options have unique advantages and disadvantages. Adaption and expansion of the current central and decentralized systems could help safeguard investments already made and minimize the cost and effort associated with the implementation. Utilization of existing ERP platform on the hand allows the MOPF to benefit from tested solutions and optimized processes associated with these packages. Advising on the appropriate and most cost effective solution is beyond the scope of this review, but could be explored if this is a MOPF priority. 53 Box 10 IT Modernization in France and Germany In conjunction with legislative and process changes IT investments are important enablers for modern public financial management. Both Germany and France have recently begun to plan and implement comprehensive IT modernization programs as levers for modernizing and rationalizing budget and accounting processes. France: France is in the process of revamping the IT environment for public financial management to strengthen operational support and compliance with organic budget law LOLF (Loi Organique Relative Aux Lois de Finances) passed in August 2001. The program is called CHORUS and aims to provide every French government agency, at both central and local levels, with a shared, integrated application for finance, budget management, accounting and reporting. In the past Ministries deployed several different information systems to manage public funds. The Chorus project will integrate all of the systems involved in state expenditures, non-tax receipts and accounting into a single, unified IT landscape. It is based on a SAP enterprise resource planning (ERP) platform and will replace existing inter-ministerial applications, while delivering part of the functionalities currently performed by ea ch ministry’s internal management applications. Chorus will ultimately concern more than 20,000 users. As such, Chorus is the largest inter- ministerial IT investment program ever undertaken in France. The four-year project was launched in April 2007 with an estimated cost of approximately EUR 0.5 Billion. Operational project management is being led by the Finance Ministry’s AIFE information technology agency, with input and supervision by other ministries, as well as by the budget office, the state agency for government modernization (DGME) and the government accounting office (DGCP). Initial deployment is begun in 2009 with a rollout to all French government budget and accounting departments being underway. During the first deployment wave Chorus was placed in every local education, and particularly in the Departments of Defense, Interior and Justice. AIFE in parallel prepared for a major wave in early 2010 on the extension scope to cover advanced features, including management of requisitions, inventory management and a paperless document management system. Germany: In Germany, major IT investments were planned to support to move to product (program) based budgeting and accounting that was initiated in 2006. The project is called modernization of budget and accounting framework. The IT modernization is closely linked to budget reform that aim to convert the federal budget to focus on performance and resources by introducing a product based budget classification and modified accrual accounting system, including a capital account. Needs for addition IT capabilities have been identified in particular to support a central business intelligence (BI) system to be added to the central processes for planning, managing funds and rendering accounts. A detailed concept, including options for the IT architecture, has been developed. The most likely option is to adapt and expand the current central and decentralized processes, in order to safeguard investments already made and minimize the cost associated with the implementation of new technical requirements of the product budget, integrated cost accounting processes and the capital account. The system communication, the systems and the interfaces will therefore be modified. Unlike France the chosen IT architecture is envisaged to integrate existing central and decentralized components, rather than replacing the current central components with a central ERP system and thereby achieving the overall integration of decentralized and central components. To attain system integration, uniform data exchange standards will be introduced to the existing decentralized budgeting and accounting systems and certified architectures for ministry-level systems will be developed centrally for ministries. The Parliamentary budget commission recently suspended funding for the project requiring further clarification from the federal MOF which is now working on a strategic realignment of the project. 54 7.3 Modernize IT Support to ANAF 113. ANAF could consider procuring a fully or largely COTS integrated solution. This was also recently recommended by the IMF FAD. COTS software solutions are used for two fundamental reasons:  to profit from processes developed by organizations all over the world, that are implemented in the COTS application  to be able to avoid high maintenance costs while upgrading to newer versions of the COTS application. It should be noted that despite these advantages, bespoke solutions are more commonly used for revenue management.37 ANAF, if it chooses to pursue a COTS (“buy rather than make�) solution, as suggested by the IMF and supported by this review, should seek to share peer experience with the implementation of such systems within the IOTA. Human Resource Management and Internal Communications Human Resource Management 114. A functional human resource management system will allow the MoPF to recruit, retain and motivate a staff with the attitudes and skill sets needed to carry out the core functions of the Ministry. It will allow the senior management of the MoPF to allocate human resources strategically across the various agencies in accordance with priorities set forth in its Strategic Plan. The system should permit sound decisions about staffing levels based on a workload analysis, expected results, and the resources needed to achieve them. It should embody a structure of grades and titles that compensates employees differentially for the kind of work performed. It should also reward employees differentially based on valid performance appraisals. The system should provide opportunities for the staff to learn new skills and modify attitudes through providing training. Attention should also be paid to career development and succession planning, especially for the Ministry‟s most senior managers. 115. The Ministry is a knowledge-based organization and its workforce is a key strategic organizational asset. The public finance function at all levels is staffed with highly educated and dedicated professional staff. More than 90 percent of Ministry staff have tertiary education, a majority in economics and accounting, followed by law. 84 percent of staff report that they are proud to work for the Ministry. Most staff have generally positive views of the Ministry. Most generally, there needs to be a recognition that the MOPF is a labor and knowledge intensive service organization and that, as such, its assets come to work in the morning and go home in the evening. Like any corporate assets, they have value and should be managed with care. They lie at the heart of the mission of the MOPF. 37 Tax Reference Model- Application Software Solutions to Support Revenue Administration in Selected Countries, March 2010, p.4 55 Figure 14 Staff Survey Results 1 Legend Favorable Unfavorable How does the Ministry of Public Finance compares with other employers? 43% 31% 2% 18% 6% I am proud to work at the Ministry of Public Finance. 51% 23% 16% 6%5% In my work group, individual staff are held accountable for their performance. 48% 29% 14% 5%3% My manager demonstrates the technical competence to lead the group effectively in meeting its overall goals. 61% 20% 9% 5%5% I have a good understanding of what is expected from me in my job. 64% 25% 1% 8%3% 0% 20% 40% 60% 80% 100% Percentage Responses Source: MOPF Staff Survey. 116. The compensation system at the MoPF is widely perceived as a fragmented, opaque, and asymmetric system. This risks undermining staff motivation. Compensation practices that pre-date the new Unitary Pay Law included bonuses, grants, and various forms of allowances, some of which were provided at the discretion of MoPF managers while others are categorical, for example, for staff involved in EU-funded projects. Under this system, which is being overhauled by the Unitary Pay Law, about one third of the total wage bill (in 2009) was dedicated to paying non-base pay compensation. As part of the austerity measures many of these allowances were suspended, although some important ones remain. The system has produced asymmetric pay levels across the organization leading to invidious comparisons across the various organizational units of the MoPF. This is confirmed by the results of the staff survey. More than half of the respondents expressed unfavorable views about the ability of the Ministry to reward performance. With similar work differentially compensated, another result is the creation of a talent market in which high-performing employees are attracted to work areas that pay bonuses while other areas suffer a brain drain. Figure 15 Staff Survey Results 2 Legend Favorable Unfavorable In the Ministry of Public Finance, staff are rewarded 18% 15% 13% 29% 25% according to their job performance. I have a good understanding of the direction in which 24% 19% 30% 20% 8% Senior Management is leading the institution. The resources allocated for my tasks are adequate to do a 27% 33% 15% 15% 10% quality job. Staff and manager changes (e.g., promotions, 36% 24% 12% 17% 12% reassignments) in my work group are made on an… 0% 20% 40% 60% 80% 100% Percentage Respondents Source: MOPF Staff Survey. 117. While compensation levels are reported to be sufficient to recruit qualified employees (before the current hiring freeze), retention is widely reported to be problematic. Executives and managers widely report that they can attract qualified personnel but that the best often resign after a couple of years to seek opportunities elsewhere. Although this is to some extent inevitable, it apparently poses a significant threat to the ability of key departments to perform adequately. As reported, this retention problem is especially acute among the Ministry‟s younger staff that uses the cachet and prestige of their 56 experience at the MoPF to market themselves elsewhere for higher pay and greater opportunity for advancement. A recent step to eliminate the bonus scheme (stimulante) has resulted in significant pay reductions across the Ministry and may further undermine the ability to retain qualified staff at the current base salaries. 118. There is, as yet, no strategic human resources plan for the MoPF, one that would align staff allocations with the substantive priorities of the MoPF. The current HR function is largely reduced to administering a personnel system rather than managing human resources strategically in support of the MOPF business strategy. The result is that people are not managed in a way that optimizes performance. In discussions with the Ministry‟s senior officials, apparent misallocations were widely reported (See also the analysis of staff allocations across functions in section 3.). The staff survey also found about a quarter of respondents reporting that their work area is under-resourced. Staffing levels often tend to be artifacts of organizational history rather than reflections of current needs. In the short run, these patterns are quite difficult to rearrange in a rigid civil service and collective bargaining environment, as civil servants cannot be transferred from one department to another without their consent. However, a longer term strategic HRM plan aligned to the MOPF strategy could increase the likelihood that, over time and with attrition, staffing resources can be more closely aligned with MOPF priorities. Some realignment of resources across different functional areas will also be needed with the envisaged shift in the compliance management approach. There will be increasing need for experienced auditors and taxpayer service experts. Reform Options 7.1 Strategic Human Resource Management 119. Human resources alignment means integrating decisions about people with decisions about the results MOPF is trying to obtain. A strategic HR process should involve senior management, line supervisors and employees. A thorough staffing analysis and workforce planning model, with external support as required, of the MoPF could provide the basis for a reallocation of human resources that will align staff resources with established priorities. Internal Communications 120. The internal communications channels of the Ministry are weak or lacking. While the ministry leadership is focused on responding to a multitude of external pressures, the business of leading and managing the organization is undervalued and is not given the recognition and resources required to improve efficiency and effectiveness. Employees are not routinely informed about the priorities and major initiatives undertaken by the MoPF. Less than half of the respondents in the staff survey felt they were well informed about the overall direction in which the senior management is taking the institution. Consistent and clear communication of the MOPF mission and its strategic direction is essential to aligning the energies of the knowledge workers who staff the Ministry. Not engaging the MOPF workforce more consistently and more broadly in the major issues confronting the Ministry is a lost opportunity. Reform Options 7.2 Strengthen Internal Communication 121. Internal communications could be strengthened through several means. Media such as an in- house newsletter, ramping up the intra-net, “town hall� meetings or “all staff� gatherings can be useful tools for senior officials to showcase new initiatives, communicate important priorities, and simply 57 disseminate news (good and bad) that affects working conditions. MoPF‟s communications program should aim to engage its employees in a two-way dialogue on its substantive initiatives, programs, and projects. There is untapped potential among the Ministry‟s educated workforce. New ideas, innovative approaches, and suggestions for better ways of doing things can come from anywhere in the Ministry, if channels are opened up and management convinces employees that their views are sought and valued. V. MANAGING CHANGE 122. The volume and importance of the changes noted in this report will require varying commitment levels, timing and resources. Employees and large groups of management will have to cope with uncertainty and will be asked to accept changes in their jobs, in the work environment and in many other respects. Like any other complex organizational change program, the likelihood of successful implementation will increase if certain preconditions are met:  High level reform commitment and leadership: Real change will only happen when top management assumes ownership of the process. Before initiating the program MOPF must have political support at the level of the cabinet as a whole or at least of the Prime Minister. Leadership by the Minister of Public Finance and the state secretaries is critical. The government might want to consider establishing a steering committee for public finance reforms. This would help elevate the profile of the reform effort and provide a mechanism for collaborative planning and decision-making at the organizational level. This body would also serve to monitor timeliness of deliverables and the appropriate use of resources related to each program. The secretary general of the MOPF, the directors general, might be nominated as members of the steering committee, which could be chaired by the minister of finance. The steering committee would be supported by small professional program management office which would be recruited from within the MOPF.  Active Change Management: Reform of the nature and scale envisioned here will inevitably meet some resistance. It is therefore important to prepare staff, managers and stakeholders (including parliament, audit and the general public), for change by disseminating an overview of the planned reforms, including their goals, means, and timing. A structured program of training sessions, conferences, events, web-pages and other communication tools would complement and contribute to disseminating the agenda.  Sequencing and prioritization: There are numerous competing short and medium term change priorities that challenge the MoPF and its senior management. To manage the change agenda it is important to be realistic and selective about what can be accomplished, what resources are required to successfully implement them, and the timing of specific changes. It is also important to sequence the change agenda to avoid change-overload which could lead short- term decline in overall performance and undermine the effort.  Ensure investment needs are covered: Resource requirements are significant, both financially and in terms of staff and leadership attention needed to move this forward. In particular, IT modernization on both the expenditure management and revenue administration side will require predictable resource commitments in the range of US$ 140 Million.  Result oriented implementation arrangements: The top leadership should be assisted by a small (5 to 10 staff), high level, professional program management office which would be recruited from the MOPF itself. Successful work in the team would be a strong recommendation for a future career within MOPF. It will also be important to set clear benchmarks or milestones against which progress can be monitored. Leadership will not only need to be involved at the upstream planning exercise but also follow through the implementation of any agreed change management program. 58 Prioritizing and Sequencing Reforms 123. The proposed reform agenda is ambitious and long term in nature. Realistically, not all can be done at once. Given limited resources prioritization is key to achieving results. The proposed actions already reflect a selective reform program and as such are the result of prioritization. However, some measures (in particular if implemented in isolation) will improve public finance only marginally, while others are real game changers that will enable performance to move to the next level. The prioritization of the reform measures should be led by the Ministry itself, but to facilitate that process an initial prioritization of recommendations in terms of their impact has been undertaken and is presented in the table below. The expected impact is based on three criteria: 1) The potential impact, or benefit, of addressing the problem, 2) The potential cost of addressing the problem and 3) The cost of not addressing the problem. Critical impact reforms tackle key binding constraints and require immediate attention. High impact reforms are important but reflect areas where progress is already underway. Enabling reforms are important but will only achieve significant impact if implemented in conjunction with other reforms. Table 9 Prioritization of Reform Measures Critical Impact Reforms High Impact Reforms Enabling Reforms Prudent Revenue Estimation (1.1) Monitor and Control Fiscal Reorganization (3.3, 6) Impact of new Legislation (1.3) Top Down Budgeting (1.2) Policy Based Expenditure HR Management and Internal Prioritization (2) Communications (8) Improve Financial Reporting Further Streamline IT Governance (7.1) Capabilities (3.2) Transactional Banking Services(3.1) Accelerate EU Absorption (4) Revenue Administration Reform (5) 124. Further work is needed to develop a Government-owned, long-term and actionable road map that sequences changes in strategy, processes, organization, and systems. The roadmap should combine larger strategic efforts, such as the introduction of a computerized Treasury general ledger, with near-term foundational “quick win� initiatives, such as a commitment recording capability in the treasury system. The way that individual reforms link and support each other is crucial to their effectiveness. Therefore, the action plan should reflect these connections taking into account the reality of progress made in each functional area. Annex 1 provides some initial considerations in this regard. 59 ANNEXES 60 Annex 1 Action Matrix Objective Sequenced Actions Impact/Priority Implementation Responsibility Progress/Output Target/Outcome Estimated Resources Period requirements (critical, high, (< 6 months, < 18 Indicator enabling) months, > 18 €1 months) Reform Area 1: Improve Budget Credibility and Macro Fiscal Discipline Deviation between <5 Percent Budgeted and Actual Revenue <0.5 Percent Deviation between Budgeted and Actual Deficit (Percent of GDP) 1.1 Implement the provision of FRL for the Critical <6 Months MOPF 0 Institutionalize Minister of Public Finance to attest to Prudent Revenue the accuracy and completeness of the Estimation information provided in the Budget Policy Strategy. Promote external validation and Critical <18 Months MOPF 0 contestability by increased transparency and independent review of Macro Fiscal Framework by Fiscal Council (as mandated by FRL). Enhance independence and status of the MOPF Macro-Fiscal Unit by subordinating it directly to the Minister of Finance. Publish Fiscal Risk Statement, including sensitivity analysis. 1.2 Preserve the MOPF‟s right to Critical <6 Months MOPF 0 Institutionalize unilaterally adjust spending requests of Top Down Line Ministries if submissions exceed Budgeting ceilings. Allow Line Ministries to allocate resources within the ceiling. Institutionalize a Cabinet level Critical <18 Months MOPF/GSG/Cabi 0 Ministerial Finance Committee Process net as part of the budget process to create collectively binding commitments to ceilings aligned with Government priorities. Integrate the Budget Policy Strategy (FRL requirement) with the budget process and ensure consistent fiscal targets. 1.3 Monitor Enable Fiscal Council to initiate and High <6 Months Fiscal Council 0 and Control publish independent fiscal impact Fiscal Impact of estimates for legislation with significant New Legislation fiscal impact (above threshold) and especially if fiscal neutrality may be violated. Enforce requirement for legislative High <18 Months MOPF/GSG/Cabi 0 proposals which are submitted to net Cabinet to contain a fiscal impact assessment prepared by MoPF Reform Area 2 Strengthen Policy Based Expenditure Prioritization Cabinet decides Medium Term Sectoral Ceilings for the FBS which are complied with during following years At least 3 sectoral spending reviews have been prepared and inform the budget process 2.1 Synchronize Harmonize the budget calendar of Law High <6 Months MOPF 0 Budget Calendar 500 and FRL. Integrate strategic planning and budgeting processes. 2.2 Refocus Institutionalize Strategic Budget Phase High <6 Months MOPF/GSG/Cabi 0 Budget Dialogue (in conjunction with Top Down net on Policy and Budgeting) to drive expenditure re- Efficiency Issues prioritization. Require sector ministries to separate baseline budgeting (funding required to continue existing policies based on previous year‟s forward estimates) Redevelop ministry strategic plans on a High <18 Months MOPF/LMs 0 program basis and strengthen link between these plans and the budget. New initiatives should be justified and at least partially financed from identified efficiency savings in the line ministry‟s baseline budget (thereby allowing line ministries to re-allocate across programs them and to retain part of the efficiency savings). Conduct selective (sectoral) spending reviews to identify efficiency gains and low performing programs. 2.3 Build Review and adjust the job descriptions High <18 Months MOPF 0 Capacity for and associated qualification Budget Analysis requirements of the positions in the 62 in the Budget Budget Department to encompass the Department tasks associated with budget analysis Conduct a training needs assessment and High <18 Months MOPF provide training program to both MOPF and sector ministries on budget analysis, including specific sectoral issues. Reform Area 3 Further Modernize Budget Execution and Treasury Functions Percentage of 20 % Payment orders submitted electronically Time required for Real Time Commitment Reporting 3.1 Further Clarify the regulatory framework for High <6 Months MOPF/MOCIS 0 Streamline electronic authorization of transactions Transactional (eSignature requirements). Banking Services Roll out of e-Account Statement pilot. High <18 Months MOPF 0 Elaborate e-archiving specifications. Automation of credit opening High >18 Months MOPF €€ procedures, and electronic submission of payment orders. Develop e-Archiving system to support automated paperless processes. 3.2 Improve Prepare Specifications for Computerized Critical <18 Months MOPF € Financial General Treasury Ledger. Reporting Capability Initiate Integration of accounting and Critical <18 Months MOPF €€ reporting system with the Treasury payment system. Build interface to transfer approved budget to the treasury data base. Record commitments in the central treasury data base. Further develop computerized treasury Critical >18 Months MOPF Time required and Real Time €€ general ledger TG/L module that periodicity for accounts for all financial transactions Commitment related to budget, commitments, and Reporting cash. Automate Reporting Function from TG/L 3.3 Reorganize Reorganize budget execution department Enabling <6 Months MOPF 0 Budget responsible for credit openings (in Execution coordination with budget department), Functions transactional banking services, accounting and reporting. 63 Once operational processes have been Enabling >18 Months MOPF 0 modernized and automated, evaluate the business needs for extensive territorial branch network. 3.4 Further Establish Cash Planning Committee in High <6 Months MOPF 0 Improve Debt the MOPF comprising budget, budget and Cash execution, macro-economic, debt Management management units and ANAF. Establish bi-weekly jour fixe to short term project cash needs. Capture cash plans of spending units High <18 Months MOPF centrally in the treasury data base to make them available for consolidated cash planning. Upgrade the primary market auction High <18 Months MOPF €€ system and make it electronic via a platform to be decided upon. Clarify regulatory framework to allow e- auctioning. Enable state treasury to directly trade in High >18 Months MOPF €€ secondary market (use repos and buy backs). Create a strategy group combining High <18 Months MOPF 0 representatives from different departments (macro forecast, budget, debt). Develop risk management framework. Strengthen capacity of Middle Office to High <18 Months MOPF €€ perform financial market monitoring and analysis. Establish active risk management, High <18 Months MOPF € including derivatives to hedge against market risks and developing a contingency risk framework for contingent liabilities (guarantees) Consider simplification of business High <6 Months MOPF 0 process for debt service payments, possibly including bulk approvals for legally binding payments in accordance with loan agreements and elimination of preventive internal control requirement. Pilot end to end electronic payment High < 6 Months MOPF € processing for debt service. Reform Area 4 Accelerate EU Fund Absorption EU Struc. Fund >60 Percent Absorption Rate 64 (time proportional) 4.1 Enhance Enable strategic re-allocation of co- High < 6Months MOPF 0 Financing financing shares to disbursing programs Capacity and projects. Strengthen the link between EU High < 18 Months MOPF 0 programming framework, namely the operational programs and budget allocations, as part of the annual budget process 4.2 Enhance Fully implement the ordinance to High < 6Months MOPF 0 Administrative prioritize staffing allocations, including Capacity transfers of staff, related to the implementation of EU programs. Specific efforts are required with regard High < 6Months MOPF 0 to the Ministry of Transport, the managing authority for the transport OP, including an immediate staffing needs analysis. Project approval procedures need to be streamlined to prioritize large and important projects, with a particular focus on the Ministry of Transport Reform Area 5 Modernization of Revenue Administration E-Filing Percentage >25 Percent of Returns Number of Tax Payments 5.1 Strengthen Further advance tax payer segmentation High <6 Months ANAF 0 Comprehensive and review the thresholds for large and Compliance medium sized taxpayers. Policy Institution-wide risk management should High <18 Months ANAF €€ be developed deploying resources according the level of risk involved and amount of revenue at stake. In the large taxpayer segment compliance should be encouraged through specialized taxpayer services and more frequent audits. In the medium taxpayer segment compliance costs should be reduced and computerized risk management. For small private and business taxpayers the main objective will be to reduce the need for direct contact with the tax administration and to enhance voluntary compliance. Further development of the High Net Wealth Individuals segment should also be pursued. A training program for new staff members and existing staff will need to complement 65 organizational and procedural reforms. 5.2 Reduce Promote e-filing and reduce face-to-face High <18 Months ANAF €€ Administrative interaction with tax payers. Costs mprove computerized risk based audit selection and case management to better direct audit resources. Modernize business processes with High <18 Months ANAF €€ further automation. Consolidate territorial organization. 5.3 Reduce Restructure the returns filing which High <18 Months ANAF 0 Compliance would require a smaller number of Costs returns. Promote e-filing and restructure the High <18 Months ANAF €€ payments system to make cash payments largely redundant. Improve tax payer services. Reform Area 6 Organizational Reform Number of First <15 Tier Operational Units 6.1 Consolidate Consolidate first tier management Enabling <6 Months MOPF 0 first tier structure of MOPF around the core management public finance functions. Strengthen SOE Oversight Function High < 18 Months MOPF 0 Reform Area 7 IT Modernization n.a. n.a. 7.1 Strengthen Establish IT governance board, Enabling <6 Months MOPF 0 IT Governance comprised of the IT department and key business units as the main decision making body to guide IT investment and management. A comprehensive and detailed IT Audit Enabling < 18 Months MOPF € is recommended to assess the MoPF's information systems, practices and operations. Develop IT strategy and (costed) investment plan aligned with Ministry strategic plan. 7.2 Integrated Prepare Scope and Technical Enabling < 18 Months MOPF € Financial Specifications for IFMIS Management Information System Introduce efficient, computerized data Enabling < 18 Months MOPF €€ exchange mechanisms between related sub-systems across the expenditure management cycle, most importantly between the budget, treasury and reporting system. Centralize treasury data base and create general ledger to record all stages of the transaction 66 processing from appropriations, opening of budget credits, commitment, purchase, payment request, reconciliation of bank statements, and accounting of expenditure. Build Operational Data Store and then Enabling > 18 Months MOPF €€ Data Warehouse as central repository for all financial data records. Reform Area 8 Strategic HR Management n.a. n.a. 7.1 Enhance Develop a HR strategy aligned to the Enabling < 18 Months MOPF 0 strategic, forward MOPF strategic plan supporting the looking HR business objectives of the MOPF. Management 7.2 Strengthen Dedicate modest resources to allow for Enabling > 6 Months MOPF € corporate more continuous internal communication communication, either in the external communication division or the public policy unit. Use MOPF intranet to communicate key corporate priorities. Increase frequency of direct communication between leadership and staff through regular town hall meetings, etc. 67 Annex 2 Comparative Review of Organizational Structures of Ministry of Finance Sweden Finland Austria Germany Hungary Slovenia Estonia Lithuania Denmark Senior 3 ministers Minister, Minister, State Minister, 2 Minister, Minister, State Minister, Minister, Minister, Management (Finance, Coordinate Secretary parliamentary Political State Secretary, Secretary Vice Permanent Financial Minister, State (plus Change state Secretary, Secretary- General Minister, Secretary Institutions, Secretary, Group, secretaries, Administrative General State Local Permanent and Capital State Secretary Secretary Government), State Secretary, 2 Market assistant state Permanent Advisor) secretary Undersecretaries (Economic Affairs, Administrative Affairs), Number 5 state secretaries 6 Directors 5 Directors 3 state secretaries 4 deputy state 6 Directors 4 deputy 4 5 deputy second-level General, 1 General secretaries General Secretaries Undersecretaries Secretaries Officials Controller- general General Portfolios of State Secretary 1 DG 1: Corporate State Sec. 1: DG 1. Budget 1. Financial 1. Financi US 1: tax + DS 1: secondlevel - Services II, and System al accounting expenditure officials Budget + DG 2: Budget III, VI, VIII Financial 2. Budget Policy methodolog policy + traffic, Corporate and State Sec 2: Z, I, Policy 3. Revenue 2. Govern y+ defense, foreign State Secretary 2 Public Finances IV, V 2. Economic 4. Treasury ment subordinate affairs, justice + – DG 3: Economic State Sec 3: VII, Policy and 5. Public Control body business affairs, Economic Affairs Policy and E Internatio Property 3. Internati supervision DS 2 econ State Secretary 3- Financial nal Affairs 6. Public onal US 2: EU policy: taxation Fiscal Affairs Markets 3. Revenue Accounta Relation Program + + macroecon + (tax) + DG 4: Taxes and and ncy s Financial law Public Customs Accountin 4. Internal Market model/income Management DG 5: g Services Developmen DS 3 State Secretary 4 Information 4. Food t + Fiscal Administration – Technology Industry, Policy +EU policy: International + Treasury Affairs privatization, Financial Markets Asset US 3: SOE, property + State Secretary 5 Managem Budget + Admin policy + – ent, Financial better regulation Local Financial Control DS 4 knowledge Government Services, US 4: State economy and Infrastruct Treasury + local ure and National government: Business Fund Local Regulatio State government, n, Secretary: social, health 68 Privatizati Corporate policy + on and Functions education, Asset science, culture Managem + labor market, ent income transfer DS 5 international policy: EU budget + international cooperation Administration Secretary for corporate management Number of 7 7 5 9 4 6 4 10 14 divisions Major Operational Departments Grouping of 1. Budget 1. Economics 1.Budget and 1.DG 1: Fiscal 1.Budget 1.Financial 1,Financial 1.Tax 1.Expenditure Major 2. Economic 2. Budget Public Finances Policy and System Policy 2. Accounting Policy Departments Affairs 3. Financial 2.Economic and Economic Financial 2.Budget 2. Government Methodology 2. Taxation 3. Fiscal Affairs Markets Policy Affairs Policy 3.Revenue Control 3. EU Program 3. Traffic, 4. Public 4. Tax and Financial 2.DG 2: Federal 2.Economic 4.Treasury 3. International Management Defense, Management 5.Personnel Markets Budget Policy and 5.Public Relations 4. Financial justice, 5. Internatioal 6. Public 3. Taxes and 3. DG 3: International Property 4. Internal Market foreign 6. Financial Management 4. Customs Customs, Affairs 6.Public Services 5. Fiscal Policy affairs Markets and 7. Government Information excise taxes, 3. Revenue Accountancy 6. EU Affairs 4.Business Institutions Financial Technology spirits and Accounting Management 7. Budget Affairs, 7. Local Controller‟s monopoly 4. Food 8. Financial Transport Government, Function 4. DG 4: Taxes Industry, Control 5. County Boards, on Treasury Methodology Macroeconomic and Housing Income, Asset 9. State Analysis property, Management, Treasury 6. Law model transactions, plus Financial 10. National and income ecological taxes Services, Fund distribution 5. DG 5: Infrastructure 7. Privatization, Subnational and SOEs, financial Business property relations, Regulation, 8.Administration WWII claims Privatization and 9. Better 6. DG 6: Federal Asset regulation Real Management 10.Local Estate & Academy of government, movable Finance, IT, social, property, payroll, health, personnel accounting, 69 of state property security) 11. Education, admin. Science, 7.DG 7: National Culture and 12. Labor International market, Financial Markets income and Monetary transfer Policy 13. EU budget 8.DG 8: 14. International Privatization Cooperation and Industrial Holdings Policy 9. DG E: European Policy Public Investment & Real Estate Internal Audit Controlling 70 Annex 3 Options for organizational structures The organizational structures presented here express illustrations of the underlying principle to create a more streamlined line management structure with fewer to level operational units. Not all aspects of the proposed options may be feasible, especially in the short run. Any reorganization should be driven by specific objectives, such as improving coordination in functionally related areas. Minister Minister’s Office Public Policy Unit General Inspection CHU Internal Audit Internal Audit Legal Affairs Director General Fiscal Policy External Affairs and Stakeholder Liaison Procurement Oversight and Coordination State Secretary State Secretary State Secretary General Secretary Corporate Functions Director General Director General Director General Director Budget Programming Revenue Policy Debt Management Human Resources Director General Director General European Affairs Authority for Coordination of Director Budget Ex. & Public Accounting Structural Funds Information Technology Director General Authority for Certification and PPP Unit Director Corporate Accounting Payment Internal Budget Directorate for State Aide and Director Price Regulation Internal Procurement Directorate General for Special CHU Internal Control Regulated Areas Minister Minister’s Office Public Policy Unit General Inspection Internal Audit Legal Affairs Director General Fiscal Policy State Secretary State Secretary State Secretary General Secretary Expenditure Management Revenue Policy & PFM Regulation Debt Management & EU Affairs Corporate Functions Director General Director General Director General Director Budget Formulation Revenue Policy Debt Management Human Resources Director General Director General Director General Director Budget Ex. & Public Accounting PFM Policies and Regulations EU Affairs Information Technology Director Internal Budget Director Internal Procurement Minister Minister’s Office Public Policy Unit General Inspection Internal Audit Legal Affairs State Secretary State Secretary State Secretary General Secretary Fiscal Management Budget Exec. & PFM Regulation Debt Management & EU Affairs Corporate Functions Director General Director General Director General Director Fiscal Policy Budget Ex. & Public Accounting Debt Management Human Resources Director General Director General Director General Director Budget Formulation PFM Policies and Regulations EU Affairs Information Technology Director General Director Revenue Policy Internal Budget Director Internal Procurement Annex 4 Linking Performance with Budget Allocations –Issues and International Comparisons General Issues A key issue in performance based budgeting (PBB) or results based management (RBM) is the linkage between performance and budget allocations. This annex discusses some general issues and then gives some OECD country examples. In all countries discussed below there has been a significant increase in the volume of performance information and improvements in information quality, but this has not been matched by a corresponding increase in the use of this information in the budget process. A key point which emerges from international experience is that there is no necessary direct connection between performance information and budget allocations. The World Bank 38 and OECD have noted that there is no mechanistic link between performance and budget appropriations. Indeed the OECD report on Performance Budgeting in OECD countries (2007) comments that designing government wide systems that automatically link performance results to resource allocation should be avoided, because such systems may distort incentives (resulting in “gaming�) and do not allow for the underlying causes of poor performance. The report identifies three main approaches in OECD countries - Performance information is presented in the budget or other government documents but has no apparent link with decision making (resource allocation or performance improvement), although it may be used for accountability purposes. - Performance information informs the budget process, along with other information and is therefore linked indirectly with budget decisions 38 See World Bank, Performance Based Budgeting; Beyond Rhetoric, PREM Note 78, February 2003. Performance Budgeting in OECD Countries, OECD 2007, Chapter 1. 72 - There is a direct formulaic linkage between (output based) performance indicators and budget allocations. However this only applies to selected areas of government activity where organizations may be funded on the basis of outputs produced – for example funding schools based on the number of students taught, hospitals based on the number of patients weighted through some case management system etc. Expenditure “norms� typically used by centrally planned economies in funding government activities are another example of such output based funding. (In this sense, where the objective is to increase outputs this can be regarded as performance based funding but otherwise unit costs of outputs are the performance (efficiency) measure. Overall the dominant approach is “performance informed budgeting� – performance informs budget decisions with this performance information being only one of several factors considered in budget decisions. The OECD notes that performance information may be more closely linked to the budget when new programs are proposed, requiring ex ante evaluation, as opposed to ex post evaluation of existing programs. In this respect there appears in some countries to be an “expectation gap� or misunderstanding about what PBB can do and is intended to do. For example it does not mean that well performing programs necessarily receive greater funding – nor that lesser performing programs receive less funding. Rather the objective of PBB is to assist governments to do “more with less� – both in terms of better allocation of resources to achieve government objectives (effectiveness) thus improving the quality of public expenditures and improving operational efficiency of government organizations. Yet many countries attempt to develop a contradictory approach - to “reward� well performing organizations with greater budget allocations. (This issue is separate from that of performance based pay for civil servants.) However the OECD report notes that few countries have endeavored to develop systems which reward organizations with increased budgets for meeting performance targets and notes the difficulties in designing and implementing such systems. It also notes that granting increased budget autonomy or flexibility to well performing organizations has been one aspect of rewarding individual organizations. It should be stressed that a key objective of PPB is to improve resource allocation – to fund well performing programs, to improve the performance of existing programs and to cease funding low performing programs whose performance cannot be improved. Performance in this case is measured by indicators of effectiveness or outcomes, rather than of efficiency or outputs, while recognizing the limitations of all performance indicators – they are only indicators, not the final truth. Because these performance indicators do not tell us the reason for the observed level of performance in depth program evaluation is needed to determine the implications for budget allocations. For example to what extent might additional funding of a well performing program further improve its performance – compared with allocating these scarce funds to some other program? If a program is performing poorly to what extent is it due to deficiencies is design as opposed to implementation – or both? Additional funding might improve its performance. In other words it does not necessarily follow that well performing programs should receive increased funding and poor performing programs should receive less. We must analyze the reasons for the level of performance as suggested by the performance indicators. It seems clear from many country examples that the development of good performance indicators is an ongoing process, with performance indicators being continuously redefined and improved. As “what is measured is what counts� it is important to measure the right thing, and the development of performance indicators must be undertaken with care. In particular performance indicators cannot be validated or legitimized until clear objectives have been set for programs through a comprehensive strategic planning process. Some countries have rushed into performance measurement before this strategic planning has been carried out. 73 In few countries is there yet full satisfaction with the quality of performance indicators. National audit institutions have often played a constructive role in reviewing performance indicators and assisting in the development of good practices. Swedish developments in particular point to a common theme – the need for better but also fewer indicators. Achieving the right balance between comprehensive and simplicity/understandability in performance indicators appears to be an ongoing problem. There is a perceived need to avoid having too many performance indicators. A final important issue is what performance information systems are available to produce reliable and timely performance data. Australia Program budgeting, and a centrally (MOF) managed system of program evaluation and substantial budgetary devolution, were all introduced from the mid 1980s under the then Financial Management Improvement Program (FMIP). The system underwent further change from 1996 with the introduction of accrual output budgeting, reflecting the New Zealand model discussed below of a “purchaser/provider� split or government as the purchaser of outputs through the budgetary process. . Recent moves have seen greater emphasis placed on formalizing outcome measures as part of the budgetary process. In the first 10 years of the budget reforms considerable emphasis was placed on the development of program evaluation capacity within portfolios or ministries, with each ministry preparing an annual evaluation plan, with oversight by the then Department of Finance. Performance information covering outcomes and outputs is presented in two main accountability documents – the portfolio budget statement (PBS) prepared by each department and the annual reports of each department and agency. While there is no formal requirement for this information to be audited for both documents the Australian National Audit Office (ANAO) has issued better practice guidance to assist in improving performance measurement, in the former case jointly with the then Department of Finance. Australian officials have often stressed that there is no direct linkage between performance indicators and the level of funding. Rather ongoing (ad hoc) expenditure and program reviews which may result in expenditure reallocations particularly in respect of proposed new programs, are a central feature of the budgetary process. France France moved to a performance budgeting system in 2001, rather later than other OECD countries. Overall some 1,500 performance indicators have been produced based on guidance produced by the Ministry of Finance, the Parliament and the national audit institution (the Court of Accounts) for those who will produce, use and verify the performance information. The indicators are required to be documented in such a way that they can be verified. At year end actual results are reported in an annual performance report (RAP) attached to the budget review law. This greatly increased amount of performance information is seen as enhancing parliamentary and public debate on the budget. The link between appropriations and performance is not automatic. Factors influencing the performance of programs and the possibility of providing additional resources to improve program performance are all considered. An inter-departmental program audit committee (CIAP) comprising inspectors-general of finance from ministries reviews the quality of the information and the analysis contained in the annual performance plans and annual performance reports. 74 France has a long history of formalized, central evaluation of government programs. The National Council of Evaluation has for many years been charged with carrying out independent evaluations of expenditure programs. However there has been no direct link between this evaluation and the budgetary process. Japan In 2002 Japan passed the Policy Evaluation Act which requires government agencies to undertake both ex ante and ex post evaluation of programs. In addition the ministries of Public Administration, Home Affairs and Posts and Telecommunications are required to undertake evaluation of cross cutting policy issues. The Act requires the results of evaluations to be “appropriately utilized� in the budget process. Ministries are required to provide performance indicators and evaluations with their budget requests. It appears that MOF sees evaluation as a means of reducing expenditures whereas agencies attempt to use it to obtain increased funding and the overall impact of evaluations is difficult to determine. The situation is further complicated by the difficulty in using the large volume of performance information which is produced - many ministries have more than 100 goals and targets. The new government elected in 2008 is seeking greater efficiencies in the public services and the new Minister of Finance has stressed the importance of evaluation and performance measurement. However it is not yet clear what impact this will have on the use of performance information in the budget process. Korea Ministries are required to submit strategic plans, annual performance plans and performance reports to the Office for Government Policy Coordination. The Ministry of Planning and Budget (MPB) also has a specialized performance issues unit. A self assessment program has been developed based on the US PART system (see later discussion under USA). The MPB uses annual performance reports and self assessments in negotiations with spending ministries and thus this information informs the budgetary process. In 2006 the government decided that the performance ratings produced by the self assessment system would be directly linked with budget allocations through an automatic cut of 10 percent in the funding of ineffective programs. While this provides a clear signal that ineffective programs are not acceptable MPB has experienced difficulties in implementing this approach due to poor quality information and “gaming� by spending ministries. Netherlands From 2001 a system of outcomes based budgeting (Policy Budgets and Policy Accountability Reform) has been introduced and performance information covering both efficiency and effectiveness is required by the Government Accounts Act to be included in the budget documents. In addition the annual report of each ministry and a consolidated annual report of the government focus on the achievement of goals as set out in the budget and their costs. There is thus a focus on increasing the informational value of the two major accountability documents – the budget documents and the annual reports. The Government Accounts Act allows performance indicators to be developed from in depth expenditure evaluations, as set out in a separate regulation on performance data and evaluation. Ministers are required to present a statement on management control, which includes the adequacy of internal systems to convert the budget inputs to appropriate outputs and outcomes, and this is included in each ministry‟s annual report. 75 The Netherlands makes considerable use of program evaluation. Each year “policy reviews� focus on a limited number of priority areas. These are carried out by small working parties which include representatives from the spending ministry and from MOF. These reviews are submitted to Parliament and are published, and are used by spending ministries and MOF during the budget process. New Zealand New Zealand‟s major public sector reforms, as reflected in the State Sector Act of 1988 and the Public Finance Act of 1989, included a major focus on performance based budgeting. Outputs are at the centre of the formal budget system. They are short formal statements of services that Government wishes to buy from public and other organizations. Since 1992, all budget funding has been provided for output targets through output plans (previously purchase agreements). Output targets are expressed in terms of quality, quantity and timing, and delivery of these outputs is monitored through corporate plans, annual reports, and formal audit by the Office of the Auditor General, who reports to Parliament on both the financial information and output performance measures. In the earlier stage of the NZ reforms there was no formal focus on outcomes in the budget process, Outcomes and „effectiveness‟ issues have been more strongly addressed since 2000, as a result of concern that a narrow focus on accountability for outputs. While output indicators s remain the core of the formal budget system agencies are expected to describe through „statements of intent‟ 39 how they will strive to deliver longer term outcomes – a system now described as “budgeting for outputs and managing for outcomes�.40 While this has resulted in some increase in program evaluation this tends to be carried out on an ad hoc rather than a systematic basis. However the new government elected at end of 2008 has commenced a system of in-depth spending reviews of government programs and organizations to be carried out on a cyclical basis over a 3-4 year period. While New Zealand‟s approach to performance budgeting has been formally based on outputs the link between (output) performance and the budget is a very indirect one – there is no mechanistic link between outputs delivered and the amount of the appropriation. Budget funding is allocated during the year regardless of the actual level of outputs produced and ex post review of variance between budgeted and actual outputs have not been systematic. However the new government is proposing to provide additional funding for organizations in the health and tertiary education sector which achieve their performance targets. Details are still being worked out. Sweden RBM in Sweden reflects its governmental system whereby most public services are provided by autonomous agencies, subject to some general policy supervision by supervising ministries. In return for their significant autonomy, which includes a one line budgetary appropriation and considerable freedom in personnel decisions, agencies are required to achieve results. The Ministry of Finance, together with the National Financial Management Authority (ESV) has overall responsibility for the development of performance measurement systems. Parliament determines the objectives within the 47 expenditure policy areas and below that for the 500 separate programs and sub-programs objectives are determined by the government. Ministries specify what is to be measured and agencies determine the relevant performance measures. 39 SSC (2005) 2005/06 Statements of Intent: Guidance and Requirements ,http://www.ssc.govt.nz/display/document.asp?NavID=208&DocID=4323 40 See Managing for Outcomes Guidance, The Treasury 2003 76 In the earlier stages of RBM extensive numbers of performance indicators were developed and in depth evaluations of all expenditure areas were to be undertaken every three years. However both these proved difficult to manage, leading to rationalization in the number of performance indicators and a more selective approach to evaluation. Performance measurement tends to focus on its use in improved resource allocation and operational efficiency, as well an accountability mechanism. Agencies prepare an annual report which includes financial, performance and other information – including how it has met the objectives set by government for its operations, which form the basis of a performance dialogue between ministries and agencies. The government also prepares a consolidated annual report for the central government sector setting out objectives aimed at and results achieved, and agencies thereafter present their budget request which sets out their objectives and results achieved, which together with the annual reports form the basis of detailed budget reviews by the relevant parliamentary committee. Performance information is further integrated into the budgetary process through special performance reports to parliament on various expenditure areas during the year. United Kingdom The UK RBM framework is based on Comprehensive Spending Reviews (CSRs) and Public Service Agreements (PSAs). Comprehensive Spending Reviews were introduced in 1999 are carried out very 2-3 years. They focus on high level government priorities and lead to three year expenditure plans for each ministry‟s contribution to these priorities. Each ministry‟s PSA contains measurable targets for a range of government objectives, focusing on outcomes. Performance information forms part of the spending review negotiations and ministries but there is no automatic link between performance and resource allocation. USA At the federal level of government, the USA has been grappling with performance budgeting and RBM in various forms for the past 60 years. It has made impressive progress overall in developing transparent performance information (both performance indicators and program evaluation) but there has been little systematic use of performance information by Congress despite the requirements of the Government Performance and Results Act, 1993 (GPRA). Under GPRA agencies are required to develop 5-year strategic plans, set annual program goals and develop output measures through annual performance plans and reports and link them with budget submissions, with five years allowed for its full implementation. These processes are observed but appear little used by Congress. However in the Office of Management and Budget (OMB), which is part of the Executive branch of government, performance information plays a much greater role in informing budget development, mainly through the Program Assessment and Review Tool (PART) initiated in 2002, which aims to cover about 20 percent of programs each year and to better link performance with the budget. a formal program assessment tool developed within OMB (Executive Branch). It aims to reinforce well performing programs and to reform or terminate poor performers by identifying strengths and weaknesses to inform funding and management decisions. Performance measures cover effectiveness, efficiency and service quality. PART seeks to reinforce GPRA requirements in that performance measures are required to be consistent with GPRA. However the US approach is a good illustration of “performance informed� budgeting, under which the extensive performance information produced by the government is used in the formulation and execution of the budget by the Executive Branch of government. 77 Annex 5 Job Descriptions for Budget Analysts (Based on US Office of Management and Budget) Senior Budget Analyst Job Description: The Budget Analyst typically serves as a focal point in MOPF Budget Department with responsibilities for the formulation and execution of the budget in an assigned area. The Analyst performs policy, program management, and regulatory analyses; reviews issues identified as needing special attention; reviews and clears legislative proposals and testimony; reviews executive orders and other documents developed in the Budget Department. The Analyst is also frequently asked to provide leadership and assistance outside his/her own area of expertise and performs a variety of data/information management and administrative tasks associated with budget analysis. Tasks:  Advises State Secretary and Minister on planning and programming for assigned accounts; anticipates and points out the policy implications and problems that require attention; suggests the outline, scope, and schedule of studies and other special projects; presents the needs of new legislation and changes in legislation; recommends and helps to arrange joint endeavors with other divisions of Budget Department and with the department(s) or agencies assigned.  Coordinates the formulations and administration of the budget for accounts assigned. Advises on the formulation of budget and fiscal policy, and ensures implementation of the policy. Reviews budget submissions; acts as chair of budget hearings; and presents recommendations thereon to the Director General, the State Secretary and the Minister. Participates in review of and is primary advisor on Budget Department recommendations relative to budget execution and implementation.  Monitors and evaluates progress made by departments and agencies in implementing and executing the Government policy. Provides updates, as needed, to policy officials as to the progress and efficiency of existing policies and programs in meeting policy objectives.  Performs legislative, economic, management, regulatory, and organization analyses for assigned program areas. Assists the policy staff on reorganization proposals, clarifies relationships during the integration of programs, and other management improvement items.  Develops, reviews, and advises on the preparation of formal documents relative to assigned departments or agencies, such as Budget messages; reviews and, when required, prepares letters for the Director General, the State Secretary and the Minister signature to agency heads.  As assigned, works with Parliamentary Committees or Committee staffs on budgetary or program matters. Qualification Requirements:  Top grade advanced degree in Economics, Public Administration, Public Policy, Law or specialized technical field (health, education, engineering)  8-10 years public sector experience, including in financial management areas  Strong analytical skills, including quantitative  Strong communication both verbal and written and professional confidence and leadership skills needed to interact with senior officials across Government 78 Budget Analyst Job Description: The budget analyst participates in a variety of functions related to the preparation, execution, and analysis of the budget. . The Analyst‟s major objective is to see that as far as possible expenditure programs reflect government policies and priorities, are the most cost effective way of achieving their objectives and are deliveredefficiently Generally, the work encompasses problem identification and resolution; compilation and analysis of program and budgetary information gathered from a variety of sources; technical and substantive review of budgetary data, and other information; preparation of associated tables, reports, letters, memoranda, and the like; liaison functions within and outside of the MoPF; representation of MoPF work at varying levels of government. Tasks:  Contributing to preparation of the budget. Working with other staff of the Division, the analyst coordinates the development of the data base that supports the annual budget and contributes to the preparation of the technical materials portion of the budget document. Reviews agency budget submissions for technical and conceptual accuracy and consistency; works with Senior analysts to resolve problems encountered; ensures that milestones in the budget preparation process are met, and that both the budget document and the data base supporting it are of high technical quality.  Preparation of recurring and ad hoc analytical reports. Frequently using personal computer applications, the specialist compiles data and other information and analyzes its implications in order to produce statistical or analytical reports for the use of MOPF policy leadership. The subject matter of the analysis may concern a wide variety of budgetary topics such as (1) planned versus actual spending in the current fiscal year; (2) the effect of budgetary proposals on the discretionary spending limits established by the FBS.  Analysis of budgetary issues. Working independently or, more typically, as part of a work group, the specialist exercises reasoning skills in considering various conceptual, technical, and procedural issues related to the budget process. The result of these efforts may include (1) development of MOPF positions on various conceptual issues to facilitate the exchange of information with the Parliament; and, (2) development of guidance for the MOPF program divisions and other GOR agencies. Qualification Requirements:  Top grade advanced degree in Economics, Public Administration, Public Policy, Law or specialized technical field (health, education, engineering)  Strong analytical skills, including quantitative  Strong communication both verbal and written 79 Annex 6 Proposed Indicative Integrated Planning & Budget Calendar The table below outlines a proposal for an integrated planning and budget calendar for Romania. The calendar reflects the key dates in the budget Law 500, as well as the new Fiscal Responsibility Law. It also incorporates two key strategic planning components:  A Policy Priorities Note that sets out the key strategic priorities of the Government that should guide the development of the Fiscal Strategy.  A streamlined ministry strategic planning process designed to provide the policy analysis that would support funding allocations and differential expenditure ceilings in the Fiscal Strategy. In addition, the Calendar also incorporates a proposed decision-making sequence that strengthens political engagement in the planning and budget process, and also proposes a clear roll for the Fiscal Council. Essentially, it is proposed that a three step decision process be followed for the three key decision points where substantive engagement at the political level is needed: 1. At the very start of the process, there should be agreement on the government‟s overall priorities, and a general agreement on the fiscal policies to be reflected in ministry strategic plans. This allows ministries to develop the detailed proposals. 2. Agreement on the concrete policy actions and fiscal limits that make up the substance of the Fiscal Strategy approved at the end of May. 3. Approval of the final budget in October. At each of these decision points, it is recommended that the following decision process be followed:  First, recommendations could be reviewed by a ministerial committee. This committee could be the existing Coordinating Committee chaired by the Minister of Finance (but with some redesigned elements, the Strategic Planning Committee chaired by the Prime Minister, or some other configuration that would allow for in-depth political discussion).  Second, the recommendations as endorsed by the ministerial committee, could be sent to the Fiscal Council for comment.  Third, final recommendations could be sent to the Government meeting for final approval. The Government meeting would consider a revised set of recommendations reflecting the advice from the Fiscal Council. This proposed sequencing for decision-making reflects two objectives: the ministerial committee strengthens the internal processes of decision-making by providing a forum for in-depth discussion of key policy issues, and the Fiscal Council strengthens accountability by placing external pressure on government to function better and make better decisions. Due Date Action Resp. Jan. 10 Prepare Policy Priorities Note GSG  This note would be an analytical document that proposes options regarding which policy priorities the government could pursue in developing its Fiscal Strategy. Prepare preliminary macro/fiscal framework including fiscal MoPF parameters to be followed in developing ministry strategic plans 80  This step is the formal start of the Fiscal Strategy process; essentially, it is a concept paper that includes the key fiscal policies and parameters, including indicative ceilings for primary budget holders based on the previous year forward estimates that should guide preparation of the Fiscal Strategy as well as ministry strategic plans. Jan. 15 ‘Ministerial Committee’* (‘MC’) reviews Policy Priorities Note ‘MC’ and fiscal parameters for preparing ministry strategic plans * „Ministerial Committee‟ refers to whichever form of committee is agreed (as discussed above) Jan. 21 Fiscal Council comments on Policy Priorities Note and fiscal FC parameters for preparing ministry strategic plans Jan. 29 Government approves Policy Priorities Note and fiscal Government parameters for preparing ministry strategic plans meeting Feb. 2 Issue Fiscal Strategy & Strategic Planning instructions to MoPF & GSG ministries  Ideally, these instructions should be issued jointly; however, if issued separately, the content and timing should be closely coordinated.  These instructions would include indicative ceilings to inform the strategic planning exercise. Mar. 31 Submit draft strategic plans, including requirements for the fiscal Ministries strategy, to GSG and MoPF Update macro/fiscal forecast (as per Law 500) MoPF Apr. 15 Sector Groups review draft strategic plans and provide comments Sector Groups Apr. 21 MoPF finalizes draft Fiscal Strategy MoPF April 28 MC* reviews draft Fiscal Strategy including sector-roll ups, MC* determines specific priority initiatives (could be savings measures or new initiatives) May 5 Fiscal Council reviews Fiscal Strategy FC May 10 Government approves Fiscal Strategy Government meeting May 15 Submit Fiscal Strategy to the government for approval (as per MoPF FRL) May 25 Government approves Fiscal Strategy Government May 30 Submit Fiscal Strategy to Parliament (as per FRL) MoPF  Jun 15 Parliamentary hearing and approval of fiscal strategy Parliament Note: There is no firm date by which the Parliament must 81 approve the Fiscal Strategy. If the decision by Parliament requires some changes that affect the budget of spending agencies and ministry strategic plans, a supplementary circular should be issued. Jun.16 Issue Budget Circular, including expenditure ceilings for each MoPF spending agency. This should involve specific expenditure limits or other restrictions on development of new proposals, instructions to prepare savings proposals, or other specific initiatives. Issue instructions for updating ministry strategic plans. GSG  These instructions are ideally issued as part of the budget circular, or at least at the same time. Aug. 1 Submit Budget proposals and revised strategy statements to Spending MoPF and GSG Agencies Review budget proposals and draft budget memorandums with MOPF/GSG recommendations to MC Sept 1 ‘MC’ budget reviews ‘MC’ Sept. 7 Finalize draft Budget GSG MoPF Oct. 10 Government approves draft Budget Government meeting Oct. 15 Submit Budget to Parliament MoPF Oct. 22 Issue instructions on annual work plan (including legislative GSG plan) Nov. 19 Ministries submit annual work plan proposals Spending Agencies Dec. 9 Draft annual work plan prepared GSG Dec. 21 Approve annual work plan; and integrated planning and budget ‘MC’, calendar for the next year Government Dec. 28 Approve Budget Parliament January 15 Ministries make final adjustments to strategic plans if necessary Ministries to reflect approved Budget 82 Annex 7 Questionnaire Staff Survey Ministry of Public Finance Respondent Position Senior Management (State Secretary, Director General) Mid Level Management (Director, Head of Section) Staff Years with the Ministry 1. How would you rate the Ministry of Public Finance as a place to work compared with other employers you know about? Favorable Neutral Unfavorable 1 2 3 4 5 2. The Ministry of Public Finance’s overall goals are clearly defined. Favorable Neutral Unfavorable 1 2 3 4 5 3. I have a good understanding of the direction in which the Ministry of Public Finance Senior Management is leading the institution. Favorable Neutral Unfavorable 1 2 3 4 5 4. I am proud to work at the Ministry of Public Finance. Favorable Neutral Unfavorable 1 2 3 4 5 5. How would you rate the quality of service that the Ministry of Public Finance provides to its internal and external clients (Line Ministries, Tax Payers)? Favorable Neutral Unfavorable 1 2 3 4 5 6. Current internal processes and procedures allow me to deliver high quality services to my clients (Line Ministries, Tax Payers), Other Internal Units). Favorable Neutral Unfavorable 1 2 3 4 5 7. I have a good understanding of what is expected from me in my job. Favorable Neutral Unfavorable 1 2 3 4 5 8. The resources allocated for my tasks are adequate to do a quality job. Favorable Neutral Unfavorable 1 2 3 4 5 9. I feel encouraged to find new and better ways of doing things. Favorable Neutral Unfavorable 83 1 2 3 4 5 10. I feel free to take informed risks in doing my work. Favorable Neutral Unfavorable 1 2 3 4 5 11. My job makes good use of my skills and abilities. Favorable Neutral Unfavorable 1 2 3 4 5 12. My manager demonstrates the technical competence to lead the group effectively in meeting its overall goals. Favorable Neutral Unfavorable 1 2 3 4 5 13. Staff and manager changes (e.g., promotions, reassignments) in my work group are made on an objective job-related basis. Favorable Neutral Unfavorable 1 2 3 4 5 14. In my work group, individual staff are held accountable for their performance. Favorable Neutral Unfavorable 1 2 3 4 5 15. In the Ministry of Public Finance, staff are rewarded according to their job performance. Favorable Neutral Unfavorable 1 2 3 4 5 84 Annex 8 Partial Lists of Persons Met Adrian Popescu Director General, General Directorate for Information Technology Alina Toma Head of Service, General Directorate for Budget Programming Ana-Maria Head of Service, General Directorate for Budget Programming Enache Anca Iordache Adjunct Director General, General Directorate for Information Technology Angela Carabaş Director General, General Directorate for Treausry and Public Debt Management Bogdan Drăgoi State Secretary, MOPF Carmen Director General, General Directorate for Strategic Planning and Monitoring, NAFA Bălăşoiu Constantin Director, General Directorate for Budget Programming Năstase Cosmina Director General, General Directorate ECOFIN Relations Geabunea Dan Matei Head of Service, General Directorate for General Directorate for Macroeconomic Analysis and Financial Policy Daniel Gruia Director General adjunct, Directorate General for Information Technology, NAFA Daniela Director, General Directorate for Budget Programming Şchiopu Dobre Alin Director adjunct, Directorate for budgetary relationships with the EU Stelian Doina Ilie Director General, General Directorate for public accounting methodology Dorin Măntescu Director General , General Directorate for Macroeconomic Analysis and Financial Policy Gabriela Director adjunct, School of Public Finance and Customs Martienscu Georgeta Petre Director, Directorate General for Accounting Regulations Georgia Babici Advisor to the Minister, MOPF Gheorghe State Secretary, MOPF Gherghina Graţiela State Secretary, MOPF Iordache Ioan Nicolescu Secretary General, MOPF Ioana Burlă Director General, General Directorate for Budget Synthesis and Policy Ioana Hanganu Head of Service, General Directorate for Budget Programming Ion Capdefier Director General , General Directorate Tax Code Julien Zamfir Director, General Directorate for Budget Programming 85 Lăcrămioara Director, Budget Accounting, MOPF Alexandru Letiţia Taloi Financial Controller, Head of Central Harmonization Unit for Internal Control Lucica Diaconu Head of Service, Directorate General for State Asset Management Mălina Marica, Director, School of Public Finance and Customs Maria Popescu Head of Service, General Directorate for Budget Programming Mihaela Public Manager, Public Policy Unit, MOPF Nedelcu Mioara Masariu Head of Service, General Directorate for Budget Programming Mirela Executive Director, Regional Treasury and Tax Administration Bucharest Călugăreanu Mirela Şiţoiu Director General , General Directorate, Human Resource Management Nicu Popescu Lead Advisor, General Directorate for Budget Programming Niţă Georgian Head of Service Inspectorate General Octavian Director, Directorate for International Cooperation, National Agency for Fiscal Deaconu Administration (NAFA) Radu Traian NAFA Vice President for Customs Administration Marginean Raluca Director, Directorate for budgetary relationships with the EU Zamfirescu Robert Hofnar Director General, General Directorate for Tax Administration Procedures, NAFA Roxana Director, General Directorate for Budget Programming Petrescu Sorin Blejnar NAFA President Ştefan Ciobanu Director General, Coordinating Authority for Structural Funds Ştefan Daia Director General , Directorate General for Information Technology, NAFA Tanţi Anghel Director, Directorate for Tax Administration Code Tiberiu Tudoran Director General, Central Harmonization Unit for Internal Audit Valentin Director General, General Directorate for Treasury and Public Accounting Mavrodin 86