Public Finance Management in the South Caucasus

Project description

Title: Public Finance Management in the South Caucasus
Commissioned by: German Federal Ministry for Economic Cooperation and Development (BMZ)
Country: Armenia, Georgia
Lead executing agency: Ministries of Finance in Armenia and Georgia
Overall term: 2014 to 2017

Context

The reform of the public finance management (PFM) systems is one of the most important goals of the Georgian and Armenian Governments. Both countries have made progress, for instance in stabilising tax revenues and fighting corruption. The PFM reforms are intended to improve the transparency of how public money is used, while increasing the legitimacy of government institutions. Public spending should become more efficient and the democratic oversight of the use of funds should be strengthened.

At present, the administrations lack trained personnel able to manage and implement the complex budget and finance reforms. There is also insufficient data and information for planning and analysing public expenditure. The supreme audit institutions repeatedly identify shortcomings in the regulation of how government funds are used, and this makes effective management all the more difficult.

Objective

Subsystems of public finances approach European standards in the fields of efficiency, transparency and accountability

Approach

In both countries, GIZ is advising the ministries of finance, the parliaments and the audit office. Besides strengthening the capacities of the individual partner institutions, the programme also focuses on the interplay between those institutions in the budget system.

Results-oriented budget management. Both countries are adopting a results-based budgeting procedure. An improved planning process, based on objectives and measureable indicators, will be inter-linked with the auditing and budget system. GIZ supports the revision of the budget legislation and the methodological framework, while carrying out capacity development in the participating ministries.

Strengthening internal control systems. GIZ is advising the ministries of finance in both countries on establishing and developing internal auditing procedures for public administration. It is also supporting the modernisation of regulations affecting the management of public resources. The approach taken is based on the European Public Internal Financial Control (PIFC) concept. This provides a structured and functional model to assist national governments with the re-design of their internal control environment, enabling them, in particular, to upgrade their public sector control systems in line with international standards and EU best practice.

Strengthening external financial controls. A properly functioning, independent supreme audit institution fosters the transparent and efficient management of government funds. GIZ is supporting the introduction of new auditing methods, especially with respect to performance auditing, as well as improved reporting procedures and cooperation with the respective parliaments.

Parliamentary oversight. Efforts to improve the parliamentary analysis of draft budgets and audit reports, and an enhanced discussion of expenditure policies all serve to strengthen democratic controls and make decision-making processes more transparent.

Tax legislation. In Georgia, the programme also supports the Ministry of Finance in adjusting its tax legislation to match European standards and international tax laws.

Interaction of the institutions. An effective budget cycle requires inter-institutional cooperation between the ministry of finance, supreme audit institution and parliament. GIZ is advising its partner institutions on achieving a common understanding of their roles and responsibilities.

Results achieved so far

The programme builds on an earlier project and reflects measures previously taken in both countries.

In Armenia, with assistance from GIZ, a new budget law was drafted and introduced to the parliamentary process in 2013. Prior to this, the ministries involved benefited from tailor-made and on the job training for the new procedures. In 2015, parliament established a budget office, and the government passed into law a national strategy for the introduction of programme budgets. Since 2014, the three above-mentioned institutions of the budget system have collaborated regularly in a high-level steering group.

In both countries, all the heads of internal auditing and the majority of auditors and local trainers – around 240 people – have received comprehensive training. To incorporate this in institutional structures, the ministries of finance have received advice on developing their own sustainable training strategies.

The State Audit Office of Georgia has, for the first time, evaluated the cost-effectiveness and usefulness of public programmes. With the assistance of GIZ, the systems for reporting to the parliament continue to improve, so that the budget committee can better utilise the audit results. Through a change in legislation, parliament has also strengthened the independence of the auditing authority.

In the Georgian parliament, meanwhile, parallel administrative structures and resources have been established for budget analysis, cooperation with the auditing authority and the provision of advice on its auditing reports. National and regional dialogue forums encourage professional exchanges between institutions and stimulate discussion on the common understanding of the responsibilities of actors involved.