PIFC - CROATIAN EXPERIENCE

1. Pifc –croatianexperience, difficultiesandlessonslearnedDanijelaStepić, PIFC consultant, former director of CHU MoF Croatia

2. PIFC - CROATIAN EXPERIENCE • Introduction • Difficultiesand how weaddressedthem • Lessonslearned

3. PIFC - CROATIAN EXPERIENCE • PIFC started in 2004 and it is stil on-going process • First we started with IA, then FMC activites started in 2007 • Negotiation process with EC – Chapter 32 Financial control opened 26 June 2007/provisionally closed 27 July 2010 • Monitoring mission of EC DG Budget – in the period of negotiation twice a year, later once a year • We had support from DG Budget, EU projects/consultants, SIGMA…, but made significant efforts and have been an active partner in developing PIFC

4. PIFC - CROATIAN EXPERIENCE Precondition for PIFC development • Strategic documents prepared and implemented • Legal framework established • laws, bylaws, rulebooks, instructions, manuals, guidelines • Administrative capacity building • trainings, seminars, educationof public officials) • Approach: PIFC development integratedwith other reform procesess such as: • Budget System Reform • Public Administration Reform • Development of the system for EU funds management • Anticorruption initiatives

5. FMC development – difficulties Inthebeginingsof FMC developmentin 2007…. • FMC wasseen as somethingthat is an “add-on” to theexistingsystemofmanagementinpublicsector • There were no clearlinksbetween FMC developmentsandbudgetsystemdevelopments • Detailedanalysisofthe currentstateof FMC werenotconductedandthereforeitwasnoteasy to determinetheprioritiesandconcretemeasures for theformersituation

6. FMC development – difficulties Inthebeginingsof FMC developmentin 2007…. • FMC inthe“legalprovisions” had all preconditions, but practicalimplementation had difficulties • Practicalimplementationof FMC at thebeginningwasfocusedon theprocesses (descriptionofprocesses, definingtheobjectivesoftheprocesses, identifyingriskinthe processes…. FMC almost becamelike the preparationforthebookofprocesses) • Thewholepictureof FMC developmentwasnotclearenough, as was themeaningof“value for money” and“managerialaccountability” inpractice

7. FMC difficulties – how we addressed them • Itwasrecognisedthat FMC developmentsrequiredevelopmentsofthe budgetsystem frominputbasedbudgeting to outputbasedbudgeting • Budgetreformsstarted 2008 andcreatedthe preconditions for FMC development Strategy for improvement and modernization of processes in State Treasury (2007 - 2011) new Budget Act (2008) • FMC developmentfrom 2009 hasbeencompletely put on thesupportofbudgetreforms Strategy for PIFC (2009 – 2011) Fiscal Responsibility Act 2010

8. FMC difficulties – how we addressed them Integrationof FMC toolsandtechniques intothe budgetsystem • Strategicplanning (mission, vision, objectives) introducedintothe budgetcycle (ministriesandcountiesobliged to preparestrategicplans, to link strategicobjectiveswithbudget resourcesviaprogrammes, strategicplansoftheministriesandcountries includesecondlevelbudget usersfromtheircompetance) • Objectivesandperformanceindicatorsintroducedintoprogramme budgeting • Riskmanagementintroducedintostrategicplanningandannual planningofactivities

9. FMC difficulties – how we addressed them Integrationof FMC toolsandtechniquesintothe budgetsystem 4. Decisionoftheministers/mayorsaboutresponsibilitiesofmanagers for achievingobjectivesandbudgetresources (mechanism for practicalimplementationofmanagerialaccountablitymanagers – assistantministers, headofsector are responsible to theminister for achievingstrategicobjectivesandmanagingof budgetresources ) • Internalprocedures for managingliabilities, revenues, assetsmanagement 6. Selfassessmentquestionaireaboutfunctioning FMC intheplanningof budget, executingofbudget, accounting, procurement, reporting - basis for FiscalResponsibilityStatemenentthatministers/countyprefects/ mayors/ is signing

10. FMC difficulties – how we addressed them Integrationof FMC toolsandtechniquesintothe budgetsystem • Plan for FMC developmentthatbudgetusersprepareeveryyear consistsof: -measures oriented to solve identified weakness through self-assessmentquestionnaires, Statement of Fiscal Responsibility, SAO findings, Internal Audit Findings - measures for further development 8. Thefirstlevelbudgetusers (ministries, counties, cities) are obliged to coordinatetheactivities for FMC withthesecondlevelbudgetusers (preparationofstrategicplans, consolidationofbudget, consolidationoffinancialreports, riskmanagement…., monitor thelevelof FMC developments, weaknesess, measurestakenfor improvementsetc.)

11. FMC difficulties – how we addressed them Allthepreviousmentionedactivitieswereneeded to showthat FMC is not“add-on” to theexistingsystemofmanagement, ratherthan existingsystemofmanagementshouldbeimprovedbyintegrationof FMC toolsandtechniques intothem Budgetreformswereneeded to createpreconditions for FMC developmentsthrough all ofitscomponents Developmentsinbudgetarysystemhelpedus to perceivemore easily theoverallpicture for FMC development ….

12. Development in budgetary system and FMC introduced a systematic approach to management Implementation of planning documents, programs, projects Up to the organization How do we achieve it ? Strategic plan Working procedures Mission BUSINESS PROCESSES Programs Vision Projects General Objectives Functional activities (finances, human resources, procurement, IT, assets) Plans Special objectives

13. elements from the previous slide should be placed in context of organizational structure at budget users (who does what? what powers does s/he have? Whom does s/he report to? How successful s/he is in executing the assigned tasks?...)

14. MINISTER/COUNTY PREFECT/MAYOR/ PIFC FiscalResponsibility Internal audit Finance Directorate DIRECTORATE C DIRECTORATE A DIRECTORATE B Services Services Services Services 2nd and 3rd level budget users Agencies Centres Health Institutions Cultural Institutions Educational Institutions

15. FMC difficulties – how we addressed them FMC cannotbesuccessfullyimplementedjustthroughguidelines, instructionsonlycomingfromthe CHU ! It must beintegratedalsointolegislation/quidelines/instructionsthat are comingfromotheractorsofkeyreformsinpublicsector (incaseof Croatia - State Treasury, MinistryofAdministration, MinistryofRegionalDevelopmentand EU funds) This is how we are changing the preconceptionof FMC as somethingthat is “added-on” insteadof anintegrativepartofthe managementfunction for example : we are developingriskmanagement as integrativepartofplanning anddecisionmakingprocess

16. FMC difficulties – how we addressed them example: Risk management implementation CHU is promoting risk management developments, giving overview of direction of development, explaining the crucial steps that should be taken, organising seminars and workshops for managers, Cooperation with the State Treasury and Ministry of Administration helped us to integrate risk management process into day-to-day activities where this processbelongs – planning and decision making

17. FMC in Croatia – Lessons learned • FMC development requires budget system development • FMC is not an „add-on” to existing management systems. There is the need to change current ways of managing budget resources and to improve them through implementation of FMC • Detailed analyses of the current state of financial management and control are necessary for determining priorities and concrete measures for improvement

18. Establishment of IA – Croatian experience We have changed the criteria for establishment IA function 4 times • 2004 - every budget organisation was obliged to establish IA • 2005 - Ministries, counties, large cities, BO with 4 mil EUR or 100 employeeswere obliged to establish IA units • 2008 – Ministries, counties, large cities, BO with 4 mil EUR and 50 employeeswere obliged establish IA units • 2013 - NEW CRITERIA

19. Establishment of IA – difficulties • Large number of small budget organisations obliged to set up IA unit • Problem to establish IA units with the adequate number of internal auditors due to lack of budget and human resources • Subordinated budget organisations established their own IA unit but with a small number of internal auditors (mostly one IA) • Scattered internal audit resorces, small IA units, and still a number of BOs, mostly from second level obliged to establish their own IA function WE HAD TO FIND A WAY FOR THE RATIONAL ESTABLISHMENT OF IA FUNCTION !

20. IA difficulties – how we addressed them 2013- a new Rulebook for IA has been prepared with newcriteria • IA units from ministries, counties, big citiescover second level BO (subordinated BO ) • Second level BO can establish IA unit if necessary because of size, importance of transaction, etc ( for example agencies dealing with EU funds) • Common internal audit units – for the hospitals, universities, municipalities • Establishment of IA function by appointment of one internal auditor is limited to small number of BO who report directly to Parlament • Establishment of IA by agreement – for municipalities

21. IA in Croatia – lessons learned • Possibilitiesfor developing internalauditdepend on thelevelofthedevelopmentoffinancialmanagement, especiallyrelating to: • wayofestablishinginternalauditininterrelatedinstitutions (budgetusersof 1st and 2nd level, e.g. ministriesandagencies...) • scopeof work ofinternalaudit • acceptanceofinternalauditbymanagementstructure

22. Management support to IA It is important to develop a mutal relationship between managers and internal auditors with active involvement of both sides Internal audit Management • active role in promoting IA • to provide advice, rather then critique • competence of IA • focus on the priorities for BO • Systemaudits/performance audit • to understand role and purpose of IA • to understand differences between control /internal audit/inspection • accept IA as a management „tool”for improvements • implementation of audit recommendations

23. PIFC – lessons learned It is importantthatthe CHU plays a veryactivecoordination role and to harmonisedevelopmentofPIFC withotherareassuch as budgetsystemandpublicreforms CHU in Croatia developedactivecooperationwith : • State Treasury • MinistryofAdministration • MinistryofRegionalDevelopmentand EU fundsandotherinstitutionsinvolvedinEUfundsmanagament • State Audit Office • Budgetusers (stateandlocallevel) • PIFC council Cooperation is accomplishedthrough : regularmeetings, involvementinthepreparationoflegalacts, organisationofcommontrainingsetc. Weusedsupportof DG Budget,DEU Zagreb, SIGMA, projects – recommondationsof EC, SIGMA reports, progressreports

24. reform holders EU stand. and best practices Government of Croatia Croatian Parliament Pifc Council State Audit Office State Treasury alignmment with the best EU practices European Commission budget reforms Central Harmonisation Unit Ministry of Public Administration public administration reform International projects support uniform approach local level reforms CRO institutions involved in EU funds management Ministry of Regional Development and EU Funds system development coordination with budget users Central level ministries, state offices, extra-budgetary users… Local level counties cities, municipalities 2nd level agencies, institutes, centres Majority government-owned companies 2nd level schools, kinder-gartens, health institutions… Majority government-owned companies

25. Challenges in front of us… • PIFC requires continuous development • PIFCtools and techniques require managers in the public sector who will know how to use these tools and who will play an active role in PIFCimplementation • well educated managers in the public sector are crucial precondition for successful implementation of PIFC • managers need to understand “the substance of the PIFC” rather then “a form of its implementation” • wehave to improvethequalityofstrategicplanning, programmebudgeting, riskmanagement, furtherdevelopmentofcontrolmechanism for acheivingbetterefficiencyandeffectivenessinmanagingofbudgetresources

26. Thank you for your attention!