CROATIA: TRANSPARENCY OF BUDGETS/MILITARY SPENDING

UNCLAS ZAGREB 002041

SIPDIS


DOD FOR OASIA/MDM:J. FRANCO
STATE FOR EB/IFD/OMA:L. GALLAGHER

E.O. 12958: N/A
TAGS: EFIN EAID MARR HR NATO
SUBJECT: CROATIA: TRANSPARENCY OF BUDGETS/MILITARY SPENDING

REF: SECSTATE 239929


1. In response to reftel, post provides the following, keyed
to reftel questions:


A. General Overview of Auditing Procedures:

(1) - According to the MOD, military expenditures are audited
in various ways. Commanders, heads of units and the
Financial Section of the MOD are responsible for monitoring
the budgets. There is an internal MOD auditor (the
Department for Programs, Budgets and Finance),and an
external auditor -- the State Audit Agency, which examines
financial reports annually. There is also an Inspector
General within the MOD for ad hoc investigations.

(2) As noted above, there are both internal MOD and external
audits.

(3) The Inspector General reports to the Ministry of Defense;
the State Audit Agency reports to the Parliament.

(4) Most of the people to whom the auditors report are
civilians (most of the top ranking people in the MOD are
civilian).

(5) There is a legislative framework for annual audits of
military expenditures.

(6) The Law on State Auditing requires annual audits of
receipts that fund the military.

-- Post knows of no recent scandals involving military
expenditures (there were serious problems in the MOD in the
'90s). The local press has been active in uncovering
procurement "scandals" in the Ministries of Health and
Transportaion, but has not reported on any financial scandals
in the MOD or military services in recent years.
Approximately seventy percent of the military's budget is for
personnel expenses, very little for procurement. Budgeting
and monitoring of budgeting are still developing in Croatia
(departments and ministries routinely over- and under-spend
their budgets),but we know of no major current cases of
abuses or fraud in the MOD.


B. Military Budget and On-Budget and Off-Budget Revenues and
Expenses

(1) The Defense Budget includes the armed forces; the
intelligence and internal security forces are covered by
other budget items ("security forces" includes only police;
Croatia does not have a gendarmerie or other paramilitary
internal armed force)

(2) There are some small off-budget receipts (from
military-owned businesses, such as hotels and related
businesses) which are reportedly audited by MOD internal
auditors.

-- An outstanding question currently under debate in the
government is how to deal with the proceeds of privatized
military property, including some desirable real estate on
the coast. One school advocates directing those proceeds
directly back to MOD, to help with modernization and fund the
social costs of the major downsizing currently going on.
Another school believes that money should come back to the
central treasury, which would facilitate monitoring and
auditing. This issue remains unresolved.


C. The Military Component of the National Budget

(1) Military spending is barely two percent of GDP, scarcely
enough to finance the modernization of the military (Croatia
is a NATO aspirant). We do not believe it receives priority
over "development" spending.

(2) Budget priorities can be and are debated in the
Parliament.


2. Comment: While Croatia has a lot of room for improvement
in its budgeting process in general -- an area it must
improve upon to advance its NATO and EU aspirations -- we
believe that Croatia meets the standards set out in the
Transparency of Budgets legislation.
FRANK


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