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 NNNN