Identifier
Created
Classification
Origin
08SKOPJE168
2008-03-03 12:43:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Skopje
Cable title:  

MACEDONIA's MISSED CAPITAL INVESTMENT OPPORTUNITIES

Tags:  EFIN ECON PGOV MK 
pdf how-to read a cable
VZCZCXYZ3155
RR RUEHWEB

DE RUEHSQ #0168/01 0631243
ZNR UUUUU ZZH
R 031243Z MAR 08
FM AMEMBASSY SKOPJE
TO RUEHC/SECSTATE WASHDC 7132
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE 0229
RUEATRS/DEPT OF TREASURY WASHDC
RUEAIIA/CIA WASHINGTON DC
RUESEN/SKOPJE BETA
UNCLAS SKOPJE 000168 

SIPDIS

SENSITIVE
SIPDIS

DEPT FOR EUR/SCE
TREASURY FOR W. LINDQUIST AND T. PHILLIPS

E.O. 12958: N/A
TAGS: EFIN ECON PGOV MK
SUBJECT: MACEDONIA's MISSED CAPITAL INVESTMENT OPPORTUNITIES


SUMMARY
-------

UNCLAS SKOPJE 000168

SIPDIS

SENSITIVE
SIPDIS

DEPT FOR EUR/SCE
TREASURY FOR W. LINDQUIST AND T. PHILLIPS

E.O. 12958: N/A
TAGS: EFIN ECON PGOV MK
SUBJECT: MACEDONIA's MISSED CAPITAL INVESTMENT OPPORTUNITIES


SUMMARY
--------------


1. (SBU) The GOM repeatedly has been unable to spend all the money
it has allocated for capital expenditures, even though government
infrastructure investments are a critical driver of sorely needed
economic growth and employment. Analysis of the budgeting process
indicates that balky procurement regulations, constant budget
adjustments due to poor financial planning, and bureaucratic
inefficiency are to blame for the government's lower-than-projected
spending. End summary.

MORE SPENDING!
--------------


2. (SBU) For several years, the GOM consistently has missed its
capital expenditures targets, including spending for construction
and rehabilitation of government facilities, roads, education and
cultural facilities, and infrastructure for energy and utilities.
Although targeted capital investments are important drivers of
economic growth, the GOM again failed to maximize its capital
investment expenditures in 2007. Although the GOM agreed with the
IMF to a deficit target of one percent of GDP for FY 2007, according
to Ministry of Finance (MOF) officials, it ended with a 0.6% surplus
due to higher-than-expected revenues and laggard spending. Post
developed this analysis of the reasons for the spending shortfall
after discussions with MOF officials, the IMF Resident
Representative, and such budget users as the GOM Road Fund.

ESTABLISHING CAPITAL EXPENDITURE TARGETS
--------------


3. (U) The GOM's process for establishing budget targets, including
capital expenditures, is relatively sophisticated largely due to an
on-going Department of the Treasury technical assistance program.
The budgeting process starts in March, with the development of the
government's strategic priorities for the following year. Using
these priorities, the MOF's budget department develops a medium term
plan establishing spending ceilings for each budget user, such as
the Ministry of Transport. After the Prime Minister and his cabinet
approve the plan in May, a budget circular is prepared and sent to
each user. Budget users, in collaboration with MOF, outline

proposed capital projects for the fiscal year. Once initial GOM
approval is granted, each user submits the completed circular to the
MOF online. The circulars are combined into a draft budget in
August; readjustments are then negotiated with budget users. The
final draft is sent in November for Parliamentary approval, after
which budget users may draw on allocated funds beginning in January
of the new fiscal year.

IF YOU HAVE IT, SPEND IT
--------------


4. (SBU) Despite the collaborative nature of the budgeting process,
many budget users consistently fall short of their proposed capital
expenditures. These shortfalls are caused by a combination of
procedural delays and hindrances in the procurement process,
constant adjustment of the budget due to poor financial planning,
and bureaucratic inefficiencies which hinder the planning and
execution of capital projects.


LENGTHY PROCUREMENT PROCESS
--------------


5. (SBU) Procedural roadblocks inherent in the previous law on
public procurement are the factors most often cited as reasons for
shortfalls in capital spending. That procurement law included an
unnecessarily long 60-day period for evaluating tenders. Each
winning bid required MOF budget department approval after completion
of the tender to ensure that funds were actually available. In
addition, the appeals process was poorly managed and overwhelmed the
commission assigned to review contested awards. These factors
combined to retard procurement spending and lengthen the tender
decision process. By law, unspent funds were returned to the
National Bank at the end of the fiscal year. That required budget
users to request new funds for the following year, and hampered
execution of multi-phase/multi-year projects. The new law on public
procurement, which became effective on January 1, reduces the
deadline for deciding on tenders and removes the requirement for
final bid approval from the MOF, which should help selected budget
users execute capital spending plans with greater timeliness and
efficiency.

CONSTANT BUDGET READJUSTMENT
--------------


6. (SBU) The GOM's habit of constantly readjusting the budget
further complicates the procurement process. During the year, the
GOM usually sends to Parliament at least one "rebalanced" budget
with new spending targets. This adjustment process consumes
administrative capacity and delays proposed tenders for capital
projects until the rebalanced budget is accepted. In FY 2007, the
GOM rebalanced the budget twice. While significantly
greater-than-expected government revenues in FY 2007 triggered the
first rebalancing, the second budget adjustment was implemented late
in the fiscal year, leaving little time for new capital projects to
be planned and executed. Improved forecasting during the initial
budget formulation process would reduce the need for such
adjustments during the fiscal year.

BUREAUCRATIC INEFFICIENCY
--------------


7. (SBU) A third factor contributing to missed capital spending
targets is bureaucratic inefficiency among individual budget users.
Authority within ministries is highly centralized, with the minister
required to approve all projects. Procurement staff will not take
initiative on proposed projects without executive guidance or
approval, which contributes to delays. Slow and unrealistic
implementation planning further complicates the process. Many
budget users are aware in November of their likely funding
allocations for the following fiscal year, but they do not begin to
plan implementation of capital expenditures until after the budget
actually passes the Parliament at the end of December. Finally,
fund disbursements are based upon annualized schedules, not
realistic analysis of the procurement schedule. The new procurement
law permits 50 percent of unspent funds to be carried-over to the
following fiscal year.

IF YOU BUILD IT...
--------------


8. (U) Despite obstacles inherent in the procurement process and
bureaucratic decision-making cycle, some budget users do/do manage
to meet their annual spending targets. For example, the Road Fund
achieved 110 percent of its FY 2007 targets, proving that realistic
capital spending targets can be reached. The Road Fund admittedly
benefits from a highly focused mission, but it is likely that other
budget users could achieve similar results if executive attention
and administrative resources were properly coordinated. The changes
required under the new procurement law will assist in identifying
other roadblocks in the capital expenditure process.

FISCAL CREATIVITY IMPROVED 2007 STATISTICS
--------------


9. (SBU) In late 2007, the GOM used a creative but short-term
solution to meet its capital spending targets. By the end of
November, the GOM had spent only 65 percent of the amount budgeted
for annual capital spending; by the end of December, however, the
GOM miraculously had reached 98 percent execution of its capital
spending target. The GOM achieved this apparent turnaround by
quickly proposing new capital projects and transferring money to
municipalities or independent government agencies to implement those
projects. This allowed the GOM to disburse FY 2007 funds before the
end of the year, while municipalities or independent agencies were
given the opportunity to actually spend the money in the next
calendar year.

COMMENT
--------------


10. (SBU) Macedonia's public infrastructure needs significant
investment, so it is unfortunate that the GOM has been unable to
make full use of its available funds. While the spending shortfalls
have been consistent over the past several years, the new
procurement procedures should ameliorate one of the causes of low
capital spending. However, the new procurement law will not address
other obstacles to effective capital spending, including constant
budget adjustments and bureaucratic inefficiency. Until those
issues are resolved, the GOM is likely to continue using legal, but
questionable, end-of-year transfers to municipalities and other
government agencies to ensure capital spending targets are met. End
comment.
NAVRATIL