PART I AUDIT REPORT ON FINAL STATEMENT OF ... Audit Report on the Final...i.e. data presented in the Bill on Final Statement of Accounts of the State Budget of Montenegro for 2012

PART I

AUDIT REPORT

ON FINAL STATEMENT OF ACCOUNTS OF THE STATE BUDGET OF MONTENEGRO FOR 2012

Audit type: General audit – Compliance audit Audited entity: Government of Montenegro – Ministry of Finance Subject of audit: Final Statement of Accounts of the State Budgets of Montenegro for 2012 Audit duration: 140 auditing days Collegium members: Mr Milan Dabovic, PhD, President of the Senate – Head of Collegium

Mr Dragisa Pesic, member of the Senate – member of the Collegium

Annual Report of the State Audit Institution for the Period October 2012 – October 2013

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Based on performed audit, determined factual state and deliberation of the audited entity’s Opinion regarding Preliminary report of the State Audit Institution (40111-01-149/99 as of 2nd September 2013), and pursuant to Art. 9. of the Law on State Audit Institution and Art 50 of the Rules of Procedure of the State Audit Institution, the authorized Collegium, comprising of the following members: Milan Dabovic, PhD (President of the Senate – Head of Collegium) and Mr Dragisa Pesic (member of the Senate – member of the Collegium), at its session held on 30th September 2013 passed the following:

FINAL AUDIT REPORT on the Bill on Final Statement of Accounts of the State Budget of Montenegro for 2012

O P I N I O N

The Audit of the Bill on Final Statement of Accounts of the State Budget of Montenegro for 2012 has been conducted in compliance with the International Standards of Supreme Audit Institutions (ISSAI standards) and applicable Montenegrin regulations. The audit has found that the Draft Law on the Final Statement of Accounts of the State Budgets of Montenegro for 2012 does not present an entirely true and fair view of the stated results, as well as of cash-based expenses. The aforementioned discrepancies primarily refer to the following materially significant segments: the result stated in the budget deficit, overspending in budget expenses, inappropriate use of budget funds and the procedure of implementation Amendments to Annual Budget Law for 2012. Therefore, according to the established irregularities and stated comments, the competent Collegium of the State Audit Institution expresses QUALIFIED OPINION.

DETERMINED IRREGULARITIES AND RECOMMENDATIONS

I – VARIANCE ANALYSIS AND MATHEMATICAL ACCURACY

According to the Bill on Final Statement of Accounts of the State Budget of Montenegro for 2012 cash deficit amounts to EUR 198.18 millions. The cash budget deficit is a result of the deficit incurred in the current budget (negative savings EUR 130.49 million), repayment of outstanding debts which do not have the character of borrowings in the amount of EUR 35.74 million and capital expenditure of EUR 67.69 million. Execution of the Budget for 2012 shows that fiscal adjustments planned by the Revised budget have not been appropriate, which led to the higher rate of cash deficit in relation to the one projected by the Revised budget, amounting up to EUR 43.24 million (projected deficit amounted to EUR 154.93 million, while the realized deficit was EUR 198.18 million. Execution of the budget has shown an additional decline in the main source of finance amounting to EUR 29.04 million and an increase in public spending amounting to EUR 14.20 million, i.e. data presented in the Bill on Final Statement of Accounts of the State Budget of Montenegro for 2012 indicate that the realized cash deficit for 2012 amounted to EUR 198.18 million. Cash basis of deficit, derived based on data from the Bill on the Final Statement of Accounts of the State Budget of Montenegro for 2012, adjusted per net changes in the balance of outstanding debts, shows the budget result as stipulated by Article 16 of the Law on Budget ("Official Gazette of Montenegro", № 46/10). Corrected deficit amounts to EUR 95.55 million. i. An additional analysis of the cash deficit has found a recorded amount of EUR 17.28 million charged to

repayment of securities, which represents capital budget expenditure. Thus, the budget result has been improved by the same amount and repayment of principal debt has unrealistically been presented. After these adjustments the final deficit amounts to EUR 212.83 million.


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a) Recommendation: Develop the Rulebook on records of outstanding debts and their repayment

in compliance with the Rulebook, establish a centralized record of occurrence and repayment of outstanding debts at the Ministry of Finance. Make corrections in the Bill on the Final Statement of Accounts of the State Budget for 2012 regarding the presented amount of the deficit, as well as adjustments relating to:

Increasing capital expenditures up to EUR 17.28 million, reducing principal debt repayments in the same amount, with the corresponding updates in financing transactions;

Reducing the repayment of debts in the amount of EUR 7.10 million, increasing in transfers to individuals, NGOs and public sector amounting EUR 1.84 million and other expenses and / or reserves in the amount of EUR 5.26 million;

Reducing subsidies in the amount of EUR 4.56 million and increasing transfers for social protection in the same amount.

ii. State budget overrun has been found in 17 consumer units in the total amount of EUR 15.17 million, out of which the allowed overspending, on the basis of donations and foreign loans, amounted to EUR 5.25 million, so the Bill on Final Statement of Accounts of the State Budget of Montenegro for 2012 has presented consumption by specified users which was increased by EUR 9.98 million in relation to the legally approved. State budget overrun has mainly resulted from the expenditures incurred due to enforcement of court decisions. However, the amount of EUR 1.36 million accounts for the current expenditure (only for this amount the Ministry has made increase and decrease in liabilities for the execution of expenditures arising from court decisions). It was necessary to use current expenditures for this amount of payments, including: transfers to individuals and / or the current budget reserve. Correction of current and capital expenditures leads to further budget overrun, which exceeds the amount reported by the Bill on the Final Statement of Accounts of the State Budget of Montenegro for 2012 by EUR 24.31 million, without the possibility of full allocation of costs per specific user. These procedures led to violation of Paragraph 3 of Article 11 of the Law on the State Budget ("Official Gazette of Montenegro", № 40/01 as of 14th August 2001, № 44/01 as of 17th September 2001, № 28/04 as of 29th April 2004, № 71/05 as of 28th November 2005, "Official Gazette of Montenegro", № 12/07 as of 14th December 2007, № 73/08 as of 2nd December 2008, № 53/09 as of 07th August 2009, № 46/10 as of 06th August 2010, № 49/10 as of 13 August 2010), which states: ”No expenditure from the Consolidated Treasury Account shall not be paid unless approved by the Law on the State Budget”.

b) Recommendation: After the correction of results, consumption that increases the allowed

amount can only partially be justified by repayments of outstanding debts arising from court decisions. In this way, jeopardizing the fiscal discipline makes the role and importance of the Annual State Budget Law irrelevant, and therefore the State Audit Institution recommends to the Government of Montenegro and the Ministry of Finance to take into consideration the fiscal limitations as defined by the Annual Law on Budget in the current and the forthcoming period.

iii. Article 14a of the Law on Amendments to the Law on Budget of Montenegro for 2012 has not been standardized accurately. Namely, pursuant to Article 14a, the revised budget for 2012 has foreseen that the planned amount of resources, set out in the programmes at the line ministries, shall be reduced by the amount of spent resources outlined in a separate table, until the entry into force of the Law on Amendments to the Law on Budget of Montenegro for 2012. However, the same Article has not defined the following:


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timeline covering the calculation of spent funds which have been deducted from the amounts earmarked for the implementation of programmes planned by the Law on Amendments to the Law on Budget of Montenegro for 2012, until the moment of entry into force of the Law,

the status of the budget plan for spending units that have ceased to function as autonomous bodies, in which the Ministry of Finance increased the current budget plan for the amounts corresponding to those the programmes, referred to in Article 14a, have been reduced by.

In addition to these deficiencies, in Article 14a of the Law on Amendments to the Law on Budget of Montenegro for 2012 there was an error identified in application of the plan set out by the Law on Amendments to the Law on Budget of Montenegro for 2012. Projected amounts specified as "the Plan" in the Bill on the Final Statement of Accounts of the State Budgets of Montenegro for 2012. Represent the current budget plan, which contains an error caused by the misapplication of the projected amounts defined by the Law on Amendments to the Law on Budget of Montenegro for 2012. These discrepancies question the adequacy of redirections which were carried out during 2012 and the consistent alignment of Montenegrin budget execution in 2012 with the plan laid down by the Law on Amendments to the Law on Budget of Montenegro for 2012.

c) Recommendations: Make corrections in the Bill on the Final Statement of Accounts of the

State Budgets for 2012 and specify the following:

timeline covering the calculation of spent funds which have been deducted from the appropriations for the implementation of programmes planned by the Law on Amendments to the Law on Budget of Montenegro for 2012, until the moment of entry into force of the Law,

the status of the budget plan for spending units that have ceased to function as autonomous bodies.

Appropriations for compensation should be planned within the competent institution - the Compensation Fund. The Compensation Fund is an institution that provides for appropriate analytical documentation and information crucial for projecting expenditure arising from compensation.

II – BUDGET REVENUES i. The Audit has found certain irregularities in the collection of public revenues, reflected in the fact that a

part of particular revenues is either not being paid into the payment accounts or not identified in a timely manner, or it has not been recorded properly.

a) Recommendation: It is recommended to the Ministry of Finance to ensure prompt and

complete records of public revenues in accordance with the Decree on the method of collecting public revenues and Directions on State Treasury Operations. It is also recommended to the Ministry of Finance to consider the possibility of providing a more adequate control of collection of public revenues from user fees paid for the use of the domain "ME", by transferring the bank accounts for the purpose of collecting these fees within the group of accounts for concessions and other fees, whose collection is under the responsibility of the Department of Public Revenues. In addition, the integration of revenue modules of Ministry of Interior and the Police Administration is also recommended, considering that Police Administration has been included in the RTGS system, i.e. it is connected to the telecommunication network of the Central Bank.


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ii. Off-balance sheet settlements, which are implemented by a document on compensation, without cash

flow, and thus are not recorded in the State Treasury General Ledger, are considered to be public spending. Although taxpayers fulfill their tax liability in the amount of a realized compensation, budget revenues and expenditures in the financial statements of the Government of Montenegro do not increase, ie reduce for this amount. b) Recommendation: It is recommended to the Ministry of Finance to keep all compensations

recorded in the State Treasury General Ledger and to implement them in accordance with the spending restrictions defined by annual laws on budget.

iii. The lack of consistency in proceeding refunds of overpaid or incorrectly paid funds has been noted in cases of refunding overpaid taxes and other liabilities (mainly in VAT refunds). The inspection control regarding the groundedness of those claims is not being carried out systematically with all the claims for refund, but the refund is executed based on the insight into a taxpayer’s detailed (analytic) card, which is often being corrected once the inspection control has been completed.

c) Recommendation: It is recommended to the Ministry of Finance to develop Rules of Procedure

in cooperation with the Department of Public Revenues, which would establish detailed terms and conditions, as well as methods for processing VAT refunds, and define norms, prescribing in which cases and to what extent of funds it shall be necessary to conduct inspection control of the VAT refund. The reimbursement of overpaid tax liabilities shall be conducted on the basis of the stated Rules of Procedure.

iv. There is an obvious problem in redirecting other types of public revenues into the Central account, as well as in redirecting funds from the Central account to other structures of public revenues, connected to Conclusions passed by Department of Public Revenues and forwarded to the Ministry of Finance.

d) Recommendation: It is recommended to provide consistent IT system of Department of Public

Revenues and the Ministry of Finance, which would enable settling other tax payables by overpayments made in one part of the tax liabilities. It is recommended to the Ministry of Finance to consider the possibility of cancelling accrued interest on tax debt, which is not yet settled according to the amount of overpaid taxes based on justified taxpayers’ claims, in accordance with Decisions made by the Department of Public Revenues.

III – BUDGET EXPENDITURES

i. The audit has found that a certain number of spending units irregularly submits the IOPPD form to the Department of Public Revenues, which is a monthly report on personal income, paid out per month, accrued and withheld personal income taxes and contributions on and from this income. Untimely submission of mentioned reports, in a situation when personal income taxes and contributions are usually paid out regularly, results in the occurrence of unrealistic situation of overpayments in detailed (analytic) cards of the state bodies, on the grounds of paid personal income taxes and contributions, and thus also in the bookkeeping of the Department of Public Revenues.


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a) Recommendation: Require of all the users of public funds to duly submit the IOPPD form - a

monthly report on paid personal income, accrued and withheld personal income taxes and contributions on and from this income for all employees.

ii. The audits carried out on a sample basis have determined improper spending, contrary to the Regulation on Uniform Classification of Accounts for the Budget, Extra-budgetary Funds and Budgets of Municipalities, with the following spending units:

charged to expenditures for material at the Forest Administration, Department of Public Revenues, Human Resources Administration, Compensation Fund, the Ministry of Transport and Maritime Affairs, the Port Administration and Water Directorate in the amount of EUR 208,704.82;

charged to business trips in the Transport Directorate, Ministry of Transport and Maritime Affairs, Ministry of Agriculture and Forestry, Forest Administration and Water Directorate in the amount of EUR 150,485.12; EUR

charged to contracted services at the Ministry of Economy, Ministry of Finance, Human Resources Administration, Ministry of Interior Affairs, the Concessions Commission, Music Centre, Forest Administration, Department of Public Revenues, Human Resources Administration, the Compensation Fund, the Ministry of Transport and Maritime Affairs, the Port Administration and Water Directorate in the amount of EUR 576,196.24.

charged to capital expenditure in Human Resources Administration, Department of Public Revenues, Ministry of Transport and Maritime Affairs and Port Administration in the amount of EUR 35,193.79.

debited to repayment of securities to residents in the amount of EUR 16,564,070.50 for the Transport Directorate and EUR 740,656.20 for Telecom.

charged to subsidies paid for redundant labour in the amount of EUR 4,564,030.00.

b) Recommendation: Perform adjustments in the reported amount of improper spending, identified by the audit, in the Bill on the Final Statement of Accounts of the State Budgets of Montenegro for 2012.

iii. The audit has found that the Ministry of Labour and Social Welfare, the Ministry for Human and Minority Rights, the General Secretariat of the Government and the Department for Protection of Competition have not recognized their consumption in the reports on the use of the current reserve, even though they used the funds. Since the budget execution is controlled by the Ministry of Finance and spending units shall be bound to submit the data on the realized expenditures to the Ministry of Finance on a quarterly basis and at the end of the budget year, up to March 31st of the current year for the previous year, a mutual weakness in the functioning of the system of internal controls has been identified.

Recommendation: It is deemed necessary to perform reporting on the use of the current budget reserve funds in compliance with Rulebook on Drafting, Composing and Submitting Financial Reports on Budgets, Extra-budgetary funds and Local Governments units on Form 9 - Report on using current budget reserve funds.


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IV – CAPITAL BUDGET i. According to its conclusions, the Government has reallocated funds from the capital budget to other

purposes, not provided for by the annual Law on the Budget. The audit has identified improper payments executed by the Transport Directorate from the Project 764 - Expropriation of land for the construction of highway Bar-Boljare, road section from Smokovac to Verusa and Project 771 - Solving the problem of bottlenecks in transport network in Montenegro - Bridge Port Milena, Boulevard Bar, bypass around Niksic phase II and bypass Golubovci. a) Recommendation: It is recommended to ensure full implementation of the Law on Budget in

planning and execution of the capital budget, and not to charge any executed payment which belongs to the current budget to the account of the capital budget.

ii. Despite the fact that the State Audit Institution had already given recommendations that ”projects for funding from the capital budget shall not be proposed without appropriate planning documentation, urban technical conditions and revised project documents”, in the Audit Report on the Final Statement of Accounts of the State Budgets of Montenegro for 2011, the audit has found that the same irregularities were repeated in 2012. It is also recommended to foresee codes for subprojects within particular projects within the capital budget of the Transport Directorate and Directorate of Public Works for 2012, which would facilitate the monitoring process of expenses by location and type of occurrence. b) Recommendation: Before the adoption of the annual Law on Budget, it is necessary to check

whether the requirements regarding planning and application of specific projects are recognized as realistic. Special attention should be paid to identified irregularities which have been repeating over a longer period, thus suggesting that a certain number of projects have not been realized due to improperly examined requirements in part of the urban technical conditions, planning documentation and revised project documents.

V – STATE PROPERTY

a) It is recommended to spending units to keep separate records of movable and immovable assets in their bookkeeping, based on valid documentation, in accordance with the Rulebook on Unique Classification of the Accounts of the State Budget and the Classification of Assets by Groups and Methods for Determining Depreciation.

b) It is necessary to ensure consistent implementation of the Law on Property and the Regulation on Keeping Records of Movable and Immovable Assets and Taking Inventory of State-Owned Property, so far as it relates to the obligation of entering data in the prescribed forms and their submission to the competent state authority – Real Estate Administration. In accordance with Art. 11 of the Rulebook on Terms and Performance of the Inventory and Harmonization of Bookkeeping Records with the actual situation (“Official Gazette of Montenegro”, № 34/09 as of May 29th, 2009) it is necessary to draw up a report on the inventory.


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c) When it comes to investment and technical maintenance, it is recommended to delegate these

tasks to the Real Estate Administration, as defined by the Regulation, given that this state body has organizational, professional and staff capacity to be considered qualified for the mentioned task. More expensive solutions are usually used in practice, such as entrusting this task to other legal entities or individuals.

VII – PUBLIC PROCUREMENT

a) It is recommended to the spending units which have not done so yet, to appoint a person to act as a Procurement Officer in accordance with Article 58 of the Law on Public Procurement, as well as to timely adopt a procurement plan in accordance with the legally established deadlines, with an obligation to deliver it to the Public Procurement Administration.

b) It is recommended to spending units to conduct public procurement using the appropriate procedure in relation to the nature and estimated value of the subject of public procurement, in accordance with Article 20 and Article 21 of the Law on Public Procurement (“Official Gazette of Montenegro”, № 42/11).

c) It is recommended to all spending units to ensure that the annual scope of public procurement executed by direct agreements does not exceed the prescribed limit stipulated by Article 30 of the Law on Public Procurement.

d) It is recommended to all spending units to provide accurate recording of required data on awarded public procurement contracts and thus enable the compiling of a complete and accurate Report, in accordance with Article 117 and Article 118 of the Law on Public Procurement.


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1. LEGAL BASIS, OBJECTIVE, SUBJECT AND SCOPE OF AUDIT 1.1 Legal basis

Pursuant to the Article 4 and 9 of the Law on State Audit Institution (“Official Gazette of Montenegro”, № 28/04, 27/06 78/06, 17/07, 73/10 and 40/11, hereinafter: the Law on State Audit Institution) and Article 51 of the Law on Budget (“Official Gazette of Montenegro”, № 40/01, 44/01, 71/05, 12/07, 73/08, 53/09, 46/10 and 49/10, hereinafter Law on Budget) and in accordance with the International Auditing Standards (INTOSAI) and Annual Audit Plan for 2013, the Audit of the Final Statement of Accounts of the State Budgets of Montenegro for 2012 was performed (hereinafter: Final Budget Account).

1.2 Objective and Subject of Audit

The main objective to the audit is to collect reliable evidence on significant facts related to regularity

(compliance) of the work of responsible individuals within spending budget unit and examination of the objective and accurate presentation of public revenues and public expenditures presented in the Bill on Final Statement of Accounts of the State Budget of Montenegro for 2012. Subject of the audit is Final Statement of Accounts of the State Budget drafted in accordance with Article 51 of the Law on Budget, Articles 1, 2, 3 and 4 of the Rulebook on Consistent Accounts’ Classification for the State Budget, Extra-budgetary Funds and Municipal Budgets (“Official Gazette of Montenegro”, № 35/05, 37/05 and 81/05) and Article 6 of the Rulebook on Drafting, Composing and Submitting Financial Reports on the State Budget, Extra-budgetary Funds and Local Governments (“Official Gazette of Montenegro”, № 32 / 10, 14/11, 16/13). In accordance with the above-mentioned, the data and reports on the following issues were audited: opening and closing balance of the Consolidated State Treasury Account; review of discrepancies incurred in relation to the planned amounts; report on borrowings taken; report on outlays from the budgetary reserves; report on guarantees given during the fiscal year; report on capital investments; report on implementation of programme budget; report on public debt and guarantees issued; report on writing off tax claims and non-tax receivables incurred prior to August 15th, 2009 and the report on receipts and expenditures of public institutions, which are not included in the Consolidated Treasury Account.

Annual financial statements are prepared and submitted at latest by March 31st of the current year for prior fiscal year, as stipulated by the Rulebook on Drafting, Composing and Submitting Financial Reports on Budgets, Extra-budgetary funds and Local Governments, on the following forms: Cash flow statement I – economic classification, Cash flow statement II – functional classification, Cash flow statement III, Cash flow statement IV, Report on Outstanding Debts, Consolidated Report of a Spending Unit Structured of Public Institutions, Report on Consolidated Public Expenditure, Statement on the manner of spending funds submitted upon the expiry of a fiscal year and Report on the manner of spending funds from the current budgetary reserve. 1.3 Scope of Audit

Apart from documents and reports controlled within the Ministry of Finance – State Treasury, audit of Final Statement of Accounts of the State Budget of Montenegro for 2012 covers separate financial reports, records and documentation of the spending units. Auditing of individual financial statements is based on controlling the compliance with respective regulations relating to the procedures of issuing and completing documents, keeping records and reconciliation with the State Treasury General Ledger, in order to verify whether the executed transactions have been supported by the relevant documents. The audit has been performed in the following spending units: Ministry of Finance, Reserves, Ministry of Interior Affairs, Ministry of


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Economy, Ministry of Agriculture and Rural Development, Ministry of Transport and Maritime Affairs, Ministry of Culture, Ministry of Information Society and Telecommunications, Human Resources Administration, Department of Public Revenues, Forest Administration, Water Directorate, Port Administration, Administration for Inspection Affairs, Directorate for Protection of Cultural Property, Games of Chance Administration, Real Estate Administration, Transport Directorate, Directorate of Public Works, Concession Commission, Montenegrin Olympic Committee, Montenegrin Music Center, Central Bank of Montenegro – Budget Revenues, Pension and Disability Insurance Fund and Compensation Fund.

1.4 Audit Procedure

The audit of the Final Statement of Accounts of the State Budget has been made in accordance with International auditing standards for the public sector (ISSA) and it includes sample-based testing of evidence that confirm the stated data and information on the Final Statement of Accounts of the State Budget. The audit also provides assessment of accounting principles and disclosure of data in compliance with International accounting standards for the public sector. In the audit process special attention was paid to collecting evidence which enable the expression of opinion on the truthfulness and objectivity of the total revenues and expenditures stated in the Bill on Final Statement of Accounts of the State Budget of Montenegro for 2012.

1.5 Accounting System

The Accounting System of the Montenegrin Budget is organized on a modif ied cash basis pursuant to the provisions of Articles 2 and 47 of the Law on Budget, Article 1 of the Rulebook on Drafting, Composing and Submitting Financial Reports on Budgets, Extra-budgetary funds and Local Governments (“Official Gazette of Montenegro”, № 3 5 /05 and 3 7 /05) and Instructions on the State Treasury (“Official Gazette of Montenegro”, № 80/08, 02/09; 45/10, 15/11 and 17/12). The accounting system is based on the records kept in the State Treasury General Ledger under the Ministry of Finance and the accounting departments of the spending units. Based on their expenditures (payments) and revenues’ records, spending units compose Financial Statements by the end of the year, which are then submitted to the Ministry of Finance – State Treasury Department, no later than March 31st of the current year for the prior fiscal year. The State Treasury General Ledger and Financial Statements from the spending units represent document basis for drafting the Final Statement of Accounts of the State Budgets of Montenegro.

2. ANALYSIS AND MATHEMATICAL ACCURACY

A preliminary control of compliance of the reported results with the laws and bylaws, as well as reality-based control of the planning process and conformity with the budget execution has been carried out by the general analysis and verification of mathematical accuracy. The general analysis has shown the structure of public spending through its execution, as well as the structure of financing and the reasons for the incurrence of cash deficit. Mathematical accuracy verification has been performed by analyzing cash flows and their adjustment for the amount of outstanding debts. As a special segment, the audit for 2012 has included amendments to the Law on Budget for 2012 (“Official Gazette of Montenegro”, № 29, 6th June 2012).

2.1 General Data

Starting from the data in the Bill on Final Statement of Accounts of the State Budget of Montenegro for 2012, there has been a cash deficit of EUR 198.18 million recorded. The cash budget deficit resulted from deficit in current expenditures (negative savings EUR -130.49 million), repayment of outstanding debts that do not have the character of a borrowing in the amount of EUR 35.74 million and capital expenditure of EUR 67.69 million.


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In M EUR

Current Revenues 1,121.02 - Current Expenditures1 1,215.77

-

Repayment of Outstanding

Debts 35.74 ₌ Savings -130.49

Savings -130.49 - Capital Expenditures 67.69 ₌ Cash Surplus/Deficit -198.18

According to the figures in the Bill on the Final Statement of Accounts of the State Budget of

Montenegro for 2012, total sources of finance and the level of public expenditure amounted to EUR 1,450.01 million. Sources of financing public expenditure have been provided from current revenues in the amount of EUR 1,121.02 million, from borrowings EUR 321.58 million, sales of assets EUR 3.48 million, donations EUR 5.02 million and cash amounting EUR 0.9 million. Public expenditure for 2012 in part of current expenditures totalled at EUR 1,215.77 million, in part of capital expenditure at EUR 67.69 million, while for repayment of outstanding debts the amount of EUR 35.74 million has been allocated, while for repayment of principal debt it amounted to 132.81 million EUR. The structure of public spending is shown in the following table:

Table 1 – Cash Deficit and the Structure of Financing as recorded by the Ministry of Finance In M EUR

Sources of finance 1,452.01 - Public expenditure 1,452.01 ₌ Principle of balance 0.00

₌ ₌

Current revenues 1,121.02 -

Current expenditures 1,215.77

₌ Cash surplus/deficit -198.18

+

Capital expenditures 67.69

+

Repayment of outstanding debts

35.74

+ +

Borrowings 321.58 - Repayment of

principle 132.81 ₌ Net borrowings 188.77

+ +

Property sale 3.48

Property sale 3.48

+

Donations 5.02

Donations 5.02

+

Cash 0.90

Cash 0.90

₌

Sources of deficit

financing 198.18

Deficit in the amount of EUR 198.18 million has been financed from net borrowings, amounting to

EUR 188.77 million, the sales of assets EUR 3.48 million, donations EUR 5.02 million, and by reducing the cash in the amount of EUR 0.9 million. Respectively, the deficit has been defined by the current expenditures1 in the amount of EUR 94.75 million, the capital expenditures amounting to EUR 67.69 million and repayment of outstanding debts amounting to EUR 35.74 million. The analysis of the structure and finance sources of deficit shows that due to deficit in state funds, most of the borrowings have been used to finance liabilities arising from social protection.

1 Current expenditures – include current spending, reserves and transfers;


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Table 2 – Structure and sources of financing deficit in million EUR

DESCRIPTION

Cu

rrent b

ud

get

Rep

aymen

t of

gu

arantees

Liab

ilities from

p

reviou

s perio

d

State fu

nd

s b

ud

gets

To

tal curren

t

expen

ditu

re

Cap

ital bu

dg

et

TO

TA

L

Deficit 0.00 -24.72 -35.74 -212.82 -273.28 -58.74 -332.02

Surplus 133.83

Deficit financed by surplus

24.72 35.74 73.37 133.83 0.00 133.83

Insufficient funds

0.00 0.00 -139.45 -139.45 -58.74 -198.19

Deficit financed by donations

-139.45 5.04 -134.41

Deficit financed by sale of property

0.00 3.48 3.48

Deficit financed by loans

138.56 0.00 50.22 50.22

Deficit financed by deposits

0.89 138.56

138.56

Insufficient funds

0.00 0.00 0.00 0.00 0.00 0.00

The total amount of net borrowings amounting M EUR 188.78 was used for financing current

expenditure of the state funds in the amount of EUR 138.56 million (73%), while EUR 50.22 million or 27% was allocated for financing the capital budget. This statement is confirmed by an analytical overview shown in the following table:

Table 3 – Structure of finance sources arising from borrowings

Column1 Column2 Column3 In M EUR

DESCRIPTION Residents Non-residents TOTAL

Short-term loans 49.35

49.35

Short-term securities 14.11

14.11

Short-term sources - Total 63.45

63.45

Repayment of securities to residents 63.45

63.45

Balance 0.00 0.00 0.00

Long-term loans 0.00 155.38 155.38

Long-term securities 0.00 93.81 93.81

Long-term sources - Total 0.00 249.19 249.19

Repayment of securities to residents 0.00 14.49 14.49

Repayment of securities to non-residents 0.00 54.87 54.87

Net indebtedness 0.00 179.83 179.83

Project loans 0.00 8.94 8.94

Total net indebtedness for financing deficit 0.00 188.76 188.76

Short-term loans, realized by issuing short-term securities, have completely been used for repaying

securities to residents. Long-term loans and foreign market securities have provided liquidity for the repayment of securities to residents and non-residents in the amount of EUR 69.36 million. The rest of the long-term financial sources and project loans, amounting EUR 188.76 million, have mainly been used for current expenditures and social benefits financing.

2.2 Cash Deposits

Cash on public accounts has been controlled by verifying the opening and closing balance, which is then reconciled with the cash inflows and outflows, confirmed by the Central Bank of Montenegro and commercial banks where, according to the consent of the Ministry of Finance, bank accounts have been opened.


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Table 4 – Cash control at the Consolidated Treasury Account

No. DESCRIPTION AMOUNT (in EUR)

1 Funds carried over from previous year 21.774

2 Receipts 1,451.120

I Total 1,472.894

3 Expenditures 1,452.013

4 Cash expenditures recognized on 31/12/2012 1.558

5 Cash balance at the year-end 19.323

6 Total cash at the year-end 20.881

II Net cash flow change -0.893

6 Bank confirmations 22.834

7 Cash expenditures recognized on 31/12/2012 1.558

II Total (6+7) 24.391

III Difference (II-6) 3.510

IV Difference found by audit 3.510

8 Ministry of Defence deposits 1.168

9 Donations and project loans 0.514

10 Privatization Council deposits 1.097

11 Directorate for Development of SMEs deposits 0.107

12 Interest bearing and non-interest bearing demand deposits of Government of Montenegro 0.397

13 Courts deposits 0.013

14 Schools deposits 0.002

15 Election commission deposits 0.008

16 Deposits for public procurement procedure 0.018

17 National Tourism Organization deposits 0.002

18 Funds not included in cash balance 0.051

19 Other 0.132

V Difference (III-IV) 0.000

The discrepancy found in the deposit balance on December 31st, 2012 amounted to EUR 3.5 million. The difference between the cash balance reported by the Bill on the Final Statement of Accounts of the State Budget of Montenegro for 2012 and the cash recorded through bank confirmations, subsequently reconciled with the Ministry of Finance, shows that cash has mostly been explained by the analytical data presented in Table 4. The audit has also found a certain number of accounts at commercial banks which are not listed in the Overview of budget users' accounts at commercial banks reported by the Bill on the Final Statement of Accounts of the State Budgets of Montenegro for 2012 and by the report submitted by the Ministry of Finance. In addition, we draw attention to the interest-bearing and non-interest bearing deposits (ordinal № 12, Table 4), presented through the bank confirmations, which have not been kept and recorded as cash at the Consolidated Treasury Account. Recommendation:

It is necessary for the Ministry of Finance to perform in cooperation with spending units a detailed analysis of the state accounts at commercial banks, make a list of total cash available at these accounts and close those ones that are not in function of public expenditure.


Page 23

2.3 Cash Flows

Summarized data on budget execution reported in Bill on the Final Statement of Accounts of the State

Budgets of Montenegro for 2012 are shown in the following table:

Table 5 – Cash Flows and Mathematical Accuracy Control Summary Tables by Economic Classification CASH DEFICIT IN 2012 In M EUR

DESCRIPTION

FINAL STATEMENT OF ACCOUNTS FOR 2012

Plan Rebalance

(Official Gazette of MNE, No. 6/12)

Plan by Final Statement of

Accounts of State Budget of MNE for

2012

Difference Executed Correction (+) Correction (-) Audited state of

facts

1 2 3 4 5 = (4 - 3) 6 7 8 = 6 + 7

1. Cash inflows 1,214.50 1,150.06 1,150.06 0.00 1,121.02 0.00 0.00 1,121.02

1.1 Taxes 763.51 725.61 725.61 0.00 687.44 0.00 0.00 687.44

1.2 Social protection contributions 371.99 351.99 351.99 0.00 362.25 0.00 0.00 362.25

1.3 Donations 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

1.4 Other inflows 74.57 68.28 68.28 0.00 65.82 0.00 0.00 65.82

1.5 Repaid loans inflows 4.43 4.17 4.17 0.00 5.50 0.00 0.00 5.50

2. Cash outflows 1,292.91 1,304.99 1,304.99 0.00 1,319.19 28.94 11.66 1,336.47

2.1 Wages and other personal earnings 382.33 377.66 376.59 -1.07 374.65 374.65

2.2 Other personal income 10.92 10.98 11.86 0.89 10.34 10.34

2.3 Material and services supplies 149.57 147.29 146.65 -0.64 153.69 153.69

2.4 Ongoing maintenance 23.62 23.18 22.89 -0.28 22.54 22.54

2.5 Interests 57.51 54.91 31.76 -23.14 56.86 56.86

2.6 Rents 8.00 7.72 7.28 -0.44 7.11 7.11

2.7 Subsidies 20.95 20.70 26.03 5.33 25.85 4.56 21.29

2.8 Transfers to individuals and non-governmental sector 29.56 29.08 31.90 2.83 31.51 1.84 33.35

2.9 Social protection transfers 477.45 477.88 482.28 4.40 481.63 4.56 486.19

2.10 Other Reserve expenditures 16.31 15.90 27.43 11.53 25.08 5.26 30.34

2.11 Granted borrowings 1.70 1.70 1.78 0.08 1.78 1.78

2.12 Capital expenditures and securities purchase 74.99 69.77 70.29 0.52 67.69 17.28 0.00 84.97

2.9.1 Purchase of non-financial assets 74.99 69.77 70.29 0.52 67.69 17.28 84.97

2.9.2 Purchase of financial assets 0.00 0.00 0.00 0.00 0.00 0.00

2.10 Repayment of liabilities from previous period 40.01 44.81 44.81 0.00 35.74 7.10 28.64

2.11 Repayment guarantees expenditures 0.00 23.43 23.43 0.00 24.72 24.72

3. Cash deficit/surplus -78.41 -154.93 -154.93 0.00 -198.18 -28.94 -11.66 -215.46

4. Sources of finance cash deficit 78.41 154.93 154.93 0.00 198.18 28.94 11.66 215.46

5. Non-deposit Internal sources of finance 10.00 -22.41 -22.41 10.00 -11.00 0.00 -17.28 6.28

5.1 Increase of credit debt based on loans 0.00 16.44 16.44 0.00 63.45 0.00 0.00 63.45

5.1.1 Debt increase by loans 0.00 16.44 16.44 0.00 63.45 63.45

5.1.2 Repayment of principle 0.00 0.00 0.00 0.00 0.00 0.00

5.2 Net indebting of securities 0.00 -48.85 -48.85 0.00 -77.94 0.00 -17.28 -60.66

5.2.1 Issuance of securities 0.00 0.00 0.00 0.00 0.00 0.00

5.2.2 Repayment of principle 0.00 -48.85 -48.85 0.00 77.94 17.28 60.66

5.3 Sale of assets 10.00 10.00 10.00 10.00 3.48 0.00 0.00 3.48

5.3.1 Sale of non-financial assets 0.00 0.00 0.00 10.00 3.47 3.47

5.3.2 Sale of financial assets 10.00 10.00 10.00 0.00 0.01 0.01

6. Net cash flow changes -90.08 -60.01 -60.01 -10.00 0.90 28.94 28.94 0.90

7. External sources of finance 158.49 237.35 237.35 0.00 208.28 0.00 208.28

7.1 Increase of credit debt based on loans 158.49 237.35 237.35 0.00 203.26 0.00 0.00 203.26

7.1.1 Debt increase by loans 158.49 291.80 291.80 0.00 258.13 258.13


7.2 Net indebting of securities 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

7.2.1 Issuance of securities 0.00 0.00 0.00 0.00 0.00 0.00


7.3 Donations 0.00 0.00 0.00 0.00 5.02 0.00 5.02

Summarizing materially significant findings shows that it is necessary make adjustments that can provide for a more objective view and presentation of the reported financial results of the previous year, by passing Amendments to Bill on Final Statement of Accounts of the State Budgets of Montenegro for 2012. We use this opportunity to emphasize that the Government of Montenegro considered Bill on Final Account of the Budget of Montenegro for 2012 submitted by the Ministry of Finance, at its session on June 13th, 2013. Accordingly, the Government of Montenegro passed the Conclusion2 determining the Bill on Final Annual

2 Number: 08-1421/3, Podgorica, June 20th, 2013


Page 24

Statement of Accounts of the Budget of Montenegro for 2012, provided that the following text: “Programme: Transport Directorate”, from the Explanatory Report, the part of Ministry of Economy, is replaced by: ”Programme: Directorate for Development of Small and Medium Sized Enterprises”.

Correction of results is suggested for a part of materially significant irregularities determined by checking mathematical accuracy or for those identified by the fieldwork through the auditors’ records, and which are listed within the text of this Report. Corrections determined at the level of four digit code have been excluded, while the corrections that exceed the amount of one million EUR have been stressed as significant in the proposal of summarized corrections.

Cash deficit analysis shows the following:

recorded expenditure amounting to EUR 17.28 million, which represents the capital budget expenditure, has been charged to repayment of securities, so it is necessary to reduce repayment of the principal debt in the same amount and increase the amount of capital expenditures;

In addition to determined deficit adjustment, it is necessary to make corrections in part of improper consumption of subsidies in the amount of EUR 4.56 million. Namely, this expenditure has been charged for the amount referring to redundant labour. It is necessary to reduce subsidies and increase the amount provided for social protection transfers-redundant labour, for the same amount;

It is necessary to make correction of the amount of EUR 7.1 million charged to repayment of commitments from the previous period and increase amounts for transfers to individuals, NGOs and public sector for the amount of EUR 1.84 million, as well as the amount for other expenses and / or reserves of EUR 5.26 million.

Given the aforementioned corrections, it is necessary to increase the cash deficit presented in the Bill on Final statement of account of the state budget, in the amount of EUR 17.28 million. Cash deficit analysis shows a recorded expenditure charged to repayment of securities in the amount

of EUR 17.28 million, which is a capital budget expenditure. In this way, the budget outcome has been improved by the same amount, thus presenting an unreal amount of principal debt repayment, i.e. better financial results in part of deficit financing. Contrary to the current budget plan, keeping records of capital budget expenditures at the position of repayment of securities resulted in overcoming the problem of budget overrun, as well as in better budget result. Keeping records of improper expenditure on the position of repayment of commitments from the previous period in the Bill on the final statement of accounts of the state budget for 2012 has not affected the final budget result, as an increase in commitments has been recorded in the same amount. However, budgetary restrictions defined by the revised budget for 2012 have been avoided in this way. Recommendation:

On the basis of the audit findings, it is necessary to revise the Bill on the final annual statement of accounts of the State budget of Montenegro for 2012 in the segments that are materially significant and consequently take appropriate systemic measures on preventing the possibility of repeating the failure in fiscal discipline in the following years.


Page 25

2.4 Cash deficit and outstanding debts Deficit cash base, derived according to data from the Bill on the final statement of accounts of the State budget of Montenegro for 2012 and revised for the net changes in outstanding debts3, shows the budget result compliant with Article 16 of the Law on Budget (“Official Gazette of Montenegro”, № 46/10). Deficit corrected in the amount of EUR 195.55 million, along with data on net change in outstanding debts, is shown in the following tabular overview:

Table 6 – Deficit modified by the data of the Ministry of Finance In M EUR

Sources of financing 1,485.12 - Public expenditure 1,485.12 ₌ Principle of

balance 0.00



₌ Modified

Surplus/Deficit -195.55

+

Capital Expenditures 67.69

+

Increase in outstanding liabilities

33.11


33.11 - Repayment of

outstanding liabilities from previous period

35.74 ₌ Net change of outstanding

liabilities -2.63

+



+

+

Sale of assets 3.48

Sale of assets 3.48

+

+

Donations 5.02

Donations 5.02

+

+

Cash 0.90

Cash 0.90

₌

Deficit financing

sources 195.55

Data shown in Table 7 show a misbalance in the part relating to:

presenting expenditures for repayment of outstanding debts, and

an increase in the amount of outstanding debts in 2012.

It has been ascertained by the Explanatory memorandum on the Bill on the final statement of accounts of the state budget of Montenegro for 2012 that repayment of commitments from the previous period includes the following:

repayment of regular instalment arising from restitution in the amount of EUR 1.84 million, and

repayments by Government Conclusions in the amount of EUR 5.16 mil.

3 Net changes in outstanding debts exclude borrowings transactions


Page 26

Regular instalment arising from restitution is current budget expenditure, not an outstanding debt, because its maturity date is in the current year. It is also not possible to declare a current budget expenditure an outstanding obligation by exercising discretion in Government decision-making. Therefore adjustments have been made in reducing net increase and net decrease in commitments, in the amount of EUR 7.1 million. Corrected data are shown in the following table:

Table 7 – Modified deficit corrected according to mathematical accuracy verification In M EUR

Sources of financing 1,478.02 - Public expenditure 1,478.02 ₌ Principle of

balance 0.00



₌ Modified

Surplus/Deficit -212.83

+


+


26.01


26.01 - Repayment of

outstanding liabilities from previous period

28.64 ₌ Net change in outstanding

liabilities -2.63

+



+

+

Sale of assets 3.48

Sale of assets 3.48

+

+

Donations 5.02

Donations 5.02

+

+

Cash 0.90

Cash 0.90

₌

Deficit financing

sources 212.83

Adjustment in current expenditures leads to further budget overrun, which has been increased in the amount of EUR 7.1 million comparing to previously reported, without the possibility of allocation of costs to a particular user. In addition, the structure of financial sources has been changed in part of net borrowings, which amount to EUR 206.5 million after correction, instead of EUR 188.77 million, as well as in part of increase and repayment of outstanding debts, as follows:

increase in outstanding debts of EUR 26.01 million;

decrease in outstanding debts of EUR 28.64 million.

Corrected deficit amount per economic classification, as well as its financing structure, are shown in the following tabular overview:


Page 27

Table 8 – Correction of reported budget result

CORRECTED DEFICIT FOR 2012 In M EUR

DESCRIPTION FINAL STATEMENT OF ACCOUNTS FOR 2012 CORRECTION OF EXECUTION

Plan Rebalance Executed Correction (+) Correction (-) Balance

1 2 3 4 5 6 7

1. Cash inflows 1,214.50 1,150.06 1,121.02 0.00 0.00 1,121.02

1.1 Taxes 763.51 725.61 687.44 0.00 687.44

1.2 Social protection contributions 371.99 351.99 362.25 0.00 362.25

1.3 Donations 0.00 0.00 0.00 0.00 0.00

1.4 Other inflows 74.57 68.28 65.82 0.00 65.82

1.5 Repaid loans inflows 4.43 4.17 5.50 0.00 5.50

2. Cash outflows 1,292.91 1,304.99 1,319.19 28.94 11.66 1,336.47

2.1 Wages and other personal earnings 382.33 377.66 374.65 0.00 374.65

2.2 Other personal income 10.92 10.98 10.34 0.00 10.34

2.3 Material and services supplies 149.57 147.29 153.69 0.00 153.69

2.4 Ongoing maintenance 23.62 23.18 22.54 0.00 22.54

2.5 Interests 57.51 54.91 56.86 0.00 56.86

2.6 Rents 8.00 7.72 7.11 0.00 7.11

2.7 Subsidies 20.95 20.70 25.85 0.00 4.56 21.29

2.8 Transfers to individuals and non-governmental sector 29.56 29.08 31.51 1.84 33.35

2.9 Social protection transfers 477.45 477.88 481.63 4.56 486.19

2.10 Other Reserve expenditures 16.31 15.90 25.08 5.26 30.34

2.11 Granted borrowings 1.70 1.70 1.78 0.00 1.78

2.12 Capital expenditures and securities purchase 74.99 69.77 67.69 17.28 84.97

2.13 Decrease in liabilities - outflows 74.99 69.77 35.74 0.00 7.10 28.64

2.14 Repayment guarantees outflows 0.00 0.00 24.72 0.00 24.72

4. Cash deficit (1 - 2) -78.41 -154.93 -198.18 28.94 11.66 -215.46

5. Sources of financing cash deficit (6 + 7 + 8 + 9) 78.41 154.93 198.18 17.28 215.46

6. Net borrowings 158.49 204.94 188.77 17.28 0.00 206.05

7. Sale of assets 10.00 10.00 3.48 0.00 3.48

8. Donations 0.00 0.00 5.02 0.00 5.02

9. Net cash flow change 0.00 -60.01 0.90 0.00 0.90

10. Net increase/reduction of liabilities (10.2 - 10.1) 40.01 44.81 2.63 -10.00 0.00 2.63

10.1 Increase of liabilities 0.00 0.00 33.11 0.00 7.10 26.01

10.2 Reduction of liabilities - outflows 40.01 44.81 35.74 0.00 7.10 28.64

11. Corrected outflows (2. - 10.) 1,252.90 1,260.18 1,316.56 28.94 11.66 1,333.84

12. Cash inflows (1.) 1,214.50 1,150.06 1,121.02 0.00 0.00 1,121.02

13. Modified c ash deficit (12 - 11) -38.40 -110.12 -195.55 -28.94 -11.66 -212.83

14. Deficit financing sources (15. + 16. + 17. + 18. + 19.) 38.40 110.12 195.55 0.00 -17.28 212.83

15. Net borrowings 158.49 204.94 188.77 0.00 -17.28 206.05

16. Sale of assets 10.00 10.00 3.48 0.00 3.48

17. Donations 0.00 0.00 5.02 0.00 5.02

18. Liabilities to suppliers -40.01 -44.81 -2.63 0.00 0.00 -2.63

19. Net cash change -90.08 -60.01 0.90 0.00 0.90

Corrections in the table show that reported deficit amount of EUR 195.55 should be corrected, to EUR 212.83 million. Corrections in the budget result consequently lead to an additional overrun in budget consumption shown in the summary table per economic classification, that should be presented with the following expenditures:


Page 28

Social protection transfers ....................................................EUR 3.91 mil.

Capital expenditures…………………………………………………..EUR 14.67 mil.

Recommendation:

Pursuant to Article 16 of the Law on Budget (“Official Gazette of Montenegro”, № 46/10), it is necessary to make correction of deficit in the amount of EUR 212.83 million. In addition, this correction requires further changes in the Bill on the final statement of accounts of the state budget of Montenegro for 2012, which specifies budget overruns reported in the summary tables per economic classification more consistently.

2.4 Fiscal Discipline

By the first verification of mathematical accuracy, in the summary tables outlaid by economic

classification, it has been found that the difference between executed – planned, by the revised budget, is identical to the difference between executed - planned as stated in the Bill on the final statement of accounts of the state budget of Montenegro for 2012. It can be concluded that redirections presented by the Bill on the final statement of accounts of the state budget of Montenegro for 2012, are harmonized regarding calculation at the level of the summary table in Articles 1 and 3. However, there have been overruns noted in the budgetary consumption per spending units, as well as inconsistency in the application of the Law on Amendments to the Law on Budget of Montenegro for 2012, comparing to the Bill on the final statement of accounts of the state budget of Montenegro for 2012, and for this reason a detailed data analysis by organizational and programme classification has been performed, that has shown some discrepancies. 2.4.1 Amendments to the 2012 Annual Law on Budget

Certain inconsistencies were indicated in budget planning during 2012. It is significant to note

inconsistencies in the part of organizational structuring of budget funds users. Pursuant to the Law on Budget for 2012 and the Decree on the State Administration Organization and Manner of Operation, some budget units are stated as separate spending units (Directorate for Anti-Corruption Initiative, the Institute for Execution of Criminal Sanctions, Police Administration, Department of Public Revenues, Customs Administration, Real Estate Department, Property administration, Games of Chance Administration, Directorate for Protection of Cultural Property, Directorate for development of small and medium enterprises, Port Administration, Maritime safety administration, Transport Directorate, Railway Directorate, Phytosanitary administration, Veterinary directorate, Forest Administration, Water Directorate, Agency for tobacco, Directorate of Public Works, Bureau for refugee care). According to revised budget as of June 2012, the aforementioned spending units have become Programmes within the competent ministries, while the State Protocol has become a Programme under the General Secretariat of the Government. In January 2012, Directorate for Youth and Sports was repealed and it became an integral part of the Ministry of Education and Sports, and it regained its status of an independent administrative authority in December 2012. The Ministry of Justice and Ministry of Human and Minority Rights were established in January 2012. Changes made by revised budget as of June 2012, as well as by Amendments on Decree on the State Administration Organization resulted in separating these units to the Ministry of Justice and Human Rights and the Ministry for Minority Rights. In December 2012, after certain organizational changes had been processed, the aforementioned spending units were returned to the status quo ante. Inconsistency in planning, caused by frequent changes in organizational structure, resulted in creation of unstable budgetary framework and significantly impeded the audit process.


Page 29

The audit of the final statement of accounts for year 2012 determined inconsistency in the application of Article 14a of the Law on Amendments to the annual Law on Budget of Montenegro for 2012 (“Official Gazette of Montenegro”, № 29, as of 06th June 2012), which states:

“For the following spending units: State Protocol, Directorate for Anti-Corruption Initiative, the Institute for Execution of Criminal Sanctions, Police Administration, Department of Public Revenues, Customs Administration, Real Estate Department, Property administration, Games of Chance Administration, Directorate for Protection of Cultural Property, Directorate for development of small and medium enterprises, Port Administration, Maritime safety administration, Transport Directorate, Railway directorate, Phytosanitary administration, Veterinary directorate, Forest Administration, Water Directorate, Agency for tobacco, Directorate of Public Works, Bureau for refugee care, which have become an integral part of relevant ministries as the Programmes, the planned resources specified within the programme at the relevant ministries will be reduced for the amount of spent funds presented in a separate table, until the entry into force of this Law”.

Pursuant to Article 14a, the Revised budget for 2012 foresees that the planned amount of resources,

specified within the Programmes at the relevant ministries, shall be reduced for the amount of spent funds as presented in a separate table, until the entry into force of the Law on Amendments to the Law on Budget of Montenegro for 2012. However, the same Article does not define:

timeframe covering the calculation of spent funds which have been deducted from the amount earmarked for the Programmes planned by the Law on Amendments to the Law on Budget of Montenegro for 2012, until the moment of entry into force of the Law,

he status of the budget plan for spending units that have ceased to function as independent bodies, whose current budget plan was increased by the Ministry of Finance for amounts reduced from the Programmes referred to in Article 14a.

In addition to these deficiencies in Article 14a of the Law on Amendments to the Law on Budget of Montenegro for 2012, an error was identified in the implementation of the plan set by the Law on Amendments to the Law on Budget of Montenegro for 2012. The projected amounts specified as “the Plan” in the Bill on final statement of accounts of the state budget of Montenegro for 2012 represent the current budget plan which contains an error caused by misapplication of the projected amounts specified by the Law on Amendments to the Law on Budget of Montenegro for 2012. These discrepancies call into question the adequacy of redirections which were carried out during 2012, as well as consistent conformity of the execution of the Budget of Montenegro in 2012 and the Plan laid down by the Law on Amendments to the Law on Budget of Montenegro for 2012.

The names by organizational codes have not been consistently applied by the Bill on the final statement of accounts of the state budget of Montenegro for 2012, and in this part, it is necessary to refer to the following:

The Final Statement of Accounts has not included and shown the spending unit under the organizational code 41506, Directorate of Public Works, where the Revised budget for 2012 projected appropriations for planned spending in the amount of EUR 5.56 million.

The Revised budget specified an incorrect organizational code for the part of public works incorporated with the Ministry of Sustainable Development and Tourism. The Revised budget specified code 41501, while the organizational code 41506 was used for this unit in the Final Statement of Accounts for 2012.

The Final Statement of Accounts presented the programme Administration under the classification number of 2401, which does not exist in the Revised budget for 2012, with the funds spent in the amount of EUR 0.18 million.


Page 30

The Ministry of sustainable development and tourism and Directorate of Public Works have identical organizational code 41506.

Revised budget has not properly located expenditures for commitments executed by the Compensation Fund. Sources allocated for compensation are planned and executed by the Ministry of Finance, while the Compensation Fund can only plan funds for administrative expenses.

Recommendation:

Through Amendments to the Bill on the final statement of accounts of the state budget of Montenegro for 2012, it is necessary to:

accurately define Article 14a for the portion of funds, which the planned amounts of spending units, that have become programmes within the relevant ministries are reduced for, with the timeframe of their calculation,

accurately define the status of the budget plan for spending units that have ceased to function as independent bodies,

to plan compensation funds within the relevant institution - the Compensation Fund. The Compensation Fund is an institution that has the appropriate analytical documentation and information that is essential for projecting expenditure arising from compensation.

2.4.2 Budgetary Overrun

The problem of budgetary overrun has been found in 17 consumer units in the total amount of EUR 15.17 million, out of which the allowed overspending, on the basis of donations and foreign loans, amounted to EUR 5.25 million, so the Bill on final statement of accounts of the state budget of Montenegro for 2012 has presented consumption by specified users which was increased by 9.98 million EUR comparing to the legally approved, as shown in the following table:

Table 9 – Budgetary Overrun OVERRUN IN BUDGET SPENDING In M EUR

Organizational classification

DESCRIPTION Rebalanced

plan

Final statement

of accounts

plan

Difference

Difference %

Execution

Budget overrun

Budget overrun - interests

Approved overruns - donations

and foreign loans

Difference

1 2 3 4 5 = (4 - 3) 6 7 8 = 7 - 4 9 10 11 = 8 - 10

30102 JUDICIARY 19.24 19.27 0.03 0.00 22.67 3.40 0.00 0.01 3.39

40201 MINISTRY OF JUSTICE 7.40 6.34 -1.06 0.00 8.51 2.17 0.00 0.06 2.11

40202 INSTITUTE FOR EXECUTION OF CRIMINAL SANCTIONS 2.00 2.97 0.97 0.00 3.42 0.45 0.00 0.00 0.45

40301 MINISTRY OF INTERIOR 53.01 43.24 -9.77 0.00 45.67 2.43 0.00 0.00 2.43

40303 POLICE ADMINISTRATION 15.35 25.43 10.08 0.00 26.40 0.97 0.00 0.00 0.97

40504 CUSTOMS ADMINISTRATION 1.69 2.51 0.82 0.00 2.52 0.01 0.00 0.00 0.01

40505 REAL ESTATE ADMINISTRATION 1.45 2.08 0.62 0.00 2.09 0.01 0.00 0.00 0.01

40701 MINISTRY OF EDUCATION AND SPORTS 117.91 116.82 -1.09 0.00 116.90 0.08 0.00 0.00 0.08

40903 DIRECTORATE FOR DEVELOPMENT OF SMALL AND MEDIUM-SIZED ENTERPRISES

0.11 0.11 0.01 0.00 0.12 0.01 0.00 0.00

0.01

41003 TRANSPORT DIRECTORATE 1.80 3.53 1.72 0.00 3.55 0.02 0.00 0.00 0.02

41101 MINISTRY OF AGRICULTURE AND RURAL DEVELOPMENT 20.30 19.50 -0.80 0.00 21.71 2.21 0.00 2.07 0.13

41102 VETERINARY ADMINISTRATION 0.47 0.66 0.19 0.00 0.66 0.00 0.00 0.00 0.00

41103 FOREST ADMINISTRATION 1.12 1.68 0.56 0.00 1.78 0.10 0.00 0.00 0.10

41501 MINISTRY OF SUSTAINABLE DEVELOPMENT AND TOURISM 6.80 6.65 -0.15 0.00 9.78 3.13 0.00 3.06 0.07

41509 NATIONAL TOURISM ORGANIZATION OF MONTENEGRO 1.39 1.39 0.00 0.00 1.45 0.06 0.00 0.00 0.06

60301 EMPLOYMENT AGENCY 22.77 22.11 -0.65 0.00 22.22 0.11 0.00 0.04 0.06

41506 DIRECTORATE FOR PUBLIC WORKS 5.56 8.40 2.83 0.00 8.46 0.06 0.00 0.00 0.06

TOTAL 278.38 274.29 1.47 0.00 289.46 15.17 0.00 5.25 9.98


Page 31

State budget overrun has mainly resulted from the expenditures incurred due to enforcement of court

decisions. In 2012, the Ministry of Finance repaid these expenses charging them to the spending units that caused them, keeping records of those payments as the repayment of outstanding debts.

However, the amount of EUR 1.36 million represents the current expenditure (only for this amount the Ministry has made increase and decrease in liabilities for the execution of expenditures arising from court decisions). It was necessary to use current expenditures for this amount of payments, including: transfers to individuals and / or the current budget reserve. Acknowledging that the Ministry of Finance has allocated execution per spending units for expenditures arising from court decisions, which represent an outstanding debt pursuant to the recommendations of the State audit institution, those appropriations should have been planned per spending unit in the same way, given that the information on outstanding debts arising from court decisions were at disposal at the moment of passing the Revised budget. Taking into account the previously reported corrections in budgetary results adjustment, the overruns amount to EUR 24.31 million, as shown in the following table:

Table 10 – Budgetary overrun after reporting results

DESCRIPTION Overruns in M EUR

Transfers to individuals and NGOs 1.45

Social protection transfers 3.91

Other Reserve expenditures 2.91

Transfers to individuals and NGOs for court rulings execution 1.36


TOTAL 24.31

Recommendation:

Expenditure exceeding the allowed figures can only partially be justified by the payment of outstanding debts arising from court decisions. In this way, jeopardizing the fiscal discipline makes the role and importance of the Annual state budget plan irrelevant, and therefore the State Audit Institution recommends to the Government of Montenegro and to the Ministry of Finance to strictly take into consideration the fiscal limitations as defined by the Annual Laws on Budget, in the current and the forthcoming period.


Page 32

2.5 Materially significant irregularities and recommendations

According to the data presented in the Bill on the final statement of accounts of the state budget of Montenegro

for 2012, cash deficit amounts to EUR 198.18 million. The cash budget deficit is a result of the deficit incurred in the current budget (negative savings EUR -130.49 million), repayment of outstanding debts which do not have the character of borrowings in the amount of EUR 35.74 million and capital expenditures of EUR 67.69 million. Execution of the Budget for 2012 shows that fiscal adjustments planned by the Revised budget have not been appropriate, which led to the higher rate of cash deficit in relation to the one projected by the Revised budget, amounting up to EUR 43.24 million (projected deficit amounted to EUR 154.93 million, while the realized deficit was EUR 198.18 million). Budget execution has shown an additional decline in the main sources of finance amounting to EUR 29.04 million and an increase in public spending amounting to EUR 14.20 million, i.e. data presented in the Bill on the final statement of accounts of the state budget of Montenegro for 2012 indicate that the realized cash deficit for 2012 amounted to EUR 198.18 million. Cash basis of deficit, derived based on data from the Bill on the final statement of accounts of the state budget of Montenegro for 2012, adjusted per net changes in the balance of outstanding debts, shows the budget result as stipulated by Article 16 of the Law on Budget ("Official Gazette of Montenegro", № 46 / 10). Corrected deficit amounts to EUR 195.55 million.

i. An additional analysis of the cash deficit has found a recorded amount of EUR 17.28 million charged to repayment of securities, which represents a capital budget expenditure. Thus, the budget result has been improved by the same amount and repayment of principal debt has unrealistically been presented. After these corrections the final deficit amounts to EUR 212.83 million.

d) Recommendation: Develop the Rulebook on records of outstanding debts and their repayment in

compliance with the Rulebook, establish a centralized records of occurrence and repayment of outstanding debts at the Ministry of Finance. Make corrections in the Bill on the final statement of accounts of the state budget for 2012 regarding the presented amount of the deficit, as well as adjustments relating to:

Increasing capital expenditures up to EUR 17.28 million, reducing principal debt repayments in the same amount, with the corresponding updates in financing transactions;

Reducing the repayment of debts in the amount of EUR 7.1 million, increasing in transfers to individuals, NGOs and public sector amounting EUR 1.84 million and other expenses and / or reserves in the amount of EUR 5.26 million;

Reducing subsidies in the amount of EUR 4.56 million and increasing transfers for social protection in the same amount.

ii. State budget overrun has been found in 17 consumer units in the total amount of EUR 15.17 million, out of which the allowed overspending, on the basis of donations and foreign loans, amounted to EUR 5.25 million, so the Bill on final statement of accounts of the state budget of Montenegro for 2012 has presented consumption by specified users which was increased by 9.98 million EUR comparing to the legally approved. State budget overrun has mainly resulted from the expenditures incurred due to enforcement of court decisions. However, the amount of EUR 1.36 million represents the current expenditure (only for this amount the Ministry has made increase and decrease in liabilities for the execution of expenditures arising from court decisions). It was necessary to use current expenditures for this amount of payments, including: transfers to individuals and / or the current budget reserve. Correction of current and capital expenditures leads to further budget overrun, which exceeds the amount reported by the Bill on the Final statement of accounts of the state budget of Montenegro for 2012 by million EUR 24.31, without the possibility of full allocation of costs per specific user. These procedures led to violation of Paragraph 3 of Article 11 of the Law on the State Budget ("Official Gazette of RMNE", № 40/01 as of 14th August 2001, № 44/01 as of 17th September 2001, № 28/04 as of 29th April 2004, № 71/05 as of 28th November 2005, "Official Gazette of Montenegro", № 12/07 as of 14th December 2007, № 73/08 as of 2nd December 2008, № 53/09 as of 7th August 2009, № 46/10 as of 6th August 2010, № 49/10 as of 13th August 2010), which states: ”No expenditure from the Consolidated Treasury Account shall not be paid unless approved by the Law on the State budget”.


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e) Recommendation: After the correction of results, consumption that increases the allowed amount

can only partially be justified by repayments of outstanding debts arising from court decisions. In this way, jeopardizing the fiscal discipline makes the role and importance of the Annual State Budget Law irrelevant, and therefore the State Audit Institution recommends to the Government of Montenegro and the Ministry of Finance to take into consideration the fiscal limitations as defined by the Annual Law on Budget in the current and the forthcoming period.

iii. Article 14a of the Law on Amendments to the Law on Budget of Montenegro for 2012 has not been standardized accurately. Namely, pursuant to Article 14a, the revised budget for 2012 has foreseen that the planned amount of resources, laid down in the programmes at the relevant ministries, shall be reduced for the amount of spent resources presented in a separate table, until the entry into force of the Law on Amendments to the Law on Budget of Montenegro for 2012. However, the same Article has not defined the following:

timeframe covering the calculation of spent funds which have been deducted from the amounts earmarked for the implementation of programmes planned by the Law on Amendments to the Law on Budget of Montenegro for 2012, until the moment of entry into force of the Law,

the status of the budget plan for spending units that have ceased to function as autonomous bodies, in which the Ministry of Finance increased the current budget plan for the amounts corresponding to those the programmes referred to in Article 14a have been reduced for.

In addition to these deficiencies, in Article 14a of the Law on Amendments to the Law on Budget of Montenegro for 2012, there was an error identified in application of the plan set out by the Law on Amendments to the Law on Budget of Montenegro for 2012. Projected amounts specified as "the Plan" in the Bill on the Final Statement of Accounts of the State Budgets of Montenegro for 2012 represent the current budget plan, which contains an error caused by the misapplication of the projected amounts defined by the Law on Amendments to the Law on Budget of Montenegro for 2012. These discrepancies question the adequacy of redirections which were carried out during 2012 and the consistent alignment of Montenegrin budget execution in 2012 with the plan laid down by the Law on Amendments to the Law on Budget of Montenegro for 2012.

Recommendations:

It is necessary to pass Amendments to the Bill on final statement of account of state budget of Montenegro for 2012, in order to specify the following:

timeframe covering the calculation of spent funds which have been deducted from the appropriations for the implementation of programmes planned by the Law on Amendments to the Law on Budget of Montenegro for 2012, until the moment of entry into force of the Law,

the status of the budget plan for spending units that have ceased to function as autonomous bodies.

Appropriations for compensation should be planned within the competent institution - the Compensation Fund. The Compensation Fund is an institution that provides for appropriate analytical documentation and information crucial for projecting expenditure arising from compensation.


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3. BUDGET REVENUES

The budget of Montenegro for 2012 recorded receipts in the amount of EUR 1,451,122,945.71, and in

accordance with Article 9 of the Law on Budget they have been presented by the following figures:

Table 11 – Sources of financing public expenditure

In EUR

1) Current revenues (taxes, contributions, fees, commissions and other revenues) 1,115,519,327.08

2) Property sale inflows 3,484,625.40

3) Loan repayment inflows 5,498,802.50

4) Donations and transfers 5,036,438.91

5) Borrowing and loans (domestic and foreign) 321,583,751.82

6) Other revenues in accordance with Law 0.00

The system of public revenues collection in Montenegro is mainly provided through Department of

Public Revenues, Customs Administration, Ministry of Interior Affairs and Public Administration, Police Administration and the Ministry of Finance. Central Bank of Montenegro regularly delivers individual bank statements of daily changes on accounts, per payors: to the Department for Public Revenues from 820 group of accounts, to the Customs Administration from 805 group of accounts, to the Police Administration from 840 group of accounts and to the State Treasury from 832 group of accounts, as well as from account 825, which the State Treasury forwards to the Ministry of Internal Affairs.

Department of Public Revenues, Customs Administration, Ministry of Interior Affairs and Public Administration and Police Administration after the identification of the type of income transfer the funds from clearing account to the Central Account of the State Treasury and simultaneously submit the “Recipient’s statement” on the structure of public revenues by eco codes and by municipalities. The Finance officer in the State Treasury distributes the paid revenues either to the Central account of State Treasury (for the income that 100% belongs to the Budget), or to the accounts of the revenue beneficiaries (divisible revenues), in accordance with the regulations governing the affiliation of these revenues. The audit has found certain irregularities in the collection of public revenues, which are reflected in the fact that part of some revenues is not paid into the accounts, is not identified in a timely manner and is inadequately recorded.

Decree on the method of collecting public revenues (“Official Gazette of Montenegro” №32/11, 61/11 and 18/12) prescribes the accounts which public revenues, defined by the law or other regulation shall be paid to, the method of payment, as well as reporting to their beneficiaries. The audit has determined the following irregularities:

Fees for the use of the domain “ME” were not paid to the account № 832 - 1194 – 19, but this fee, on a quarterly basis, was paid directly into the Central account of State Treasury, from the account at commercial bank CKB, № 510-0451-88, in the total amount of EUR 1,682,781.53. The audit has found that there are no appropriate control measures developed at the State Treasury for the oversight of the stated budget revenue collection.

Other fees for roads were not paid in full to the account 832 - 2027 - 33, but Transport Directorate and the Montenegrin Telekom AD made a declaration of set-off for the amount of EUR 46,353.71.

Pursuant to Article 67 of the Directions on State Treasury Operations, recipients will submit their Recipient's statement to the State Treasury before 12 a.m. every business day. The audit has found that the Department of Public Revenues submits Recipient's statements to the State Treasury with a delay. It is necessary that the Ministry of Finance, in accordance with Article 72 of the Instruction on State Treasury Operations, ensure timely delivery and records of the recipients’ statements.


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Recommendations:

It is recommended to the Ministry of Finance to provide timely and overall records of public revenues, in accordance with the Decree on the method of collecting public revenues and Directions on State Treasury Operations.

It is recommended to the Ministry of Finance to examine the possibility of providing more adequate control over the collection of revenues from fees for the use of the domain “ME”, in a way to transfer the account for the collection of these fees within the group accounts concession and other fees, whose collection is under the supervision of Department of Public Revenues.

The integration of revenue modules of Ministry of Interior and the Police Administration is also recommended, considering that Police Administration has been included in the RTGS system, i.e. it is connected to the telecommunication network of the Central Bank.

3.1 Records and Collection of Revenues – Department of Public Revenues

Decree on the method of collecting public revenues (“Official Gazette of Montenegro”, № 82/04, 010/05, 32/05, 49/05, 51/05, 76/05, 82/05, 11/06, 17/06, 35/06, 81/06, 42/07, 53/07 and “Official Gazette of Montenegro”, № 06/07, 06/08, 39/08, 56/08, 72/08, 81/08, 22/09, 30/09, 42/09, 47/09, 71/09, 84/09, 04/10, 11/10, 33/10, 46,10, 72/10, 07/11, 17/11), prescribes a group of accounts 820 - for collection and the manner of collection of public revenues (taxes, contributions, fees, etc), which are collected by the Department of Public Revenues.

After submission of statements of the Central Bank on daily changes on the accounts, Department of Public Revenues performs identification by type of revenue and per payers. Thereafter, on a daily basis, the funds are electronically transferred from the clearing account into the central account of the State Treasury, based on the Revenue statement of recipient.

Upon the receipt of the Revenue statement, the Ministry of Finance (State Treasury) allocates the inflows on budgetary revenues of the following beneficiaries: the State Treasury, the Pension and Disability Insurance Fund, the Health Insurance Fund, Municipalities, the Union of Municipalities PI "Morsko dobro" and the Equalization Fund.

According to the summarized overview of revenues per eco-codes, collected by the Department of Public Revenues as a recipient, as well as in accordance with the report of the Central Bank, the total cash inflow amounted to EUR 831,155,808.40. Data on the collected and allocated public revenues conducted through the Central Account of the State Treasury, acc.№ 907-83201-98, for the period 1st January 2012 - 31st December 2012, are shown in the following table:


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Table 12 – Allocation of revenues collected by Department of Public Revenues in the period 1st January – 31st December 2012

Code Budget user Allocated amount (in EUR)

00 State treasury of Montenegro 773,442,341.93

302 Podgorica 8,229,415.43

310 Cetinje 520,513.95

329 Danilovgrad 716,695.96

400 Niksic 1,971,586.42

418 Savnik 28,367.51

426 Pluzine 709,284.17

507 Pljevlja 1,648,815.24

515 Zabljak 246,398.05

604 Berane 650,658.35

612 Plav 145,119.45

620 Rozaje 738,636.28

639 Andrijevica 210,689.61

701 Bijelo Polje 1,015,908.20

710 Mojkovac 197,085.61

728 Kolasin 514,723.87

809 Bar 2,895,447.49

817 Budva 3,096,890.40

825 Ulcinj 934,217.55

9001 Compensation Fund 23,198,536.17

906 Herceg Novi 2,510,636.05

914 Tivat 1,214,436.03

922 Kotor 2,302,480.82

9600 PI "Morsko dobro" 3,753,619.64

9990 The Union of Municipalities 263,204.71

TOTAL 831,155,708.89

Department for Public Revenues has not submitted its Final Statement of Account for 2012 within the

legally prescribed period (deadline up to 31st March 2013), in compliance with the obligation laid down in Article 6, Paragraph 1, Item 13 and Paragraph 2 of the Law on Tax Administration (“Official Gazette of Montenegro”, № 65/01 ... 28/12), and Article 19, Paragraph 4 of the Rulebook on Tax Accounting (“Official Gazette of Montenegro”, № 81/06). Namely, the mentioned Final Statement of Account of the Department of Public Revenues was presented during the audit procedure conducted in this state authority, on July 19th, 2013, along with the explanation given on the reasons for delay in drafting the Final Statement of Account, as follows:

Both, the old and the new information system are still in use in the Department of Public Revenues, and they have not been properly integrated;

By the introduction of a single deposit account, all types of public revenues collected on the basis of income are paid into a single deposit account and are experientially, (based on the percentage of participation), allocated to individual items. Upon the submission of Tax return, i.e. IOPPD forms, previous temporary postings are cancelled, and afterwards the actual debit entry is posted. This procedure takes a lot of time, causes delays and makes the work more complicated.

An independent audit of the Department of Public Revenues IT system has been conducted in this state authority and an audit report, presenting analysis of the current situation, assessments and recommendations, has been completed. The audit report states that “the existence of two different IT systems, (“old” and “new”) within the same organization is intolerable and that additional efforts should have been made on full integration of those systems into a single one. Therefore, the intention of introducing a third, unrelated system is also not justified. The Department of Public Revenues also points out that “a software solution, which allows to scroll through any report from the single account on the basis of the balance on the detailed (analytic) accounts of taxpayers has not been completed yet, which, at this moment, makes it necessary for the branch offices to perform individual analysis of each taxpayer when determining the actual state.”


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3.1.1 Off-balance settlements4 and Agreements of Cession

The audit of the Final accounts of Tax bookkeeping for 2012 has found that the postings on the class

“3” and “7” are balanced, which is compliant with Art. 10 of the Rulebook on Tax bookkeeping. According to the records of Department of Public Revenues, off-balance sheet settlements amounted to EUR 15,486,194.25, which mainly relate to commitments incurred due to agreements of cession and offsetting of mutual debts among: the Government of Montenegro and Montenegrin Electric Enterprise, Coal Mine Inc. Pljevlja and Aluminum Combine Podgorica. Protector of property and legal interests of Montenegro duly submitted a Statement of claim № 1027/13 as of August 6th, 2013 to the Commercial Court.

Off-balance sheet settlemets are also related to the documents on compensation concluded by the Pension and Disability Insurance Fund and Health Insurance Fund with the taxpayers from commercial and non-commercial sector. The Funds submit an overview of conducted compensations on the ground of contributions to the Department of Public Revenues, including the following data: payment account, tax identification number, amount and date, and based on these data Department of Public Revenues closes entries. Off-balance sheet settlemets also include payment of tax liabilities, through the Central Depository Agency, by Compensation Fund bonds. Off-balance sheet settlements, which are implemented by compensation, without cash flow, and thus are not recorded in the State Treasury General Ledger, are considered to be public spending. Although taxpayers fulfill their tax liability in the amount of a realized document on compensation, budget revenues and expenditures in the financial statements of the Government of Montenegro do not increase, ie reduce for this amount. Recommendation:

Ministry of Finance should record all compensations in the State Treasury General Ledger and to implement them in accordance with the spending limitations defined by annual laws on budget.

3.1.2 Refund of Value Added Tax (VAT) Povracaj poreza na dodatu vrijednost

According to Decisions made by Department of Public Revenues on VAT refund, taxpayers were entitled to a total of EUR 76,999,212.56 of value added tax refund. EUR 21,501,500.34 was reimburst from the account at the Central Bank, where the inflow of funds collected by Department of Public Revenues is being recorded. Due to insufficient amount of funds on the account at the moment of issuing Decisions, the Department of Public Revenues submitted Decisions for a refund, totaling EUR 55,497,712.22, to the Ministry of Finance to be executed accordingly.

Department of Public Revenues shall submit a Recipient statement to the Ministry of Finance, which shows the inflows, ie the difference between VAT collected and refunded. However, the statement does not include VAT refund taken over for execution by the Ministry of Finance, so the credit balance of Department of Public Revenues is not reduced in the the same amount. The lack of consistency in processing reimbursement of overpaid or incorrectly collected tax duties has been stated in cases of refunding overpaid taxes and other liabilities (mainly in VAT refunds). The inspection control regarding the groundedness of those claims is not being carried out systematically with all the claims for refund, but the refund is executed based on the insight into a taxpayer’s detailed (analytic) card, which is often being corrected once the inspection control has been completed. In 2012, a total of 640 tax controls, regarding accuracy and regularity of calculation and payment of tax liabilities were conducted, where in 525 controls, ie 82.03%, there were corrections made,

4 Source:Department of Public Revenues


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totaling EUR 13,048,326.00. According to Article 50, Paragraph 5 of the Law on Value Added Tax (“Official Gazette of Montenegro” № 65/01...29/13), the Ministry of Finance should have defined detailed conditions and manner of input VAT refund, which was not presented during the audit procedure. The same fact was identified in the audit of the Final tax accounts for 2010. Recommendation:

It is recommended to the Ministry of Finance to develop Rules of Procedure in cooperation with the Department of Public Revenues, which would establish detailed terms and conditions, as well as methods for processing VAT refunds, and define norms prescribing in which cases and to what extent of funds it shall be necessary to conduct inspection control of the VAT refund. The reimbursement of overpaid tax liabilities shall be conducted on the basis of the stated Rules of Procedure.

3.1.3 Refund and Reallocation of Tax Payments

The time limit for refund of overpaid or incorrectly paid funds has been established by legal provisions. The refund and reallocation of tax payments to other forms of public revenues is made within the prescribed period, up to Decembre 31st, 2012 when it comes to a refund of tax made by Department of Public Revenues. There is an obvious problem in redirecting other types of public revenue in a single payment account, as well as in redirecting from the single account to other types of public revenue with the Decisions passed by the Department of Public Revenues and forwarded to the Ministry of Finance. The audit has found that Department of Public Revenues forwarded 391 decisions totaling EUR 10,470,340.70, in order to be reallocated from the VAT payment account into the State Treasury central account. The above mentioned redirections were not carried out until the audit fieldwork had been completed, i.e. until August 3rd, 20135. If Department of Public Revenues failed to proceed in accordance with taxpayers’ requests on redirecting funds from the payment account for overpaid liabilities on the grounds of public revenues to other accounts, it would certainly call into question the authority of tax administration6. As stipulated by Law, the Department of Public Revenues charges daily interest against unsettled tax payments to the taxpayers who have filed requests for redirection of overpaid funds. Therefore, the Final tax account does not present an objective statement of public revenues. Failure of tax authority to comply with taxpayers’ requests in all cases, except for financial reasons, are justified by responsible persons in the Department of Public Revenues with complications caused by the use of an inappropriate IT system, so it is necessary to make additional efforts and invest resources to enable the system to meet the needs of both, tax authority and taxpayers. Recommendations:

It is necessary to provide consistent IT system of the Department of Public Revenues and the Ministry of Finance, which would enable settling other types of tax payables by overpayments made in one part of the tax liabilities.

It is recommended to the Ministry of Finance to consider the possibility of cancelling accrued interest on tax debt which is not yet settled according to the amount of overpaid taxes based on justified taxpayers’ claims, in accordance with Decisions submitted by the Department of Public Revenues.

5 During September 2013 the Ministry of Finance executed most of required reallocations of overpaid VAT funds to other accounts. 6 Reallocation of funds from taxes and contributions accounts, income tax account, excise on gas oils (euro disel) to a single account is not possible at the moment


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3.2 Materially Significant Irregularities and Recommendations

i. The Audit has found certain irregularities in the collection of public revenues, reflected in the fact that a

part of particular revenues is either not being paid into the payment accounts or not identified in a timely manner, or it has not been recorded properly. a) Recommendation: It is recommended to the Ministry of Finance to ensure prompt and

complete records of public revenues in accordance with the Decree on the method of collecting public revenues and Directions on State Treasury Operations. It is also recommended to the Ministry of Finance to examine the possibility of providing a more adequate control of collection of public revenues from user fees paid for the use of the domain "ME", by transferring the bank accounts for the purpose of collecting these fees within the group of accounts for concessions and other fees, whose collection is under the responsibility of the Department of Public Revenues. In addition, the integration of revenue modules of Ministry of Interior and the Police Administration is also recommended, considering that Police Administration has been included in the RTGS system, i.e. it is connected to the telecommunication network of the Central Bank.

ii. Off-balance sheet settlements, which are implemented by compensation, without cash flow, and thus

are not recorded in the State Treasury General Ledger, are considered to be public spending. Although taxpayers fulfill their tax liability in the amount of a realized document on compensation, budget revenues and expenditures in the financial statements of the Government of Montenegro do not increase, ie reduce for this amount. b) Recommendation: It is recommended to the Ministry of Finance to keep all compensations

recorded in the State Treasury General Ledger and to implement them in accordance with the spending restrictions defined by annual laws on budget.

iii. The lack of consistency in proceeding refunds of overpaid or incorrectly paid funds has been noted in

cases of refunding overpaid taxes and other liabilities (mainly in VAT refunds). The inspection control regarding the groundedness of those claims is not being carried out systematically with all the claims for refund, but the refund is executed based on the insight into a taxpayer’s detailed (analytic) card, which is often being corrected once the inspection control has been completed. c) Recommendation: It is recommended to the Ministry of Finance to develop Rules of

Procedure in cooperation with the Department of Public Revenues, which would establish detailed terms and conditions, as well as methods for processing VAT refunds, and define norms, prescribing in which cases and to what extent of funds it shall be necessary to conduct inspection control of the VAT refund. The reimbursement of overpaid tax liabilities shall be conducted on the basis of the stated Rules of Procedure.

iv. There is an obvious problem in redirecting other types of public revenues into the single payment

account, as well as in redirecting funds from the single account to other structures of public revenues, connected to decisions made by the Department of Public Revenues and forwarded to the Ministry of Finance. d) Recommendation: It is recommended to provide consistent IT system of Department of

Public Revenues and the Ministry of Finance, which would enable settling other tax payables by overpayments made in one part of the tax liabilities. It is recommended to the Ministry of Finance to consider the possibility of cancelling accrued interest on tax debt, which is not yet settled according to the amount of overpaid taxes based on justified taxpayers’ claims, in accordance with Decisions submitted by the Department of Public Revenues.


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4. BUDGET EXPENDITURES

According to the Bill on the final statement of account of the State budget of Montenegro for 2012,

budget expenditures amount to EUR 1,452,013,971.81, and they are structured as follows:

Table 13 – Structure of Public Expenditures

In EUR

1) Current expenditures 658,054,102.25

2) Transfers to institutions, individuals and NGOs 31,512,191.61

3) Social protection transfers 481,633,606.48

4) Reserves 18,078,018.46

5) Capital expenditures 67,686,855.13

6) Granted borrowings 1,775,633.69

7) Repayment of liabilities from previous period 35,738,087.52

8) Expenditures for repayment of guarantees 24,719,832.63

9) Repayment of principle debt 132,815,644.04

4.1 Current Expenditures

Pursuant to the Law on Budget, Article 10, Paragraph 1, Item 1, current expenditures relate to: gross earnings and contributions payable by employer, other personal income, expenses for material and services, ongoing maintenance, interests, rents, subsidies and other expenditures. According to Article 3 of the Bill on the final statement of account of the State budget of Montenegro for 2012, current expenditures amount to EUR 658,054,102.25, and their structure is shown in the following table:

Table 14 – Structure of current expenditures

In EUR

1) Gross wages and contributions charged to employer 374,653,307.63

2) Other personal income 10,336,327.24

3) Material and services expenses 153,691,947.66

4) Ongoing maintenance 22,543,512.98

5) Interests 56,859,854.54

6) Rent 7,110,247.58

7) Subsidies 25,853,418.30

8) Other reserve expenditures 7,005,486.32

4.1.1 Gross Earnings and Contributions Payable by Employer

Pursuant to the Law on Budget for 2012, expenditures on the ground of gross earnings of employees

were planned in the total amount of EUR 382,331,203.68, which was reduced by EUR 3,313,241.78 as defined by the revision of budget, and further decisions on redirection reduced the amount set by the revised budget by an additional amount of EUR 2,432,318.74, so the current budget plan amounted to EUR 376,585,643.16. Expenditures on gross earnings of employees were realized in the amount of EUR 374,653,307.63, which was 0.51% less than planned. These expenditures account for 25.80% of the total budget expenditures and 11.22% of the gross domestic product of Montenegro for 2012.


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Table 15 – Planning and execution of funds appropriated for gross earnings of employees

Column1

DESCRIPTION AMOUNT (in EUR)

1) Defined by Annual plan for 2012 382,331,203.68

2) Reduced by revised budget for 2012 3,313,241.78

3) Reduced by reallocation 2,432,318.74

4) AVAILABLE FOR SPENDING 376,585,643.16

5) EXECUTED 374,653,307.63

6) Executed/available for spending (5 / 4 x 100) 99.49

Taxes shall be determined pursuant to the Law on Tax on Income of Natural Persons (“Official

Gazette of Montenegro”, № 65/01, 12/02, 37/04, 29/05, 78/06, 04/07 and “Official Gazette of Montenegro”, № 86/09), depending on the amount of gross earnings and established scale according to which the tax is calculated at the rate of 9%. Contributions shall be determined in accordance with the Law on Contributions for Compulsory Social Insurance (“Official Gazette of Montenegro” № 13/07 and “Official Gazette of Montenegro”, no 79/08 and 86/09), at the following rates: contribution rate for pension and disability insurance, payable by an employee is 12% and payable by an employer is 8.50%, health insurance contribution rate payable by an employee is 5.00% and payable by an employer is 5.50%, and contribution rate for unemployment insurance payable by an employee is 0.5%, and payable by an employer is 0.5%.

The audit has found that the Law on Civil Servants and State Employees (“Official Gazette of Montenegro” № 39/11...50/11), the Law on Earnings of Civil Servants and State Employees (“Official Gazette of Montenegro”, № 86/09 ..14/12) and Rulebook on the Internal Organization and Systematization, are not being fully implemented at the Administration for Inspection Affairs and Games of Chance Administration.

The audit has found that a certain number of spending units irregularly submits the IOPPD form to the Department of Public Revenues, which is a monthly report on personal income paid out per month, accrued and withheld personal income taxes and contributions on and from this income. Untimely submission of mentioned reports, in a situation when personal income taxes and contributions are usually paid out regularly, results in the occurrence of unrealistic situation of overpayments in detailed (analytic) cards of the state bodies, on the grounds of paid personal income taxes and contributions, and thus also in the bookkeeping of the Department of Public Revenues.

The audit of Human Resources Administration has found that during the period from 1st January 2012 to 31st December 2012 742 civil servants and state employees were employed in the state administration through internal advertisements, public advertisements and open public competitions (in the ministries, administrations, secretariats, bureaus, directorates and agencies). However, the auditing of tested sample of budget spending units determined that restrictive employment measures have not been applied consistently. The budget users have circumvented restrictions on employment, the way they engaged individuals on the basis of agreements on temporary and provisional work and temporary service contracts. On the ground of such contracts, more than 400 persons were engaged in the state administration during 2012, as follows: 97 employees in the Real Estate Department, 89 in the Ministry of the Interior, 71 in the Forest Administration, 45 in the Directorate for Protection of Cultural Property, 32 in the Department of Public Revenues, 24 in the Ministry of Finance, 21 in the Administration for Inspection Affairs, 12 in the Ministry of Economy, 12 in the Ministry of Maritime, 12 in the Ministry of Transport and Maritime Affairs, 12 in the Human Resources Administration, 7 in the Ministry of Culture, 7 in the Games of Chance Administration, 6 in the Ministry of Agriculture and Forestry, 4 in the Water Management, 2 in the Transport Directorate and 1 in the Port Administration.


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Recommendations:

Demand of all state institutions to submit IOPPD form on a regular basis - a monthly report on personal income paid out per month, accrued and withheld personal income taxes and contributions from this income for all employees.

It is necessary to reconsider the issue of engagement on the grounds of agreements on temporary and provisional work and temporary service contracts, to comply such practice with the adopted employment strategy and to adapt it to the real needs and actual demands of all the institutions.

4.1.2 Other Personal Income

Budget item 412 - Other personal income, keeps records on the following payment requests and

payments related to: meals, annual leave, winter supplies, housing benefits and separate life allowances, transport, fees to MPs, academic fees, jubilee awards, severance pays and other remunerations. Pursuant to the Law on Budget for 2012, budget expenditures on the grounds of other personal income of employees were planned in the total amount of EUR 10,921,650.33, which was reduced by EUR 3,473.33 as defined by the budget revision, and further decisions on redirection reduced the amount set by the revised budget by an additional amount of EUR 939,502.50, so that the final plan amounted to EUR 11,864,626.16. Budget plan was realized in the amount of EUR 10,336,327.24, which accounts for 12.88% less than planned.

Table 16 – Planning and execution of funds appropriated for other personal income

Column1



2) Reduced by revised budget for 2012 3,473.33

3) Increased by reallocation 939,502.50


5) EXECUTED 10,336,327.24


4124 – Housing Benefits and Separate Life Allowances

Budget item 4124 - Housing benefits and separate life allowances, an amount of EUR 1,864,349.21 was planned, reduced by EUR 24,240.00 pursuant to revised budget plan, and further reduced by decisions on reallocation of funds for additional EUR 83,023.81, so that the final plan amounted to EUR 1,757,085.40. Budget plan was realized in the amount of EUR 1,683,507.97, i.e. 95.81%.

At the Ministry of Transport and Maritime Affairs, in Budget item 4124 – Housing benefits and

separated life allowances the planned budget appropriations amounted to EUR 19,982.86, while the realization totalled to EUR 19,910.00, or 99.64%. The audit of expenses recorded in this item has found that generated expenditures relate to participation in rent payment in 2012 on a monthly basis of EUR 110.00, for employees and certain individuals who have been engaged on the grounds of temporary service contracts. These payments were carried out pursuant to Decision № 01-550/1 as of February 17th, 2012, according to requests previously submitted by employees, along with lease agreements enclosed. The Decision was made in compliance with Article 93 of the Law on State Administration and Article 109 of the Law on Civil Servants and State Employees.


Page 43

At Port Administration in Budget item 4124 - Housing benefits and separated life allowances the planned and realized budget appropriations amounted to EUR 2,640.00. The audit control of expenses recorded in this account has found that generated expenditures relate to participation in rent payment for employees in 2012 on a monthly basis of EUR 110.00. The payments were carried out for two employees pursuant to issued Decisions, in compliance with Article 93 of the Law on State Administration and Article 109 of the Law on Civil Servants and State Employees, according to requests previously submitted by employees, along with a Statements enclosed (specifying details on apartment lease, the amount of lease), certified by a notary.

Pursuant to Article 1 of the Law on Salaries of Civil Servants and State Employees, it has been determined that: “A civil servant or state employee shall exercise the right to salary, allowance, and other personal income in the manner and under conditions as set forth by this Law and the General Collective (Bargaining) Agreement.” Conditions, manner of exercising the right and the amount of salaries and other income shall be determined by a Government regulation. Pursuant to Article 29 of the Regulation on Allowances and Other Income of Civil Servants and State Employees and Article 30 of the Regulation on Compensation Costs to Civil Servants and State Employees, which were effective during 2012, the separate life expenses shall be compensated to “civil servants who are sent to operate outside their place of residence by orders of the head of a state authority and thus separated from their families ... “. Rental participation is not provided for pursuant to the above mentioned regulations and is considered a improper consumption. 4129 - Other Remunerations

In Budget item 4129 - other remunerations, annual planned appropriations amounted to EUR 7,832,298.17, which was reduced pursuant to the revised budget by EUR 68,286.67, while decisions on redirection of funds increased the planned amount for EUR 416,544.38, so that the final plan amounted to EUR 8,180,555.88. The plan was realized in the amount of EUR 6,923,423.38, i.e. 84.63%.

In Budget item 4129 – other remunerations, the Ministry of finance planned expenditures in the amount of EUR 208,431.18, while the realized amount was EUR 188,788.40. The audit was performed against expenditures amounting EUR 118,958.60 or 63.29%. The audited sample completely relates to remunerations paid out to members of working bodies. The audit has determined the following irregularities:

taxes and contributions were not calculated and paid for transferred remunerations,

the amount of prescribed remuneration was not consistently complied with at several working groups, totalling EUR 10,104.60,

provisions stipulating that the engagement in working teams shall be performed after regular working hours and outside the scope of regular duties were not complied with, and

there are no working groups’ reports which should have served as basic documents for remunerations’ payments.

Except for the Working Group for drafting the new Strategy of the system of internal financial control

development in the public sector of Montenegro for the period 2013-2017, other working bodies have not submitted their Reports on activities, which is contrary to the provisions of the Decision on Criteria for determining the rate of remuneration for a member of working body or other types of work.

The Administration for Inspection Affairs has duly calculated and paid tax on income of physical persons and surtax on income tax when transferring remunerations to civil servants and state employees, but they have not calculated and paid social insurance contributions. Real Estate Administration has realized payments from this position, related to remunerations for the members of the tender committees and members of the commissions for real estate evaluation, totalling EUR 9,048.00, while they failed to carry out the calculation of taxes and contributions. Ministry of Transport and Maritime Affairs has performed payments from this position within the set amount of EUR 5,020.00, for persons engaged on a temporary service contract.


Page 44

4.1.3 Expenses for Material and Services

As stipulated by the Law on Budget, estimated appropriations for expenses for material and services

amounted to EUR 149,567,183.54,61, which was reduced by the revised budget by EUR 2,525,825.37, and additionally reduced by decisions on redirection amounting to EUR 389,680.00, so the final budget plan totalled at EUR 146,651,677.60. A total of EUR 153,691,947.66 was executed, which accounts for a surplus of EUR 7,040,270.06, i.e. 4.80% more than planned.

Table 17 – Planning and execution of appropriations for expenses for material and services

Column1 DESCRIPTION AMOUNT (in EUR)



3) Reduced by reallocation 389,680.57


5) EXECUTED 153,691,947.36


Budget appropriations intended for budget item 4131 – expenses for material amounted to EUR

60,160,686.18, while according to the revised budget this amount was reduced by EUR 261,560.15, and decisions on redirection of funds additionally reduced it for EUR 692,612.88, so the resources available for spending finally amounted to EUR 59,206,515.15. A total of EUR 58,786,231.26, was executed, or 0.71% less than planned.

After the completion of a specified sample testing on this budget item, the occurrence of improper spending has been identified in the Forest Administration, Department of Public Revenues, Human Resources Administration, Compensation Fund, the Ministry of Transport and Maritime Affairs, the Port Administration and the Water Management in the amounts and for the purposes as stated in the following table:

Table 18 – Improper spending in expenses for material and services In EUR

Spending units

Forest A

dministration

Departm

ent of Public

Revenues

Hum

an Resources

Adm

inistration

Com

pensation Fund

Ministry of T

ransport

Port A

dministration

Water M

anagement

Total

Recorded at 4131 167,374.86 14,413.64 12,263.53 6,275.71 3,413.28 2,722.51 2,241.29 208,704.82

To be recorded at the follow

ing items

4129 14,413.64 14,413.64

4132 2,241.29 2,241.29

4133 5,052.43 5,052.43

4134 1,269.85 1,269.85

4139 550.00 6,275.71 3,413.28 1,495.46 11,734.45

4181 1,227.05 1,227.05

4143 7,800.57 7,800.57

4313 7,600.00 7,600.00

4415 2,843.68 2,843.68

4416 2,598.01 2,598.01

4630 151,923.85 151,923.85

Total 167,374.86 14,413.64 12,263.53 6,275.71 3,413.28 2,722.51 2,241.29 208,704.82


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Budget appropriations intended for budget item 4132 – business travel expenses were planned

in the amount of EUR 5,971,190.98, reduced by the revised budget in the amount of EUR 357,565.44, and increased by decisions on redirection of funds in the amount of EUR 449,915.72, finally totalling to EUR 6,063,541.26. Amount of EUR 5,759,493.18 was executed or 5.01% less than planned. After completing control of a tested sample on this budget item, improper spending of small portions has been identified at the Transport Directorate (EUR 4,260.01) and the Ministry of Transport and Maritime Affairs (EUR 1,691.50). However, the audit of the Ministry of Agriculture and Forestry, Forest Administration and Water Management has identified larger expenditures for business travel comparing to the data presented in the General Ledger of spending units and the Bill on final statement of accounts of the state budget of Montenegro for 2012. An amount of EUR 145,453.61 over the planned has been spent for these purposes and reallocated from other budget items, in amounts stated in the following table:

Table 19 – Improper spending for business travels In EUR

Spending units Ministry of

Agriculture and Forestry

Forest Administration Water Management Total

Business travel expenses recognized by 2012 Final

statement of accounts of the State budget

23,000.00 33,694.61 3,692.55 60,387.16

Bu

siness travel

expen

ses fou

nd

by

aud

it

4131 7,152.56 7,152.56

4139 2,908.00 18,210.00 3,687.55 24,805.55

4161 1,273.00 1,273.00

4171 89,361.58 89,361.58

4411 6,386.92 6,386.92

4412 16,474.00 16,474.00

Factual state determined by audit

131,743.58 60,330.17 10,074.47 205,840.77

It is necessary to emphasize that during the formation of groups for negotiation chapters for the

purpose of explanatory and bilateral screening, Government of Montenegro delegated task to the Ministry of Agriculture, among others, to provide the necessary funds for business travels at the expense of available funds from their own budget, and it resulted in the overrun shown in the presented table.

Budget appropriations for item 4134 – electrical energy expenses were planned in the amount of EUR 19,249,104.77, increased by the revised budget in the amount of EUR 11,104.77, and additionally increased by decisions on redirection of funds in the amount of EUR 325,152.88, so the final amount of resources available for spending totalled to EUR 19,585,326.42. A total of EUR 19,258,568.52 was executed, or 1.67% less than planned. The following irregularities have been identified in this budget item:

At the Forest Administration electric energy expenses were estimated in the amount of EUR 240,000.00, while the execution recorded amounted to EUR 203,325.56. However, the outstanding liabilities to suppliers in 2012 account for EUR 95,596.72, which makes a total expenditure of EUR 298,922.28 in this item in 2012 or EUR 58,922.28 over the planned.

At the Water Management, electric energy expenses were planned in the amount of EUR 5,760.00 and the execution was recorded in the same amount, while total energy expenses amounted to EUR 11,294.31, or EUR 5,263.25 over the planned.

At Port Administration, paid electric energy expenses amounted to EUR 7,200.00, while the real expenditures amounted to EUR 5,084.00, meaning that the remaining amount of EUR 2,115.80 stands for an advance payment to supplier.


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The budget item 4139 – contractual services records payment requests and payments arising from

concluded contracts aimed at supporting the execution of spending unit activities, including solicitors’ and legal services, consulting services, projects and studies development, professional training of employees, translation services, printing and copying, media and promotional services, audit services, insurance and other services.

In the budget item 4139 – contractual services, the planned appropriations amounted to EUR 56,696,362.04, which was reduced by the revised budget by EUR 4,113,929.05, and additionally reduced on the grounds of decisions on redirection of resources, amounting to EUR 1,220,502.57, so the final plan amounted to EUR 51,361,930.42. However, the execution was carried out in the amount of EUR 60,607,306.64, or 18% more than planned.

Failure to comply with regulations, or an improper implementation of regulations were determined after the completion of test checking of a selected sample at this budget item, which resulted in improper spending performed from this budget position. By test checking of a selected sample on budget item of contractual services, improper spending was identified at the Ministry of Economy, Ministry of Finance, Human Resources Administration, Ministry of Interior Affairs, Concession Commission, Montenegrin Music Centre, Forest Administration, Department of Public Revenues, Human Resources Administration, the Compensation Fund, the Ministry of Transport and Maritime Affairs, the Port Administration and Water Management.

The abovementioned budget users misused contractual services to pay expenses that do not belong to this budget item. Contractual services account was used to pay other remunerations, expenses for material, business travel expenses, business gifts expenses, expenditures for electric energy, banking services and negative exchange rate differences, current maintenance of facilities and equipment, rental of facilities, subsidies, transfers, capital expenditures, as well as for payment of debts. Review of improper spending by users is shown in the following tabular overview:


Page 47

Table 20 – Table of improper spending by contractual services expenditures In EUR

Spending units

Improper spending in budget position 4139 determined by audit Total

4129

4131

4132

4133

4134

4137

4142

4143

4161

4171

431

4415

4630

Ministry of Economy

56,626.23

66,119.22

44,915.48

22,853.70

16,017.47

206,532.10

Ministry of Finance

45,560.32

4,319.70

4,914.00

3,333.03

3,694.45

78,110.40

139,931.90

Human Resources Administration

63,500.00

2,192.10

65,692.10

Ministry of Interior

55,388.72

55,388.72

Concession Commission

18,568.80

9,597.09

628.60

28,794.49

Music Centre

18,450.00

18,450.00

Real Estate Administration

10,000.00

3,790.80

3,389.08

17,179.88

Directorate for Protection of Cultural Property

4,090.00

137.78

268.12

3,969.00

8,464.90

Directorate for Public Works

1,542.01

1,002.92

6,990.17

9,535.10

Port Administration

6,655.00

6,655.00

Ministry for Information Society and Telecommunications

5,500.00

5,500.00

Department for Public Revenues

3,925.00

3,925.00

Games of Chance Administration

1,710.91

776.17

1,421.39

3,908.47

Ministry of Agriculture

2,908.00

2,908.00

Transport Directorate

2,200.00

2,200.00

Compensation Fund

765.00

765.00

Administration for Inspection Affairs

365.58

365.58

Total

166,735.03

11,710.91

182,383.72

8,110.50

1,044.29

44,915.48

13,231.00

11,744.59

3,969.00

22,853.70

8,855.00

22,532.62

78,110.40

576,196.24

The audit has found that at the following budget users, the Real Estate Administration, Ministry of

Interior Affairs, Forest Administration, Directorate for Protection of Cultural Property, Department of Public Revenues, Ministry of Finance, Administration for Inspection Affairs, Ministry of Economy, Ministry of Culture, Ministry of Transport and Maritime Affairs, Human Resources Administration, Pension and Disability Insurance Fund, Games of Chance Administration, Ministry of Agriculture and Forestry, Water Management, Transport Directorate and Port Administration, the employees were engaged on the basis of agreements on temporary and provisional work and temporary service contracts, to perform tasks originally envisaged as regular tasks


Page 48

by the systematization act, and which the working posts have been systematized for. The mentioned engagements are not in compliance with the provisions of the Labour Law and the Law on Civil Servants and State Employees. The Audit has identified violations of other regulations, at first place of the Law on Personal Income Tax (“Official Gazette of Montenegro”, № 65/01, 12/02, 37/04, 78/06, 04/07 and 86/09, 73/10, 40/11 and 14/12) and the Law on contributions for compulsory social insurance (“Official Gazette of Montenegro”, № 13/07, 79/08, 86/09, 78/10, 40/11 and 14/12). The audit has found that the Real Estate Administration, Human Resources Administration and the Concession Commission Concessions have not paid taxes and contributions, while the Directorate for Protection of Cultural Property and Games of Chance Administration have paid taxes, but not the contributions for compulsory social insurance and surtax, in accordance with the aforementioned regulations. The audit has also identified violations of the Law on Budget, as the two budget users, Transport Directorate and the Port Administration have paid expenditures (transfers) that were not foreseen by their budget plan. 4.1.4 Ongoing Maintenance

According to the Law on Budget, expenditures for ongoing maintenance were estimated at EUR

23,620,610.39, reduced by the revised budget by EUR 287,842.66, and additionally reduced by decisions on redirection in the amount of EUR 441,103.79, so the final resourced available for spending stood at EUR 22,891,663.94. The execution amounted to EUR 22,543,512.98, or 1.52% less than estimated.

Table 21- Planning and execution of funds appropriated for ongoing maintenance expenses

Column1






5) EXECUTED 22,543,512.98


4.1.5 Interests

According to the Law on Budget for 2012, expenditures for interests were estimated at EUR

57,505,241.61, reduced pursuant to the revised budget in the amount of EUR 2,600,000.00 and determined amount was additionally reduced by decisions on redirection, amounting to EUR 23,142,509.73, so the plan by current budget amounted to EUR 31,762,731.88. Expenditures for interests were executed in the amount of EUR 56,859,854.54, which accounts for 79.01% more than the current budget plan.

Table 22 – Planning and execution of funds appropriated for other personal income






5) EXECUTED 56,859,854.54



Page 49

Over the last five years, the share of interests in the GDP has been reporting a progressive trend of

growth. This share was extended from 0.73% in the 2008 to 1.70% in 2012.

Chart 1 – % share of interests in the GDP

Burden imposed on budget on the basis of interests paid in 2012 was increased by approximately 2.5

times compared to 2008, whereas in the same period, the cash budget deficit was increased by 11 times. A sudden increase in deficit over the recent years will have the impact on the further growth of budgetary appropriations on the grounds of interests, which will require further rational use of funds in the part of budget spending or additional borrowings that will provide liquidity for the proper implementation of current expenditures and liabilities stipulated by law in the field of social protection.

415–1 Interests to Residents

Interest to residents were carried out in the amount of EUR 7,968,428.86 which was 51.72% more than estimated by current budget. The tested sample amounted to EUR 3,941,361.47, or 50.40% of the implemented amount. The created overrun of the estimated amount resulted from the increase in short-term borrowings at commercial banks, in order to provide for liquidity.

According to the tested sample, the interest paid to resident commercial banks is mostly related to the interest paid to Erste bank Podgorica, NLB Montenegro bank Podgorica, Hypo Alpe Adria Bank Podgorica and Hipotekarna bank Podgorica.

Transfers to "Erste Bank" A.D. Podgorica for repayment of interest resulted from the assumed debt, made by legal state entities in 2011 and were carried out in accordance with the following liabilities:

Pursuant to Article 12 of the Law on Budget of Montenegro for 2011, (“Official Gazette of Montenegro”, № 78/10) and Decision on Borrowing and Issuing State Guarantees of Montenegro for 2011 (“Official Gazette of Montenegro”, № 16/11), the Government of Montenegro - Ministry of Finance assumed debts, totalling EUR 20,160,000.00 of the following: Railway Infrastructure of Montenegro Inc. Podgorica, in the amount of EUR 8,500,000.00; PE Regional Waterworks “Crnogorsko primorje”, in the amount of EUR 7,000,000.00; Montenegrin Fund for Welfare Housing Development, in the amount of EUR 3,800,000.00, as well as the obligations of the Broadcasting Company Radio-Television of Montenegro to Atlasmont Bank, in the amount of EUR 858,256.00.


Page 50

Consequently and in accordance with the amounts included in the tested sample, the transfers from

this budget item on the basis of repayment of interests amounting EUR 266,647.93 were carried out in accordance with:

Loan agreements concluded between Erste Bank ad Podgorica and these legal entities and Loan Repayment Programmes, which are an integral part of the Loan Agreement;

Agreements between the Government of Montenegro – Ministry of Finance and these legal entities on assumption of obligations, including all the costs arising from the Loan arrangement, in force as of 1st January 2011;

Protocols on assumption of debts arising from these loans, concluded between the Government of Montenegro - Ministry of Finance and Erste Bank ad Podgorica.

According to the tested sample, other transfers of funds to Erste Bank A.D. Podgorica were carried out

on the basis of the following:

interest paid in the amount of EUR 104,258.32 by the Loan agreement № LD/10050/00082 as of February 25th, 2010, concluded between Erste Bank A.D. Podgorica and the Government of Montenegro - Ministry of Finance. The loan is intended for the completion of construction works on the building of the Police Administration in Podgorica;

interest paid in the amount of EUR 92,205.00, by the Loan agreement № LD/10103/00110 as of April 14th, 2010 concluded between the Government of Montenegro - Ministry of Finance and Erste Bank A.D. Podgorica, approved for the restoration works on cultural monuments in Cetinje;

interest paid in the amount of EUR 50,136.99, by the Loan agreement № LD/12086/00089 as of March 30th, 2012 concluded between the Government of Montenegro - Ministry of Finance and Erste Bank A.D. Podgorica;

interest paid in the amount of EUR 59,685.20, by the Loan agreement on overdraft № OD/11081/00075 as of April 27th, 2011 and the Annex № 1/11 of the Loan agreement on overdraft № OD/11081/00075, as of December 21st, 2011, concluded between the Government of Montenegro - Ministry of Finance and Erste Bank A.D. Podgorica.

Transfers to NLB Montenegro bank a.d. Podgorica on the basis of interest according to the

tested sample were carried out as follows:

the amount of EUR 11,095.89, transferred according to the terms and conditions laid down in the Revolving loan credit agreement № KR 2012/813 dated as of February 23rd, 2012,

the amount of EUR 20,342.47, transferred according to Short-term loan agreement № KR 2012/1649 concluded and signed on April 3rd, 2012,

the amount of EUR 39,410.49, transferred according to Agreement № KR 2007/6326.1 as of May 16th, 2007, concluded between NLB Montenegro bank a.d. Podgorica and Municipality of Budva, for the implementation of the programme by Directorate of Public Works related to land development and infrastructure connections and works on furnishing a primary school in Budva, under the Agreement on construction № 06-768 as of April 4th, 2007,

transfers of funds to Hypo Alpe Adria Bank a.d. Podgorica, amounting to EUR 15,828.63, under the Agreement on short-term loan №KR-425/12 as of April 6th, 2012.

As determined on the basis of the tested sample, transferred funds to Hipotekara bank a.d.

Podgorica refer to repayment of interest on short-term loans, maintenance of the current liquidity of the budget in accordance with the following Loan agreements:


Page 51

the amount of EUR 3,811.48, under the Loan arrangement № 101-275/2 as of February 3rd, 2012, concluded between the Government of Montenegro - Ministry of Finance and Hipotekarna bank a.d. Podgorica in the amount of EUR 1,500,000.00, the loan was fully repaid on February 29th, 2012.

the amount of EUR 9,016.40, under the Loan arrangement № 101-1065/2 as of April 4th, 2012, concluded between the Government of Montenegro - Ministry of Finance and Hipotekarna bank a.d. Podgorica;

the amount of EUR 7,815.91, under the Loan arrangement № 101-2172/2 as of June 26th, 2012, concluded between the Government of Montenegro - Ministry of Finance and Hipotekarna bank a.d. Podgorica;

The funds from this budget item were also transferred for the interest paid on account of liquidity of the

Ministry of Finance, based on T-bills issued by the State of Montenegro, as well as funds for the costs of T-bills issue on the basis of the calculation made by the Central Bank of Montenegro.

The Central Bank of Montenegro was transferred funds amounting EUR 429,607.20 on the basis of T-bills issuing costs related to auctions organized and held in 2011, the, according to the memo sent by the Central Bank of Montenegro, CBM № 10-230/1 as of 17th January 2012. The stated amount should have been recorded in the budget item 413-7- Bank services and negative exchange rates. This budget item was debited by the funds transferred to CBM in the amount of EUR 429,607.20, based on T-bills issuing costs related to auctions organized and held in 2011, in accordance to the calculation made by CBM, № 10-230/1 as of 17th January 2012, which should have been recorded in the budget item 413-7- Bank services and negative exchange rates. Recommendation:

In order to present real data of reported expenditures arising from interests paid to residents and to delimit costs, as explained in the Audit Reports of the Final Statement of Accounts of the State Budgets of Montenegro from the previous years, it is necessary to estimate and state commission, fees and other costs of banking services in budget positions prescribed by the Regulation on uniform classification of accounts for the budget, extra-budgetary funds and budgets of municipalities.

415–2 Interests to Non-Residents

Interest to non-residents were carried out in the amount of EUR 48,891,426.40, which was 84,42% more than estimated by current budget plan. The tested sample amounted to EUR 46,908,113.22 or 95.94 % of the implemented amount.

According to the Law on Budget for 2012, appropriations for this budget item were projected at EUR 53,748,641.33, and this amount was reduced pursuant to the Law on Amendments on the Law on Budget for 2012 by EUR 4,100,000.00. Following Decisions of the Ministry of Finance on reallocations, the amount was additionally reduced by EUR 23,137,809.73, so the current budget amounted to EUR 26,510,831.60, while a total of EUR 48,891,426.40 was executed.

The deficit in this position, totalling EUR 22,380,594.80 has been transferred from Consolidated Treasury Account, as provided for in Article 43 of the Law on Budget, stipulating that the Government has a permanent and indefinite power to transfer payments of interest or principal arising from the debt of the State from the appropriations deposit on the Treasury Consolidated Account and pursuant to the terms and conditions previously agreed to by the Government. It is recommended to the Ministry of Finance to make reduction of estimated funds from this budget position by redirection, in percentages prescribed by the


Page 52

provisions of Article 35 of the Law on Budget, and to the extent that will not upset the balance between projected and executed appropriations for the payment of interests.

Redirections of resources, totalling EUR 23,137,809.73, were carried out based on decisions of the Ministry of Finance to programmes and expenditures, amounting EUR 363,296.43, and in compliance with the decisions of the Ministry of Finance and pursuant to the Conclusions of the Government of Montenegro, among spending units, in the amount of EUR 22,774. 513.30.

Redirections of resources from this budget position to programmes and expenditures, amounting EUR 363,296.43, based on decisions of the Ministry of Finance, were carried out in compliance with the following:

within the programme Budget Management, the estimated appropriations for item 4139 – contractual services were increased by EUR 166,140.00;

the estimated appropriations were increased by EUR 150,000.00 for following expenditure items: budget expenditure 4112 - Personal income tax, in the amount of EUR 35,537.00; 4113 - The employees’ contributions, in the amount of EUR 74,990.43; 4114 - The employers’ contributions, in the amount of EUR 20,530.00; 4115 - Municipal surtax in the amount of EUR 5,331.00; 4139 - Municipal surtax in the amount of EUR 13,611.57;

the projected expenditures for Commission Programmes (organizational code 1732) were increased by EUR 47,156.66, for the following outlays: 4112 – Personal income tax, in the amount of EUR 12,873.30; 4113 – The employees’ contributions, in the amount of EUR 25,761.53; 4114 – The employers’ contributions, in the amount of EUR 6,202.38; 4115 – Municipal surtax in the amount of EUR 2,319.45.

Pursuant to Conclusions of the Government, redirections of resources from this budget position were

carried out in the amount of EUR 22,774,513.30, as follows:

For the Programme Development of Energy, Mining and Industry (3041) for the outlay 4171 Subsidies for production and provision of services, the estimated appropriations at the Ministry of Economy (organizational code 40901) were increased by EUR 1,140,415.36;

For the Programme Development of Energy, Mining and Industry (3041-0435) for the outlay 4171 Subsidies for production and provision of services, the estimated appropriations at the Ministry of Economy (organizational code 40901) were increased by EUR 4,191,993.16;

For the Programme Fund for Pension and Disability Insurance (organizational code 2481), the outlay: 4231 - Old age pension, the estimated appropriations at the Fund for Pension and Disability Insurance (organizational code 60101) were increased by EUR 1,502,104.55;

the estimated appropriations for the Ministry of Labour and Social Welfare (organizational code 41601), for the implementation of the Program: Social, Veterans’ and Disability Insurance (organizational code 2971), were increased by EUR 1,940,000.00, for the following outlays: outlay 4211 - Children allowance, in the amount of EUR 205,366.54, expenditure 4213 – Family welfare, in the amount of EUR 1,252,702.37, expenditure 4214 - Maternity leave, in the amount of EUR 479,273.53, expenditure 4217 – Residential and nursing care services in the amount of EUR 2,657,56;

the estimated allocations for the Ministry of Labour and Social Welfare (organizational code 41601), for the implementation of the Program: Social, Veterans’ and Disability Insurance (organizational code 2971), were increased by EUR 2,500,000.00, for the outlay 4214 – Maternity leave, in the amount of EUR 2,500,000.00;

the allocations for Reserves (organizational code 40502) were increased by EUR 11,500,000.00.


Page 53

The amount of interests paid on external debt during 2012 increased by 18.17% in relation to amount

of fulfilled obligations arising from the interests on external debt in the previous year (absolute value stated EUR 8,883,442.40), largely due to the repayment of obligations regarding interest for Eurobond bonds in the amount of EUR 28,800,000.00 (in 2011 it amounted to EUR 15,750,000.00). These obligations for the interest payments amounting EUR 28,800,000.00 were executed for repayment and interest paid in the amount of EUR 13,050,000.00, on the basis on Eurobond issue bonds amounting EUR 180,000,000.00 and for the repayment of second interest instalment in the amount of EUR 15,750,000.00, incurred on the basis of Eurobond issue bonds in the amount of EUR 200,000,000.00. The interest rates for these bonds amount to 7.25% and 7.875%.

Liabilities on the basis of interest towards Credit Suisse International were paid in the 2012 in a reduced amount in relation to the previous year, by EUR 2,695,885.48, due to refinancing of the arrears incurred on the basis of the Loan agreement signed on July 30th, 2009, by concluding a new Loan agreement with Credit Suisse International on April 11th, 2012, totalling EUR 150 million. On the basis of the new Contract, the refinancing of previous debt to Credit Suisse was carried out in the amount of EUR 52,185,000, as well as the payment amounting EUR 873,591.00 for the interest and other costs. Thus, obligations towards Credit Suisse on the basis of the old arrangement were fully executed.

A new, third period has started for the calculation of interests on the respective amount of newly

concluded arrangement with Credit Suisse totalling to 150 million EUR. Other significant transfers of funds to non-resident creditors relate to:

interest payment to Paris Club of creditors;

interest payment to European Investment Bank – EIB, for the loans intended for the Project of Roads and Bridges Rehabilitation in Montenegro, the Project of Urgent Transport Remediation – component B1, the Railways Reconstruction Project, the Project of Roads and Bridges Rehabilitation - A3, Project “Waters and Sewage Systems – B”;

interest payment to European Bank for Reconstruction and Development - EBRD, in respect of an assumed debt of Railway Infrastructure of Montenegro, Project of Regional Roads Reconstruction;

interest payment to KFW;

interest payment to Austrian bank Steiermärkische Bank und Sparkassen AG, for the Purchase of Special Fire Fighting and Rescue Vehicles;

interest payment to Erste Group Bank AG, for the implementation of budget commitments;

interest payment to Eurofima for assumed debt of Railway Transport of Montenegro;

interest payment to International Bank for Reconstruction and Development - IBRD, for the Project Energy Efficiency MEEP, Consolidation Loan D, Consolidation Loan E and Consolidation Loan F.

The repayment of funds amounting EUR 674,496.49 was also carried out during the current year, for

the first and second instalment of interest arising from the Development Policy Loan (DPL I), Financial sector development policy, № 80910 ME as of 26th, September 2011, concluded between Montenegro and the IBRD.

The outlays from this budget position were transferred for expenditures in respect to incurring associated costs of borrowings in the current year, as it was the case in previous years. Due to this, a total transfer amounted to EUR 260,896.32. Out of the stated figure, the amount of EUR 200,601.33 refers to the costs of employment of funds, according to the following structure: the amount of EUR 185,837.41 was transferred to the International Development Association (IDA), the amount of EUR 14,763.92 to KFW - German development bank, while the amount of EUR 60,294.99 relates to engagement of a solicitor in the negotiations for the loan arrangement with Credit Suisse. From the budget position 4152 - Interests to non-residents, pursuant to decisions passed by the Ministry of Finance on redirection of estimated appropriations, the redirection of funds in the amount of EUR 23,137,809.73 was executed in the current year, which led to a total amount of EUR 26,510,831.60 of estimated current budget funds, while the executed amount was EUR


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48,891,426.40. Redirecting decreased the amount of appropriations for these purposes, so the insufficient amount of funds was compensated by transfers from the Consolidated Treasury Account in the amount of EUR 22,380,594.80, as stipulated in Article 43 of the Law on Budget, the Government has a permanent and indefinite power to transfer payments of interest or principal arising from the debt of the State from the Treasury Consolidated Account and pursuant to the terms and conditions previously agreed to by the Government. Recommendations:

It is recommended to the Ministry of Finance to make reduction of estimated funds from this budget position by redirection in percentages prescribed by the provisions of Article 35 of the Law on Budget, and to the extent that will not upset the balance between projected and executed appropriations for this budget item.

According to the tested sample, an amount of EUR 260,896.32 was also paid from this budget item, related to the costs of employment of funds amounting to EUR 200,601.33, and the solicitor’s services in negotiations for the loan arrangement with Credit Suisse amounting to EUR 60,294.99, which should have been recorded in items prescribed by the Regulation on uniform classification of accounts for the budget, extra-budgetary funds and budgets of municipalities, in order to present the actual status of expenditures for interests.

As specified in Audit reports on the Final Statement of Accounts of the State Budgets of Montenegro for 2009, 2010 and 2011, it is of a crucial importance to estimate and recognize incurring associated borrowing costs, bank commissions, fees and other expenses in appropriate budget accounts as stipulated by the Regulation on uniform classification of accounts for the budget, extra-budgetary funds and budgets of municipalities, in order to present the actual status of expenditures for interests, i.e. the costs of employment of funds and bank commissions should have been recognized in item 413 -7 Bank services and negative exchange rates, while the costs of solicitor’s engagement and services should have been recognized in item 413-1-9 Solicitor’s and legal services.

4.1.6 Rents

As stipulated by the Law on Budget for 2012, estimated appropriations for rental expenses amounted

to EUR 8,001,214.35, which was decreased by EUR 284,190.00 according to revised budget plan, and thus determined amount was additionally reduced by decisions on redirection in the amount of EUR 433,469.85, so the current budget plan amounted to EUR 7,283,554.50. Rental expenses were executed in the amount of EUR 7,110,247.58, which is 2.38 % less than defined by a current budget plan.

Table 23 – Planning and execution of funds for rental expenditures

Column1






5) EXECUTED 7,110,247.58



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4.1.7 Subsidies

As stipulated by the Law on Budget for 2012, projected appropriations for subsidies amounted to EUR

20,950,000.00, which was decreased by EUR 250,000.00 according to revised budget plan, and thus determined amount was increased by decisions on redirection in the amount of EUR 5,331,608.52, so the current budget plan amounted to EUR 26,031,608.52. Expenditures for subsidies were implemented in the amount of EUR 25,853,418.30, which is 0.68 % less in relation to the current budget plan.

Table 24 – Planning and execution of appropriations for subsidies




3) Increased by reallocation 5,331,608.52


5) EXECUTED 25,853,418.30


Subsidies Program is being implemented in cooperation with the Ministry of Economy, Ministry of

Labour and Social Welfare, the Ministry of Finance and Montenegrin Electric Enterprise EPCG. The Since October 2007, the Government of Montenegro has continuously been implementing electricity bills subsidies for the socially most vulnerable citizens. Due to the increase in electricity prices at the beginning of 2012, and following its Conclusion №06-799 from May 3rd, 2012, the Government of Montenegro passed decision to expand the potential number of beneficiaries up to 25,0007, and by the same Conclusion the Ministry of Labour and Social Welfare was obliged to quarterly submit updated information on the users of this right to Montenegrin Electric Enterprise EPCG. Pursuant to the Conclusion of the Government dated July 5th, 2012, it was decided that the electricity bills delivered to this category of users shall be subsidized up to December 31st, 2012. In the period January - December 2012 subsidies amounting to EUR 1,925,204.23 were calculated for electricity supplied to households based on subsidized electricity bills totalling 151,034. In the course of 2012, the amount of EUR 1,553,430.10 was paid out total accrued subsidies for 2012 (1,925,204.23). Outstanding debts on the basis of accrued electricity subsidies for the households for year 2012 amounted to EUR 372,074.10.

According to the concluded Contract № 01-2553/12 of December 28th, 2007 and the Framework long-term Protocol on electricity supply of Aluminium Plant Podgorica, KAP, in the period 1st January 2009 – 31st December 2012, the agreed subsidies for electricity supply of KAP were fully implemented in the amount of EUR 60,000,000.00, ending with December 31st, 2012, according to the data provided by the Ministry of Economy. Based on the tested sample, it has been determined that the Ministry of Economy transferred to the KAP Podgorica a total amount of EUR 6,442,621.07 in the period 1st January to 31st December 2012, from this budget item. The audit has found that a portion of the costs of subsidizing electricity to the KAP Podgorica in the period 1st January - 31st December 2012 was paid from the Budget Reserves, amounting to EUR 2,500,000.00, in accordance with the Conclusion of the Government.

Recommendations:

The Law on Budget (Art. 33) stipulates that for urgent and unforeseen expenditures during the fiscal year, current and permanent reserve funds shall be used. The Ministry of Finance shall decide on usage of funds from the current and permanent reserves, with the previous approval from the Government.

7 In 2012, the number of subsidies beneficiaries varied from 8,230 in February, up to 14,096 in December.


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Coverage for the costs of subsidizing electricity to the KAP Podgorica in accordance with the Contract № 01-2553/12 of December 28th, 2007 and the Framework long-term Protocol on electricity supply of KAP in the period 1st January 2009 – 31st December 2012 should have been entirely planned by the Law on Budget for 2012, because the stated costs had been defined by the Contract prior to the enactment of the Law on Budget for 2012.

4.2 Social Protection Transfers

As stipulated by the Law on Budget for 2012, projected appropriations for social protection transfers

amounted to EUR 477,450,477.02, which was reduced by EUR 784,499.74 according to revised budget plan, and thus determined amount was increased by decisions on redirection in the amount of EUR 5,614,257.49, so the available funds recognized in the current budget plan amounted to EUR 482,280,234.77. Total executed outlays for social protection transfers amounted to EUR 481,633,606.48, which was in line with the current budget.

Table 25 - Planning and execution of appropriations for social protection transfers

Column1






5) EXECUTED 481,633,606.48


Expenditures for social protection transfers are intended for financing exercise of rights in the field of

social protection, redundant, rights related to pension and disability insurance and other rights in the field of health insurance.

Graph 2 – Social Protection Transfers - Structure


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4.2.1 Expenditures for Redundant Employees

As stipulated by the Law on Budget for 2012, projected appropriations for redundant employees amounted to EUR 18,100,000.00, which was increased by EUR 849,560.84 according to revised budget plan, and thus determined amount was reduced by EUR 1.391.062.10 pursuant to decisions on redirection. In the Bill on Final Statement of Accounts of the State Budgets of Montenegro for 2012, instead of the increase, a decline was presented according to the revision of appropriations, amounting to EUR 366,999.74.

Table 26 – Planning and execution of appropriations for redundant employees






5) EXECUTED 16,130,418.14


Due to aforementioned, the Bill on Final Statement of Accounts of the State Budgets of Montenegro

for 2012 reported the estimated amount of EUR 16,341,938.16, instead of EUR 17,558,502.74, in accordance with the information shown in the following table:

Table 27 – Correction of data on planned and executed allocations for redundant employees






5) EXECUTED 16,130,418.14


According to the data reported in the Final account, the execution amounted to EUR 16,130,418.14

and it is equivalent to the figures reported in the Treasury General Ledger, while execution determined by the current budget is by 8.13% less in relation to estimated appropriations, and not by 1.29 %, as it was reported on the page 201 of the Reasoning for the Bill on Final Statement of Accounts of the State Budgets of Montenegro for 2012.

The largest portion of expenditure within this group of accounts was paid for unemployment benefits to the Employment Agency of Montenegro, amounting to EUR 11,223,914.28, as well as for severance payments for redundant employees to the Labour Fund, in the amount of EUR 2,125,000.00.

Estimated expenditure on the basis of severance payments for redundant at the Ministry of Finance amounted to EUR 1,500,000.00, the revised budget increased this amount by EUR 1,249,654.70, and according to the records in the Treasury General Ledger, the budget plan was further increased by EUR 1,348,996.08 pursuant to decisions on redirection. The plan reported by the Final budget accounts amounts to EUR 2,881,996.24, and it is necessary to make corrections of the reported data by Amendments to the Bill on Final Statement of Accounts of the State Budgets of Montenegro for 2012.

The audit has identified weaknesses in the system of internal controls, as certain transfers were not accompanied by a complete documentation, which suggests the existence of payments on the basis of verbal communication among the budget users and processing of transfers without the signature of the Minister of


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finance. In the particular case at Police Administration, there was a Request submitted by the Police Administration, for the transfer of funds amounting to EUR 1,061,337.55 for the purpose of severance payments in the Police Administration, while the Ministry of Finance transferred EUR 1,216,564.53. An official disbursement request for additional amount of EUR 155,226.98 was not presented to the audit, but an uncertified list was subsequently delivered, with the names of the Police Administration officers and the account numbers with commercial banks. The Minister did not sign the disbursement request.

The audit has determined disbursements of funds from this budget account to the Municipality of Pljevlja, amounting EUR 25,000.00 and to the royal capital of Cetinje, amounting EUR 30,000.00, for settlement of liabilities arising from for other purposes, which is considered a improper spending of funds. Disbursements to municipalities as an aid funding in paying out redundant should not be applied in practice, given that municipalities have their own budget.

The audit has also identified a misapplication of Decisions on the amount of severance payment to civil servants and state employees (“Official Gazette of Montenegro”, № 23/10 of April 29th, 2010), as a result of disbursement of severance payments to a redundant civil servant of the PI “National Museum of Montenegro” – Cetinje, in the amount of 10 average salaries. As Decisions on the amount of severance payment to civil servants and state employees does not envisage such an amount of disbursement, totalling to 10 average gross salaries in Montenegro, this indicates to an incorrect calculation made and the lack of an adequate system of internal control. The Minister did not signed i.e. approved of this Decision, so the disbursement was made in accordance with the Decision signed by the Director of the institution PI “National Museum of Montenegro” Cetinje, which does not define the criteria used for the calculation of determined amount of remuneration in respect of severance payment. Irregularity in relation to severance payments’ expenditures upon a consensual termination of employment, refers to the employer’s obligation to develop a programme of measures to address redundancies, (retraining or additional professional training of an employee in order to perform duties at the same or another employer, the assignment to another employer within the employee’s educational category level), in order to consider options for addressing the rights of individuals who have been declared redundant, while the severance pay should be disbursed only if an employee has not been provided for any of the rights foreseen by this Programme. Recommendations:

It is recommended to the Ministry of Finance to disburse severance payments to civil servants and state employees in the amount and for the purposes as set forth by the Decisions on the amount of severance payment to civil servants and state employees (“Official Gazette of Montenegro”, № 23/10 of April 29th, 2010), and by the Regulation on uniform classification of accounts for the budget, extra-budgetary funds and budgets of municipalities, in order to ensure earmarked spending of budget funds.

In order to improve the system of control, it is recommended that disbursements are made exclusively after being signed by the Minister, in accordance with Article 20 of the Law on Salaries of Civil Servants and State Employees ("Official Gazette of Montenegro", № 14/12 as of March, 7th 2012). Before a disbursement is processed, it is necessary to provide that the authorizing officer has checked for the adequate documentation prior to certification of requirements to justify the amount of requested funds and thereby prevent the possibility of larger disbursement than the requested one, in accordance with Paragraph 35 of the Instruction on State Treasury Operations.


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4.2.2 Pension and Disability Insurance Rights

Expenditures for pensions and other rights in accordance with the Law on pension and disability insurance, disbursed in 2012 total to EUR 378,962,096.59 and have increased by EUR 22,086,773.17 or by 6.19% in relation to 2011. Overview of beneficiaries of rights in the field of pension and disability insurance, by their structure is shown in the following table 8:

Table 28 – Number of beneficiaries of Pension and Disability Insurance Rights

Item DESCRIPTION Numbers of

beneficiaries Share %

Execution (amount in EUR)

Share %

423 Pension and disability insurance rights 121,044 100.00% 378,962,096.59 100.00%

4231 Old-age pensions 54,229 44.80% 209,408,460.12 55.26%

4232 Disability pensions 23,515 19.43% 71,390,656.78 18.84%

4233 Survivor's pensions 28,733 23.74% 76,393,604.05 20.16%

4234 Allowance 7,013 5.79% 10,304,717.26 2.72%

4235 Cash benefits and compensations 1,192 0.98% 2,828,571.35 0.75%

4236 Other rights 6,362 5.26% 8,636,087.03 2.28%

Based on the tested sample amounting EUR 240,852,478.50 or 63.55%, there was no indication of

improper spending found. Disbursement is being conducted based on valid documentation of accrued pension benefits, submitted by the Department for the calculation and payment of rights in the Fund. Controls on conformity with the procedures prescribed by the Fund are being carried out prior to the final calculation and data processing.

As stipulated by the Law on Pension and Disability Insurance, the Fund of pension and disability insurance shall maintain the Main Register of Participants, contribution payers and Beneficiaries of entitlements arising from pension and disability insurance. the Main Registry for employees in the public administration body competent for police affairs and the Agency for National Security shall be maintained by those bodies in the manner stipulated by this Law, while the Fund shall perform the control over the registry maintenance. The Main Register shall be maintained in accordance with prescribed uniform methodological principles. Data shall be entered in the Main Register on the basis of applications submitted on legally prescribed forms that may also be submitted by means of electronic data processing. During 2012, Department for processing Main Register data, which operates within the Department for the implementation of pension and disability insurance, controlled and entered a total of 396,153 applications for entering data into the Main Register database of participants. During 2012, a surplus of 19,550 applications were processed in relation to 2011, when a total of 376,603 applications were entered.

As reported, expenditures for pensions and other rights in accordance with the Law on pension and

disability insurance, disbursed in 2012, totalled to EUR 378,962,096.59 and have increased by EUR 22,086,773.17 or by 6.19% in relation to 2011. The growth in expenditures arising from old age pensions has been influenced by the following:

a) growth in number of pensioners, which has largely resulted from amendments to legal regulations

implemented during 2011, significantly effecting the Fund's expenses in the reporting period. The increase in the number of pensioners in 2012 in comparison to 2011 totalled 1,940. The total number of beneficiaries regarding the exercise of all the rights at the end of 2012 was increased by 2,757 or 2.33% compared to the end of the previous year. Number of users of rights in Montenegro was increased by 2,588 and the number of beneficiaries outside of Montenegro by 169.

8 Source: Pension and Disability Fund


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Table 29 - Number of beneficiaries of PDI rights in the period December 2009 - 2012

Number DESCRIPTION 01/12/2009 01/12/2010 01/12/2011 01/12/2012

Montenegro

1. Pensions 97,088 99,196 103,439 106,477

2. Other rights 9,604 9,187 8,655 8,205

I Total (1 + 2) 106,692 108,383 112,094 114,682

Abroad

3. Pensions 4,263 4,887 6,041 6,223

4. Other rights 146 132 152 139

II Total (3 + 4) 4,409 5,019 6,193 6,362

III TOTAL (I + II) 111,101 113,402 118,287 121,044

b) Indexation of pensions performed as stipulated by the Law on Pension and Disability Insurance and pursuant to Decision on determining pensions and cash benefits as of 1st January 2012 amounted to 2,6%. The indexation has been performed as follows: the pension value of one personal point is indexed as of 1st January of the current year, on the basis of statistical data, by developments in the cost of living and average salary of those employed in the territory of Montenegro for the previous year, compared to the year prior to it, in the percentage representing the sum of 75% of the percentage increase, i.e. decline in the cost of living and 25% of the percentage of increase, i.e. decline of salaries.

The financial statements of the Fund for Pension and Disability Insurance show disproportionally rapid

growth in the number of beneficiaries of rights on pension and disability insurance and disbursements on those grounds, in relation to the contributions paid for pension and disability insurance. It influenced a significant increase in the Fund budget deficit, from the amount of EUR 102.46 million in 2010, to EUR 156.71 million in the 2102. Data regarding this difference are given in the following graph:

Graph 3 – The ratio of pensions and social security contributions for Pension and Disability Insurance

It should also be emphasized that as of 2009, the outlays have not included health insurance contributions for pensioners due to consolidation of transactions of state funds finance under the Consolidated Treasury Account. Thus the Fund for Pension and Disability Insurance obligations on the basis of contributions for health insurance of pensioners have been reported unrealistically.


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Recommendation:

It is necessary that the Ministry of Finance and the Pension and Disability Insurance Fund write off arrears for contributions in health insurance of pensioners and to present contributions for health care of pensioners as transactions that increase public spending by the amount of accrued, collected and disbursed contributions for health insurance of pensioners.

Expenditures for old-age pensions, pursuant to the initial plan, amounted to EUR 196,475,720.73.

However, it was necessary to provide an additional amount of EUR 12,932,740 for the execution of this expenditure, i.e. 6.58% more than planned. In order to provide the funds necessary for the payment of the pensions, the deficit in relation to the initial plan was covered by redirection of funds in accordance with Art. 35 of the Law on Budget, so that the final budget plan for this type of expenditure amounted to EUR 209,416,905.75, while the execution totalled EUR 209,408,460.12, i.e. 100% of the current plan.

A total expenditure for disability pensions amounted to EUR 71,390,656.78 in 2012. The initial plan, amounting EUR 78,765,237.64, was reduced pursuant to decisions on redirection of funds by EUR 7,372,181.62, so that the final plan amounted to EUR 71,393,056.02. Reducing the required funds for expenditure on this budget position incurred due to a decline in the number of disability pension beneficiaries. The total number of disability pensioners in December 2011 was 23,866, while in December 2012 it was 23,515.

Expenditures for survivor's pensions were planned in the amount of EUR 79,000,000.00, while the plan was reduced pursuant to decisions on redirection of funds by EUR 2,597,816.73 and the final plan amounted to EUR 76,402,183.87. The execution totalled EUR 76,402,183.87. Starting from 1st January 2012, in accordance with the Law on Pension and Disability Insurance, the indexation has been performed and cash benefit arising from survivor’s pensions in the amount of 2.6%. An increasing number of beneficiaries of rights did not significantly affected the rate of executed expenditures on this grounds, given the data from the disbursement database, the number of survivor’s pensions amounted to 28,733 in December 2012, while the recorded number in December 2011 amounted to 28,369 pensioners.

Expenditures for cash benefits and compensations amounted to EUR 10,304,717.26 which is by

1.09% less in relation to the execution from 2011. The stated amount refers to the following payments:

Occupational disability benefits to employees EUR 3,226,781.93

Funeral cost compensations EUR 3,917,324.92

The initial budget plan for 2012 amounted to EUR 11,980,226.90, and it was reduced pursuant to decisions on redirection of funds by EUR 1,667,099.88, so that the final plan amounted to EUR 10,313,127.02. The execution totalled at EUR 10,304,717.26.

Allowances were realized in the amount EUR 2,828,571.35 which is by 5.4% less than in 2011. This type of payment relates to:

Allowance for a memorial EUR 75,657.85

Aid and care allowance EUR 2,752,913.50

The initial budget plan for 2012 amounted to EUR 3,651,116.74. However, the initial plan was reduced pursuant to decisions on redirection of funds by EUR 822,545.22, so that the final plan amounted to EUR 2,828,571.35, which actually was the amount executed, as well.


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Expenditures arising from exercising other rights (pensions paid on the basis of social insurance agreements) amount to EUR 8,636,087.03, which is by 0.78% less than in 2011 (EUR 8,704,079.62). Decline in these types of expenses, despite an increase in the number of pensioners outside Montenegro, resulted from a huge number of recalculations among the former states of Yugoslavia performed during 2012, which implies a different disposition of pensions, in proportion to the insurance periods spent in the particular state.

A total of 23,768 requests for claim were settled in the first instance administrative proceedings in 2012, upon the requests of the insured persons to exercise their rights from pension and disability insurance in domestic insurance. A total number of 19,610 of new claims were filed, while the number of those carried over from the previous year amounted to 4,158. 21,223 requests for claim were settled, out of which 18 763 positively, and 2,460 negatively. 2,545 claims were pending. The number of pending cases at the end of 2012 was influenced by several reasons, as follows:

The Pension and Disability Fund has been facing a problem with the collection of contributions for compulsory social insurance payable by the insured and by the employers. In particular, there is a problem noticed in exercising rights to pension and disability insurance for the participants who pay contributions by themselves, (self-employed individuals and farmers), who usually make payment of contributions to cover the minimum insurance period in order to acquired pension rights, even though they were employed -insured for an extended period of time, while the rest of the insurance period the obligations for contributions remain mostly unsettled. The employers, i.e. companies in liquidation procedure can also have a problem with the payment of contributions. According to the Law on compulsory social-insurance contribution, defining collection and control of taxes and contributions, as well as the establishment and management of a central registry of obligors of personal income tax, obligors of contributions for compulsory social insurance, the insured of compulsory social insurance and the system of execution are under the jurisdiction of the Department of Public Revenues. The Pension and Disability Fund has sent a written notice to the Ministry of Labour and Social Welfare and to the Ministry of Finance, as competent authorities, informing them on the problem of unpaid contributions for beneficiaries eligible to retirement, but whose contributions for pension and disability insurance have not been fully paid. In practice, for such cases who have acquired the right, but have not settled the obligations yet, the Fund notifies the Department of Public Revenues, as the competent authority.

In those cases where a previous Medical expert evaluation is required to be carried out with the First instance disability commission, it is not possible to comply with the legal timeline as stipulated by the Law on General Administrative Procedure, due to procedures in scheduling immediate medical check-up. In addition, in case that the First instance disability commission confirms the right, each individual case is subject to a mandatory medical revision of the Second instance commission, so the number of these subjects affects the duration the procedure. In practice, this results in two separate procedures, evaluation of working capacity at the First and Second instance commission, and passing decisions on entitlement in the First instance (there were 909 such requests carried over to 2013).

Department of Foreign Insurance of the Fund for Pension and Disability Insurance of Montenegro is currently applying 25 Agreements on social insurance with other countries, and as far as former Yugoslav republics are concerned, the recalculation has been done as of the date of secession of the former states. A certain procedure is prescribed by these Agreements, including confirmation of insurance period, obtaining other evidence through the established forms (these procedures take a long time and therefore, based on this, a number of 685 pending requests were carried over). The Department for conducting foreign insurance was working on the settlement of a total of 4,847 requests, out of which 2,637 new and 2,210 carried over from the previous year. A number of 3,327 were resolved positively, 835 negatively, while 685 requests were pending. The number of requests increased by 52% in relation to the previous year. As the Agreement on social security with Slovenia entered into force on


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1st January 2012, a total number of requests for resolving under the terms of this Agreement amounted to 546.

Certain more favourable criteria, comparing to the general conditions, for eligibility of particular categories of participants to a pension, as well as determining the level of pension were prescribed by the Law on Pension and Disability Insurance (“Official Gazette of Montenegro”, № 79/08), more favourable than the general conditions. Those legal provisions ceased to be valid on December 31st, 2012, so a larger number of requests was filed at the year-end, and they were carried over to the next year. According to previous years’ experience, there is always an increased number of requests at the year-end and they are carried over to the next year, as they cannot be solved (if the request is submitted on 30th December).

First instance disability commission resolved 3,529 requests for medical expertise in 2012. Number of

requests filed amounted to 4,431, while 909 requests were carried over to 2013, due to delays in scheduling expertise. Out of 3,529 resolved requests, a number of 3,353 related to the assessment of working capacity, 33 to evaluation of physical impairment, while 143 requests related to the assessment of incapacity for independent life. 4.3 Transfers to Institutions

Expenditures for transfers to public institutions were planned in the amount of EUR 13,782,698.84. Pursuant to the revised budget plan, the amount was reduced by EUR 148,576.79 , while the decisions on reallocation additionally reduced those expenses by EUR 111,575.65, so that the final plan amounted to EUR 13,522,546.40. A total of EUR 13,467,068.97 was executed, or 0.41% less than planned.

Table 30 – Planning and execution of expenditures for transfers to institutions






5) EXECUTED 13,467,068.97


Based on a sample tested within this position, the audit has determined the following:

In the position 4311 - Transfers to public institutions, the Ministry of Economy planned expenditures

amounting EUR 573,534.84. The execution totalled EUR 573,534.80 i.e. 100% of the planned expenditures. The tested sample amounted to EUR 234,343.91 i.e. 40.71% of the executed. From this position the expenditures were executed for the transfers to:

the Institute for Standardization of Montenegro..........EUR 209,693.84

Montenegrin Accreditation Authority...........................EUR 363,840.96.

The funds have been transferred to the Institute for Standardization (individual monthly requests) on the basis of the Agreement on the implementation of the Plan and Work program of the Institute for Standardization of Montenegro on passing Montenegrin standards for 2012 (Agreement on implementation) № 01-635/2 dated March 15th, 2012 and № 07/5/12 dated February 27th, 2012, concluded between the Ministry of Economy and the Institute for Standardization.


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The funds have been transferred to the Montenegrin Accreditation Authority on the basis of the Annual agreement on the implementation of the Work program of the Montenegrin Accreditation Authority for 2012. Based on data reported by the Bill on the Final Statement of Accounts of the State Budget of Montenegro for 2012, it can be determined that expenditures planned within the Ministry of Economy – referred to Functional Classification 40901 - expenditures for Programme 3064 - Accreditation and Programme 3065 - The development and adoption of standards.

The audit has found that expenditures for the Programme Accreditation and the Programme Development and adoption of standards were planned only in position 4311 - Transfers to public institutions. Projected own income of the Accreditation Authority and the Institute for Standardization has not been reported as a source of funding. Therefore, it was necessary to do the following:

align the classification of expenditures per programme activities for the Programme 3064 - Accreditation for 2012 with the classification of expenditures reported in the Plan and work program of the Accreditation Authority for 2012.

classification of expenditures per programme activities for the Programme 3065 - Development and adoption of standards for 2012 should have been aligned with the classification of expenditures reported in the Plan and work program of the Institute for Standardization of Montenegro on passing Montenegrin standards for 2012, based on which the Agreement on implementation) № 01-635/2 dated March 15th, 2012 and № 07/5/12 dated February 27th, 2012 was concluded.

Projected own income of these budget users for 2012 should have been included in the sources of funding, as well as the cash in the accounts at commercial banks at the beginning of the period.

Recommendation:

It is recommended to the Ministry of Finance to initiate amendments of regulations to allow for the annual Law on Budget to:

- Align the classification of expenditures for Programmes Accreditation and Development

and adoption of standards with classification of expenditures reported in the Plan and work programme for the fiscal (calendar) year, which serves as the basis for concluding the Annual agreement on the implementation.

- Include projected own income of the Accreditation Authority and the Institute for

Standardization in the sources of funding of the Programmes Accreditation and Development and adoption of standards, as well as the cash in the accounts at commercial banks at the beginning of the period.

4.4 Capital Expenditures

Pursuant to Article 4 of the Law on Budget, expenditures for equipment were planned in the amount of EUR 8,205,098.24. The plan was reduced according to the revision of the budget by EUR 2,141,585.38 and by decisions on reallocation of resources the plan was reduced by an additional amount of EUR 224,950.89. The final budget plan totalled EUR 6,288,463.75. The execution amounted to EUR 7,366,196.33 or it exceeded the plan by 17.14%. Sources of finance in this budget position are as follows:

Budget funds…......................EUR 4,845,643.60

Loans and borrowings............ EUR 813,372.34 (Project of improving the health system)

Earmarked revenues...............EUR 958,127.00 (out of which EUR 933,173.03 or 97.39% refers to the Health Fund)


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Own revenues.....................EUR 749,050.40 (out of which EUR 713,055.66 or 95.19% refers to the Ministry of Defence).

After completing control of a tested sample on this budget item, improper consumption has been identified at Human Resources Administration, Department of Public Revenues, Ministry of Transport and Maritime Affairs and Port Administration in the amounts and for the purposes as outlined in the following table:

Table 31 – Improper spending in account expenses for equipment In EUR

SPENDING UNITS

Improper spending in budget position 4415 determined by audit

Total

411 4129 4133 4630

Human Resources Administration 27,500.00 27,500.00

Department for Public Revenues 5,015.17 5,015.17

Ministry of Transport and Maritime Affairs 2,343.62 2,343.62

Port Administration 335.00 335.00

Total 5,015.17 27,500.00 335.00 2,343.62 35,193.79

4.5 Borrowings and Loans

As initially planned, expenditures for borrowings and loans amounted to EUR 1,700,000.00. The

planned amount was increased pursuant to decisions on redirection by EUR 75,634.00, so that the final plan amounted EUR 1,775,634.00. The execution was completed in line with the planned amount.

Table 32 – Planning and execution of allocations for borrowings


1) Defined by Annual plan for 2012 1,700,000.00 2) Increased by revised budget for 2012 0.00

3) Increased by reallocation 75,634.00


5) EXECUTED 175,633.69


4.6 Repayment of Debts

Pursuant to the Law on Budget for 2012, planned expenditures for the repayment of debts amounted

to EUR 125,836,986.92, the plan was increased by EUR 45,707,737.18 according to the revised budget, and the available resources outlined in the current budget plan totalled EUR 171,544,724.10. Expenditures for social protection transfers were realized in the amount of EUR 193,273,564.19, which is 12.67% more comparing to the amount planned by the current budget.

Table 33 – Planning and execution of allocations for repayment of debts



2) Increased by revised budget for 2012 45,707,737.18

3) Increased by reallocation 0.00


5) EXECUTED 193,273,564.19


4.6.1 Repayment of Securities and Loans to Residents

Expenditures for the repayment of securities and loans to residents amounted to EUR 77,940,832.65. Expenditures for these purposes have been realized in the percentage higher by 59.55% in relation to the amount foreseen by the budget plan for the repayment of principal on short term loans, concluded for


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maintenance of current liquidity of the budget. As stipulated by Article 17 of the Law on the Budget (“Official Gazette of Montenegro”, №40/01, 44/01, 28/04, 71/05, “Official Gazette of Montenegro”, № 12/07, 73/08, 53 / 09, 46/10, 49/10) and Article 4 of the Decision on borrowing and giving state guarantees of Montenegro for 2012 (“Official Gazette of Montenegro”, № 18/12 and 40/12), and for the purpose of financing budget deficit, the Ministry of Finance can take short-term loans from internal and external sources and issue short-term securities, the longest for the period of six months, regardless of the annual increase of debt limit stipulated by the Law on Budget of Montenegro for 2012. .

According to the sample tested and on the basis of commitments arising from short term loans, concluded for the purpose of providing the budget liquidity, the following transfers of funds were carried out from this budget position: a) According to tested positions, repayment of obligations to the Erste Bank A.D. Podgorica, relate

to the following:

Loan agreement № LD/12086/00089 dated March 30th, 2012, amounting EUR 4,000,000.00, obligation paid on May 30th, 2012;

Loan agreement № LD/12198/00035 as of July 17th, 2012, loan fully repaid in the amount of EUR 5,000,000.00 on August 1st, 2012;

Agreement on overdraft loan № OD 11081/00075 dated April 27th, 2011, which was approved in the amount of EUR 10,000,000.00 in order to improve the user’s operational liquidity, and Annex № 01/11 of the Agreement on overdraft loan, № 11081/00075 dated April 27th, 2011, repaid in the amount of EUR 7,000,000.00.

According to the Confirmation of the Erste Bank ad Podgorica, on December 31st, 2012, the balance of obligations under the Agreement on overdraft loan № OD 11081/00075 totals EUR 10,000,000.00, out of which the amount of EUR 6,000,000.00 was repaid on 14th January 2013, while the repayment of the amount of EUR 4,000,000.00 was not executed by the end of the audit fieldwork. Other payments to the Erste Bank A.D. Podgorica were carried out as follows:

in accordance with the Loan agreement № LD/10103/00110 as of April 14th, 2010, in the amount of EUR 5,000,000.00 concluded between the Government of Montenegro - Ministry of Finance and Erste Bank A.D. Podgorica, approved for the restoration works on cultural monuments in Cetinje;

in accordance with the Loan agreement № LD/10050/00082 as of February 25th, 2010, concluded between Erste Bank A.D. Podgorica and the Government of Montenegro - Ministry of Finance, intended for the completion of construction works on the Police Administration building in Podgorica.

Other transfers of funds to the Erste Bank A.D. Podgorica were carried out based on the assumed debts in 2011 related to the repayment of principal according to Loan arrangements, including the assumed debt of the Railway Transport, Montenegrin Fund for Welfare Housing Development, PE Regional Waterworks “Crnogorsko primorje”. The stated transfers were carried out on the grounds of debts of these legal entities to creditors assumed by the Government of Montenegro – Ministry of Finance, for obligations arising from Loan arrangements, Pursuant to Article 12 of the Law on Budget of Montenegro for 2011, (“Official Gazette of Montenegro”, № 78/10) which prescribes that the Government of Montenegro – Ministry of Finance shall assume debts totalling EUR 20,160,000.00.

According to the Decision on Borrowing and Issuing State Guarantees of Montenegro for 2011 (“Official Gazette of Montenegro”, № 16/11) and Conclusions of the Government of Montenegro № 03-5462 as of June 9th, 2011, the Government of Montenegro passed the Information on assumption of debts totalling EUR 20,160,000.00, structured as follows:

Railway Transport Montenegro a.d. Podgorica in the amount of EUR 8,500,000.00,


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PE Regional Waterworks “Crnogorsko primorje”, in the amount of EUR 7,000,000.00,

Montenegrin Fund for Welfare Housing Development, in the amount of EUR 3,800,000.00 and

Broadcasting Company Radio-Television of Montenegro, in the amount of EUR 858,256.00. Pursuant to the aforementioned Conclusions of the Government of Montenegro, the Agreement on assumption and conversion of debt to equity, № 06-2130/1 dated June 29th, 2011 was concluded between the Government of Montenegro - Ministry of Finance and Railway Transport Montenegro a.d. Podgorica, based on which the Government assumed the commitments of the Railway Transport Montenegro a.d. Podgorica in the amount of EUR 8,500,000.00, structured as follows:

The loan at Erste Bank ad Podgorica, in the amount of EUR 7,000,000.00, with all costs arising from the Loan Agreement № LD 10117/00002 dated April 30th, 2010, effective from 1st January 2011 year;

Debt of the Railway Transport Montenegro a.d. Podgorica to the Railway Infrastructure a.d. Podgorica, on the basis of maintenance of the railway infrastructure, in the amount of EUR 1,500,000.00.

On the basis of the assumed debt of Railway Transport, the Government of Montenegro increased its equity in this company by EUR 8,500,000.00. The share of the Government of Montenegro in the equity of Railway Transport has increased in accordance with the following:

Decision of the Assembly of Shareholders on conversion of debt to equity, Decision № 7517/2 dated October 31st, 2011, by issuing 1,609,459 shares, the share of the Government in the equity of Railway Transport ad Podgorica has been increased from 3,845,017.00 shares to 5,454,476.00 shares, accounting for 89.2790% of the total equity;

Decision on issue of shares on the account of converting debt into equity, № 7517/4 of October 31st, 2011, issuing the amount of EUR 8,500,000.00, divided into 1,609,459 series D shares of nominal value of EUR 5.281278;

Decision on capital increase passed by the Assembly of Shareholders, № 7517/3 dated October 31st, 2011, on increasing equity of Railway Transport Montenegro ad Podgorica to a total of EUR 32,265,816.00, while it previously amounted to EUR 23,765,816.00.

According to the aforementioned Conclusions, the Government of Montenegro - Ministry of Finance concluded an Agreement № 06-2128/1 from June 29th, 2011 with the PE Regional Waterworks “Crnogorsko primorje”, on assumption and conversion of debt into equity. Pursuant to the terms and conditions agreed under this Agreement, the Government of Montenegro has increased its capital with PE Regional Waterworks “Crnogorsko primorje” in the amount of EUR 7,000,000.00 and assumed liabilities of PE Regional Waterworks “Crnogorsko primorje”, in the amount of EUR 7,000,000.00, for repayment of loans to Erste bank ad Podgorica, with all costs arising from the Loan Agreement № LD/10196/00016 from July 15th, 2010, effective from 1st January 2011. Thus the Government of Montenegro’s share in the equity of PE Regional Waterworks “Crnogorsko primorje” has been increased in line with the Agreement by EUR 7,000,000.00. The funds obtained under this credit arrangement shall be used to finance the project of Regional Waterworks “Crnogorsko primorje”.

According to the aforementioned Conclusions, the Government of Montenegro - Ministry of Finance concluded an Agreement № 06-3387/1 form August 31st, 2011, with Montenegrin Fund for Welfare Housing Development Podgorica, on assumption of debt and assignment of immovable property. The Government assumed debts of the Montenegrin Fund for Welfare Housing Development Podgorica to Erste Bank A.D. Podgorica, in the amount of EUR 3,800,000.00, with all costs arising from the Loan agreement № LD 10040/00086 from February 23rd, 2010. In accordance with the terms of the Agreement, Montenegrin Fund for Welfare Housing Development Podgorica is agreed to transfer the rights to its immovable property (real estate) into the ownership of the Government of Montenegro - Ministry of Finance, for the cadastral parcels from the Real estate folio № 3645 KO Niksic, registered under the number of 103-956-1-836/2011 as of February 2nd, 2011, and in the amount of the debt assumed.


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As a security instrument for duly repayment of obligations under the Loan agreement with Erste Bank ad, the Government of Montenegro-The Ministry of Finance issued an irrevocable and unconditional Guarantee № 01-1945/1 from February 23rd, and concluded the Mortgage agreement HPP/04810 on February 23rd, 2010 on the subject property with “The Independent Trade Union of Bauxite Mine” ad Niksic.

The funds obtained under this Loan arrangement have been intended for financing the purchase of land plot totalling 46,038 m2, registered in the Real estate folio №3645 KO Niksic, according to the Real estate sale Contract number 01-293 from February 18th, 2010, concluded between The Independent Trade Union of Bauxite Mines” ad Niksic and the Montenegrin Fund for Welfare Housing Development Podgorica. The total land price amounts to for EUR 3,683,040.00, which equals to EUR 80.00 per one square meter. As defined by the Real estate sales Contract, the Fund is purchasing the land plot with the intention of building residential and business premises, according to determined urban and technical conditions. Based on the Real estate folio № 3645 KO Niksic, from March 21st, 2013, the Ministry of Finance was entered in the cadastre register with the right 1/1 to dispose of the part of the property, registered as the State of Montenegro property 1/1, while the part of the property was registered a mortgage in favour of Erste Bank ad Podgorica.

b) According to the tested sample, repayment of other obligations towards NLB Montenegro Bank ad

Podgorica refers to short-term loans borrowed for the purpose of maintaining the current liquidity of the budget, including the following:

Short-term loan agreement № KR 2012/1649 concluded and signed on April 2nd, 2012, amounting EUR 5,000,000.00, fully repaid on April 26th, 2012;

Revolving loan credit agreement № KR 2012/813 dated as of February 23rd, 2012, to max amount of EUR 5,000,000.00, repaid in the amount of EUR 5,000,000.00 during the year;

Repayment of commitments to PODGORICKA Bank Societe Generale Group ad Podgorica refers to obligations under the Short-term revolving agreement, № 00-420-2000288.8 dated as of April 26th, 2011, amounting to EUR 10,000,000.00 and the Annex 1 of the Short-term revolving agreement № 00-420-2000288.8 / 1 dated as of November 17th, 2011, hereunder repaid in the amount of EUR 7,000,000.00;

the Government of Montenegro, Ministry of Finance and Societe Generale Bank Montenegro ad concluded the Annex 2 of the Short-term revolving agreement № 00-420-2000288.8. Changes in Art. 2, as follows: “terms, conditions and timeline of loan repayment: at maturity and due to be repaid on March 31st, 2013”;

According to the Statement of financial positions of Podgoricka Bank - Societe Generale Group ad, the balance of outstanding payments regarding Agreement № 00-420-2000288.8 / 1 amounts to EUR 3,000,000.00.

c) Repayments of commitments to Hipotekarna Bank A.D. Podgorica refer to obligations under the short-term loans intended for maintaining current liquidity of the budget, in accordance with the following loan agreements:

Loan Agreement № 101-275/2 dated as of February 3rd, 2012 in the amount of EUR 1,500,000.00, repaid on February 29th, 2012.

Loan Agreement № 101-1065/2 dated as of April 4th, 2012 in the amount of EUR 2,000,000.00, repaid on May 3rd, 2012;

Loan Agreement № 101-2172/2 dated as of June 29th, 2012 in the amount of EUR 2,000,000.00, repaid on July 24th, 2012.


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d) Repayment of commitments to Hypo Alpe Adria Bank was carried out in accordance with the Short-term loan Agreement №KR-425/12, dated as of April 6th, 2012, amounting to EUR 3,000,000.00, repaid on May 4th, 2013.

e) Other transfers towards the CKB Bank AD Podgorica were carried out in accordance with the

Annex to the Agreement on the assumption of debt arising from the Overdraft loan Agreement № 952-88-136 dated as of May 20th, 2010, № 1867/1, dated June 22nd, 2012, among the Government of Montenegro - Ministry of Finance, CKB Bank and the Fund for Pension and Disability Insurance, amounting to EUR 3,000,000.00.

Repayment commitments arising from the implementation of the Directorate of Public Works Programme,

refers to the following:

a) Repayment of commitments to NLB Bank Montenegro A.D. Podgorica, carried out in accordance with the Loan Agreement № KR 2007/6326.1 as of May 16th, 2007, concluded between NLB Montenegro bank a.d. Podgorica and Municipality of Budva, for the implementation of the programme by Directorate of Public Works related to land development and infrastructure connections and works on furnishing a primary school in Budva, under the Agreement on construction № 06-768 as of April 4th, 2007.

b) Repayment of commitments to CKB a.d. Podgorica, carried out in accordance with the Loan Agreement dated as of October 6th, 2008, for the implementation of the Directorate of Public Works Programme: Development of Project plan and construction works on the reconstruction of the existing facility for the Regional School of Public Administration (RESPA). A total of EUR 5,671,500.00 has been allocated for the repayment of principal for T-bills (the in 2011 it amounted to EUR 8,000,000.00). In accordance with Art. 38 paragraph 1 of the Law on Budget, it is envisaged that the State shall borrow up to the borrowing rate determined by the annual Budget Law. Due to the issue of T-bills and taking short-term loans for liquidity, and the amount of short-term loans whose repayment period exceeds 6 months, it is necessary to define the annual amount of T-bills issue and short-term borrowings by the annual Law on Budget and Decision on borrowing and issuing guarantees of Montenegro.

For the implementation of the Directorate of Public Works Programme, the following transfers have also

been carried out:

the commitment amounting EUR 3,620,926.76 was repaid (amount repaid in 2010 totalled EUR 2,599,416.08, amount repaid in 2011 totalled EUR 2,599,416.08) for conducting construction work on the road section Risan–Grahovo-Zabljak and bypasses around cities, section: Savnik-Grabovica-tunnel “Ivica”, in accordance with the Contract № 13/09 dated as of September 16th, 2009 (contracted works cost total EUR 17,546,059.64, method of payment: within seven years) and the Annex of the Contract №01-11507/1 dated as of December 27th, 2011, (the Annex amount to EUR 4,086,471.76).

the commitment amounting EUR 3,380,710.44 was repaid (amount repaid in 2010 totalled EUR 1,800,793.77; amount repaid in 2011 totalled EUR 2,401,058.36), for carrying out construction works on bypass around Bijelo Polje, in accordance with the Contract № 19/08 as of June 5th, 2008 (contracted works cost a total of EUR 13,806,085.54, method of payment: within six years), and the Annex of the Contract №01-10816/1 as of December 6th, 2011;

the commitment amounting EUR 4,045,497.56 (amount repaid in 2010 totalled EUR 3,138,044.76; amount repaid in 2011 totalled EUR 3,138,044.76), for carrying out construction work on the road section Risan–Zabljak: the entrance to the tunnel “Ivica” - Moticki gaj - Zabljak (+090.5 KM3 - KM16 +683.17), in accordance with the Contract №05/08 as of April 24th, 2008 (contracted works cost a total of EUR 21,181,802.19, method of payment: within eight years, according to the Annex of the Contract №1 as of June 27th, 2008: and, method of payment: within seven years, according to the Annex of the Contract, №01-3417/3 as of May 17th, 2010);


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the commitment amounting EUR 1,809,280.46 (amount repaid in 2010 totalled EUR 2,880,000.00; amount repaid in 2011 totalled EUR 2,880,000.00), for carrying out reconstruction work on the regional road M-2 Podgorica- Petrovac, section I: Vojisavljevica Street – Crossroad to airport; section II: Crossroad to airport – Golubovci (bypass beginning); section III: Bypass around Golubovci, in accordance with the Contract №27/08 as of December 18th, 2008 and the Annex of the Contract № 01-3233/1 as of March 26th, 2009, (contracted works cost a total of EUR 36,771,688.45, method of payment: within seven years);

the commitment amounting EUR 3,707,727.28, (amount repaid in 2010 totalled EUR 2,595,415.99; amount repaid in 2011 totalled EUR 4,875,285.20), for carrying out construction work on the regional road Risan-Grahovo-Zabljak: section Dragalj Polje - Grahovo, (L:7KM), in accordance with the Contract № 04/08 as of March 13th, 2008 (contracted works cost a total of EUR 6,245,666.48, method of payment: within seven years, 4 instalments have been paid in the current year, each by EUR 231,320.98 in accordance with the Contract), section Grahovo – Osjecenica ( L=7,975 km), in accordance with the Contract № 34/08 as of December 18th, 2008 (contracted works cost a total of EUR 11,592,660.11, method of payment: within seven years, 4 instalments have been paid in the current year, each by EUR 436,375.91, according to the Contract ), section Osjecenica – Vilusi (L: 5.52 km) in accordance with the Contract № 36/08 as of December 18th, 2008 (contracted works cost a total of EUR 6,999,638.90, method of payment: within seven years, 4 instalments have been paid in the current year, each by EUR 259,245.89). For the transfers to Telekom Montenegro A.D. Podgorica, a total of EUR 740.656,20 was allocated or 61.721,35 per month (amount paid in 2011 totalled EUR 740,656.20). The stated obligation incurred pursuant to the Agreement on the Transfer of Shares (of the founder's rights in the Radio Broadcast Center doo Podgorica), concluded between Telekom Montenegro ad Podgorica and the Government of the Republic of Montenegro as of December 2004. As in previous years, pursuant to the revised Bill on Final Statement of Accounts of the State Budgets of Montenegro for 2012, from this position funds were transferred for expenditures including Contracts on carrying out construction works for the Transport Directorate (EUR 16,564,070.50) and for Telekom (EUR 740,656.20).

Recommendation:

Acknowledging that this position recognizes and records payment requests related to expenditures incurred due to outlays for the paying off of debt in respect to issued securities and loans borrowed from resident financial institutions, expenditures identified by the audit, including those on the grounds of the Agreement for Execution of Works for the Implementation of Transport Directorate Programme, in the amount of EUR 16,564,070.50, and those to Telekom Montenegro ad Podgorica, in the amount of EUR 740,656.20, should have been planned and executed within the Capital Budget.

In addition, it is deemed necessary to define, pursuant to the Annual Law on Budget and Decision on Indebting and Issuing Guarantees of Montenegro, to what limit the issue of government T-bills and short-term loans used for providing current liquidity will not increase net government debt, due to amount of short-term loans whose repayment period exceeds 6 months.

4.6.2. Paying off Securities and Loans to Non-Residents

At this position the execution amounted to EUR 54,874,811.39, the tested accounted for EUR 46,908,113.22 or 85.48% of the execution at this position. Obligations to creditors were carried out regularly in the current year. All the payments executed by the State on the basis of servicing debt over the debt timeline


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are recorded in the debt management system. Provisions of the loan agreement, including the terms of debt amortization, interest payments, commissions based on the provided services, and other provisions of the agreement are recorded in the debt management system.

Mostly transfers of funds for repayment of principal to the creditors were carried out over the current year, as follows:

repayment of commitments to Credit Suisse International for realization of budget liabilities;

repayment of obligations to Paris Club of Creditors;

repayment of commitments to KFW: for the Project Water Supply and Wastewater Disposal in the Coastal Region (Phase III), for the Project Water Supply and Wastewater Disposal in the Coastal Region (Phase II), for the Project of Rehabilitation, Improvement and Expansion of Water Supply Sector and Sewage System of the Coastal Region of Montenegro and Municipality of Cetinje,

repayment of commitments to Erste Group Bank AG, for realization of budget liabilities;

repayment of commitments to Austrian bank Steiermärkische Bank und Sparkassen AG, for the purchase of special firefighting vehicles;

repayment of commitments to Societe Generale Paris, for funding the Project Educational Information System In Montenegro;

repayment of commitments to International Financial Corporation IFC, on the basis of loans № 000596-30, № 000952-30, № 24797-00;;

repayment of commitments to International Bank for Reconstruction and Development (IBRD), for Consolidation Loan D, Consolidation Loan E, Consolidation Loan F;

repayment of commitments to EIB, for the Railways Reconstruction Project, for the Project of Urgent Transport Remediation;

repayment of commitments to Czech Export Bank, for assumed obligations of the “Railway Infrastructure of Montenegro” a.d. Podgorica;

repayment of commitments to Eurofima, for assumed obligations of Railway Transport of Montenegro ad Podgorica;

repayment of commitments to UBS AG, in the amount of EUR 1,400,058.09 grounded on II instalment of the principal for API bonds.

repayment of commitments to UBS AG, was carried out in accordance with the Agreement on Reconciliation signed on August 29th, 2011, between the Government of Montenegro, Ministry of Finance and UBS AG, in order to settle obligations of Montenegro to UBS AG on the grounds of API bonds issued by the National Bank of Yugoslavia, on 29th September 1988.

As specified in the Audit Reports on Final Statement of Accounts of the State Budgets of Montenegro

in 2010 and 2011, the existing information system, obtained as a guarantor of the Ministry of Finance of Bosnia and Herzegovina and used by the Debt Management Department, is a consolidated system of tracking and monitoring of external debt as of the date of loan withdrawal, through recording data from the repayment schedule, interest, fees and other costs associated with the loan, recording repayment obligations to foreign creditors. Based on the data input, the system can provide different reports, such as, reports of indebtedness, on payments to foreign creditors, as well as data on the debt balance. There are certain limitations indicated, due to the lack of technical staff to maintain the system, as well as due to insufficiently adjusted forms of reporting, while the records of domestic (internal) debt are kept in Excel, and therefore it should be improved. In conclusion, we believe that in order to improve the recording and reporting system in the Debt Management Department, it is necessary to provide licensed information system for keeping records of external and internal debt.

We deem it necessary to provide an efficient and reliable information system in order to improve work in the Debt Management Department and to adopt binding management procedures which would contribute to effective and efficient performance of activities.


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Over the year, the Ministry of Finance has had reconciliation of mutual commitments with particular

international creditors. We believe that the reconciliation of mutual obligations should be performed at least once a year with all the creditors. 4.6.3. Repayment of Guarantees in the Country

The payment requests and payments related to all expenditures incurred due to outlays for debt repayment in respect to guarantees issued in the country are recorded at this budget item. According to the budget, there were no appropriations for this position, while the execution amounted to EUR 1,292,092.45.

The Government of Montenegro - Ministry of Finance has issued a guarantee to CKB Bank AD Podgorica, № 06-115/1 as of 19th January 2012, on behalf of the beneficiary “Jadransko brodogradiliste” ad Bijela, in the amount of EUR 1,050,000.00, in accordance with the Annex № II, № 02-102 as of 17th January 2012, of the Loan Agreement № 950-93-906 as of June 5th, 2011. The said guarantee was planned by the Law on Budget of Montenegro for 2011. (“Official Gazette of Montenegro”, № 078/10 and 028/11) and the Decision on Indebting and Issuing Guarantees of Montenegro for 2011. (“Official Gazette of Montenegro”, №016/11 and 066/11).

Issuing of guarantee to the CKB Bank AD Podgorica on 19th January 2012, in accordance with the Decision on Indebting and Issuing Guarantees of Montenegro for 2011, has been explained in the Montenegro 2011 Budget Bill.

In 2012 the Government of Montenegro, Ministry of Finance executed payment of commitments on issued guarantees in favour of domestic beneficiaries in the amount of EUR 1,292,092.45, out of which the repayment of obligations to Podgoricka Bank Societe Generale Group AD accounted for EUR 747,351.55, on behalf of “Pobjeda” ad Podgorica, while the repayment of obligations to NLB “Montenegro bank” ad Podgorica amounted to EUR 544,740.90 on behalf of “Bauxite Mines” AD Niksic.

The Ministry of Finance paid out the amount of EUR 747,351.55 on December 27th, 2012 in favour of “Podgoricka Bank Societe Generale” ad Podgorica, in accordance with the Guarantee issued № 06-2225/1 as of July 10th, 2009 on behalf of the user of guarantee “Pobjeda” AD Podgorica, and in accordance with the Loan Agreement № 00-421-0400032.5 as of July 10th, 2009, concluded between “Pobjeda” AD Podgorica and Podgoricka Bank Societe Generale ad Podgorica and in accordance with the Conclusions of the Government of Montenegro, № 06-82/2 as of December 26th, 2012. In 2011 a total of EUR 992,274.50 was paid out.

Given that the Government of Montenegro - Ministry of Finance repaid due commitments arising from issued guarantees to Podgoricka bank Societe Generale ad in Podgorica, number 06-2225/1, the Ministry of Finance and the “Pobjeda” ad Podgorica concluded the Agreement on setoff of mutual obligations on May 16th, 2013, which sets-off receivables of the Ministry of Finance arising from outstanding debt per guarantee, number 06-2225/1 as of July 10th, 2009 to Podgoricka Bank Societe Generale Group ad Podgorica, in the amount of EUR 1,745,904.40, in accordance with the Long-term Loan Agreement, number 00-421-0400032.5 as of July 10th, 2009, totalling EUR 2,970,000.00, concluded between Podgoricka Bank Societe Generale ad Podgorica and “Pobjeda” AD Podgorica.

According to the Agreement on a set-off of mutual obligations, Pobjeda is obliged to settle a debt of EUR 1,745,904.40 to the Ministry of Finance in twenty equal, quarterly instalments, amounting EUR 87,295.22 per each, where Pobjeda transfers the first instalment to the Ministry of Finance on September 30th, 2013 and the last one on June 30th, 2018, whereas Pobjeda shall deliver to the Ministry Finance 20 bill of exchange statements of authorization along with 20 copies of blank bill of exchange.


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Ministry of Finance paid out an amount of EUR 544,740.90 on October 30th, 2012 in favour of NLB

Montenegro banka ad Podgorica, in accordance with the Guarantee issued №: 06-1828/1 as of June 9th, 2009 (Annex I of the Guarantee, № 06-4241/1 as of December 31st, 2009, and Annex II of the Guarantee № 06-4894/1 as of December 31st 2011) on behalf of “Bauxite mines” ad Niksic, in accordance with the Conclusions of the Government of Montenegro, № 06-65/2 as of October 30th, 2012.

Pursuant to the Decision on Indebting and Issuing Guarantees of Montenegro for 2009, the Government of Montenegro - The Ministry of Finance issued a guarantee №06-1828/1 as of June 9th, 2009 in favour of NLB “Montenegro bank” AD Podgorica, as a security instrument for the Loan Agreement № KR2009/1600 as of May 11th, 2009 in the amount of EUR 5,000,000.00 (Annex I № KR2009/1600.1 as of November 24th, 2009 and Annex II, № KR2009/1600.2 as of December 15th, 2011), concluded between the NLB Montenegro bank ad Podgorica and Bauxite Mine AD Niksic. The Ministry of Finance guaranteed to pay out all contractual obligations to a maximum amount of EUR 5,000,000.00 plus the interest and other costs specified in the contract.

The Ministry of Finance did not set off mutual obligations against Bauxite Mines ad Niksic, in respect of repaid due commitment in the amount of EUR 544,740.90, on the Guarantee issued to NLB Montenegro bank ad Podgorica. Recommendations:

The Ministry of Finance should have provided funds for repayment of debts arising from domestic guarantees at the item 4621 - Repayment of guarantees in the country by the Law on Budget of Montenegro for 2012 (“Official Gazette of Montenegro”, № 66/11 and 29/12 ), and pursuant to item 134 of the Directions on State Treasury Operations (“Official Gazette of Montenegro”, №80/08, 02/09, 45/10, 15/11, 17/12), which prescribes that all payments by the Government to honour defaulted loan guarantees must be paid from the Treasury Consolidated Account against the funds planned for such purposes.

We deem it necessary that the Ministry of Finance settles mutual relations with Bauxite Mines ad Niksic regarding the debt repaid in favour of NLB Montenegro bank, amounting to EUR 544,740.90, in respect of issued Guarantee № 06-1828/1 as of June 9th, 2009, (Annex I of the Guarantee, № 06-4241/1 dated as of December 31st, 2009, and Annex II of the Guarantee № 06-4894/1 as of December 31st 2011).

4.6.4. Repayment of Guarantees Abroad

The payment requests and payments related to all expenditures incurred due to outlays for debt repayment in respect to guarantees issued abroad are recorded at this budget item. According to the budget, there were no appropriations for this position, while the execution amounted to EUR 23,427,740.18.

Pursuant to Article 11, Paragraph 2 of the Law on Budget of Montenegro for 2012 (“Official Gazette of

Montenegro”, №66/11, 29/12), it is envisaged that the Government of Montenegro shall issue guarantees amounting up to EUR 10,000, 000.00, while the Decision on Indebting and issuing guarantees of Montenegro for 2012 (“Official Gazette of Montenegro”, № 18/12, 40/12) determined that the State of Montenegro shall issue a loan Guarantee in favour of the European Bank for Reconstruction and development (EBRD), for the realization of the Project “Major repair and overhaul of upper structure of the railroad line Kolasin-Trebjesica” in the amount of EUR 10 million. According to the Bill on Final Statement of Accounts of the State Budget of Montenegro for 2012 and the Review of guarantees issued abroad performed by the Ministry of Finance, the Ministry of Finance issued the guarantee provided for the EBRD in the amount of EUR 10,000,000.00.


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Payments amounting EUR 23,427,740.18 have been executed from this item, in accordance with the

notification sent by Deutsche Bank on April 2nd, 2012 on the activation of the Guarantee issued in respect to the Loan Agreement, signed on June 25th, 2010, among the Parties Aluminum Plant AD Podgorica, Deutsche Bank Luxembourg S.A. and Deutsche Bank AG, London Branch. At its session held on February 13 th, 2012, the Government passed the Decision on assumption of debt of Aluminum Plant AD Podgorica to Deutsche Bank AG, London Branch (“Official Gazette of Montenegro”, №11/12). Montenegrin Parliament passed the Decision on Confirmation of Decision on Assumption of Debt of Aluminum Plant AD Podgorica to Deutsche Bank AG, London Branch (“Official Gazette of Montenegro”, №11/12). Accordingly, the Ministry of Finance planned appropriations for foreign guarantees at the item 4622 by revision of the Budget. Recommendation:

It is deemed necessary that the Government of Montenegro - Ministry of Finance settles mutual relations with Aluminium Plant AD Podgorica against debts paid off and due debts in respect to Guarantees issued abroad to international creditors.

4.6.5. Repayment of Liabilities from the Previous Period

The payment requests and payments related to all expenditures incurred due to outlays for settlement of commitments from previous period, provided that the period of commitment exceeds one year. The execution at this position amounted to EUR 35,738,087.52, out of which the allocations for the Ministry of Finance Programme 405011711

budget management, the amount of EUR 24,005,235.39 was realized and

the amount of EUR 11,732,852.13 was realized against the budget of spending units which caused them, up to the limit of funds available.

Disbursement of funds arising from court rulings and transferred against the budget of spending units has not been predicted by the Law on Budget for 2012. According to the sample tested, outlays from this budget item mostly refer to the following:

Payout of a portion of debt on the grounds of citizens’ foreign currency savings, which resulted by enforcement of the Law on Settling Commitments and Claims Arising From Foreign Debt and Currency Savings (“Official Gazette of Montenegro № 55/03 and 11/03), Law on Paying Out Citizens’ Foreign Currency Savings Deposited With Authorized Banks Non-Residing In the Republic of Montenegro (“Official Gazette of Montenegro № 81/06), Regulation on the Conversion of Foreign Currency Savings of Citizens Into Bonds (“Official Gazette of Montenegro”' № 42/04) and on the basis of the Law on Paying Out Foreign Currency Savings of Citizens Deposited With Dafiment Bank AD Belgrade and Bank Privatne Privrede DD Podgorica, deposited through the company Jugoskandik DD Beograd (“Official Gazette of Montenegro”, № 20/08). The payout of foreign currency savings to citizens on behalf of the Ministry was carried out by authorized banks in accordance with the Contract on Representation in Matters of Payouts of Foreign Currency Savings of Citizens. The audit has not included verification of payments to end-users. A premature payment of converted foreign currency savings bonds OB17, OB16, OB15, OB14, in the amount of EUR 414,380.00 was carried out from this position, in favour of the Archbishop Ordinariat Bar, provided that the Ordinariat indorse said bonds to the Ministry of Finance;

Payout of regular instalment on the grounds of compensation of confiscated property rights to former owners, in accordance with Article 22 of the Law on Restitution of Confiscated Property Rights and Indemnification (“Official Gazette of Montenegro”, №21/04 and 49/07) and pursuant to the Regulation on Determining Payout of Compensation to Former Owners of Confiscated Property Rights in Cash Assets for 2012 (“Official Gazette of Montenegro”, №33/12);


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Transfer of funds in the amount of EUR 2,690,947.80 in favour of the EPCG Montenegro, Organizational Unit Supply Cetinje was carried out from this position, according to the Conclusions of the Government of Montenegro, № 06-58, as of September 27th, 2012, by which the Government of Montenegro assumed debt of PE Water supply and Sewage Cetinje arose from electricity supply bills. It has been determined that payment in respect to the assumed debt has been realizing from the position 4630 - Repayment of debt from the previous period;

In addition, the assumption of debt totalling EUR 879,915.11 was also realized from this position, in accordance with the Conclusions of the Government of Montenegro, № 06-2090/6 as of November 30th, 2012, for paying out the following obligations:

o debt on electricity supply EUR 147,015.43, o debt for taxes and contributions (30th November 2012) EUR 339,640.10, and o debt to other creditors EUR 393,259.58.

Article 11, Paragraph 1 of the Law on Budget of Montenegro for 2012 (“Official Gazette of

Montenegro”, № 66/11, 29/12) prescribes that the Government shall assume debts in the total amount of EUR 10.0 million, but it does not provide for the position which assumed commitments shall be implemented from.

Payment of assumed debt from the budget item 4630 - Repayment of commitments from the previous period is not in compliance with the Regulation on Uniform Classification of Accounts for the Budget, Extra-budgetary Funds and Budgets of Municipalities. Other payments from the position 4630 mainly relate to the following:

Transfers of funds to the Agency for Electronic Communications and Postal Services, in the amount of EUR 257,990.54 (in 2011 transfer amounted to EUR 492,727.99);

Transfer to Radio Broadcasting Center, amounting EUR 1,254,206.94 (in 2011 transfer amounted to EUR 1,655,446.82), was carried out in respect to assumed debt of broadcasters / electronic media to the Agency for Electronic Communications and Postal Services and Radio Broadcasting Center in accordance with Article 12 Paragraphs 4 and 5 of the Law on Budget of Montenegro for 2011, the Law on budget of Montenegro for 2012, the Conclusions of the Government of Montenegro № 03-2061 as of March 10th, 2011, and pursuant to the Decision of the Commission for State Aid Control number: 01-19/1 as of February 23rd, 2011, which assessed the Assistance Programme to help broadcasters as compliant with the Law on the Control of Granted State Aid. The Ministry of Culture submitted the application for granting State aid to all broadcasters / electronic media in Montenegro through the Government assistance programme (Letter number 05-44 as of 20th January 2011, № 05-44/2 as of February 18th, 2011). Funding for this Programme has been provided by assuming debt of electronic media / broadcasters owed to the Agency for Electronic Communications and Postal Services, generated by fees for the use of frequencies for the period 2009-2010, totalling EUR 1,008,774.08, and owed to the Radio Broadcasting Center, and generated by leasing infrastructure facilities and leasing transmission and broadcasting capacities of radio - signals for the period 2009-2010, totalling EUR 3,438,930.56. The total amount of the State aid, accounting for EUR 4,447,639.61, shall be paid over a period of three years, as follows: the amount of EUR 2,148,174.81 was paid out in 2011, the amount of EUR 1,512,197.48 was paid out in 2012, while in 2013 the amount to be paid out accounts for EUR 787,267.34. Transfer of means for repayment of debt assumed of broadcasters / electronic media, in a total amount of EUR 1,512,197.48, was appropriated by the Law on Budget of Montenegro for 2012. Recipients of State Aid from Assistance Programmes for broadcasting / electronic media are the broadcasters who are registered and have their head offices in Montenegro;

Payments of commissions and fees, which used to be paid in the previous years on the basis of calculation made by CB of Montenegro, have not been executed from this position in the current year.

According to the tested sample, payment of commitments arising from debt assumption in the amount of EUR 3,570,862.91 was realized in accordance with the Conclusions of the Government of Montenegro from


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the current year, and executed from the position 4630 – Repayment of commitments from the previous period, as follows:

the payment of commitments of PE “Water Supply and Sewage” Cetinje, for the debt arising from electricity supply bills, totalling EUR 2,690,947.80 and

the payment of commitments of “Dairies Zora” AD Berane, totalling EUR 879,915.11.

These payments do not belong to commitments from the previous period, and therefore could not have been realized from the budget position 4630. Recommendations:

The budget item 4630 - Commitments from previous years, records expenditures for outstanding debts from previous years, in compliance with applicable legal regulations and pursuant to the Regulation on Uniform Classification of Accounts for the Budget, Extra-budgetary Funds and Budgets of Municipalities.

It is deemed necessary to report expenditures incurred in the current year, up to the agreed sums and appropriated resources, according to the type of expenditure through the corresponding budgetary positions.

4.7 Reserves

Current budget reserves funds were projected by the Law on Budget of Montenegro for 2012 in the

amount of EUR 8,556,000.00. The stated amount was reduced by EUR 97.33 pursuant to the revised budget, while it was increased according to the decisions on redirection by EUR 11,730,761.47, so that the final budget plan amounted to EUR 20,189,417.37. The execution stood at EUR 18,078,018.46 or 89.54% of the plan.

Table 34 – Planning and execution of resources appropriated for Reserves






5) EXECUTED 18,078,018.46


Reserves are intended and used for financing urgent and unforeseen expenditures during the fiscal

year. In 2012 urgent and unforeseen situations occurred in February as a result of major weather disasters, as well as in September, with the organization of parliamentary elections. However, there is a significant mismatch in planning of these budget allocations in relation to current needs. The problem of planning has been overcome by bringing in a Decision on reallocation of funds from other budget positions. Thus, the allocations for budgetary position 4152 - Interest to non-residents were reduced by EUR 11,500,000.00 and this sum was diverted to current budget reserve, which increased the initially projected amount by 2.38 times.

Using the resources of the current budget reserve is regulated by the provisions of Art 33 of the Law on Budget and the Rulebook on Detailed Criteria for the Use of Resources of the Current and Permanent Budget Reserve. Spending of budget reserve funds has been approved by Decisions of the Government of Montenegro, Decisions of the Inner Cabinet of Ministers and Decisions of the Commission for the allocation of part of the current budget reserve funds. The approval for spending has been issued for the purpose of:


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provision of insufficient amount of funds for financing regular activities of spending units;

assistance to legal entities for financing activities;

assistance to individuals (in: medical treatment, education and improving financial situation);

other purposes (damage claims due to natural disasters, the allocation of funds for the organization of parliamentary elections, awarding sports federations for the results achieved, disbursement of social programmes to companies and for other purposes). The sample of EUR 15,015,242.91 was tested, i.e. 83.05% of realized expenditure. Based on the

inspected sample, the audit determined the following findings:

Spending units used the current budget reserve in the total amount of EUR 10,678,978 to fund unforeseen expenditures, as well as for expenditures planned in an insufficient amount. Considering that Article 33 of the Law on Budget provides that the current reserve funds shall be used for emergency and unforeseen expenses, we deem it incompliant with the Law on Budget to fund expenditures planned in an insufficient amount from the current budget reserve.

The Rulebook on Drafting, Composing and Submitting Financial Reports on the State Budget, Extra-budgetary Funds and Local Governments (“Official Gazette of Montenegro”, № 32 / 10, 14/11, 16/13), Article 2 prescribes that a spending unit shall submit the Report on Using Current Budget Reserve Funds on the Form 9, along with their Annual Financial Statements.

The audit has found that the Ministry of Labour and Social Welfare, the Ministry for Human and Minority Rights, the General Secretariat of the Government and Department for Protection of Competition have not recognized their consumption in the reports on the use of the current budget reserve, even though they used the funds.

Since the budget execution is controlled by the Ministry of Finance and spending units shall be bound to submit the data on the realized expenditures to the Ministry of Finance on a quarterly basis and at the end of the budget year, up to March 31st of the current year for the previous year, a mutual weakness in the functioning of the system of internal controls has been identified. Recommendation:

Reporting on the use of current budget reserve funds should be compliant with the Rulebook on Drafting, Composing and Submitting Financial Reports on the State Budget, Extra-budgetary Funds and Local Government Units on Form 9 - Report on Using Current Budget Reserve Funds.

It has been determined by the audit that, after a conducted public procurement procedure, contractual

obligations of the Ministry of Interior Affairs for the purchase of identification documents were paid from the current budget reserve. As the most effective way of funding these procurements, the Ministry of Finance proposed the following:

to plan resources for the respective procurement under the current budget reserve for the period 2011-2014,

to deliver specification of purchases to the Ministry of Finance before sending purchase orders to the supplier,

to deliver copies of invoices received from suppliers to the Ministry of Finance for payment.


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The audit has found difficulties in handling these payments by the Treasury officers in respect of

reference to clauses from the contracts, as they were not submitted to the respective officers. In addition, uncertified copies of invoices has been submitted to the Ministry of Finance (without the registration seal), which indicates to mutual deficiencies in the system of internal controls. The Law on Public Procurement, Article 39, stipulates that if a public procurement procedure takes several years, the commitments that will become due in the following years must be stipulated in the amounts provided for by the regulations governing budget execution for each particular year.

As stipulated by the Law on Budget, Article 31, a spending unit may enter into a contractual commitment, the implementation of which will extend into the subsequent fiscal year, provided that such expenditure is planned for the next fiscal year, i.e. if the Ministry of Finance proposed so.

It is deemed necessary to revise the proposal of the Ministry of Finance to assume a commitment on planning and paying expenditures of another spending unit from the current budget reserve, contrary to Article 33 of the Law on Budget, while at the same time it has not provided the appropriate control measures in compliance with Article 9 of the Law on the system of internal controls in the public sector. The described method of budgeting, and therefore the execution of these expenditure, is not in compliance with the provisions of the Law on Budget, Public Procurement Law and the Law on the system of internal controls in the public sector.

The audit has found that in accordance with Article 2, Paragraph 2 of the Rulebook on detailed criteria for the use of resources of the current and permanent budget reserve, certain legal entities (economic entities) are granted assistance from the current budget reserve each year for financing their regular activities. Article 4 of the Rulebook stipulates that the funds of current budget reserve for assistance to legal entities in financing regular activities, can be used up to the level determined by the line Ministry, which shall issue an opinion on the adequacy of the application filed.

The audit has found that the documentation does not include the opinion of the Ministry on the validity of the request submitted, which suggests that the procedures, laid down in the Rulebook, have not been followed. We deem that Article 2, Item 2 of the Rulebook on Detailed Criteria for the Use of Resources of the Current and Permanent Budget Reserve is not compliant with the Law on State Aid and that a company should address to the relevant Commission in accordance with the Law and the Decree on Detailed Criteria, Conditions and Manner of Allocation of the State Aid (“Official Gazette of Montenegro”, № 27/10, 34/11).

Pursuant to the Conclusions of the Inner Cabinet of the Government, a large number of individuals received payments for various purposes, primarily for medical treatment, education, improvement of financial situation and the improvement of housing conditions. The audit has found that due to the large number of payouts, there has been a number of cases in which payments were executed twice or more times to the same individual, which suggests the existence of a deficiency in the system.

We think that the government should provide a certain amount of resources to deal with these requests, while the process of their distribution, on the principle of specific purposefulness, should be left to the competent institutions.

The audit has found that the amount of EUR 2,500,000.00 was transferred to Electric Power Distribution Centre - Zabljak from the budget reserve for covering the costs of subsidizing electricity to KAP, according to the Conclusions of the Government. These expenditures should have been planned by the Law on Budget for 2012, within the resources intended for payment of subsidies, because they had been defined in the Contract, prior to passing the Law on Budget for 2012.


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From the current budget reserve a one-time assistance fee, amounting to EUR 500,000.00, has been paid to the Bauxite Mines Union, and a sum of EUR 200,000.00 has been paid to RTCG as assistance in paying out severance to employees in RTCG. We believe that those expenditures should have been planned and executed in compliance with the Law on Labour Fund and Article 98 of the Labour Law, via the Labour Fund which provides payment of the outstanding debts to employees which incurred as a result of bankruptcy, if debts are not paid or are partially paid.

By its Conclusion № 06-2191/2 as of February 9th, 2012, the Government of Montenegro adopted the proposal for the allocation of financial and other assistance to local governments for the repairment of disasters caused by extremely bad weather conditions and approved funds from the current budget reserve to municipalities suffering consequences of disaster, for the purchase of fuel. In order to assist in providing a sufficient amount of fuel, the government has assumed an obligation to repay costs to supplier “Jugopetrol” AD by signing said Cession Agreement on ceded liabilities. In addition, pursuant to its Conclusion № 06-233/3 as of February 16th, 2012, the Government adopted the Agreement on donation of 50,000 litres of petroleum products from the donor Jugopetrol AD Kotor, which were distributed by the Commission for Assessment of Damage Caused by Natural Disasters to the following municipalities: Niksic, Pljevlja, Bijelo Polje, Berane, Plav, Rozaje, Zabljak, Mojkovac, Ansaijevci, Kolasin, Savnik, Pluzine and the royal capital of Cetinje.

According to Article 10, Paragraph 2 of the Law on Financing Political Parties, all the confirmed electoral lists (13) have been paid off the amount of EUR 22,924.44 each, or a total of EUR 298,017.78, which accounts for 20% of the total sum of EUR 1,490,088.89, appropriated by the Law on Budget. In addition to these payments, the examination of the respective documentation confirmed that all electoral lists that won seats in the Parliament (seven electoral lists), have been paid off a portion corresponding to the number of seats won, or 80% of the total amount appropriated by the Law on Budget, which accounts for a total amount of EUR 1,192,071.11. The calculating formula for the portion is as follows: EUR 1,192,071.11 : 81 = EUR 14,716.93. Recommendations:

Planning amounts of expenditures for each spending should be aligned with the Law on Budget - Section III Preparation and Planning of the Budget, while the current budget reserve funds are used in accordance with the Law, for urgent and unforeseen needs.

Reporting on spending funds of the current budget reserves shall be carried out in accordance with the Rulebook on Drafting, Composing and Submitting Financial Reports on the State Budget, Extra-budgetary Funds and Local Governments on Form 9 - Report on Using Current Budget Reserve Funds.

The audit has found that the criterion stipulated by Article 2, Paragraph 2 of the Rulebook on Detailed

Criteria for the Use of Current and Permanent Budget Reserve Resources is not compliant with the Law on the State Aid and the Regulation on that a company should address to the relevant Commission in accordance with the Law and the Decree on Detailed Criteria, Conditions and Manner of Granting State Aid, and therefore we deem said criterion should be revoked by the Ministry of Finance, as a relevant authority which adopted it.


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4.8 Cash Transactions – Treasury

The State Treasury has provided cash withdrawals for covering the needs of spending units in the

amount of EUR 4,115,459.37, which is by EUR 1,435,842.26 or 25.87% less than in the 2011, thus reflecting a significant continuation of cash payments reduction trend. However, the audit of budget spending units included in this year’s audit plan found that there are still failures in the following: segregation of finance officers’ duties, keeping the cash book updated, the efficiency in cash payments, valid documentation of full travel expenses, improper spending, the annual return of advances and the cash count in the treasury.

4.8.1 Segregation of Finance Officers’ Duties

The audit has established that at the Ministry of Culture, Directorate for Protection of Cultural Property, PI Montenegrin Music Center, the Concession Commission and Water Directorate, separation of duties is not exercised in accordance with Art. 9, Item 2, of the Law on the system of internal financial control in the public sector (“Official Gazette of Montenegro, № 73/08, 20/11, 30/12), referring to the segregation of duties in a manner that does not allow the same person to be simultaneously responsible for authorization, implementation, recording and control, and the Instructions on State Treasury Operations - Chapter XIII Advances.

4.8.2 Travel Orders Documentation

The audit has found that the travel orders do not contain all the prescribed documents, that they have not been discharged timely, daily allowances have not been accurately calculated, and in certain cases the advance payments have not been returned to the treasury.

By the inspection of a number of cases at the Real Estate Administration, it has been identified that none of the official reports on the business travels had complete information on the calculation of the travel order expenditures (departure and arrival time), the auditors have not been able to determine, in a materially significant amount, whether the daily allowance calculation was correct. In addition, frequent justification of travel expenses for business travels in the country for a period longer than prescribed has also been found and none of the controlled accounts were approved by the director (or any other person authorized to approve the cash account).

By examining travel orders and fiscal receipts used for justification of expenses at the Forest Administration, in several cases it has been found that the travel orders have not been filled - no names and surnames of the travel order user and the signature of the ordering party, no date of issue and disbursement and the business travel destination has not been entered. The Orders have been justified by cash bills for business gifts along with accrued daily allowances. Orders have not been accompanied by a report on business travel. The receipts which justify the travel orders in several cases have not been controlled-signed by the ordering party.

At the Transport Directorate, travel orders have been processed after the travel was completed in certain cases, and they have not been accompanied by valid documents, such as a Letter of invitation, a Decision on an official business trip, on the basis of which the time spent on an official trip and an associated percentage for the calculation of daily allowances would have been clearly established.

At the Ministry of Economy, a travel order has not defined terms on whether the use of official car or own car has been approved in certain cases, and the expenses, calculated and paid, relate to the use of own


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car. Particular cases have been identified in which the orders were not accompanied by a report on business travel.

At the Directorate for Protection of Cultural Property travel orders are incomplete, i.e. do not contain all the necessary elements prescribed by Article 5 of the Regulation on reimbursement of expenses to Civil Servants and State Employees; in addition, in certain travel orders daily allowance has been calculated contrary to Article 7 of the stated Regulation.

At the Administration for Inspection Affairs, travel orders are not always submitted for disbursement

within 48 hours after the completion of official business travel, while the reports on business trips are being made within seven days. 4.8.3 Improper Spending

At the Water Directorate, a portion of cash needed for the treasury, amounting to EUR 3,664.66, has been charged against budget item 4411 - Expenditures on generally important infrastructure, and was spent for travel expenses. This amount should have been recognized at the position 4132 – Business travel expenditures.

In the Ministry of Agriculture and Rural Development, in order to fund travel expenses and daily allowances, cash has been raised through the treasury from other positions in the amount of EUR 75,914.26, i.e. a total of EUR 75,914.26 of funds has been improperly spent.

At the Ministry of Culture the payments withdrawn from the treasury, amounting EUR 7,230.36, referred to the IPA - projects. According to General Ledger of the Ministry, the recorded cash amounted to EUR 6,230.36. Funds in the amount of EUR 1,000.00, related to the IPA project “Cultema”, have been recorded as reserved to fund “Donations” instead of the “IPA” by mistake, so that the records in the General Ledger differs in the same amount comparing to outlays disbursed from the treasury. The Ministry has submitted a request for correction of the error in the SAP system to the Ministry of Finance, which has not been done.

The Concession Commission raised cash for telephone bills’ expenses in the amount of EUR 745.46 against the item 4132 – Business travel expenses, and it should have been planned and realized at the position 4135 - Expenditures for telephone service. 4.8.4 Cash Return

The Directorate for the Protection of Cultural Property has not acted in accordance with Paragraph 162 of the Instructions on State Treasury Operations, which stipulates that unspent funds shall be returned to the Main Treasury Account no later than the last day of a fiscal year, i.e. by December 31st, 2012.

4.8.5 Cash Count Procedure

At the Forest Administration, Water Directorate and the Concession Commission, a procedure of cash count in the treasury on December 31st, 2012 was not performed, while the Ministry of Economy was not completed a balance of cash assets on bank accounts with commercial banks on December 31st, 2012. In certain cases, the Ministry of Transport, Transport Directorate and Directorate for Protection of Cultural Property made calculations and carried out disbursements of business travel expenses to individuals engaged by temporary service contracts, as well as to persons who were not permanent employees of spending units, but were part of professional teams composed by the Minister's Decision, which was not in compliance with the applicable provisions of the Regulation on Compensation of Costs to Civil Servants and State Employees (“Official Gazette of Montenegro”, №57/11) and the General Collective Agreement.


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4.9 Materially Significant Irregularities and Recommendations i. The audit has found that a certain number of spending units irregularly submits the IOPPD form to the

Department of Public Revenues, which is a monthly report on personal income paid per month, accrued and withheld personal income taxes and contributions payable on and deducted from this income. Untimely submission of mentioned reports, in a situation when personal income taxes and contributions are usually paid on a regular basis, results in the occurrence of unrealistic situation of overpayments in detailed (analytic) cards of the state bodies against the paid personal income taxes and contributions, and thus also in the bookkeeping of the Department of Public Revenues.

a) Recommendation: Demand all the users of public funds to duly submit the IOPPD

Form - a monthly report on paid personal income, accrued and withheld personal income taxes and contributions payable on and deducted from this income for all the employees.

ii. The sample-based audit has determined improper spending, contrary to the Regulation on Uniform

Classification of Accounts for the Budget, Extra-budgetary Funds and Budgets of Municipalities, with the following spending units:

charged against expenditures for material at the Forest Administration, Department of Public Revenues, Human Resources Administration, Compensation Fund, the Ministry of Transport and Maritime Affairs, the Port Administration and Water Directorate in the amount of EUR 208,704.82;

charged against business travels expenses in the Transport Directorate, Ministry of Transport and Maritime Affairs, Ministry of Agriculture and Forestry, Forest Administration and Water Directorate in the amount of EUR 150,485.12; EUR

charged against contracted services costs at the Ministry of Economy, Ministry of Finance, Human Resources Administration, Ministry of Interior Affairs, the Concessions Commission, Music Centre, Forest Administration, Department of Public Revenues, Human Resources Administration, the Compensation Fund, the Ministry of Transport and Maritime Affairs, the Port Administration and Water Directorate in the amount of EUR 576,196.24.

charged against capital expenditure in the Human Resources Administration, Department of Public Revenues, Ministry of Transport and Maritime Affairs and Port Administration in the amount of EUR 35,193.79.

charged against expenditure for repayment of securities to residents in the amount of EUR 16,564,070.50 for the Transport Directorate and EUR 740,656.20 for Telecom.

charged against subsidies paid for redundant labour in the amount of EUR 4,564,030.00.

c) Recommendation: Make adjustments in the Bill on the Final Statement of Accounts of

the State Budgets of Montenegro for 2012, correcting the reported amount of improper spending identified by the audit.

iii. The audit has found that the Ministry of Labour and Social Welfare, the Ministry for Human and Minority

Rights, the General Secretariat of the Government and the Department for Protection of Competition have not recognized their consumption in the reports on the use of the current reserve, even though they used the funds. Since the budget execution is controlled by the Ministry of Finance and spending units shall be bound to submit the data on the realized expenditures to the Ministry of Finance on a quarterly basis and at the end of the budget year, up to March 31st of the current year for the previous year, a mutual weakness of the system of internal controls functioning has been identified.


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c) Recommendation: It is deemed necessary to perform reporting on the use of the current budget reserve funds in compliance with the Rulebook on Drafting, Composing and Submitting Financial Reports on Budget, Extra-budgetary funds and Local Governments Units on Form 9 - Report on using current budget reserve funds.

iv. As stipulated by the Law on Budget for 2012, projected outlays for redundant employees amounted to

EUR 18,100,000.00, which was increased by EUR 849,560.84 according to the revised budget plan, and thus determined amount was reduced by EUR 1.391.062.10, pursuant to decisions on reallocation. In the Bill on Final Statement of Accounts of the State Budget of Montenegro for 2012, instead of the increase, a decline was presented according to the revised plan of appropriations, amounting to EUR 366,999.74. The stated error caused the incorrect data reported by the Bill on Final Statement of Accounts of the State Budget of Montenegro for 2012, wherein a final plan totalled EUR 16,341,938.16, instead of EUR 17,558,502.74.

d) Recommendation: Make corrections in the Bill on the Final Statement of Accounts of

the State Budgets of Montenegro for 2012, by the reported amount identified by the audit.


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5. CAPITAL BUDGET

The Capital Budget for 2012 was initially projected in the amount of EUR 70,185,000.00, the stated

sum was reduced by EUR 4,699,900.01, and the final plan amounted to EUR 65,485,099.99, out of which the execution totalled at EUR 58,737,973.28 or 10.30% less than planned.

Table 35 – Planning and execution of resources appropriated for the Capital budget




3) Increased by reallocation 0.00


5) EXECUTED 58,737,973.28


The Capital Budget is being executed through the Transport Directorate, as a state body competent

for the management, development, construction, reconstruction, maintenance and protection of the state roads of Montenegro, and through the Directorate of Public Works, which performs professional tasks related to the construction and reconstruction of facilities of the primary technical infrastructure, state bodies’ facilities, facilities in the sector of health, education, culture, as well as sports complexes and facilities located at attractive tourist sites, and other facilities which are of public interest and the construction of which is financed by the State. 5.1 Capital budget - Transport Directorate

Appropriations for the Capital Budget of the Transport Directorate for 2012 amounted to EUR

34,200,000.00, this sum was reduced by EUR 1,900,000.00 according to the revised budget plan, and pursuant to decisions on reallocation, it was additionally reduced by EUR 700,000.00, so the final plan amounted to EUR 31,600,000.00. Appropriations for the Capital budget for 2012 included allocations for the implementation of projects initiated in previous years, as well as for the projects that are going to be implemented during the controlled budget year and the following years. The planned Capital Budget of the Transport Directorate for 2012, totalling EUR 31,600,000.00 (allocations for twelve programmes) was executed in the amount of EUR 25,363,767.35 (seven programmes), or 19.37% less than planned.

The funds realized in the amount of EUR 25,363,767.35 have been spent on the following projects:

projects that were initiated in previous years, totalling EUR 19,540,739.09 or by the rate of 61.84% of the budgeted funds,

projects commenced in 2012, amounting to EUR 5,823,028.27 or by the rate of 18.43%.

The realization of the Capital Budget of the Transport Directorate in 2012 was financed from two sources of revenues:

general budget revenues accounting for EUR 23,762,441.46 (93.69%),

withdrawal of the loan from the EIB, accounting for EUR 1,601,325.89 (6.31%). The structure of the planned and executed Capital Budget under the competence of the Transport

Directorate, by projects and types of expenditures outlined according to economic classification, is presented in the following table:


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Table 36- The Plan and execution of Capital budget of Transport Directorate In EUR

Project

Project classification

Econom

ic classification

Expenditure item

Appropriations for 2012

Execution

% of execution

Sam

ple

Budget plan

Rebalance

Reallocated

Final plan

Adriatic - Ionian motorway project development

755 413-9 Contracted services

200,000.00 -150,000.00 0.00 50,000.00 0.00 0.00

Reconstruction of regional and main roads in Montenegro

761

412-9 Other commissions

72,000.00 0.00 0.00 72,000.00 0.00 0.00

413-9 Contracted services

528,000.00 0.00 0.00 528,000.00 514,063.63 97.36 261,995.56

441-1

Expenditures for infrastructure of general importance

9,400,000.00 0.00 0.00 9,400,000.00 8,298,626.83 88.28 7,584,653.95

Expropriation of land for construction of motorway Bar - Boljare, road section from Smokovac to Verusa

764 413-9 Contracted services

500,000.00 -250,000.00 0.00 250,000.00 159,999.99 64.00 159,999.99

Crossroads reconstruction 766


100,000.00 0.00 0.00 100,000.00 29,911.82 29.91

441-1


1,400,000.00 -200,000.00 0.00 1,200,000.00 0.00 0.00

Landslide mitigation, bridges and slopes, elimination of black spots on regional and main roads

767


30,000.00 0.00 0.00 30,000.00 0.00 0.00

441-1


1,470,000.00 -200,000.00 0.00 1,270,000.00 746,013.55 58.74 537,536.66

Bypass Rozaje 769 441-1


400,000.00 -300,000.00 0.00 100,000.00 0.00 0.00

Solving the problem of bottlenecks in transport network in Montenegro - port Milena Bridge, Boulevard Bar, bypass around Niksic phase II, bridge on Tara river near Kolasin and bypass Golubovci

771


70,000.00 0.00 0.00 70,000.00 0.00 0.00


730,000.00 0.00 0.00 730,000.00 472,506.54 64.73 184,089.21

441-1


14,500,000.00 -600,000.00 -1,900,000.00 12,000,000.00 10,561,740.76 88.01 9,679,606.52

Investment road resurfacing of regional and main roads

772 441-1


400,000.00 0.00 0.00 400,000.00 0.00 0.00

Investment maintenance of regional and main roads, oversight, designing, expropriation, revision

773


240,000.00 0.00 0.00 240,000.00 167,573.82 69.82 158,050.00


760,000.00 0.00 0.00 760,000.00 389,510.37 51.25 282,858.03

441-1


500,000.00 0.00 0.00 500,000.00 29,251.75 5.85 26,794.75

Construction of tunnel Tifran

774


40,000.00 0.00 0.00 40,000.00 17,135.79 42.84

441-1


1,960,000.00 0.00 1,200,000.00 3,160,000.00 2,376,106.61 75.19 2,339,025.13

Construction of third lanes 775 441-1


400,000.00 -200,000.00 0.00 200,000.00 0.00 0.00

Programme of flood mitigation inn regional and main roads

776 441-1


500,000.00 0.00 0.00 500,000.00 1,601,325.89 320.27 641,467.50

TOTAL 34,200,000.00 -1,900,000.00 -700,000.00 31,600,000.00 25,363,767.35 80.27 21,856,077.30


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The audit conducted on the Bill of the Final Statement of Accounts of the State Budget of Montenegro

for 2012 has also verified the capital projects in the amount of EUR 21,856,077.30 or 86.17% of total capital budget execution of the Transport Directorate in 2012, and ascertained the following irregularities: Project 761- Reconstruction of Regional and Main Roads in Montenegro

The reconstruction of six sections on main and regional roads in Montenegro, planned under this Project, includes the following routes:

• Reconstruction of the road Vilusi - Vracenovici; • Reconstruction of the road Berane - Lubnice; • Reconstruction of a road section Slijepac bridge-Tomaševo-Pljevlje / section Pavino-polje-Kovren; • Reconstruction of the road Vladimir - Sukobin; • Reconstruction of the road Kosanica - Bobovo (the Municipality of Pljevlja); • Reconstruction of the road Berane – Petnjica The Project objectives include better connection of certain undeveloped areas with major main roads

and tourist centres, as well as with approaches to border crossings. The estimated value of these reconstructions in 2012 amounted to EUR 10,000,000.00. A total of EUR 8,812,690.46 or 88.13% of the amount planned was spent for these purposes.

The Ministry of Sustainable Development and Tourism adopted a document on new Urban-technical conditions, № 04-869/1-11 as of February 23rd, 2011, defining new terms on the width of the roadway to 6.60 m, instead of 6.0 m, which resulted in carrying out additional construction works, according to the Annex I of the Contract № 02-3449/1 , concluded on May 8th, 2012, for construction works on the reconstruction of road Tuzi-Bozaj, in the amount of EUR 279,208.00 VAT included, with the new agreed price increased by 14.04% comparing to the initial contract value, thus totalling at EUR 2,267,190.22 VAT included, and newly agreed deadline for the completion of construction works, extended to May 20th, 2012.

Reconstruction of this route was not foreseen by the Law on Budget for 2012. It was concluded by the audit that, due to additional works undertaken on the respective site, the Transport Directorate did not comply with the provisions of Article 38, Article 31 and Article 25, Paragraph 1, Item 4 Indent 1 of the Public Procurement Law (“Official Gazette of Montenegro”, №42/11), which stipulates that it is obligatory to act by Amendment to the Procurement plan for 2012, along with the consent of the Ministry of Finance on the provided financial resources, as well as to conduct the negotiated procedure without prior publication of a call for bidding, with previously obtained approval of the competent authority on meeting requirements for its implementation, given that the Transport Directorate had already fulfilled conditions compliant with legal provisions, defined in Articles 25, Paragraph 1, Item 4, Indent 1 of the mentioned Law, which states “for public works contracts and public service contracts not included in the contract concluded after the public procurement procedure was conducted, but which, due to unforeseen circumstances, have become necessary to the provision of the services or works described therein, when such additional works or services cannot be technically or economically separated from the original contract without major inconvenience to the contracting authorities, provided that the contract, whose aggregate value may not exceed 15% of the amount of the concluded contract, is concluded with the bidder whose contract is still in force”.

The amount of EUR 12,300.00, charged to the position of this Project, i.e. against the budget item 413-9 contracted services, was paid out for remunerations for the participation in the work of the Real Estate Administration Commission, formed for the purpose of the Transport Directorate, and delegated a task of valuation of properties necessary for the reconstruction of regional road R10, Slijepac most – Tomasevo – Pavino Polje – Kovren – Vrulja (section: Kovren – Pavino Polje – Crkvice), in cadastral municipality (KO) Grab,


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KO Lekovina, KO Kovren and KO Bliskovo. In addition, the amount of EUR 5,000.00 was paid on behalf of the Real Estate Administration Commission, formed for the purpose of the Transport Directorate, and delegated a task of valuation of properties necessary for the reconstruction of the road Berane-Lubnice in KO Pesca and KO Luzac, for the expenses of the expert testimony services.

Based on the evidence presented (specification of expert’s report and opinion costs with instructions for payment to the members of the Commission, № 03-10485/1 as of December 20th, 2012, and № 03-4274/1 as of May 31st, 2012), the audit could not provide assurance of adequacy and validity of payments to individuals who were not employed by the respective spending unit, as well as for an individual who is employed by the audited entity. Given that the auditor neither had an appropriate insight into the documents, nor the required documentation in respect to incurred expenditures was provided to the auditor, this part of control procedure could not have been completed.

Project 764 - Expropriation of Land for the Construction of the Motorway Bar-Boljare Section from Smokovac to Verusa

The work on land expropriation for the construction of the motorway Bar-Boljare, section from

Smokovac to Verusa and Matesevo, started in 2009, and was continued in 2010, the year of 2010 was scheduled as timeline for the completion of this work. However, due to undefined construction model of the motorway, the expropriation was not finished during 2011, or in 2012. According to the Capital budget for 2012, the appropriations for these purposes amounted to EUR 500,000.00. Pursuant to the revision of the Budget, the amount was decreased by EUR 250,000.00, and the execution totalled EUR 159,999.99.

The audit has ascertained that the funds in the amount of EUR 159,999.99, recorded at the item 413-9 contracted services and allocated for the Project 764, were spent for other purposes that had not been foreseen by the Capital Budget of the Transport Directorate for 2012. Pursuant to the Conclusion of the Government of Montenegro, № 06-443/3 as of March 15th, 2012, the amount of EUR 159,999.99 from the budget item related to the expropriation of land for the highway Bar-Boljare, was paid into account of the Fund for Pension and Disability Insurance, in order to connect the years of service for the workers of Bauxite Mine AD Niksic, who are beneficiaries of social programmes, and that is not in compliance with Article 11, Paragraph 3 of the Organic Budget Law (“Official Gazette of Montenegro”, №40/01, 44/01, 28/04, 71/05, “Official Gazette of Montenegro”, №12/07, 73/08, 53/09, 46/10, 49/10), which stipulates that “no expenditure shall be paid out of the Treasury Consolidated Account unless approved by the Law on State Budget.”

Project 771 - Solving the problem of bottlenecks in the transport network of Montenegro - Port Milena bridge, Boulevard – Bar, bridge on the Tara river in Kolasin, bypass around Niksic Phase II and Golubovci bypass.

The Project envisages construction works carried out on the construction of Port Milena bridge, the

Boulevard at the entrance of Bar, construction of a bridge on the river Tara in Kolasin, bypass around Niksic Phase II and bypass Golubovci Phase III. The appropriations for these purposes amounting to EUR 15,300,000.00 were reduced according to the revised budget by EUR 600,000.00, and pursuant to decisions on reallocation, additionally reduced by EUR 1,900,000.00, so the final plan amounted to EUR 12,800,000.00. The funds were realized in the amount of EUR 11,034,247.30. As the investor, the Transport Directorate concluded a Contract (by call №21/11) on August 30th, 2011, on the reconstruction of the main road M-2.4-Petrovac-Bar, from km 18 +200 to km 20 +200 (Boulevard Bar), registered therein under the Number 01-7773/1, with the contract price totalling EUR 3,173,052.46, VAT included and the timeline for completion of six (6) calendar months. The Agreement on co-financing of works on the subject facility, concluded between the Transport Directorate and the Municipality of Bar (№ 01-1116/1 as of February 2nd, 2011), provided that Transport Directorate shall fund the amount of EUR 2,000,000.00 and the Municipality of Bar the remaining amount for the implementation of the overall project. The audit has determined that the Transport Directorate


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funded the portion of financial obligation of the Municipality of Bar, in the amount of EUR 1,173,051.85 (pursuant to the Conclusion of the Government of Montenegro, №06-2365/4 as of November 29th, 2012). Considering that the expenditures incurred as a result of disbursement of funds in the reported amount were not planned by the Capital Budget for 2012, it is deemed essential that the Government of Montenegro draw up an Annex to the Agreement with the Municipality of Bar on regulating the mutual rights and commitments.

The Transport Directorate transferred a sum of EUR 293,150.00 against the allocation for this Project, the budget item 441-1 Expenditure on Infrastructure of General Importance, into the account of the Ministry of Finance - Deposit for Expropriation, on the grounds of expropriation of land for the Project of Road Construction Gusinje-Grnčar and the Project of Southern Bypass Plav, as well as for commitments arising from the purchase of land for construction of the Northern bypass Plav, based on the Conclusion of the Government of Montenegro, № 06-2406/3 as of December 6th, 2012. The audit has found that the allocated funds amounting EUR 293,150.00 do not correspond to the purposes determined by the Capital budget of the Transport Directorate for 2012.

Pursuant to the Conclusion of the Government of Montenegro, № 06-1007/3 as of May 17th, 2012, the Transport Directorate ensured funding for the Project “Let’s Keep it Clean” transferring the amount of EUR 94,488.87 from this Project, the expenditure item 413-9 contracted services to the public utility companies, for salary disbursements to employees in this public sector. The audit sampled transfers amounting EUR 58,676.48 against the item of the contracted services, and the same related to the amount paid out for the purpose of the implementation of this Project. The audit has found that the audited subject carried out payments, using the funds allocated for the Project 771 - Solving bottlenecks in transport network of Montenegro, against the expenditure item 413-9, pursuant to the Conclusion of the Government of Montenegro, №06-1007/3 as of May 17th, 2012, in the amount of EUR 58,676.48, which did not meet purposes planned by the budget. The implementation of the Project “Let’s Keep it Clean” was not planned by the Capital Budget of the Transport Directorate for 2012, which is contrary to the above provisions of Article 11, Paragraph 3 of the Law on Budget.

In addition, a sum of EUR 6,877.00 was transferred from the Project 771 - Solving bottlenecks in transport network of Montenegro, against the item 413-9 Contracted services, for remunerations for the participation in the work of the Real Estate Administration Commission- Regional Office Niksic, formed for the purpose of the Transport Directorate, and delegated a task of assessing the market value of immovable property in private ownership to be expropriated for the reconstruction of the bypass around Niksic Phase II – road route Grebice –Vidrovan. Based on the evidence presented, the audit could not provide assurance of adequacy and validity of payments to individuals who were not employed by the respective spending unit, as well as for an individual who is employed by the audited entity.

Programme 773 - Investment Maintenance of Regional and Main Roads, Oversight, Designing, Expropriation, Audits

Appropriations for other remunerations, recorded at the item 412-9 in 2012, amounted to EUR

240,000.00, with the execution of EUR 167,573.82 or 69.82%. Based on the presented accounting records, which served as an evidence of expenditure justification, the audit has determined recording of remuneration disbursements against this item in the controlled period, on behalf of employees engaged in Commissions which were formed in accordance with the needs of the Transport Directorate, in the amount of EUR 158,050.00.

The audited entity passed a Decision № 01-22/2, as of January 9th, 2008, on determining the remuneration rate for the membership in commissions, project groups, teams and other forms of work, which defines remuneration rate arising from participation in the work of commissions appointed or composed to meet the needs of this state body (Article 6 - Article 9). By passing SAI Decision, the Transport Directorate


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exceeded the limits of its competences, given that the terms and conditions, manner of exercising and the costs reimbursement rate and other earnings of civil servants and state employees are regulated by the Government Regulation, as stipulated by Article 19 of the Government Regulation. Namely, the terms and conditions, the manner of exercising and the costs remuneration rate and other earnings of civil servants and state employees are regulated by the Decision on criteria for determining the remuneration rate for membership in working body or other form of labour, passed by the Government of Montenegro (“Official Gazette of Montenegro”, №22/11 as of April 29th, 2011) and the Decision on Criteria for determining the remuneration rate for membership in working body or other form of labour, passed by the Government of Montenegro (“Official Gazette of Montenegro”, №26/12 as of May 24th, 2012, and № 34/12 as of June 29th, 2012). The audit of expenditures on synthetic account 412-9 other remunerations, confirmed that remuneration disbursements, arising from employees’ membership in commissions, were carried out without accrued taxes and contributions for mandatory social insurance and surtax for 11 months in 2012, while the remuneration disbursement, arising from employees’ membership in commissions in December 2012, was carried out with accrued and paid tax and surtax, but contributions for mandatory social insurance were not paid. Recommendation:

As stipulated by Article 14 of the Law on Income Tax of Natural Persons and Article 3a of the Law on Mandatory Social Insurance Contributions, earnings of employees, in respect of remunerations for membership in working groups and commissions, are considered to be earnings generated on the basis of labour relation, i.e. corresponding to labour relation and if reimbursed by the same employer, the employer shall be legally obliged to calculate and pay income tax of natural persons and mandatory social insurance contributions. In addition, data on reported disbursements should have been included in unified forms of Reports on calculated and paid income tax of natural persons and mandatory social insurance contributions (IOPPD) and submit them to the Department of Public Revenues within the legally prescribed deadline (by the 15th of each month for the previous accounting period). Article 1 of the Decision on Criteria for Determining the Remuneration Rate for Membership in Working

Body or Other Form of Labour (“Official Gazette of Montenegro”, №22/11 as of April 29th, 2011), prescribes the criteria for determining the remuneration rate for the members of an advisory body formed by the Government of Montenegro and the remuneration rate for the members of work teams, working groups and other types of labour, formed by the President or Vice President of the Government of Montenegro, the Minister or the Head of the other administrative authority. Article 4, Paragraph 1, Item d) stipulates that a work team, depending on the scope, complexity, multidisciplinary and timelines for the execution of delegated task, may be established a compensation rate for the preparation of proposals of by-laws, whose enactment is in charge of the ministry, and for the implementation of public procurement procedures, up to EUR 1,000.00. The Government of Montenegro passed a new Decision on Criteria for determining the remuneration rate for membership in working body or other form of labour in 2012, where it reduced the rates for determining remunerations, introduced the issuing approval for establishment of a work team and limited the remunerations to be paid per month, to disbursements payable according to a single-based payment.

The Transport Directorate carried out payments against this item totalling EUR 158,050.00, in respect of remunerations disbursed to employees, members of the tender commissions, the commissions for internal technical review and monitoring of conducted construction works, the Commission for the implementation of projects financed by the international financial institutions, the Commission with the task of control and certification of timetables, price lists and itineraries in internal and international road transport, the Commission for drafting the Capital budget of the Transport Directorate for 2013 and other commissions.

The audit has found that the employees’ compensations arising from participation in the abovementioned commissions (with the exception of the Commission for the list of cash count), were paid in amounts exceeding the limit allowed by and laid down in Article 4, Paragraph 1, Item d) of Decision on criteria


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for determining the remuneration rate for membership in working body or other form of labour (“Official Gazette of Montenegro”, №22/11 as of April 29th, 2011), i.e. the limit laid down in Article 7, Paragraph 1, Item d) of Decision on criteria for determining the remuneration rate for membership in working body or other form of labour (“Official Gazette of Montenegro”, №26/12 as of May 24th, 2012, and № 34/12 as of June 29th, 2012), which stipulate that the work team may be paid a remuneration up to a maximum of EUR 1,000.00, i.e. EUR 800.00 for performing assigned tasks.

Based on the insight into the documents presented as evidence which justifies monthly payments to employees in respect of remunerations for participation in commissions formed for the implementation of projects financed by the international financial institutions – PIU units, it was determined that there was no prior approval of the Government obtained, that each member of the PIU was paid monthly remuneration in the amount which exceeded 50% of the average net salary in Montenegro in the previous year, as well as that the employees who were paid monthly instalments of remuneration based on the participation in the work of PIU unit, also received payment based on other remunerations, which is contrary to the provisions of Article 4, Paragraph 1 and Article 6 of the abovementioned Decision.

The provisions of Article 5 of the Decision on criteria for determining the remuneration rate for membership in the working body or other form of labour (“Official Gazette of Montenegro”, №22/11 as of April 29th, 2011), or Article 9 of the Decision on criteria for determining the remuneration rate for membership in the working body or other form of labour (“Official Gazette of Montenegro”, №26/12 as of May 24th, 2012, and № 34/12 as of June 29th, 2012), stipulate that the remuneration for the engagement in a working team may be exercised for the work performed after regular working hours and outside the scope of regular duties and on the basis of prepared and submitted Report on the activities of the working team presenting the basis for remuneration, which was often not the case at the Transport Directorate, since the working groups were mainly composed for the tasks considered to be regular tasks and duties systemized by the Act on internal organization and job classification. In addition, it was concluded that the Reports on the Activities of Working Teams (at the Commissions for internal review of conducted works and at the PIU units) were not made and submitted, which is not in compliance with Article 5, i.e. Article 9 of the abovementioned Decisions.

It was determined by the audit that decisions on composing commissions for internal review of performed construction works and the Projects Implementation Unit, for the projects funded by the international financial institutions - PIU units, do not include timelines regarding a task completion and publishing the Report on activities. Recommendation:

It is recommended to the Transport Directorate to act in compliance with Article 55 of the Regulation on Organization and Operation of the State Administration when composing working groups, as well as with the Decision on criteria for determining the remuneration rate for membership in the working body or other form of labour, which regulate the manner of composing project groups, teams or other forms of labour. In addition to planning resources and specifying tasks for each member, the Act on composing a project group, team or any other form of labour, should also establish timelines regarding both task completion and publishing the Report on Activities.

774 – Tunnel Tifran Construction Project

The construction of a tunnel through Tifran has been planned due to the impossibility of landslide

mitigation and lessening of the slope in Tifran gorge. According to the Capital Budget for 2012, appropriations for realization of the Tunnel Tifran Construction Project amounted to EUR 2,000,000.00, which was increased


Page 91

by EUR 1,200,000.00 pursuant to the Decisions on reallocation of funds, so the final plan totalled at EUR 3,200,000.00. The realization of this Project amounted to a total of EUR 2,393,242.40.

The payout recorded in the controlled period at the item 441-1 Expenditures for infrastructure of general importance was carried out following the certified interim status reports, with accrued value of work performed in the amount of EUR 2,339,025.13, for the works undertaken on the construction of the tunnel Tifran, according to the Contract (Call № 36/11), dated November 4th, 2011, the Ordering party registration number 01-9851/1, and the Contractor registration number 10101/11, with the agreed contract value of works, amounting to EUR 4,442,147.17 VAT included, and the timeline for completion of 12 (twelve) calendar months. The audit has determined the payment according to a Prepayment Invoice in 2011, amounting to EUR 444,214.72, which accounts for 10% of the Project value, in accordance with the provisions of Art. 39.1. of the Contract, and following the dynamics of the completed works, the commitments under the Project were paid off in 2012 based on percentual deductions (10%) from the payments to the Contractor.

Prepayment invoice № 2, registered at the audited entity under the number 02-7426/1 on September 14th, 2012, was paid to the Contractor in the amount of EUR 550,000.00, based on the Conclusion of the Government of Montenegro, № 06-1923 as of September 13th, 2012, “for the purpose of an advance payment to the sub-contractor, Bauxite Mine AD Niksic, against the item of the capital investments for the construction of Tifran tunnel”, which is not compliant with the stated provisions of the Contract, according to which an advance of 10% had already been paid immediately after the conclusion of the Contract in 2011.

The weaknesses noted in previous years regarding the implementation of the planned Projects, have been repeated in 2012. The audit has established the following:

Development of the Project Adriatic-Ionian motorway was not initiated in 2012, as it was scheduled, since the construction documentation for the preparation of this project was not completed;

Program 766 - for the purpose of elimination of bottlenecks in the regional and main roads, this project planned the reconstruction of the following intersections: Jaz, Cetinje, Morinj, Bijelo Polje, Mojkovac and Bar. Due to the delay in delivering project documentation, prepared by Municipalities or in cooperation with the Municipalities, the implementation of these projects was not initiated in 2012. Development of project documentation for the reconstruction of intersections Morinj, Cetinje and Bijelo Polje was initiated, and the amount of EUR 29,911.82 was paid out of the item Contracted services in respect of the beginning of this project.

Due to delay in adopting construction documentation by the Municipality of Rozaje, there were no activities undertaken in the implementation of the Programme: 769 - Bypass Rozaje, in 2012;

The EIB loan was provided for funding the Project: 772 - Investment road resurfacing of main and regional roads. Due to an uncompleted tender procedure, there was no implementation of this Project. The EIB loan was also intended for funding the Project: 755 – Construction of third lane. Due to uncompleted project documentation, the implementation of this project failed in 2012.

5.2 Capital Budget – Directorate of Public Works

Appropriations for the Capital Budget of the Directorate of Public Works for 2012 amounted to EUR 35,985,000.00. The revision of the budget reduced this amount by EUR 2,799,900.01, and Decisions on reallocation increased it by EUR 700,000.00, so the final plan amounted to EUR 33,885,099.99. A total value of the capital budget execution realized by the Directorate of Public Works in 2012 amounted to EUR 33,374,205.93. The amount of EUR 28,954,058.92 (86.76%) was financed from the general state budget revenues, while a total of EUR 4,420,147.01 or (13, 24%) was financed from loans (provided through the World Bank or the European Investment Bank), including the Project of Emergency Measures and Flood


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Prevention, amounting to EUR 3,996,302.34, and the Project of the Real Estate Administration, amounting to EUR 423,844.67.

The rest of the allocations were not realized due to the following reasons:

the construction of regional sanitary landfills and wastewater treatment was not commenced due to unfinished preparation process, i.e. uncompleted procedure of obtaining urban and technical requirements, the failure in obtaining approval of the project documentation, the unfinished revisions, not provided construction permits issued by the future users of landfills and plants, so the conditions for the realization of credit lines were not created;

for a certain number of projects where elaboration of project documentation was planned, the same was not performed because the users had not carried out activities preceding the development of project documentation, such as: the provision of urban-planning assumptions, resolving property legal relationship and ensuring the necessary conditions for elaboration of project documentation from the respective institutions;

construction of a number of facilities started later than planned, due to provision of the new Public Procurement Law applicable as of 1st January, and which extended timelines of public tendering procedures.

According to the amount of allocations defined by the Revised Capital Budget Plan for 2012, the total

sum of EUR 28,114,500.00 (82.97%) refers to the projects initiated in previous years, while the amount of EUR 5,770,500.00 (17.3%) refers to the planned projects, whose implementation began in 2012. Durin 2012, the Directorate of Public Works was carrying out activities by all programs (14 programs) included in the Capital Budget. As for the appropriation for projects whose implementation began in 2012, the execution totalled at about 81%.


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Table 37 – The Plan and execution of the Directorate of Public Works Capital budget

No. Project

Revised Capital Budget for 2012 Paid by 31/12/2012

Current expenditures

Capital expenditures

Total Current

expenditures Capital

expenditures Total

1

804 - Construction and reconstruction of administrative premises for State bodies

972,097.71 6,399,250.00 7,371,347.71 720,584.33 5,931,104.21 6,651,688.54

2

805 - Construction, reconstruction and renewing of cultural objects

490,000.00 2,975,000.00 3,465,000.00 87,380.55 2,551,637.51 2,639,018.06

3 806 - Construction and reconstruction of sports facilities

152,000.00 5,383,000.00 5,535,000.00 97,184.25 5,055,170.01 5,152,354.26

4 807 - Construction of housing facilities

0.00 200,000.00 200,000.00 0.00 180,000.00 180,000.00

5 808 - Construction and reconstruction of border crossings

32,902.89 40,000.00 72,902.89 19,492.29 4,454.28 23,946.57

6

809 - Construction of Institute for Execution of Criminal Sanctions facility

30,000.00 570,000.00 600,000.00 11,622.41 357,247.49 368,869.90

7 810 - Construction of local infrastructure

429,500.00 7,630,500.00 8,060,000.00 193,991.13 7,074,635.28 7,268,626.41

8 812 - Projects of environmental protection

414,000.00 521,000.00 935,000.00 144,889.04 230,882.10 375,771.14

9 818 - Construction and reconstruction of health care facilities

645,100.00 1,729,550.00 2,374,650.00 519,217.39 1,728,649.97 2,247,867.36

10 819 - Construction and reconstruction of social care facilities

160,000.00 1,113,200.00 1,273,200.00 69,214.92 1,025,211.12 1,094,426.04

11 812 -Construction and reconstruction of educational facilities

561,100.00 1,571,800.00 2,132,900.00 249,994.26 1,497,166.24 1,747,160.50

12 822 - Construction and acquisition of consular mission facilities abroad

0.00 1,000,000.00 1,000,000.00 0.00 1,000,000.00 1,000,000.00

13 824 - Emergency aid and flood prevention

15,000.00 35,000.00 50,000.00 444,057.09 3,552,245.25 3,996,302.34

14 825 - Law on Petrovic Njegos Dynasty

182,000.00 633,000.00 815,000.00 125,000.00 503,174.81 628,174.81

TOTAL 4,083,700.60 29,801,300.00 33,885,000.60 2,682,627.66 30,691,578.27 33,374,205.93

The verification of capital projects amounting to EUR 16,392,336.33 in 2012 has been performed by

the audit of the Bill on Final Statement of Accounts of the State Budgets of Montenegro for 2012, and there have been no irregularities indicated, except in the part of nominating projects for funding from the capital budget without submitting construction documentation, urban technical conditions and revised project documentation. Based on the established facts, we believe that the audited entity successfully adjusted its organization to the status changes which occurred in the second half of 2012. The overall dynamics of operations, the quantity and quality of the audited entity’s activities during 2012 were organized and successfully executed along with the activity of the line ministry in conducting the oversight.


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5.2 Materially Significant Irregularities and Recommendations

iii. According to its Conclusions, the Government has reallocated funds from the Capital Budget to other purposes, not provided for by the Annual Law on Budget. The audit has identified improper expenditures executed by the Transport Directorate from the Project 764 - Expropriation of land for the construction of motorway Bar-Boljare, road section from Smokovac to Verusa and Project 771 - Solving the problem of bottlenecks in transport network in Montenegro - Bridge Port Milena, Boulevard Bar, bypass around Niksic Phase II and bypass Golubovci.

Recommendation:

It is recommended to ensure full implementation of the Law on Budget in planning and execution of the Capital Budget, and not to perform any current budget payments against the capital budget account.

iv. Despite the fact that the State Audit Institution had already given recommendations that “projects for funding from the capital budget shall not be proposed without appropriate planning documentation, urban technical conditions and revised project documents”, in the Audit Report on the Final Statement of Accounts of the State Budgets of Montenegro for 2011, the audit has found that the same irregularities were repeated in 2012.

v. It is also recommended to foresee codes for subprojects within particular projects in the Capital budget of the Transport Directorate and Directorate of Public Works for 2012, which would facilitate the monitoring process of expenses by position and type of origin.

Recommendation:

Before the adoption of the annual Law on Budget, it is deemed necessary to verify whether the assumptions regarding planning and nomination of specific projects are recognized as realistic. Special attention should be paid to irregularities identified by the audit, which have been repeating over a longer period of time, thus suggesting that a certain number of projects have not been realized due to improperly examined assumptions in part of considering the urban technical conditions, planning documentation and revised project documents.


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6. PROPERTY

Law on State Property regulates the use, management and disposing with assets and other goods belonging to the State of Montenegro or to the local self-government. The audit on the management of state property, performed in budget spending units included in the audit, has determined that there are still inconsistencies in the implementation of legal standards in respect to keeping records on state property and reporting to competent authority on the condition of the state property. Pursuant to Article 50 of the Law on State Property, the state authorities are obliged to submit the data on movable and immovable assets to the administration authority competent for property affairs in electronic form, for the purpose of keeping the Registry of Immovables, i.e. accounting records of movable assets. The audit has found that activities on the implementation of software for electronic Registry of state property have not been finalized yet. There are cases that budget spending units do not carry out the inventory of assets and do not submit data in accordance with the prescribed forms.

At the Ministry of Economy, the Inventory commission did not make the list of cash count (balance) at bank accounts in commercial banks on December 31st, 2011 and failed to carry out the list of liabilities of the Ministry (class 2 accounts), with the balance at the date of December 31st, 2011.

The Concession Commission did not make the list of assets, receivables and liabilities, with the balance at the date of December 31st, 2011.

By the completion of performing fieldwork procedure, the Real Estate Administration did not have an adopted Report on the list of assets for 2012 and did not submit the Report on value of the property at its disposal to the Ministry of Finance and Property Administration, in accordance with Article 50 of the Law on State Property.

The Inventory commission was formed in the Port Administration, with the task to make an inventory list of fixed assets, immovable and movable property. The Commission prepared the inventory lists, but not the Report on the list of state property with the balance at the date of December 31st, 2012. Pursuant to Article 50 of the Law on State Property, the information on the list of assets of the Administration, with the balance at the date of December 31st, 2012, were not submitted to the administration authority competent for property affairs, the Property Administration.

The Administration for Inspection Affairs has not finished the final inventory of assets yet, because this state authority was established during the year and it overtook the assets from a few bodies. It is deemed necessary for the Administration to harmonize the value of equipment – property with the value recorded in the previous user documentation, i.e. carry out the inventory of assets and make the final calculation of depreciation. In accordance with Article 4a of Regulation on Conditions and Manner of Using Means of Transport Owned by the State of Montenegro (“Official Gazette of Montenegro”, № 21/10, 57/11, 63/12), the Head of the Administration for Inspection Affairs was obliged to determine the number of vehicles necessary for the smooth operation of this state body, in accordance with the Rulebook on the Use of Transportation Means. Said Rulebook, № 08501-296 as of 28th March 2013, governing the manner of using means of transport was presented to the auditors and submitted to the Ministry of Finance.

The Ministry of Culture and the Directorate for Protection of Cultural Property carried out the inventory of movable and immovable property, but they neither assessed the property nor provided data on immovable property they disposed of.

It was determined that at the Human Resources Administration, the fixed assets amounting EUR 3,178.70, were not specified in the inventory list of assets. The Human Resources Administration did not deliver the inventory lists to Property Administration within the timeframe prescribed by the Law.


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The Department of Public Revenues does not have in its possession assets of artistic and cultural value owned by the State of Montenegro, but it uses works of art from PI “Museums and Galleries” Podgorica on the basis of revert. For works of art which this body uses, the state auditor was not presented an opinion on the value and way of safeguarding issued by the authority competent for protection of cultural property.

Water Directorate did not make the list of cash count in the treasury and the list of cash deposits (balance) at bank accounts. The official premises which the Directorate dispose of was not recorded in the inventory of property.

It has been determined that the audited spending units do not submit reports on forms prescribed by the Decree on Manner of Keeping Records of Movable and Immovable Property and Taking Inventory of State-Owned Assets of Montenegro, passed by the Government of Montenegro, but in accordance with the written note of the Property Administration instead, on a form created by Property Administration. 6.1 Materially Significant Irregularities and Recommendations Recommendations:

It is recommended that spending units should keep separate records of movable and immovable property in their accounting, based on valid documentation, in compliance with the Regulations on Unified Classification of Account for the State Budget and Categorizing of Property by Groups and Methods for Determining Depreciation.

It is deemed necessary to ensure consistent application of the Law on Property and the Decree on Manner of Keeping Records of Movable and Immovable Property and Taking Inventory of State-Owned Assets of Montenegro of Montenegro, in part that relates to the obligation of entering data in the prescribed forms and their submission to the competent government authority - Property Administration. Compose a Report on Inventory in compliance with Art. 11 of the Rulebook on Time Limits and Carrying Out Inventory and Alignment of the Book Value with the Factual State (“Official Gazette of Montenegro” №34/09 as of May 29th, 2009).

When it comes to investment and technical maintenance, it is recommended to delegate these tasks to the Property Administration, as defined by the Regulation, given that this state body has organizational, professional and staff capacity to be considered qualified for the mentioned task. More expensive solutions are usually used in practice, such as assigning these tasks to other legal entities or individuals.


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7. PUBLIC PROCUREMENT

The audit of public procurement procedures carried out by the budget spending units identified still

existing omissions, in part of: appointment of a public procurement officer, adopting public procurement plans, compliance with the legal regulations and transparency in the implementation of procedures, the scope and delivery of reports on public procurement, as well as one determined case of the lack of application of the Public Procurement Law. 7.1 Appointment of Public Procurement Officer

The Directorate for Protection of Cultural Property, while it operated as an autonomous body of the

state administration, did not appoint a public procurement officer, as stipulated by the Article 58 of the Public Procurement Law. 7.2 Public Procurement Plans

An unrealistic ratio between planned and realized public procurements has been noticed in certain spending units, which indicates to a conclusion on inconsistent compliance with Article 38, Paragraph 2, Item 3 and 4 of the Public Procurement Law, which stipulates that public procurements plan contains the estimated value of public procurement for each individual subject of public procurement, as well as to timely amend the public procurements plan. At the Compensation Fund, public procurement plan was realized in the percentage of 31.7%; at the Real Estate Administration the realization amounted to 43.70%; at the Ministry of Economy, the amount reached 45.23%; at the Human Resources Administration it amounted to 60%; the Montenegrin Music Centre realized 68.77%. In addition, the audit has found that:

the Concession Commission did not, as would be compliant with the Public Procurement Law, draw up the Public Procurement Plan for 2012;

The Directorate for Protection of Cultural Property adopted a public procurements plan approved by the Ministry of Finance. However, considering that the Administration did not appoint a Public Procurement Officer, it can be concluded that the Law was not complied with in part relating to the sequence of actions and procedures in the public procurement process. The public procurement officer should have been appointed prior to adoption of the public procurement plan.

7.3 Compliance and Transparency in the Implementation of Procedure

Spending units, being bound to act in compliance with the Public Procurement Law, are obliged to conduct the public procurement according to the prescribed procedure and the estimated value of the public procurement, in compliance with Article 20 and 21 of the Public Procurement Law. Sharing a single subject of public procurement during the year and avoiding the application of prescribed procedure of public procurements have been found in the Human Resources Administration, Forest Administration, the Ministry of Economy, Water Directorate, Music Centre and the Directorate for Protection of Cultural Property, which is not in compliance with Article 44, Paragraph 4 of the Public Procurement Law (“Official Gazette of Montenegro”, № 42/11) and the basic principles of public procurement. 7.4 The Scope and Submission of Reports on Public Procurement

The audit has found that the data presented in reports on public procurements do not correspond to the actual spending of budget funds for goods, services and works, which means that all purchases have not been reported in the Annual report.


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The audit has found that following spending units: Ministry of Transport and Maritime Affairs, Ministry

of Agriculture and Rural Development, Music Centre and the Directorate for Protection of Cultural Property, presented the incorrect Report on awarded public procurement contracts, i.e. that it does not contain information on all the realized public procurements, which is not in compliance with Article 117 of the Public Procurement Law (“Official Gazette of Montenegro”, № 46/06), which stipulates that the contracting authority is obliged to keep records on conducted public procurement procedures and concluded public procurement contracts. The audit has also identified certain delays in submitting the Report on public procurement to the competent authority, while the Concession Commission did not submit the Report on public procurement contracts awarded for 2012 to the Public Procurement Administration. 7.5 The Lack of Public Procurement Law Application The Montenegrin Olympic Committee (COK) has addressed to the Ministry of Finance with a request to be excluded from the list of legal entities subject to the Public Procurement Law, by referring to Article 2, Paragraph 1, Item 3 of the Law. Given that: COK is not an international organization, COK is on the list of legal entities subject to applying the Public Procurement Law, and that spending of public funds is in question, it is deemed necessary that COK should respect the principle of economy and efficiency of the use of public funds, the principle of ensuring competition and competitiveness of the procedure, as well as the principle of equality, and it should apply the Public Procurement Law. 7.6 Materially Significant Irregularities and Recommendations Recommendations:

It is recommended to the spending units, which have not done so yet, to appoint a person for conducting the tasks of a public procurement officer in compliance with Article 58 of the Public Procurement Law and to adopt public procurements plan in compliance with the legally established time limits, with the mandatory submission to the Public Procurement Administration.

It is recommended to the spending units to implement public procurement using the appropriate procedure in relation to the nature and the estimated value of the subject of a public procurement, in compliance with Article 20 and Article 21 of the Public Procurement Law (“Official Gazette of Montenegro”, № 42/11).

It is recommended to the spending units to provide that the annual scope of public procurements executed by direct agreement do not exceed the prescribed limit, in compliance with Article 30 of the Public Procurement Law.

It is recommended to all the spending units to ensure correct recording of the required data on awarded public procurement contracts and thus enable drawing up of a complete and accurate Report, in compliance with Article 117 and Article 118 of the Public Procurement Law.

Documents

PART I AUDIT REPORT ON FINAL STATEMENT OF ... Audit Report on the Final...i.e. data presented in the Bill on Final Statement of Accounts of the State Budget of Montenegro for 2012