1. Fiscal Principles or Rules (Design— High; Effectiveness—Low)

27. Montenegro has several fiscal rules aimed at providing a firm and stable anchor for the medium-term budgetary framework. These rules were adopted with the approval of the LBFR in 2014. The framework attempts to ensure fiscal sustainability by complementing the constraints for government debt and deficit, with limits on government spending and contingent liabilities. The framework is applicable to the general government, though the limits from the rules are mostly on the central government. The LBFR also includes rules at the general government level. Table 3.1 presents a summary of the rules in the LBFR and the most recent outturn.

^{Table 3.1}

Fiscal Rules in Montenegro

Source: IMF Staff estimates based on the 2020 Final Accounts Notes:

^*All numbers refer to 2020 final accounts unless stated otherwise.

^**Outstanding government guarantees issued by the Government of Montenegro on foreign and domestic loans as reported on the General Government Debt for the year 2020.

^***All criteria refer to Central Government with the exception of the Local government deficit.

⁺Information not available to the mission.

^{Table 3.1}

Fiscal Rules in Montenegro

Criteria***	Indicator	Most Recent Outturn*	Article in Law
Primary Fiscal Balance	Positive	-6.65%	Article 19
Current Expenditures and transfers	Lower than revenues and grants	EUR -236.6m	Article 19
Budget deficit	Less than 3% of GDP	-8.9%	Article 20
Public Debt	Less than 60% of GDP	105%	Article 20
Growth rate of current budget ceilings and state funds	Less than real GDP growth forecast	NA+	Article 22
Growth of capital budget and reserve	Less than nominal GDP growth forecast	NA+	Article 22
Total guarantees	Less than 15% of GDP	5.1%**	Article 53
Local government deficit	Less than 10% of local revenues	NA+	Article 27

Source: IMF Staff estimates based on the 2020 Final Accounts Notes:

^*All numbers refer to 2020 final accounts unless stated otherwise.

^**Outstanding government guarantees issued by the Government of Montenegro on foreign and domestic loans as reported on the General Government Debt for the year 2020.

^***All criteria refer to Central Government with the exception of the Local government deficit.

⁺Information not available to the mission.

View Table

^{Table 3.1}

Fiscal Rules in Montenegro

Criteria***	Indicator	Most Recent Outturn*	Article in Law
Primary Fiscal Balance	Positive	-6.65%	Article 19
Current Expenditures and transfers	Lower than revenues and grants	EUR -236.6m	Article 19
Budget deficit	Less than 3% of GDP	-8.9%	Article 20
Public Debt	Less than 60% of GDP	105%	Article 20
Growth rate of current budget ceilings and state funds	Less than real GDP growth forecast	NA+	Article 22
Growth of capital budget and reserve	Less than nominal GDP growth forecast	NA+	Article 22
Total guarantees	Less than 15% of GDP	5.1%**	Article 53
Local government deficit	Less than 10% of local revenues	NA+	Article 27

Source: IMF Staff estimates based on the 2020 Final Accounts Notes:

^*All numbers refer to 2020 final accounts unless stated otherwise.

^**Outstanding government guarantees issued by the Government of Montenegro on foreign and domestic loans as reported on the General Government Debt for the year 2020.

^***All criteria refer to Central Government with the exception of the Local government deficit.

⁺Information not available to the mission.

28. The Fiscal Policy Guidelines (FPG) is a rolling medium-term fiscal framework that is prepared annually and informs the budget process. The FPG covers the budget year plus two forward years and is adopted each year by the Government by the end of April. The FPG presents the medium-term objectives of economic policy, projections of macroeconomic indicators and fiscal aggregates according to the economic classification. It also distinguishes between current and capital budgets but not between ongoing and new projects. Finally, the FPG shows fiscal aggregates of economic and fiscal policy against the fiscal rules.

29. While the legal framework on fiscal rules exists and the FPG is regularly prepared and adopted, its effectiveness is questionable as compliance seems limited. The debt level has exceeded the target of 60 percent of GDP since the adoption of the fiscal rules in 2014 and maintained an increasing trend for the last three years, from 64 to 105 percent of GDP. The government’s plans to adjust the budget towards compliance with the fiscal rules were not successful. Additionally, the LBFR does not have escape clauses that allow the government to breach the rules in case of certain predetermined events. The FPG does not provide information on previous years’ compliance of fiscal rules, which are only monitored ex-post by the State Audit Institution (SAI). The average deviation between the FPG and approved budget deficit is about 1.6 percent of GDP, since 2018, while the average budget balance outturn deviates from the fiscal rule (3 percent) by about 1.9 percent of GDP (Figure 3.4).

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Fiscal Rules Compliance

Citation: IMF Staff Country Reports 2022, 166; 10.5089/9798400210891.002.A001

Source: Ministry of Finance and Social Welfare

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30. The government is reviewing options to strengthen the enforcement of fiscal rules. Amendments to the LBFR would aim at increasing the effectiveness of fiscal rules by strengthening ex-ante monitoring and ensure these are followed. Among the options being analyzed is the creation of a fiscal council to assess if fiscal plans are consistent with existing rules, which could help assess whether major projects are consistent with fiscal sustainability.

2. National and Sectoral Plans (Design—Medium; Effectiveness—Low)

31. Montenegro’s formal strategic framework is based on a hierarchy of documents flowing from the government’s political vision and international commitments (Figure 3.5). The government’s overarching national vision and strategic objectives are contained in the ”Development Directions” document¹⁰, which sets out policy objectives for a four-year period and is independent of the government’s mandate timeframe. The Government’s Medium-Term Work Program and the Fiscal Strategy is prepared by each new government, setting out policy objectives for its four-year term in office. Strategies related to EU accession, including the Economic Reform Program (ERP), also contribute to the high-level strategic priorities. Beneath this level, the strategies produced by infrastructure-focused spending units are accompanied by two-year action plans which include details of investment-related activities, their expected costs, performance indicators and targets (mainly, outputs, and, in limited cases, also outcomes) over the medium term.

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Policy Planning System in Montenegro

Citation: IMF Staff Country Reports 2022, 166; 10.5089/9798400210891.002.A001

Source: Secretariat-General’s Office of the Government of Montenegro

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32. The strategic planning framework does not effectively guide resource allocations to public investments in practice. Its effectiveness is hampered by the high fragmentation of the planning framework; limited coordination among initiatives without a focus on investment; and absence of a strong link between planning and the budget resource envelope. Numerous strategies are produced (e.g., an estimated 89 currently, down from 120 in 2017), with sectors served by varying numbers of strategies and timeframes, which either overlap or leave gaps. Some strategies focus on an individual policy (program) area within a specific sector or in the context of improving services in that sector. Sector strategies’ action plans contain some projects found in the budget, with high-level cost information, but the strategies have not been produced within a resource constraint and the costing information covers only two years.

33. Despite some recent reductions in the number of strategies, improved alignment of strategies to capital programs and budgets is still a work-in-progress. The government’s 2018 Decree on the Methodology and Procedure for Drafting, Aligning and Monitoring of the Implementation of Strategy Documents, and accompanying guidelines, sets out the minimum quality criteria for all strategy documents. While the details of some on-going and planned capital projects are set out in the Action Plan to the Development Directions, which is unusual in a high-level strategic document, spending units do not appear to use it when planning their investment resource allocations. The Action Plan itself is updated regularly, and its purpose appears to focus on reflecting what has been agreed rather than guiding forward planning decisions at spending unit level. The new program-budget format provides an opportunity for authorities to link capital budget expenditures explicitly to the government’s strategic objectives. The Decision on the capital Budget and evaluation of criteria also requires that projects are included in a strategic document adopted by the government for its inclusion in the budget.

3. Coordination Between Entities (Design—Medium; Effectiveness—Medium)

There is no legal requirement for coordination of capital spending between SNGs and the central government, though it occurs indirectly through different channels. The existing framework ensures that information on SNGs’ capital investments is shared with the MoF as part of the approval process for local budgets. Because the MoF does not approve which initiatives are included in the SNGs budgets, this sharing of information does not ensure that capital investment priorities between levels of government are aligned, nor complementarities are identified. Box 3.2 identifies some channels through which coordination takes place.

34. Coordination improves as projects become more complex and require additional central support, such as direct funding or debt guarantees. Major capital investments by SNGs are normally financed by the central government and are published as part of the state budget. This support gives the MoF a window to ensure that it approves only those initiatives that are aligned with and complementary to the central government’s priorities. Projects financed directly from local budgets will not be found alongside central government investments, limiting the capacity of the MoF to develop a database of capital projects at the local level.

35. There are no capital transfers to SNGs, as financial support for SNGs capital projects is provided directly from the state budget. By March 15 SNGs must submit to the MoF the list of projects requiring central government support, with the final decision taken by government in July of the same year; the selected projects are implemented by the central government. The final amount available to projects proposed by SNGs will only be confirmed once the budget for the upcoming fiscal year is approved, which can be a few weeks before the start of the fiscal year, or even later as is the case with the budget for fiscal year 2021.

36. Information on contingent liabilities arising from the projects of SNGs, SOEs, and PPPs are not fully reported to the central government and are not presented in the budget documents. The Directorate for Local Self-Government and State-Owned Companies maintains a register of SOEs and undertakes some basic financial analyses of SOEs, though a consolidated report on SOEs is not prepared. The contingent liabilities arising from PPPs and from capital projects financed by the municipalities are not reported to the government, either at central level or at the level of individual budgetary units. The debt department of the MoF does maintain an updated database on guarantees provided to SNGs, which is published in quarterly and annual debt reports, most of which are financing capital investments.

4. Project Appraisal (Design—Low; Effectiveness—Low)

37. Major capital projects are not subject to rigorous, technical, economic, and financial analysis. Few projects within the Single Project Pipeline (SPP) (see institution 10) are backed by robust feasibility studies. These studies are normally prepared by external consultants, following project appraisal methodologies and procedures of the financier, and not available to the public.¹¹ Institutional capacity for preparing feasibility studies or project proposals for major projects is limited. No central support or regular training for project appraisal is provided to line ministries or SNGs. The MoF lacks the capacity to assist institutions responsible for preparing pre- or feasibility studies. Basic parameters for project appraisal, such as the economic cost of capital or shadow price of labor, are not estimated or published by a central agency. Few projects include risk analysis in the appraisal studies. The SAI highlighted poor planning, costing, and preparation of projects in the education and health sectors.¹²

38. Actions to strengthen project appraisal have been adopted but fall short of ensuring a rigorous technical, economic, and financial analysis. The 2018 “Decision on drafting the capital budget and determining and evaluating criteria for selection of capital projects” (hereafter the Decision) established a methodology and a procedure for the preparation and planning of implementation of capital investment projects. The Decision requires investment proposals above EUR 5 million to at least have feasibility studies and cost-benefit analysis (Article 4). Preparation of project profiles or pre-feasibility studies are not required, reducing opportunities for screening projects at an early stage, making it difficult to discard sub-standard projects before they gain momentum (political or public support). Appendix 3 provides an example of the stepwise project appraisal process used in Chile.

39. The project appraisal indicators required by the Decision and complementing regulation are not a methodology for project appraisal.¹³ The project proposal form helps standardize the presentation of project information and the approval process, but do not guide public sector institutions for preparing a project appraisal at the concept, pre-feasibility or feasibility stages.¹⁴ Key aspects of a project appraisal methodology, like calculating financial and economic indicators, are not required as part of the Form for Application for Capital Project Funding. Project risk information could be more specific, particularly the quantitative one, to provide the MoF a better understanding of its project’s risk profile. Risk analysis is available for major projects within feasibility studies prepared following EU or IFI guidelines, but not for domestically financed projects.

5. Alternative Infrastructure Financing (Design—Low; Effectiveness—Medium)

40. Competition in infrastructure markets is hampered by SOEs involvement in key economic sectors. SOEs are involved in multiple sectors of the economy but there has been progress in opening the market up to the private sector.¹⁵ A 2020 EBRD report estimates that SOEs represent 5.5 percent of GDP, which is slightly lower than for other countries in the Western Balkans.¹⁶ Monopolies in energy (EPCG), water supply and rail (ZPCG) dominate the provision of infrastructure in these sectors, though there have been recent private investments in hydro and wind power plants. There are also ongoing efforts for electricity generation by private citizens.

41. The overall SOE oversight framework is weak, with limited revision of investment plans and financial performance by the MoF. The Directorate of Local Self-Government and State-Owned Companies receives information on investment plans but does neither consolidate nor publish this information report. Information is mostly available for projects that receive government support through on-lending or guarantees. SOEs’ business plans, which include investment initiatives, are not approved by supervisory bodies. A timeline of MoF’s plans to improve the oversight function is not available.

42. The independence of economic infrastructure regulators is prescribed by Law but not guaranteed in practice. The Energy Regulatory Agency (ERA) regulates, approves, and publishes tariffs for electricity or gas supply based on a defined formula, but the Government can adjust a portion of the tariff.¹⁷ The ERA is also the regulator in the water sector, though it is still in the early stages of being operational. The railway company (ZPCG) is majority owned by the government and determines the pricing structure for rail services, which should cover the operational cost, maintenance, and wages, but there is a possibility of subsidy from Government if needed, or cross-subsidization between passenger and freight transport services.¹⁸

43. Recent improvements to the PPP framework should support the development of PPPs. A new PPP law introduced on December 2019 has wide institutional and sectoral coverage and provides an institutional framework for the preparation and implementation of PPPs.¹⁹ The law established the Montenegrin Investment Agency (MIA), which took on the roles of several entities previously involved in the promotion of PPPs. The MoF is still in the process of compilating a PPP policy, which is expected to be completed by end-2021. The effectiveness of the new arrangement prescribed by the PPP law was not assessed as there are no PPP projects under the new PPP Law and guidance of MIA. There is no consolidated record of PPPs in Montenegro, and limited data about PPPs is available through the official reports of bodies in charge of their implementation, such as the Concession Commission.

44. PPPs are not fully integrated with the overall public investment management process. PPPs are implemented in accordance with the PPP law, which sets different procedures for project development, selection and appraisal compared with traditionally-procured projects. There is no explicit requirement for assessments of budget affordability beyond the medium-term fiscal framework, nor guidelines in place for doing so. Irrespective of the funding sources and procurement method, all projects should follow a unified gateway process to ensure projects proceed on their merits (Appendix 5). Fiscal risk assessment methodologies should be developed to ensure the government does not bear excessive risks and inform mitigation strategies.

Recommendations

Issue 1: Lack of a clear and cohesive strategic planning framework undermines the government capacity to identify the most efficient way to allocate public investment resources in the medium term.

Recommendation 1: Streamline and consolidate the current strategic framework into a hierarchy headed by a clear and achievable set of high-level policy goals, and a rationalized set of sector strategies which are directly aligned to achieving the high-level goals and which provide sufficient guidance to determine medium-term budget allocations. (December 2021; Secretariat-General’s Office, MoF and sector ministries).

• Set out a formal strategic planning structure and hierarchy for the central government, based on a single national strategic anchor and a limited number of sector strategies (covering inter alia capital investment) to be specifically aligned to the anchor.

• Undertake a stock-take of current strategies by sector and reduce the number of sector-specific strategic documents to only 1 per priority sector.

• Determine an overall public investment fiscal envelope for the duration of the strategic documents.

• Issue guidelines to spending units on aligning medium-term capital budget allocations with sector planning goals.

Issue 2: Contingent liabilities arising capital projects of SNGs, SOEs and PPPs are not regularly reported to the MoF and the legislature and not presented along with budget documentation (SNGs, SOEs, or PPP).

Recommendation 2: Improve management of contingent liabilities from capital projects sponsored by SNGs, SOEs, and those procured through PPPs (December 2022; MoF)

• Complete a stock take exercise to identify contingent liabilities from major projects.

• Include in the budget documentation a summary of contingent liabilities related to major projects, e.g., part of the fiscal risk statement/chapter in the Fiscal Policy Guidelines.

Issue 3: Lack of a standard methodology for appraising capital investment projects undermines quality project preparation and reduces effectiveness of a centralized project review function.

Recommendation 3: Develop appraisal methodologies for project preparation and provide centralized guidance on their implementation to increase quality of project proposals. (December 2022; MoF and NIC)

• Develop guidelines and manuals that guide project preparation.

• Estimate national parameters for economic appraisal.

• Train officers from line ministries and other agencies responsible on project preparation.

Issue 4: No central support is provided to line ministries on project preparation and review, who lack capacity to prepare projects or act as effective counterparts to external consultants undertaking complex project appraisals.

Recommendation 4: Strengthen central support provided to implementing ministries and agencies by creating a central team of professionals focused on project appraisal and review. (July 2022; MoF and NIC)

• The team of experts should be capable of providing support on:

  • i. preparing ToR’s for contracting pre-feasibility or feasibility studies,

  • ii. acting as counterparts for the review of such studies,

  • iii. reviewing project appraisal documents of large projects to ensure initiatives projects provide public value before projects are presented for selection,

  • iv. preparing ex post evaluations of selected projects.

• The team of experts should define guidelines for project appraisal and national parameters to be used across all capital project regardless of sources of funding.

Issue 5: Independent external expert review of complex infrastructure projects is currently not required. This is a good practice to ensure that projects are thoroughly reviewed before starting.

Recommendation 5: Adjust regulation to require that projects meeting certain criteria be subject to an independent review by external experts. (July 2022; MoF)

• Establish the criteria and indicators to be used to identify which projects should be subject to this external evaluation process.

Issue 6: Central oversight of PPP projects and capital investment plans of SOEs is not comprehensive enough, and proper guidelines and procedures for central review and assessment not in place.

Recommendation 6: Develop guidelines and gateway procedures for the central review and assessment of PPP projects and capital investment plans of SOEs. (June 2022; MoF, Directorate for Local Self-Government and State-Owned Companies, PPP Unit)

• Develop methodologies and guidance for assessing value for money of different procurement options, budget affordability, and fiscal risk assessments.

• Establish gateway procedures for central review of projects.

• Report PPP commitments and contingent liabilities to MoF and in the Budget Message.

• SOEs’ investment plans should be submitted to MoF during the budget preparation process.

• Publish SOEs’ capital investment plans alongside the state budget documentation.

6. Multi-year Budgeting (Design—Medium; Effectiveness—Low)

45. Montenegro’s capital budget preparation process includes some elements of a baseline approach to medium-term projections (Article 30 of the LBFR). Rolling three-year ceilings for capital expenditures are provided annually in the Guidelines for Fiscal and Macroeconomic Projections (MTEF document). These ceilings are provided in aggregate form for two agencies, the DT and the PWA, which centralize project implementation. The rationale for such centralization is to streamline resource allocations for the implementing agencies with higher implementation capacity. In contrast, within the current budget medium-term ceilings are provided for each accountable institution (primarily, ministries) who are responsible for the execution.

46. The 2021 Annual Budget law introduced a new program budget format that is presented only for the budget year, with not publication of total constructions cost of major projects. In the 2021 Annual Budget Law projects are classified under the relevant program and sub-program according to the relevant implementing agency. The estimated total construction cost for each capital project is provided in the narrative section of this document, as a lump sum under the relevant program and sub-program for each project. However, projections of the total construction costs of major capital projects are not disaggregated by year over a medium-term period.

47. In practice, the budget process does not provide consistent and credible multi-year projections for capital expenditures. Only first year ceilings are binding, with indicative ones for the outer years. Weak credibility is evidenced in the comparison of medium-term ceilings in successive MTEFs with actual expenditures in each year (Figure 3.6). For the datapoints available, the outturn fluctuated between 26 and 183 percent of the ceiling forecast. In the budget, an analysis of outer-year projections shows that there are multiple instances of the same projected amounts being included for both the second and third years, which may reflect implementation plan issues or the lack of reliable project information (Institution 14). Furthermore, changes in total project costs from one budget to the next are not explained in a published document.

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Credibility of Medium-Term Ceilings Over Time (EUR million)

Citation: IMF Staff Country Reports 2022, 166; 10.5089/9798400210891.002.A001

Source: Guidelines on Macroeconomic and Fiscal Policies (Capital Budget aggregate ceilings), and Annual Accounts (Capital Budget aggregate outturns), MoFNote: The data are based on ceilings set out in the Macroeconomic and Fiscal Guidelines (MTEF). Some data are not included in the figure because the government did not adopt the 2017-20 Guidelines, and the 2016-19 Guidelines were prepared but not published.

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7. Budget Comprehensiveness and Unity (Design—High; Effectiveness—Medium)

48. Public investment projects are prepared, budgeted and undertaken through the capital budget.²⁰ The capital budget focuses on the creation of new, or the reconstruction of existing, non-financial assets, while acquisitions of non-financial assets with a life-span of fewer than five years (across any sector) are included in the current budget.²¹ Coverage of capital projects is comprehensive of GoM resources, external loans and grants, with no capital project spending undertaken by extra-budgetary entities (indirect budget users) from their own resources. Both budgets use the program, functional and economic classifications, and source of funding.

49. However, despite good coverage of capital projects from these resources, more detailed information on projects by their financing source is not easily available. The budget documents do not include systematic breakdowns of financing information for all projects, or projects undertaken by SOEs; there are no ongoing PPPs on which to present information in the budget documents. The quarterly budget reporting forms request breakdowns by sources of financing but the examples provided to the team showed incomplete information, and more comprehensive information on disaggregated actual expenditures for the capital budget were not available.

50. Information on wider public sector investment, specifically that being undertaken by SOEs, is not provided in the budget. Despite the limited information on SOE public investments (Institution 5), the government has extended loan guarantees to SOEs for almost EUR 400 million (15 percent of GDP), of which EUR 140 million are still outstanding.²² Ensuring that Parliament considers the budget in the content of total public investment from all sources of funds would improve its legislative scrutiny and highlight areas of potential fiscal risk. Countries with comprehensive budget documentation, provide annexes with information on public investment projects undertaken by SOEs, PPP commitments, and multi-year expenditure information on sources of funds for all projects.

51. Budget unity is undermined by the institutional fragmentation of capital budget preparation and implementation, and its lack of integration with current budget process (Table 3.2). Spending institutions (e.g., ministries, departments, and agencies) do not have full control of their sectoral spending as capital budgets are appropriated and implemented through the DT and the PWA. While both capital and current budget preparation is managed by the MoF, the two budgets are presented in different sections in the Law on the Annual Budget and in the full budget documentation; both budgets are presented separately by accountable institution, program, and sub-program. Thus, capital, and current budget program expenditures are not shown together under each relevant spending unit, which may not always be informed or aware of the current implementation status of the projects in their sector. Some countries (e.g., Chile) have used service agreements between policy ministries and implementing agencies, which allow the capital budget to be allocated to the former with the execution undertaken by the latter (Appendix 6).

^{Table 3.2}

Main Institutional Responsibilities for Capital Budget Projects

Source: IMF staff

^{Table 3.2}

Main Institutional Responsibilities for Capital Budget Projects

Stage in project Cycle	Spending Unit	TD / PWA	MoF	Government / Parliament
Project concept development / initial design	X
Pre-selection	X
Project appraisal (no independent review)	X
Project list compilation	X		X
Project selection for budgeting			X	X (G)
Preparation of capital budget documentation		X	X
Ceiling-setting/Budget appropriation		X	X	X (G,P)
Cashflow projections for projects in budget		X	X
Virement (reallocations, e.g., btw projects)		X	X	X (G)
Reporting – financial and physical		X	X	X (G, P)

Source: IMF staff

View Table

^{Table 3.2}

Main Institutional Responsibilities for Capital Budget Projects

Stage in project Cycle	Spending Unit	TD / PWA	MoF	Government / Parliament
Project concept development / initial design	X
Pre-selection	X
Project appraisal (no independent review)	X
Project list compilation	X		X
Project selection for budgeting			X	X (G)
Preparation of capital budget documentation		X	X
Ceiling-setting/Budget appropriation		X	X	X (G,P)
Cashflow projections for projects in budget		X	X
Virement (reallocations, e.g., btw projects)		X	X	X (G)
Reporting – financial and physical		X	X	X (G, P)

Source: IMF staff

8. Budgeting for Investment (Design – Medium; Effectiveness – Medium)

52. The existing PIM framework provides reasonable protection to investment projects during implementation. Within the medium-term capital budget framework, project expenditures are appropriated on an annual basis, with indicative projections for two outer years. Information on total project costs is included in the budget documentation, specifically in the narrative section of the capital budget for each project. This was first done for the 2021 budget, so there is no baseline with which to compare current forecasts and no explanations of changes in projects’ costs. There are no multi-year appropriations or information on multi-year commitments. Transfers from capital to current budgets are prohibited by Article 47 of the LBFR and the SAI confirms that virements do not take place in practice.

53. Completing on-going projects is an explicit priority for the government, for the length of project implementation. The Annual Budget Laws for the last three budgets (2019-2021) include a statement to the effect that the overwhelming majority of the capital budget is for the continuation and completion of ongoing projects.²³ Budget submission forms require spending units to provide separate submission requests for ongoing and new projects. There are no appropriation-based mechanisms in place to protect funding of ongoing projects (e.g., commitment appropriations). However, that a project is already under implementation is an explicit criterion in the budget selection process undertaken by the selection commission.²⁴

54. Overall, there is reasonable protection for ongoing projects, but this is facilitated by the dominance in the capital budget of a single project whose completion is a priority (see Figure 3.7 for the effect on capital infrastructure investment deviations). In practice, this means that most projects in the capital budget (in terms of volume) are small, and it is more difficult for a broader group of projects of significance (in value terms) across sectors to be included. In particular, delays in the completion of the large project have a knock-on effect on the introduction of other priority infrastructure projects to the extent of remaining compliant with the fiscal rules.

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Deviations in Capital Investments Between Outturns and Planned

(EUR million)¹

Citation: IMF Staff Country Reports 2022, 166; 10.5089/9798400210891.002.A001

Source: Government Final Accounts¹ The data exclude capital equipment.

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9. Maintenance Funding (Design—Low; Effectiveness—Medium)

55. Budget allocations for maintenance are not underpinned by minimum required standards covering each type of asset, for either current or capital maintenance. There are few methodologies in place to determine the minimum maintenance requirements for individual asset types, the associated cost calculations, and budget requirements. An example is the methodology used for routine maintenance of roads. Even when some sort of guidance exists, there are important gaps in the coverage of methodologies for certain high-cost types of infrastructure (e.g., bridges), which undermines the usefulness of these estimates. This is of particular concern given that the complexity of the BBH, which will likely require substantial maintenance expenses and are yet to be defined.

56. Investment maintenance is based on medium-term plans adopted by the government, but it is not clear if a methodology backs these estimates, and compliance is weak. In roads, for example, the authorities refer to the Plan for Regular and Investment Maintenance, Reconstruction and Construction of State Roads, which is adopted annually by the government. This document is compiled by the DT based on data inputs, e.g., field conditions as assessed by manual visual inspections. However, a 2019 SAI performance audit²⁵ found that the DT did not prepare and submit to the government a medium-term program for the development and maintenance of state roads, as required. Thus, the choice of capital maintenance projects for state roads was not based on a prioritized list of maintenance activities, assessed against pre-defined objective criteria, covering traffic levels, technical, economic, and environmental criteria.

57. Both current (routine) and capital (investment) maintenance spending are planned over a medium-term period and are published in the Annual Budget Law and the associated budget documentation. The presentation and reporting of maintenance expenditures is set out in Article 6 of the LBFR. Current maintenance is included in the Current Budget according to the economic classification, and capital maintenance is shown under individual projects in the 2021 Capital Budget.²⁶ In previous budget years, capital maintenance was shown not by individual projects but by programs. Actual expenditures for both current and capital maintenance are included in regular in-year and end-year (annual) budget execution reports by spending unit and program but not by individual project.

58. Despite the aforementioned shortcomings, planned and actual maintenance expenditures fared better than may have been expected. Expenditures on infrastructure maintenance²⁷ (capital and current) averaged approximately 10 percent of total expenditures on infrastructure annually over the last four years (Figure 3.8). Trends in planned and actual maintenance on infrastructure are shown in Figure 3.9.

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Maintenance Spending on Infrastructure

(Share of total infrastructure expenditures)

Citation: IMF Staff Country Reports 2022, 166; 10.5089/9798400210891.002.A001

Source: Government Final Accounts¹ Data exclude maintenance on equipment.

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Planned and Actual Infrastructure Maintenance Expenditures¹

Citation: IMF Staff Country Reports 2022, 166; 10.5089/9798400210891.002.A001

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59. With the planned expansion in the financing sources for capital investment (e.g., PPPs) efforts are underway to develop a more systemized approach to maintenance planning and budgeting. There are plans to develop methodologies for determining sector- and asset-specific maintenance requirements and the preparation of asset registers, including the identification of a periodic update process, has begun (Institution 15). This data should help determine the costs of required maintenance and underpin maintenance expenditure planning for the budget. (Appendix 7 discusses the implications of maintenance planning and budgeting for large and/or complex projects).

10. Project Selection (Design—Medium; Effectiveness—Medium)

60. Montenegro has taken steps to align project selection to international good practices. The Budget Law and the “Decision on Drafting the Capital Budget and Determining and Evaluating Criteria for Selection of Capital Projects” (the Decision) established a process, criteria and scoring parameters to guide project selection. The “Methodology for Selection and Prioritization of Infrastructure Projects” defines a process for the selection of strategically significant infrastructure projects to be included in a pipeline of investment projects, that classifies projects based on their level of preparedness (Appendix 7). Central entities were created or assigned the function of screening investment projects before selection for funding (e.g., domestic, external, or private). Standardization was enhanced through the creation of templates designed to capture key project information to be used in the selection process (e.g., a “Form” that must be submitted to the MoF for projects to be considered in the selection process).

61. Significant shortcomings in project information undermines the selection process. Supporting documentation, such as feasibility or environmental studies, is not required to be sent to the screening entities, even though project templates require the sponsor to indicate if these have been prepared. Even if the studies are available, the weaknesses in project appraisal (see Institution 4), raises concerns on the quality of the information; cost information can be preliminary and implementation plans may need revision or are non-existent.²⁸ It is common for projects to be presented without having supporting pre-feasibility or feasibility studies, or at least a good project concept (project profile) for smaller projects.²⁹ Major projects should be assessed by an independent expert, but these documents are not published. These issues imply that decisions are taken limited information, or that the quality of the supporting studies cannot be assessed. As a result, the centralized project screening process has become focused not on the quality of the appraisals but on whether basic information was prepared.

62. The procedures and criteria defined for project selection are not fully guiding the process. Projects can be selected for inclusion in the capital budget, as assessed by the government, even if they do not comply with all appraisal requirements established in the Decision or achieve a low score in the screening process done by the Commission. A review of the “Proposal of the List of Priority Capital Projects (LPCP) financed from the capital budget of the state in 2021” prepared by the Commission in July 2020 showed that, out of a total of 112 projects submitted for consideration, only 21 were included in the list submitted to Government.

63. The existing lists of projects cannot be considered a single project pipeline of projects ready for implementation. The main challenge is that projects fall into one of two lists depending on the potential funding source. The Unified List of Priority Infrastructure Projects (SPP) was created in 2015 following EU recommendations but only registers projects that are candidate for available EU funds, primarily the Western Balkan Investment Framework.³⁰ The LCPC prepared by the Commission based on the project submitted to the MoF contains initiatives only financed by from the state budget.

64. Key risk parameters for project selection are not part of the criteria for selecting projects to enter the project pipelines. Selection criteria do not include Indicators of a project’s risk are not within the selection criteria.³¹ The level of maturity of the project is a criterion for prioritizing the SPP, but it is not considered for projects which are candidates for government financing.³² The information on which the Commission scores projects are preliminary and incomplete given that preparatory studies are missing.

Recommendations

Issue 7 The lack of an effective medium-term budgeting process hampers the government’s ability to plan the appropriate resource flows to multi-year capital projects over the lifetime of both the projects themselves as well as of the constructed assets.

Recommendation 7: Improve the credibility of medium-term capital budget ceilings and forward projections and incorporate the calculation of life-cycle costs in medium-term budget plans. (December 2021; MoF and sector ministries)

• Include in the capital budget guidelines the requirement for spending units to include estimates of life-cycle costs for new and on-going capital budget projects as part of their budget submissions and to include medium-term operational and maintenance projections in the current budget under the relevant program for projects nearing completion

• Use a baseline approach to improve the credibility of medium-term capital budget ceilings

Issue 8: The lack of complete information on public capital investments hampers full legislative scrutiny and early warnings of areas of potential fiscal risk.

Recommendation 8: Improve the transparency of total public investments by including information on all sources of funds for public sector investments in the budget documents. (December 2021; MoF)

• Compile information on existing capital projects being implemented by SOEs and on future PPP projects.

• Include in the budget documents an annex containing information for SOE-managed capital project investments and their relationship to national strategic priorities.

Issue 9: The separation of current and capital budget planning hinders spending units from using resources efficiently to achieve government’s key public investment policy objectives.

Recommendation 9: Ensure responsibility for setting capital budget ceilings and determining budget appropriations, and thereby accountability to Parliament for these resources, is provided to the relevant sector ministries, instead of to the implementing Administrations, as currently. (December 2021; MoF)

• Revise the budget guidelines (overall and capital budget) to reflect these changes.

• Establish a mechanism (e.g., service agreement) for enabling the Administrations to have a role in implementing spending ministries’ projects.

Issue 10: The absence of a systematic approach to planning maintenance requirements risks higher public investment costs through the under-provision of necessary maintenance.

Recommendation 10: Introduce a systematized approach to maintenance planning for the budget supported by more comprehensive information on asset values, and quality, sector- and asset-specific methodologies. (June 2022; MoF, Ministry of Capital Investment and Ministry of Ecology, Spatial Planning and Urbanism)

• Prepare a prioritized list of key infrastructure assets

• Compile information on values and current conditions of priority infrastructure assets

• Prepare and document methodologies for maintenance planning and budgeting for the major infrastructure asset types, covering both routine (current) maintenance and major rehabilitation or reconstruction (capital or investment maintenance).

Issue 11: There are two pipelines of projects, most lacking good pre-investment studies, as candidates for budget resources or IPA funds. Selection criteria are not based on economic indicators and do not adequately consider important aspect like risks and project maturity.

Recommendation 11: Develop a single project pipeline independent of funding sources, which should incorporate additional criteria to inform project selection. (December 2022; MoF)

• Prepare list of all projects in current pipelines.

• Classify list of all projects in current pipelines according to their financing sources.

Recommendation 12: Improve existing criteria for project selection incorporating those aspects that are not currently being considered but are of key importance, including at least economic indicators, risk assessment and project maturity. (December 2022; MoF)

• Identify relevant additional criteria (economic, risk and project maturity)

• Incorporate these criteria into the regulations for project selection procedures

11. Procurement (Design— High; Effectiveness—High)

65. The public procurement process in Montenegro is open and transparent and major projects are tendered in a competitive process. The Public Procurement Law,³³ adopted in December 2019 and entered into force in July 2020, is broadly aligned with the EU acquis³⁴ and sets a legal framework for public procurement to be transparent and open to all companies based on non-discrimination and equal treatment. The law introduced competitive dialogue, partnership for innovation, and competitive negotiation procedures. It strengthened transparency and efficiency through the introduction of an e-procurement system, and simplified procedures, while enhancing monitoring and remedy systems. In 2020, Montenegro’s public procurement of goods, works, and services accounted for 13 percent of GDP, with over 73 percent of all procurement procedures completed through an open and competitive process.³⁵ The number of contracting authorities remained relatively high at 660, but the average number of bids submitted per tender offer increased to 2.3 from 2 in 2019.

66. The law outlines comprehensive transparency requirements, and the public has access to complete procurement information, but monitoring should be strengthened. An e-procurement system became fully operational in January 2021, and the entire public procurement process is now automated, with all information published in the system.³⁶ No major project has been fully tendered since the e-procurement system is still in its early stage of implementation, and, due to the delays in adopting the 2021 budget, no major project has yet been fully tendered electronically. The procurement procedures that started in 2020 are still carried out in a paper-based manner, but information on all its stages is available on the procurement portal.³⁷ Although the law stipulates that public procurement plans must be submitted to the Ministry of Finance by January 31, the PWA had not submitted one as of the beginning of July 2021.³⁸ Procurement is monitored by contracting authorities, the Ministry of Finance, the Commission for the Control of Public Procurement, and the SAI. The Public Procurement Inspectorate is performing inspection control, and in the period July-December 2020 executed 152 controls in 141 entities,³⁹ finding 44 irregularities.⁴⁰ The Ministry of Finance publishes annual reports on public procurement. Furthermore, the law prescribes contracting authorities to produce and submit to the Ministry of Finance semi-annual reports on implementation of public procurement. However, these are yet to be submitted⁴¹ and published, since in the first semi-annual period from the entry into force of the new law, contracting authorities were only asked to submit statistical reports.⁴² The e-procurement system does not yet produce standard statistical and analytical reports.

67. Procurement complaints are reviewed by an independent body and their recommendations are timely and published. The State Commission for the Control of Public Procurement is an independent body responsible for reviewing appeals related to public procurement, reporting to the Parliament. The new law introduced mandatory submission of public procurement appeals via the e-procurement system and increased the number of days for solving complaints to 30 calendar days from 15 in the former law, which can be extended by an additional 10 calendar days. In 2020, a total of 269 complaints were handled, and the Commission made timely decisions on each of them, reducing the average response time for deciding on a complaint from 30 and 21 days in 2018 and 2019, respectively, to 18 in 2020.⁴³ All decisions are published on the Commission’s website⁴⁴ and the e-procurement platform. Appeals against the Commission for the Control of Public Procurement can be made to the Administrative Court, the number of which was reduced to 38 in 2020 from 52 in 2019.

12. Availability of Funding (Design—High; Effectiveness—High)

68. Updated cash-flow forecasts are prepared monthly, and budget organizations are provided with commitment ceilings for the full fiscal year. Cash flow reports are prepared and, alongside monthly user expenditure reports, are submitted to the Treasury, which uses them to determine where funds can be re-allocated to other areas. The Treasury regularly prepares cash forecasts based on revenue and expenditure forecasts provided by the tax and customs administration and budgetary forecasts. There is day-to-day communication with the Budget Department and Contracting Agencies. Reports are prepared on a daily and monthly basis for internal use and cash monitoring.

69. Cash for project outlays is provided in a timely manner based on approved appropriations. There are no instances of cash rationing. According to the Treasury’s information, there are no significant arrears on investments and the average cash balance ensures timely payment of investment spending. A couple of projects under implementation were put on a reduced execution rate for two months in 2021, awaiting budget approval, but this caused only minor delays.

70. External financing is partially integrated in the main government bank account structure. There is a treasury single account (TSA) through which all central government payments are made. However, donor funding can be deposited in private commercial bank accounts as per the specific donor agreements. The funds in these accounts are transferred to the TSA before distribution for expenditure by the contracting agencies.

13. Portfolio Management and Oversight (Design – Medium; Effectiveness - Low)

There is portfolio oversight for major projects at Ministry and Agency Level, but not centrally. Systems are in place at the Directorate of Economic Policy and Development to gather timely data centrally, but the detail of the data is not adequate for decision-making, and there is no centralized oversight. Completed projects have only recently been incorporated in the reports. The data are documented in a quarterly report. Annual progress reports are monitored to ensure that there is oversight for projects. The latest progress report was issued in 2019. The Ministry of Education as well as the Ministry of Ecology, Spatial Planning and Urbanism both have portfolio management principles in place.

71. Funds can be re-allocated between domestically budget-funded projects, but not between projects with international funding. Re-allocation of funds is ruled by the LBFR, which allows fund re-allocation during implementation of up to 10 percent of the total amount between projects and program that are funded from the capital budget (LBFR Article 45), with the approval of MoF. All re-allocations are monitored and approved by the MoF.

72. Ex-post reviews are not conducted regularly for all major projects. Externally-financed projects are likely to be reviewed ex-post at the request of the lender, but reports are not necessarily published. Projects funded domestically are subject to the regular inspections required to close contracts, but these do not cover all of the issues covered in an ex-post review. Representatives from MoF, Ministries, and Agencies that met with the mission confirmed that ex-post reviews were not conducted regularly. The SAI has recommended that ex-post reviews be conducted for adjustments in the project implementation policies.

14. Management of Project Implementation (Design – Medium; Effectiveness – Medium)

73. There are multiple layers of project monitoring by senior officials, both of physical progress as well as financial costs, but implementation plans are not prepared in detail. Responsibility for monitoring physical and financial progress of projects rests with the respective Implementing Agencies.⁴⁵ The PWA commences with contracting, implementing, and commissioning once the capital budget is approved, but is not closely involved in the planning phase. Project managers from PWA conduct the management of project implementation and are joined by officials acting as project managers from line ministries (e.g., Education or Health). The extent of the contents of implementation plans could not be verified but officials from PWA and TA acknowledged the low quality, or non-existence, of plans when initiating the contracting process. Implementation plans are important for implementation readiness, as well as project maturity. Typical elements of a project implementation plan are illustrated in Appendix 9.

74. Management of project implementation by the Agency for Transport is conducted in detail. The Roads section in the Agency for Transport monitors project implementation by means of an Excel spreadsheet in all the required details to make management decisions as well as to track progress on a month-to-month basis. The report tracks physical progress, description of activities implemented so far, as well as financial progress, with applicable remarks for management decisions. Risks can also be identified. The report is a good example that could be implemented by other Agencies and Line Ministries as well.

75. There are rules for project cost adjustments, including a review of project rationale, but it is not systematically applied. The rules for project cost adjustment are clearly defined in the Law on Procurement, Article 151. Project costs for infrastructure projects may be adjusted by a maximum of 20 percent of the original contract value, without changing the scope of the original contract. Once the project cost adjustment exceeds 20 percent, the balance of the work must be advertised in an open tender. Approval from MoF is required before a cost adjustment is made. These rules are not utilized much as projects are relatively small and not adjusted regularly. Implementation of the cost adjustment procedure for a mega-project such as the Bar-Boljare Highway could not be verified. However, the overall cost of the project has increased due to additional works and currency depreciation without a review being published.

76. Ex post performance audits for nationally-funded projects are conducted on a yearly basis and audit reports are published. The SAI conducts performance audits on both on-going and completed projects. The audits deal with projects in detail, describe conclusions and require that the audited entities shall, within 30 days, submit to the SAI an action plan for the implementation of the recommendations, which contains measures, stakeholders, and deadlines. The Audit reports are also submitted to Parliament, for discussion. The performance audits currently do not include an audit of the planning and appraisal process of projects, which is a shortfall, as this is a critical stage of the project development.

15. Monitoring of Public Assets (Design—Medium; Effectiveness—Low)

77. Existing regulations provide support for relatively sound management of asset registers. The government’s Regulation on the Manner of Keeping Register of Movable and Immovable Property and the Stock-taking of State-Owned Assets requires that state institutions maintain a register of movable and immovable assets, and of shares. The registers should be updated through annual stock taking exercises and include, but are not limited to, data on inventory number, asset acquisition procedure, purchase, and book value. The updated records should be submitted to the Cadastre and State Property Administration (CDPA) by the end of February each year. The regulation also foresees that depreciation should be taking place.⁴⁶

78. Despite the existing regulations, monitoring of public assets is weak. Surveys of public assets are regularly conducted but condition assessments are not done. The government does not produce consolidated financial accounts including the value of non-financial assets and depreciation. Currently, the CDPA holds information on more than 500,000 assets but it does not consolidate it in a way that allows it to report or prepare any type of analysis. There is neither an assessment of the values nor conditions of reported assets, which are needed to have accurate depreciation figures and asset write-off dates.

79. The government is adopting measures to improve the management of asset registers. With the reorganization of the government at the beginning of 2021 two administrations responsible for asset registers were merged into the CDPA, reducing fragmentation. The CDPA is moving forward with developing the Asset Registry System (ARS), a centralized register of movable and immovable property, the development of which started in 2014, and is expected to be completed by the end of 2021. The new system should give access to direct (approximately 100) and indirect (approximately 350) users, including municipalities. The ARS is planned to be linked to the FMIS system managed by the Treasury, supporting timeliness of information, which should allow for developing practices for reporting and analyses. However, further upgrades would be needed for the system to register assets from SOEs.

Recommendations

Issue 13: The portfolio of major capital projects is not monitored in adequate detail and frequency to compile a progress report that is helpful for senior management to take well-informed decisions to ensure timely and within budget project implementation. Risks are also not managed.

Recommendation 13: Consolidate and review the portfolio of major projects to enable government to have an overview on the performance of all major projects. (December 2021; MoF, Line Ministries, Implementing Agencies)

• Detailed reports should be issued at least quarterly with all performance indicators required for informed management decisions regarding adjustments to project implementation.

• Progress reports should be submitted to MoF, Line Ministries and Agencies for their review and actions where required.

Issue 14: There is no systematic procedures for ex-post review which would enable government to adjust implementation policies and procedures on the basis of implementation experience.

Recommendation 14: Develop procedures for ensuring ex-post evaluations of major capital projects are completed and results shared with relevant stakeholders. (December 2021; Line Ministries, Implementing Agencies, MoF, Public Procurement)

• Establish regulatory requirement for ex-post reviews of investment projects that includes basic quantitative and qualitative performance assessment.

Issue 15: Detailed progress reports on the execution of major capital projects are not prepared in a timely manner and relevant information on project progress (e.g., projects risks) is not available to support management decision-making.

Recommendation 15: Develop a framework for reporting on major capital projects to ensure appropriate monitoring by implementing Agencies, MoF, and Line Ministries. (October 2021; Implementing Agencies, MoF, Line Ministries)

• Determine the periodicity of progress reports to be prepared by Implementing Agencies.

• Identify the physical and financial progress information required to support decision making that should be covered by these reports.

• Develop templates for the progress reports to ensure uniformity and allow comparisons across initiatives.