VZCZCXYZ2888
RR RUEHWEB

DE RUEHSQ #0169/01 0631245
ZNR UUUUU ZZH
R 031245Z MAR 08
FM AMEMBASSY SKOPJE
TO RUEHC/SECSTATE WASHDC 7134
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE 0231
RUEATRS/DEPT OF TREASURY WASHDC
RUEAIIA/CIA WASHINGTON DC
RUESEN/SKOPJE BETA

UNCLAS SKOPJE 000169 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EUR/SCE 
TREASURY FOR W. LINDQUIST AND T. PHILLIPS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON PGOV MK
SUBJECT:   MACEDONIA's MISSED CAPITAL INVESTMENT OPPORTUNITIES 
 
 
SUMMARY 
------- 
 
¶1.  (SBU) The GOM repeatedly has been unable to spend all the money 
it has allocated for capital expenditures, even though government 
infrastructure investments are a critical driver of sorely needed 
economic growth and employment.  Analysis of the budgeting process 
indicates that balky procurement regulations, constant budget 
adjustments due to poor financial planning, and bureaucratic 
inefficiency are to blame for the government's lower-than-projected 
spending.  End summary. 
 
MORE SPENDING! 
-------------- 
 
¶2.  (SBU) For several years, the GOM consistently has missed its 
capital expenditures targets, including spending for construction 
and rehabilitation of government facilities, roads, education and 
cultural facilities, and infrastructure for energy and utilities. 
Although targeted capital investments are important drivers of 
economic growth, the GOM again failed to maximize its capital 
investment expenditures in 2007.  Although the GOM agreed with the 
IMF to a deficit target of one percent of GDP for FY 2007, according 
to Ministry of Finance (MOF) officials, it ended with a 0.6% surplus 
due to higher-than-expected revenues and laggard spending.  Post 
developed this analysis of the reasons for the spending shortfall 
after discussions with MOF officials, the IMF Resident 
Representative, and such budget users as the GOM Road Fund. 
 
ESTABLISHING CAPITAL EXPENDITURE TARGETS 
---------------------------------------- 
 
¶3.  (U) The GOM's process for establishing budget targets, including 
capital expenditures, is relatively sophisticated largely due to an 
on-going Department of the Treasury technical assistance program. 
The budgeting process starts in March, with the development of the 
government's strategic priorities for the following year.  Using 
these priorities, the MOF's budget department develops a medium term 
plan establishing spending ceilings for each budget user, such as 
the Ministry of Transport.  After the Prime Minister and his cabinet 
approve the plan in May, a budget circular is prepared and sent to 
each user.  Budget users, in collaboration with MOF, outline 
proposed capital projects for the fiscal year.  Once initial GOM 
approval is granted, each user submits the completed circular to the 
MOF online.  The circulars are combined into a draft budget in 
August; readjustments are then negotiated with budget users.  The 
final draft is sent in November for Parliamentary approval, after 
which budget users may draw on allocated funds beginning in January 
of the new fiscal year. 
 
IF YOU HAVE IT, SPEND IT 
------------------------- 
 
¶4.  (SBU) Despite the collaborative nature of the budgeting process, 
many budget users consistently fall short of their proposed capital 
expenditures.  These shortfalls are caused by a combination of 
procedural delays and hindrances in the procurement process, 
constant adjustment of the budget due to poor financial planning, 
and bureaucratic inefficiencies which hinder the planning and 
execution of capital projects. 
 
 
LENGTHY PROCUREMENT PROCESS 
------------------------------ 
 
¶5. (SBU) Procedural roadblocks inherent in the previous law on 
public procurement are the factors most often cited as reasons for 
shortfalls in capital spending.  That procurement law included an 
unnecessarily long 60-day period for evaluating tenders.  Each 
winning bid required MOF budget department approval after completion 
of the tender to ensure that funds were actually available.  In 
addition, the appeals process was poorly managed and overwhelmed the 
commission assigned to review contested awards.  These factors 
combined to retard procurement spending and lengthen the tender 
decision process.  By law, unspent funds were returned to the 
National Bank at the end of the fiscal year.  That required budget 
users to request new funds for the following year, and hampered 
execution of multi-phase/multi-year projects.  The new law on public 
procurement, which became effective on January 1, reduces the 
deadline for deciding on tenders and removes the requirement for 
final bid approval from the MOF, which should help selected budget 
users execute capital spending plans with greater timeliness and 
efficiency. 
 
CONSTANT BUDGET READJUSTMENT 
----------------------------- 
 
¶6. (SBU) The GOM's habit of constantly readjusting the budget 
further complicates the procurement process.  During the year, the 
GOM usually sends to Parliament at least one "rebalanced" budget 
with new spending targets.  This adjustment process consumes 
administrative capacity and delays proposed tenders for capital 
projects until the rebalanced budget is accepted.  In FY 2007, the 
GOM rebalanced the budget twice.  While significantly 
greater-than-expected government revenues in FY 2007 triggered the 
first rebalancing, the second budget adjustment was implemented late 
in the fiscal year, leaving little time for new capital projects to 
be planned and executed.  Improved forecasting during the initial 
budget formulation process would reduce the need for such 
adjustments during the fiscal year. 
 
BUREAUCRATIC INEFFICIENCY 
-------------------------- 
 
¶7. (SBU) A third factor contributing to missed capital spending 
targets is bureaucratic inefficiency among individual budget users. 
Authority within ministries is highly centralized, with the minister 
required to approve all projects.  Procurement staff will not take 
initiative on proposed projects without executive guidance or 
approval, which contributes to delays.  Slow and unrealistic 
implementation planning further complicates the process.  Many 
budget users are aware in November of their likely funding 
allocations for the following fiscal year, but they do not begin to 
plan implementation of capital expenditures until after the budget 
actually passes the Parliament at the end of December.  Finally, 
fund disbursements are based upon annualized schedules, not 
realistic analysis of the procurement schedule.  The new procurement 
law permits 50 percent of unspent funds to be carried-over to the 
following fiscal year. 
 
IF YOU BUILD IT... 
------------------ 
 
¶8. (U) Despite obstacles inherent in the procurement process and 
bureaucratic decision-making cycle, some budget users do/do manage 
to meet their annual spending targets.  For example, the Road Fund 
achieved 110 percent of its FY 2007 targets, proving that realistic 
capital spending targets can be reached.  The Road Fund admittedly 
benefits from a highly focused mission, but it is likely that other 
budget users could achieve similar results if executive attention 
and administrative resources were properly coordinated.  The changes 
required under the new procurement law will assist in identifying 
other roadblocks in the capital expenditure process. 
 
FISCAL CREATIVITY IMPROVED 2007 STATISTICS 
------------------------------------------ 
 
¶9. (SBU) In late 2007, the GOM used a creative but short-term 
solution to meet its capital spending targets.  By the end of 
November, the GOM had spent only 65 percent of the amount budgeted 
for annual capital spending; by the end of December, however, the 
GOM miraculously had reached 98 percent execution of its capital 
spending target.  The GOM achieved this apparent turnaround by 
quickly proposing new capital projects and transferring money to 
municipalities or independent government agencies to implement those 
projects.  This allowed the GOM to disburse FY 2007 funds before the 
end of the year, while municipalities or independent agencies were 
given the opportunity to actually spend the money in the next 
calendar year. 
 
COMMENT 
-------- 
 
¶10. (SBU) Macedonia's public infrastructure needs significant 
investment, so it is unfortunate that the GOM has been unable to 
make full use of its available funds.  While the spending shortfalls 
have been consistent over the past several years, the new 
procurement procedures should ameliorate one of the causes of low 
capital spending.  However, the new procurement law will not address 
other obstacles to effective capital spending, including constant 
budget adjustments and bureaucratic inefficiency.  Until those 
issues are resolved, the GOM is likely to continue using legal, but 
questionable, end-of-year transfers to municipalities and other 
government agencies to ensure capital spending targets are met. End 
comment. 
NAVRATIL