January 2017 Establishing a Fiscal Risk Management Department in the Ministry of Finance of Serbia World Bank Disaster Risk Financing and Insurance Program World Bank Europe and Central Asia Disaster Risk Management Establishing a Fiscal Risk Management Department in the Ministry of Finance of Serbia World Bank Disaster Risk Financing and Insurance Program World Bank Europe and Central Asia Disaster Risk Management Acknowledgements This review was prepared by a World Bank team composed of The team acknowledges helpful inputs and comments received at Benedikt Signer (disaster risk finance and insurance specialist), various stages from Martina Dalic (International Monetary Fund), Vica Bogaerts (disaster risk management specialist), and Martin Cigdem Aslan, Samantha Cook, Jonas Fallov, Olivier Mahul, Lazar Luis Alton (disaster risk finance and insurance specialist), with Sestovic Srdjan Svircev, Ashley Taylor, Ana María Torres, and support from Edward Kuhn (disaster risk finance and insurance Joaquin Toro (all World Bank), and Murray Petrie (consultant). consultant). The functional review that informed this note was Anne Himmelfarb edited the report. carried out by Professor Dragan Lončar, Faculty of Economics, University of Belgrade, with assistance by Filip Stojanovic. The team is grateful for financial support from the government of Switzerland, which made this project possible. This work was Preliminary findings of this review were presented and discussed developed under a partnership between the Swiss State Secretariat during a workshop held in Belgrade, Serbia, March 29–30, 2016, for Economic Affairs (SECO) and the World Bank’s Disaster Risk hosted by the minister of finance. Participants included 40 Financing and Insurance Program (DRFIP) to support middle- officials from the government of Serbia and development partner income countries in building their financial resilience. The representatives. The review benefited greatly from the technical program provides tailored advisory services and institutional expertise of the participants, and the recommendations in this capacity building on the public financial management of natural report reflect the discussions at the workshop. disasters. The engagement in Serbia is jointly implemented between DRFIP and the Disaster Risk Management Team for the The team gratefully acknowledges the input, information, and Europe and Central Asia Region. other invaluable contributions offered by representatives of the government of Serbia, and in particular of the Ministry of Finance. Without their skills and expertise, the findings and recommendations of this review would not have been possible. ESTABLISHING A FISCAL RISK MANAGEMENT DEPARTMENT IN THE MINISTRY OF FINANCE OF SERBIA 03 Table of Contents 02 Acknowledgments 05 Abbreviations 07 Executive Summary 09 Introduction 11 1. Assessment of Fiscal Risks 11 Overview 11 Fiscal Risks Faced by the Government of Serbia 13 2. Analysis of Current Practices 19 Relevant Legislation for Fiscal Risk Management 15 Analysis of Relevant Stakeholders 19 3. Examples of International Good Practices 23 4. Gap Analysis 25 5. Recommendations 25 High-Level Recommendations 25 Proposed Organizational Structure 28 Process Mapping: Macro Processes 30 Potential Obstacles to Implementation and Potential Mitigating Actions 33 6. Conclusion 04 ESTABLISHING A FISCAL RISK MANAGEMENT DEPARTMENT IN THE MINISTRY OF FINANCE OF SERBIA 35 Appendix A. Current Structure and Capacity of Human Resources in the Ministry of Finance 37 Appendix B. Fiscal Risk Management Model Matrix of Prospective Roles and Responsibilities 47 Appendix C. Process Mapping: Micro Processes 57 Appendix D. Policies and Procedures That Could Be Developed and Adopted by Ministry of Finance to Strengthen Fiscal Risk Management 59 Appendix E. People Interviewed in the Preparation of This Report 61 Appendix F. Outcomes of the Workshop on Fiscal Risk Management, Belgrade on March 1, 2016 63 Bibliography ESTABLISHING A FISCAL RISK MANAGEMENT DEPARTMENT IN THE MINISTRY OF FINANCE OF SERBIA 05 ABBREVIATIONS DMFAP Department for Macroeconomic and Fiscal Analysis and Projections DRFIP Disaster Risk Financing and Insurance Program FRMD Fiscal Risk Management Department GoS Government of Serbia IMF International Monetary Fund MoF Ministry of Finance NBS National Bank of Serbia PDA Public Debt Administration PE Public enterprise PEMG Public Enterprises Monitoring Group PPP Public-private partnership SECO Swiss State Secretariat for Economic Affairs SOE State-owned enterprise 06 ESTABLISHING A FISCAL RISK MANAGEMENT DEPARTMENT IN THE MINISTRY OF FINANCE OF SERBIA ESTABLISHING A FISCAL RISK MANAGEMENT DEPARTMENT IN THE MINISTRY OF FINANCE OF SERBIA 07 Executive Summary In recent years, Serbia has faced substantial fiscal costs In light of these gaps—and based on discussions at a from contingent obligations associated with public workshop on fiscal risk management held in Serbia in enterprises, as well as unexpected expenditures arising March 2016—stakeholders from across the government from the catastrophic floods of May 2014. This situation have agreed on the need to establish a Fiscal Risk makes clear that Serbia is exposed to important fiscal risks, Management Department (FRMD) within the Ministry of and that the impact of the resulting shocks could be sizable Finance. The stated objective of the new department would if such risks are not properly managed. be to strengthen fiscal risk management and coordination across the government. Specifically, the responsibilities of Serbia’s Budget System Law defines fiscal risks as “short- the department would include (i) ensuring that fiscal risks term and medium-term variations of fiscal variables are properly identified, quantified, monitored, mitigated, against the values envisaged in the Budget, financial and/ and disclosed, and collecting all available information and or other reports or projections of public finances.”1 In analysis relevant for fiscal risk management; (ii) providing other words, fiscal risks are driven by circumstances that, advice to the minister of finance on issues of fiscal risk if realized, would bring significant revenue shortfalls or and recommending actions to mitigate risks; and (iii) expenditure increases, and most likely bring increases in coordinating all government entities that are involved in or deficits and public debt as well. In general, sources of fiscal relevant for fiscal risk management. risks include direct liabilities and liabilities contingent on the occurrence of a particular event. Examples of important The findings of this review suggest that the FRMD should and specific sources of fiscal risk for Serbia include public comprise three units. One unit would focus on monitoring enterprises, government debt guarantees, and disaster risk. fiscal risks related to public and state-owned enterprises and state-issued guarantees, thus absorbing much of the While current legislation covers some fiscal risks work of the current Public Enterprises Monitoring Group. and some aspects of how to manage them, important It would work closely with the Ministry of Economy as well gaps remain in the country’s fiscal risk management as other relevant ministries. A second unit would focus framework. International best practice suggests several on monitoring fiscal risks related to macroeconomic and aspects of current Serbian practice that could be improved, financial market performance and direct liabilities. This including fiscal reporting; the monitoring of state-owned unit would collaborate closely with the National Bank of enterprises and public enterprises; the quantification Serbia and other teams within the Ministry of Finance, in of fiscal risk; the management of fiscal risks associated particular as regards data collection. A third unit would with public-private partnerships (PPPs), such as through focus on monitoring risks related to local governments, better assessments of new PPP proposals and monitoring public-private partnerships, and natural disasters, and of PPPs; proactive efforts to address detected fiscal risks, would also identify new potential sources of fiscal risk. by encouraging government decision makers to give greater weight to the recommendations of fiscal risk The proposed FRMD should work closely with existing management bodies (such as the fiscal council); and disaster entities involved in fiscal risk management, and the risk financing. specific responsibilities of all relevant stakeholders should be clearly defined. For instance, the new FRMD should work closely with the Budget Department and 1. http://www.mfin.gov.rs/UserFiles/File/english/AMENDMENTS%20 the Department for Macroeconomic and Fiscal Analysis AND%20ADDENDA%20TO%20THE%20BUDGET%20 and Projections on subnational budgets; with the Budget SYSTEM%20LAW.pdf 08 ESTABLISHING A FISCAL RISK MANAGEMENT DEPARTMENT IN THE MINISTRY OF FINANCE OF SERBIA Department and relevant disaster risk management a public sector hiring freeze is in effect; and current institutions to determine an appropriate level of actors may be resistant to changes. But these obstacles contingency funds; and with the Commission for Public can be surmounted. Obstacles related to legal or procedural Private Partnerships to manage fiscal risks associated with gaps regarding fiscal risk management could be addressed PPPs. At the same time, it is critical that the responsibilities by passing relevant amendments to the legal framework. of the FRMD and other entities involved in fiscal risk Potential obstacles related to an ongoing public sector management be clearly defined and delineated, and that the hiring freeze could initially be overcome by shifting and/or interactions between them be clearly mapped out. using existing staff currently working on issues related to fiscal risk management. To minimize potential resistance There are several potential obstacles to creation of the to change and overlap of responsibilities, the creation proposed FRMD: the legal framework does not clearly of the FRMD should be effectively communicated to all specify the fiscal risks or include mandates for managing relevant stakeholders, and respective responsibilities clearly them; there are few procedures for managing fiscal risk; explained and discussed in workshops and trainings. ESTABLISHING A FISCAL RISK MANAGEMENT DEPARTMENT IN THE MINISTRY OF FINANCE OF SERBIA 09 Introduction In recent years, Serbia has faced substantial fiscal costs from • Responsibility for fiscal risk management is contingent obligations associated with public enterprises, disbursed among multiple departments within as well as unexpected expenditures arising from the the Ministry of Finance (MoF) and other agencies catastrophic floods of May 2014. This situation makes clear across the GoS. that Serbia is exposed to important fiscal risks, and that the • Understaffing and a lack of specialized skills impede impact of the resulting shocks could be sizable if such risks effective fiscal risk management; specifically, the are not properly managed. management of fiscal risk from public and state- This review responds to a request from the government owned enterprises, disasters, and public-private of Serbia (GoS) for World Bank support in analyzing partnerships was (PPPs) found to be insufficient. and assessing the government’s fiscal risk management Based on the review and on discussions at a workshop held capabilities and in exploring options to strengthen in March 2016, this study recommends the creation of a them. The review was informed by technical missions, dedicated fiscal risk management unit within the MoF. interviews, and workshops involving GoS stakeholders and representatives of the World Bank and International The proposed Fiscal Risk Management Department (FRMD) Monetary Fund (IMF). would provide advice to the minister of finance on risk exposure, recommend actions to mitigate risks, coordinate The review identified several key fiscal risks faced by existing units involved in fiscal risk management, and the GoS: directly manage specific fiscal risks that are not already • Poor business performance by public and state- addressed through other government bodies. The owned enterprises importance of this and work already underway was also confirmed in the government in 2015 in its Memorandum • Activation of government-issued guarantees of Economic and Financial Policies to the International • Natural disasters Monetary Fund (IMF)2 • Financial instability and exchange rate volatility This note summarizes the main findings of the technical review and workshop. It describes the key fiscal risks faced by the GoS, the current practices for mitigating these risks, The review noted that while some fiscal risks are currently and deviations from good practice based on international monitored by state agencies, important gaps remain: experiences that should be addressed going forward. Finally, the review proposes a structure for a Fiscal Risk • Existing legislation covers most important identified Management Department within the MoF, and sets out sources of contingent liability, but gaps remain in potential roles, responsibilities, and processes in detail. how these risks are addressed and what mechanisms exist to respond financially. • Quantification, reporting, and mitigation of fiscal risks are not sufficient. 2. International Monetary Fund, “Third Review Under the Stand-By Arrangement and Request for Modification of Performance Criteria—Press Release; Staff Report; and Statement by the Executive Director for the Republic of Serbia,” Country Report No. 15/347, December 18, 2015. ESTABLISHING A FISCAL RISK MANAGEMENT DEPARTMENT IN THE MINISTRY OF FINANCE OF SERBIA 11 1. Assessment of Fiscal Risks • Contingent explicit liabilities are legal or contractual Overview obligations that will arise only if a particular future According to Article 2, Provision 25e of the Budget System event occurs (e.g., if a banking sector crisis occurs); Law, fiscal risks are defined as “short-term and medium- thus they are rarely, if ever, included in the budget. term variations of fiscal variables against the values Contingent implicit liabilities are obligations that depend • envisaged in the Budget, financial and/or other reports or on the occurrence of a particular event and that the projections of public finances.”3 In other words, fiscal risks government is not explicitly mandated to act upon. are driven by circumstances that, if realized, would bring Such obligations are not typically officially recognized significant revenue shortfalls or expenditure increases, and until after an event that triggers the liabilities occurs. most likely increase deficits and public debt. The triggering event, the value at risk, and the potential Various documents highlight fiscal risks faced by the size of government outlays are uncertain.6 government of Serbia. The “Fiscal Strategy for 2016 with As direct liabilities—both implicit and explicit—are Projections for 2017 and 2018,” for example, details a planned, anticipated, and covered by existing operational number of key fiscal risks that confront the government.4 procedures in the Ministry of Finance, this report focuses The Fiscal Council regularly releases opinions that highlight on contingent liabilities. However, a future FRMD should and elaborate on specific fiscal risks as well. In addition, also monitor and maintain transparency around direct risks related to the public debt are listed in the “Public Debt liabilities, which can cause serious fiscal difficulties. Management Strategy for the Period 2015 to 2017.” The risks identified in the sources above are of four types: Fiscal Risks Faced by the Direct explicit liabilities are legal or contractual obligations • that will arise in any event and that the government is Government of Serbia legally mandated to settle when they become due. They In interviews, representatives from government departments are the subject of conventional fiscal analysis. involved in fiscal risk management identified various risks • Direct implicit liabilities are moral obligations or expected confronting Serbia. These risks were consolidated and assessed burdens the government is not legally obligated to act on the basis of their potential impact on Serbia’s fiscal situation on but may nevertheless be required to meet based on and the likelihood of their occurrence (table 1). public expectations and political pressures.5 3. http://www.mfin.gov.rs/UserFiles/File/english/AMENDMENTS%20 AND%20ADDENDA%20TO%20THE%20BUDGET%20SYSTEM%20LAW.pdf 4. Government of the Republic of Serbia, “Fiscal Strategy for 2016 with Projections for 2017 and 2018,” 43–44, http://www.mfin.gov.rs/UserFiles/ File/dokumenti/2016/FS%20za%202016%20EN.pdf. 5. Adapted from Hana Polackova Brixi and Allen Schick, Government at Risk: Contingent Liabilities and Fiscal Risk (Washington, DC: World Bank, 2002), 22–23, http://documents.worldbank.org/curated/en/284531468771891611/ Government-at-risk-contingent-liabilities-and-fiscal-risk. 6. Ibid, 23. 12 ESTABLISHING A FISCAL RISK MANAGEMENT DEPARTMENT IN THE MINISTRY OF FINANCE OF SERBIA Table 1. Fiscal Risks Faced in Serbia Source of fiscal risk Description Effect on government finances Impact Likelihood Poor business Poor financial results from public Decline in planned government Significant Likely performance of and state-owned enterprises revenues from public enterprises public and state- owned enterprises Problems with planned Increase in expenditures to reorganization and restructuring cover financial losses or unpaid efforts contributions to social welfare funds Activation of Inability of local governments, Increase in expenditures due to Moderate Likely government-issued public or state-owned enterprises repayment of guaranteed debt guarantees to meet debt obligations, leaving government with obligation to repay their debts Natural disasters Floods, earthquakes, landslides, Unforeseen expenditure on relief, Moderate Possible droughts, and other natural recovery, reconstructiona hazards Possible tax revenue shortfall due to fall in economic activity Financial and Depreciation of the Increased expenditures Moderate Possible foreign exchange domestic currency for repayment of foreign- markets denominated debtb Rise in interest rates in domestic or international capital markets Possible squeezing of fiscal space by higher refinancing costs Decline in economic Unanticipated decline in Shortfall in expected Moderate Unlikely activity economic activity public revenues Lower than projected economic Potential increase in public growth spending (e.g., social transfers) Banking sector Insolvency of one or more banks Increase in expenditures Moderate Rare crisis due to recapitalization of financial institutions Increased borrowing costs due to potential credit rating decline caused by (anticipated) government bailout of financial institutions Public-private Decline of project revenue Increase in government Low Rare partnerships below contractually expenditures guaranteed level, activating government guarantees Unforeseen cost increases (e.g., due to contract termination) Local government Excessive fiscal deficits of local Increase of transfers to local Negligible Unlikely budgets governments governments, undermining central government finances a. The 2014 floods caused damage and losses amounting to 4.8 percent of GDP (€1.7 billion EUR] and affected an estimated 1.6 million people. The Serbian economy contracted by 1.8 percent in 2014, instead of growing by 0.5 percent as had been projected. b. Government of the Republic of Serbia, “Public Debt Management Strategy for the Period 2015 to 2017,” 32, http://www.javnidug.gov.rs/upload/Strategija/ Strategija%20cir/2015-2017/Public%20Debt%20Management%20Strategy%20for%20the%20Period%202015%20to%202017.pdf. ESTABLISHING A FISCAL RISK MANAGEMENT DEPARTMENT IN THE MINISTRY OF FINANCE OF SERBIA 13 2. Analysis of Current Practices it defines which funds can be used to cover unforeseen Relevant Legislation for Fiscal expenditure needs or revenue shortfalls when fiscal risks Risk Management materialize; among the possible funds are the Budgetary Fund for Emergency, the Current Contingency Reserve, and This section reviews the legal framework and institutional the Permanent Budgetary Reserve. and operational practices that determine current fiscal risk management in Serbia. The Public Debt Law Although Serbia currently has no legal acts explicitly The Public Debt Law defines the tasks associated with defining the management of its fiscal risks, existing public debt management, including the management of legislation does dictate roles, responsibilities, and exchanges rate, interest rates, and other risks; the purchase procedures for managing a number of the risks listed in and sale of foreign currency; cash management; etc.8 It also table 1. The Budget System Law and the Public Debt Law defines various procedures associated with these tasks and cover areas that are relevant for fiscal risk management. the roles and responsibilities of key stakeholders involved. Furthermore, two regulations contain relevant provisions: the Regulation on General Conditions for the Issuance The Law on Public-Private Partnerships and Sale of Long-term Government Securities on the and Concessions International Financial Market, and the Regulation Enacted in 2011, the Law on Public-Private Partnerships on General Conditions for the Issuance and Sale of and Concessions introduced the concept of public-private Government Securities on the Primary Market. partnership into Serbian law in an integrated and systematic manner.9 It regulates the proposal and approval processes The Budget System Law for the establishment of PPPs, including the type of entity The Budget System Law regulates the planning, preparation, authorized to submit proposals; it lays out the rights and adoption, and implementation of the national budget, of obligations of public and private partners; and it governs local government budgets, and of financial plans of various the creation, status and, competence of the Commission for state funds.7 As a result, the Budget System Law governs Public Private Partnerships. While the law states that the the planning of budgetary revenues and expenditures that distribution of risk has to be considered and clarified in the are relevant for all risks identified above, especially for conditions of the contract, it provides only general guidance risks related to public and state-owned enterprises, local on this distribution; specifically, it indicates that risk should governments’ budgets, and risk related to macroeconomic be the responsibility of the partner who can better manage outcomes (e.g., economic activity and inflation). The Budget or affect it.10 The law also lays out how the creation of PPPs System Law also details the roles and responsibilities of some stakeholders involved in fiscal risk management, including the Fiscal Council and the Treasury. In addition, 8. Official Gazette of the Republic of Serbia No. 78/2011, Public Debt Law, Article 11. 9. Official Gazette of the Republic of Serbia No. 88/2011, 15/2016, Law on Public-Private Partnerships and Concessions, http://www.ppp.gov.rs/doc/ 7. Official Gazette of the Republic of Serbia No. 103/2015, Budget System PPP%20and%20Concession%20Law%20PARLIAMENT.pdf. Law. 10. Ibid., Articles 27, 46. 14 ESTABLISHING A FISCAL RISK MANAGEMENT DEPARTMENT IN THE MINISTRY OF FINANCE OF SERBIA Table 2: Fiscal Risks and the Legal Framework: Key Laws and the Sources of Fiscal Risk They Cover Poor business performance Public-private partnership Activation of government government budgets Financial and foreign Banking sector crisis Decline in economic issued guarantees exchange markets Natural disasters of PEs and SOEs activities Local Inflation activity Law Budget System Law X X X X Public Debt Law X X The Law on Public-Private X Partnership & Concessions The Law on Reconstruction X Following Natural and Other Hazards The Law on the National Bank of X X Serbia Note: PE = public enterprise; SOE = state-owned enterprise. should be supervised,11 and a 2016 amendment to the law Disasters.14 It institutes the Government Office for Public requires that fiscal implications be considered before a Investments Management,15 dictates its activities and project is approved.12 But there is no entity responsible for reporting requirements,16 and specifies the sources of monitoring fiscal risks arising from PPPs. The Commission funding for the office.17 It also stipulates the requirements for Public Private Partnerships is an advisory body and has for obtaining aid and damage assessment. no specific mandate to monitor fiscal risks.13 This law sets out a number of important provisions related The Law on the Use of Funds for Restoration to managing the cost of natural disasters. But no explicit and Protection from Natural Disasters mandate exists for any government entity to set out and implement financial protection policies and instruments This legislation, enacted in 1992, was the first law in Serbia that would comprehensively manage the potential fiscal entirely dedicated to the rehabilitation of large-scale impact from disasters. damage; it defines what qualifies as a natural disaster, establishes the procedure for allocating funds following The Law on the National Bank of Serbia a disaster, and stipulates the creation of the Fund for the This law governs the status, organization, powers, and tasks rehabilitation and protection from natural disasters. of the National Bank of Serbia, as well as its interactions The Law on Reconstruction Following Natural with other Serbian entities and with international and Other Hazards organizations and institutions. From a fiscal risk management perspective, the law is important because it Enacted in 2015, this law supersedes the Law on the Use of Funds for Restoration and Protection from Natural 14. Law on Reconstruction Following Natural and Other Hazards, Article 35, http://www.obnova.gov.rs/uploads/useruploads/Documents/Zakon_o_ obnovi%20nakon%20el%20i%20druge%20nepogode_engl.pdf. 11. Ibid., Article 62. 15. Ibid., Article 13. 12. Ibid., Article 13. 16. Ibid., Articles 11, 16–19, 23, 24, 28. 13. Ibid., Article 68. 17. Ibid., Article 14. ESTABLISHING A FISCAL RISK MANAGEMENT DEPARTMENT IN THE MINISTRY OF FINANCE OF SERBIA 15 details the functions of the Administration for Supervision • Manages the state guarantees registry of Financial Institutions. Together with the Law on Banks, • Provides input on the assessment of major public it provides the legal framework for the supervision of the investment projects banking sector in Serbia.18 Interviews with GoS representatives suggest that staff In conclusion, important sources of fiscal risks are covered within the PDA generally have the required level of expertise by existing legislation (see table 2). However, no law exists to fulfill their roles. However, some skill gaps were noted that specifically and comprehensively addresses fiscal risks in IT, accounting, auditing, and quantitative finance in the and fiscal risk management. middle and back offices. The biggest capacity gap was due to understaffing: interviews indicated that 40 employees would be required for the office to reach full efficiency, but Analysis of Relevant Stakeholders only 26 employees were currently in the administration. This section briefly describes key stakeholders currently The number of employees is limited by the Decision on the involved in fiscal risk management in Serbia, their roles Maximal Number of Employees in the Organizations of and interests, and the fiscal risks they are involved in State Administration, Public Agencies, and Mandatory Social managing.19 Security. These limits result in heavily burdened employees and potential bottlenecks. 1. Ministry of Finance 1.2. Department for Macroeconomic and Fiscal The MoF has a prominent and legally sanctioned role in Analysis and Projections (DMFAP) managing fiscal risks, and carries out this role through five administrations and departments (see figure 1 for an The DMFAP is in charge of forecasting fiscal and organizational chart of MoF, with these entities highlighted): macroeconomic variables, analyzing the fiscal implications of legislation and policies, and annually drafting the three- 1.1. Public Debt Administration year Fiscal Strategy. The department works closely with the Statistical Office, the National Bank of Serbia, the PDA, As defined in the Public Debt Law, the Public Debt and the Treasury in order to collect the appropriate data Administration (PDA) is responsible for the management of for its analyses. Its projections are used throughout the public debt. In this role, it MoF and the Fiscal Council, and provide the basis for the • Prepares the government’s debt national budget. management strategy Interviews with department staff made clear that the • Takes action to reduce risks resulting from public DMFAP, like the PDA, is understaffed. This problem puts a debt (e.g., via currency swaps, foreign exchange significant strain on existing staff and undermines the quality options, etc.) of analysis. Interviews indicated that 21 staff were required to adequately fulfill the mandate of the department, which • Monitors negotiations on borrowing when a state currently employs 14. In particular, more staff skilled in guarantee is required macroeconomic and fiscal forecasting are needed. • Monitors local government borrowing 1.3. Budget Department • Monitors and analyzes domestic and foreign The Budget Department plays a pivotal role in the financial markets preparation and approval of the annual budget and in the overall management of Serbia’s budget system and various state institutions. In addition, the Budget Department is 18. Official Gazette of the Republic of Serbia Nos. 44/2010, 76/2012, responsible for a number of activities directly related to 106/2012, 14/2015, Law on the National Bank of Serbia. 19. The information in this section was compiled from official documents fiscal risk management, including analyzing the budgets of and interviews with GoS representatives. 16 ESTABLISHING A FISCAL RISK MANAGEMENT DEPARTMENT IN THE MINISTRY OF FINANCE OF SERBIA Figure 1. Organizational Diagram of the Ministry of Finance Highlighting Entities Involved in Fiscal Risk Management Administrations / departments involved in Public Enterprises Monitoring Group fiscal risk management Minister of Finance Tax Administration Department for legal affairs Public Debt Administration Minister of Finance cabinet Department for Administrations Secretariat Treasury Administration human resources Department for Customs Administration work transparency Department for professional and operational affairs Administration for Commission for the prevention of state aid control money laundering Department for Internal audit group financial affairs Free zones Administration Tobacco Administration State secretary Department for Customs Department Financial Macroeconomic Budget Fiscal system system for control of system and Fiscal Analysis Department Department and policy public lands Department and Projections Department Department for Internal Internal cooperation Contracting and EU assistance Property and control and European Financing of Coordination legal affairs and audit integration European Union Department department department Funded Programs local governments and public and state-owned enterprises. 1.5. Public Enterprises Monitoring Group (PEMG) It also helps determine the level of the government’s current contingency reserve. The PEMG is an ad hoc expert panel located within the Ministry of Finance.20 The group analyzes financial Like other areas of the MoF, the department has been found statements of public enterprises, state subsidies, and lacking in qualified personnel. The department currently guarantees, and reports on a quarterly basis to the state has 32 employees, whereas 46 would be required to deliver secretary and minister of finance. It does not conduct any appropriately on its current commitments, according to type of scenario analysis, stress test, or risk valuation. department officials. In addition, the wages paid by the department are inadequate to attract staff with the requisite 2. Ministry of Economy technical ability. Within the Ministry of Economy (ME), the Department for 1.4. Internal Control and Audit Department Control and Monitoring of Public Enterprises is responsible for topics related to fiscal risks. The ME cooperates closely The Internal Control and Audit Department is responsible with the MoF regarding the business performances of for operational risks within the MoF and for improving state-owned and public enterprises. It gathers financial financial management and control within Serbia’s public data from the public enterprises it controls and from state- sector at large, thereby reducing fiduciary and ultimately fiscal risk. 20. It was previously housed within the Ministry of Economy. ESTABLISHING A FISCAL RISK MANAGEMENT DEPARTMENT IN THE MINISTRY OF FINANCE OF SERBIA 17 owned enterprises that are in process of restructuring. 5. Public Investment Management Office These financial statements are then forwarded to the (formerly the Office for Reconstruction and MoF for analysis, primarily by the Public Enterprises Flood Relief) Monitoring Group. The office is tasked with managing reconstruction projects 3. National Bank of Serbia and aid allocation following natural and other hazard events; it focuses primarily focusing on the rebuilding In addition to its primary task of achieving and maintaining of preschool, school, health care, and social protection price stability, the National Bank of Serbia plays a key role in premises. It coordinates implementation of the national maintaining and strengthening the stability of the financial disaster risk management program and reports quarterly to system. It issues and revokes operating licenses for banks the government. and carries out prudential supervision of bank operations. It also is responsible for bank resolutions. 6. Public Private Partnership Commission 4. Fiscal Council The Public Private Partnership Commission is an interdepartmental, independent public body that provides The Fiscal Council plays an important role in fiscal risk expert guidance on the implementation of public-private management. It independently reviews and analyzes partnership projects and concessions. Reporting annually to macroeconomic and fiscal projections, economic policies, the government, the commission assists in the drafting of the government’s fiscal strategy, the draft budget, and draft PPP proposals, conducts cost-benefit analyses of projects, laws—specifically by commenting on how fiscal risks have and delivers formal opinions regarding the approval of been managed and whether the government followed its concessions. It is also tasked with identifying relevant fiscal rules in the previous year. It also assesses the health of international best practices in PPP management. state-owned and public enterprises, providing transparent, independent data that can be used as the basis for fiscal risk analysis. 18 ESTABLISHING A FISCAL RISK MANAGEMENT DEPARTMENT IN THE MINISTRY OF FINANCE OF SERBIA ESTABLISHING A FISCAL RISK MANAGEMENT DEPARTMENT IN THE MINISTRY OF FINANCE OF SERBIA 19 3. Examples of International Good Practices Examples of fiscal risk management practices from other • A risk management policy, which specifies the countries, as well as relevant recommendations from preconditions under which governments take on international organizations, help identify gaps in Serbia’s specific fiscal risks. current fiscal risk management architecture and provide • Clearly defined accountabilities, so that individual recommendations to strengthen it. departments and line ministries identify, estimate, The IMF’s Fiscal Transparency Code establishes principles analyze, and monitor specific fiscal risks under covering the following three dimensions of fiscal their remit. governance: 21 • A central oversight body, to allow monitoring of 1. Fiscal reporting. Fiscal reports should provide a aggregate fiscal risk and analysis of possible comprehensive, relevant, timely, and reliable overview of relationships between different sources of risk and the government’s financial position and performance. their potential interactions, Such a body could also be tasked with assessing risk mitigation practices 2. Fiscal forecasting and budgeting. Budgets and their and conducting exercises on how to respond to the underlying fiscal forecasts should provide a clear realization of risks. statement of the government’s budgetary objectives and policy intentions, and comprehensive, timely, and • Central control over major risks, so that one authority credible projections of the evolution of public finances. (e.g., the minister of finance) has control over approving contracts that expose the government to 3. Fiscal risk analysis and management. Governments should fiscal risks. disclose, analyze, and manage risks to the public finances and ensure effective coordination of fiscal decision These four key principles provide the basis for the suggested making across the public sector. role and responsibilities of the Fiscal Risk Management Department in the Serbian MoF. An IMF report on best practices in fiscal risk management suggests that fiscal risk management is ideally based on the In order to learn from international experience, the fiscal following institutional arrangements:22 risk management practices of a number of countries at various levels of economic development were reviewed. 21. International Monetary Fund, “Fiscal Transparency Code,” 2014, http:// blog-pfm.imf.org/files/ft-code.pdf. 22. International Monetary Fund, “Analyzing and Managing Fiscal Risks: Best Practices,” June 2016, https://www.imf.org/external/np/pp/ eng/2016/050416.pdf. 20 ESTABLISHING A FISCAL RISK MANAGEMENT DEPARTMENT IN THE MINISTRY OF FINANCE OF SERBIA Chile New Zealand Chilean management of PPP contingent liabilities and New Zealand has arguably one of the world’s most advanced direct commitments has been referred to as best-in-class fiscal risk management regimes,24 characterized by a high globally.23 Since 1991, only 3 of 59 projects have activated the level of transparency, well-designed fiscal policy rules, and minimum revenue guarantee, with a resulting total payment clear guidelines for fiscal risk management and mitigation. by the government of approximately US$20 million per Two to three times a year, a “Statement of Specific Fiscal year (0.01 percent of GDP). The Ministry of Public Works Risks” is prepared by the Treasury with information on has authority to award concessions but it needs the MoF’s policy risks25 and contingent liabilities from legal obligations, approval throughout the contract preparation process. This both quantifiable and unquantifiable. The Treasury also involvement gives the MoF the opportunity to evaluate regularly assesses general macrofiscal risks, subjecting the contingent liabilities taken on by the government as a projections to sensitivity analysis and full alternative result of concessions. Concessions must be awarded in a macroeconomic scenarios. In addition, at least every four competitive bidding process open to any firm, national or years, the Treasury is required to publish a “Statement on foreign; contracts can be adapted to each project. the Long-Run Fiscal Position” to ascertain the sustainability of public finances over 40 years; this analysis covers a wide variety of fiscal risks. The Office of the Auditor General Colombia actively audits financial statements, contingent liabilities, and specific risks. A small general contingency account Colombia links the management of contingent liabilities to exists for urgent spending needs that cannot be met with fiscal discipline, debt sustainability, reduction of fiscal risk, existing resources. Furthermore, risks related to state-owned and transparency in the management of public resources. A and public enterprises are monitored by their shareholding dedicated fiscal risk management unit has been established ministries through quarterly reporting requirements, and are in the Ministry of Finance. Its functions include (i) defining also regularly monitored by the Treasury. risk guidelines for the management of public debt; (ii) designing risk policies, guidelines, and strategies for the management of the Treasury, public debt, guarantees, Romania counterguarantees, and contingent liabilities of the nation; (iii) designing, developing, and reviewing the methodologies There are three areas of Romanian fiscal risk management for estimating contingent liabilities and the sustainability of that seem particularly relevant for the Serbian government public debt; (iv) designing and proposing guidelines for the as it reforms its fiscal risk management practice going participation of private capital in infrastructure projects and forward.26 First, borrowing by local governments is in assets directly or indirectly owned by the nation; and (v) controlled by law and capped at 30 percent of average local producing reports for monitoring and controlling operations government revenue over the past three years. Information in the Treasury related to public debt, guarantees, on local government revenue, expenditures, and debt is counterguarantees, and contingent liabilities of the nation. In 2015 the unit was staffed with 23 officials. 24. See, for example, Brixi and Schick, Government at Risk, 465. See also Aliona Cebotari, Jeffrey Davis, Lusine Lusinyan, Amine Mati, Paolo Mauro, Murray Petrie, and Ricardo Velloso, “New Zealand’s Approach to Fiscal Risk Disclosure and Management,” appendix 2 in Fiscal Risks: Sources, Disclosure, and Management (Washington, DC: International Monetary Fund, 2009), 47–49. 25. New Zealand is possibly unique in disclosing “policy risks”—that is, policy changes that the government has under active consideration—as fiscal risks. Such policy risks are not usually regarded as fiscal risks because they are under the control of the government. In New Zealand the disclosure of policy risks is linked to increasing the credibility of the medium-term fiscal forecasts, which contain explicit indicative envelopes 23. Cigdem Aslan and David Duarte, “How Do Countries Measure, Manage, to allow for new policy initiatives. and Monitor Fiscal Risks Generated by Public-Private Partnerships? Chile, 26. International Monetary Fund, “Romania: Fiscal Transparency Peru, South Africa, Turkey,” Policy Research Working Paper 7041, World Evaluation,” MF Country Report No. 15/67, March 2015, 60, https://www.imf. Bank, Washington, DC, September 2014, 16. org/external/pubs/ft/scr/2015/cr1567.pdf. ESTABLISHING A FISCAL RISK MANAGEMENT DEPARTMENT IN THE MINISTRY OF FINANCE OF SERBIA 21 published monthly. Second, risk arising from the activation contracts, and natural disasters, in coordination with other of government-issued guarantees is capped under a divisions of the ministry; (iii) designing, developing, and requirement that the government set a ceiling for the evaluating methodologies for quantifying and assessing issuance of new guarantees in the current budget year plus financial risk, operational risk, and contingent liabilities; the next two.27 Third, Romania has created a separate unit (iv) monitoring risk limits; (v) proposing approaches within its Directorate General for Fiscal Policy dedicated to to controlling or mitigating risks; and (vi) developing a monitoring state-owned and public enterprises.28 contingency plan for the Ministry of Finance. As of 2015 the unit was staffed with 15 public officials. Hungary Turkey Several aspects of Hungary’s fiscal risk management framework could be instructive for Serbia.29 To Turkey’s fiscal risk management practices related to PPPs manage fiscal risk associated with PPPs, Hungary has and to financial markets and guarantees could be relevant multiple levels of government institutions involved in for Serbia. In Turkey, the responsibilities for drafting, approving, monitoring, and evaluating PPPs, including approving, financing, and monitoring PPPs are divided an interministerial committee on PPPs that can propose between various ministries, the High Planning Council, and amendments to existing regulations, express its opinion the Treasury. In addition, the government has developed on specific projects, and monitor and evaluate project a cross-ministerial Debt Management Committee to serve implementation. In addition, the MoF proposes a ceiling on as a decision-making and coordinating mechanism for debt budget commitments associated with PPPs.30 To manage management issues. A Risk Management Unit has also fiscal risks associated with state guarantees, Hungary been created to formulate the strategy for risk-based debt has imposed an annual ceiling on the amount of new management and monitoring of associated risks. state guarantees (at 1 percent of GDP) and requires that each guarantee be reported to the State Audit Office and published in the official Hungarian Gazette.31 South Africa The South African government uses good practices in the management of risks arising from public and state-owned Peru enterprises, local government budgets, and public-private Peru created a dedicated fiscal risk management unit, the partnerships.32 To manage risks related to public and Risk Management Division (DGR—Dirección de Gestion state-owned enterprises, the government of South Africa del Riesgo), in the Ministry of Economy and Finance to created an Assets and Liability Management Division manage financial risks, operational risks, and contingencies within the Treasury; this division assesses risks arising due to legal proceedings, contracts, and natural disasters. from these entities, rates them according to their risk Its specific functions include (i) designing and proposing profiles, and requires them to submit audited financial policies, guidelines, and strategies for financial risk (market, statements and quarterly performance reports, which it credit or counterpart, investments), operational risk, and incorporates into budget documentation. In addition, contingencies due to legal proceedings, contracts, and the nine largest public enterprises are overseen by the natural disasters; (ii) identifying, monitoring, and evaluating Department of Public Enterprises, which works to ensure financial risk and contingencies from legal proceedings, that they are managed efficiently. To mitigate fiscal risk 27. Ibid., 48. 28. World Bank, “Romania Functional Review: Public Finance Sector 32. The discussion of South Africa draws on Republic of South Africa, Final Report,” World Bank, Washington, DC, October 2010, 30, https:// Republic of South Africa Public Expenditure and Financial Accountability: openknowledge.worldbank.org/handle/10986/12291. Public Financial Management Performance Assessment Report, Final 29. Brixi and Schick, Government at Risk, 214–21. Report (Rotterdam: ECORYS, September 2008), 66–68, http://www. 30. Cebotari et al., Fiscal Risks: Sources, Disclosure, and Management, 25. treasury.gov.za/publications/other/Final%20PEFA%20Report%20-%20 31. Brixi and Schick, Government at Risk, 219. 29%20Sept%202008.pdf. 22 ESTABLISHING A FISCAL RISK MANAGEMENT DEPARTMENT IN THE MINISTRY OF FINANCE OF SERBIA associated with local governments, the government has mandated that subnational governments cannot generate explicit fiscal liabilities for the central government, and the Treasury publishes a consolidated “Local Government and Expenditure Review.” Finally, the government has created a specialized PPP unit within the Treasury to regulate projects, provide technical assistance, and develop a generic project cycle to ensure effectiveness of design, implementation, and monitoring efforts. ESTABLISHING A FISCAL RISK MANAGEMENT DEPARTMENT IN THE MINISTRY OF FINANCE OF SERBIA 23 4. Gap Analysis When Serbia’s existing model for dealing with fiscal risks 2. Need for improved monitoring of state-owned enterprises and is compared to good practices (as recommended by the public enterprises. Despite having multiple governmental IMF) and to practices of select countries, a number of gaps bodies tasked with monitoring state-owned and public become apparent. enterprises, these enterprises still pose a substantial risk to the budget; in recent years, several entities have The countries assessed have centralized the management of incurred high losses and made frequent calls on state fiscal risks to various degrees, either instituting a separate guarantees. A new Fiscal Risk Management Department unit that oversees all fiscal risks (e.g., Turkey) or specialized should work closely with existing stakeholders to units focusing on major sources of fiscal risks such as PPPs establish a comprehensive monitoring system and plans or state guarantees for loans. Without fail, ministries of for managing restructuring efforts and enforcement of finance play a central role in fiscal risk management. corporate governance principles. In most countries highlighted, multiple government 3. Lack of proper fiscal quantification. The GoS does not agencies and departments are involved in managing fiscal quantify potential adverse impacts of various fiscal risks in risks. The experience of these countries makes clear that a comprehensive manner. However, some work in this area the sources of fiscal risks vary, and that they may change as is currently conducted by the Public Debt Administration certain risks are effectively addressed or new ones emerge and the Department for Macroeconomic and Fiscal Analyses (e.g., through the creation of new PPPs). The potentially and Projections, and future efforts to quantify fiscal risks changing nature of fiscal risks, the correlation between comprehensively should build on this. Comprehensive fiscal various risks, the specific expertise required to rigorously risk reports published by a new FRMD should quantify as analyze overall fiscal risk, and a direct (or short) reporting far as possible the risks from all identified and quantifiable line to the minister of finance are major advantages of a contingent obligations, and should also take account of the centralized fiscal risk management unit. That being said, a effects of possible interactions between various risks in fiscal risk management unit does not necessarily need to discussing the overall risk to fiscal outcomes. monitor and develop policies to mitigate all identified risks by itself. Rather, it could coordinate the efforts of other 4. Limited fiscal risk management content in assessments and bodies involved in fiscal risk management, analyze the work monitoring of PPPs. The existing institutional framework of such bodies, assess the interactions between risks, and in Serbia does not ensure adequate monitoring of PPPs produce standardized reports on fiscal risk. (or major public works, in general), particularly during implementation. As a result, emerging fiscal risk arising from Based on the review of other countries’ experiences and on ineffective implementation might not be detected in time to the good practices recommended by the IMF, the following allow effective mitigating action. Fiscal liabilities contracted gaps in Serbia’s fiscal risk management architecture emerge: by central government entities should be monitored and 1. Lack of detailed fiscal reporting. At the moment, the reevaluated after the approval and during implementation of government of Serbia does not regularly publish a report major PPPs. Recent modifications to the PPP law go part of or statement dedicated to fiscal risks and fiscal risk the way toward this goal, for example by strengthening risk management. Following the practice of New Zealand, assessment during project appraisal.33 the GoS could introduce regular reporting on fiscal risks, including a comprehensive fiscal risk statement 33. Official Gazette of the Republic of Serbia No. 15/2016, Law on Public- Private Partnerships and Concessions, http://www.ppp.gov.rs/doc/ describing the GoS’s strategy for managing fiscal risks PPP%20and%20Concession%20Law%20PARLIAMENT.pdf. 24 ESTABLISHING A FISCAL RISK MANAGEMENT DEPARTMENT IN THE MINISTRY OF FINANCE OF SERBIA 5. Inadequate reduction of operating and fiscal risks. Although the Budget System Law defines the role of the Fiscal Council as a critical advisory body, its recommendations and opinions, particularly on public and state-owned enterprises and state guarantees, are often neglected. The assessments and conclusions of the Fiscal Council and other experts have minimal impact on decisions on loans, guarantees, and major publicly financed projects. Assessments by the Fiscal Council should have a greater impact on decisions made by the government in the area of fiscal risk management. Additionally, actions taken by the government to mitigate fiscal risks should be transparent and publicly disclosed, to allow leading experts to provide advice and input on these actions. 6. Understaffing of government institutions in charge of fiscal risk management. A lack of sufficient resources strains the staff currently involved in fiscal risk management. This problem is difficult to address because of restrictions that prevent the hiring of new staff, including both the Law on Determination of Maximal Number of Employees in the Public Sector and the Decision on Maximal Number of Employees in State Administration.34 However, in the short-term, understaffing could be addressed by rearranging existing capacity within the GoS. 7. Lack of a disaster risk financing framework. The GoS currently has no comprehensive, forward-looking strategy for managing the fiscal risk posed by natural disasters, leaving the government reliant on ex post budget reallocations, emergency borrowing, and donor assistance—all of which can lead to a delayed, unpredictable, and underfunded emergency response. In order to integrate disasters into a broader contingent financing framework, a comprehensive national disaster risk finance strategy could be developed in coordination with the Public Investment Management Office. 34. Official Gazette of the Republic of Serbia No. 68/2015, Law on Determination of Maximal Number of Employees. ESTABLISHING A FISCAL RISK MANAGEMENT DEPARTMENT IN THE MINISTRY OF FINANCE OF SERBIA 25 5. Recommendations High-Level Recommendations Proposed Organizational Structure We propose that the department report directly to a At a workshop in March 2016, stakeholders from across the state secretary of the Ministry of Finance as opposed to GoS agreed on the need to create a Fiscal Risk Management becoming part of an existing department within the MoF Department within the Ministry of Finance. The stated (see figure 2). This arrangement is preferable because objective of the new department would be to strengthen of the importance and broad scope of the FRMD’s role. fiscal risk management and coordination across the In addition, the MoF could explore the establishment of GoS. Specifically, the responsibilities of the department a risk committee comprising key stakeholders for fiscal would include risk management. • Ensuring that fiscal risks are properly identified, The following paragraphs lay out a proposed structure for quantified, monitored, mitigated, and disclosed, the FRMD, including units, indicative number of staff, and and collecting all available information and analysis responsibilities. While this is a first proposal based on the relevant for fiscal risk management review and conversations with officials, detailed decisions on how to design this department will have to be taken by • Providing advice to the minister on issues of fiscal the MOF during the implementation phase establishing it. risk and recommending actions to mitigate risks Three specialized units are suggested; they are described • Coordinating all government entities that are below and illustrated in figure 3.35 involved in or relevant for fiscal risk management 1. Unit A monitors fiscal risks related to public and state-owned (e.g., developing a national disaster risk finance enterprises and state-issued guarantees.36 This unit could strategy in collaboration with Public Investment consist of three employees and focus on managing the Management Office) risks associated with • Directly managing specific fiscal risks not already a. Poor business performance of public and state- covered by other governmental bodies owned enterprises We recommend that the new department complement b. Activation of government-issued guarantees existing institutions and avoid duplicating activities that are already undertaken by other entities; the outputs of the new department should include periodic reports to the relevant state secretary, who can use them to inform risk mitigation decisions, ensure that risk mitigation measures are reflected in the draft budget, and effectively communicate mitigating 35. The groups that will constitute the FRMD will conduct some activities measures. Beyond this, the department should deliver ad that could partially overlap with the tasks of existing structures within the MoF or other institutions active in fiscal risk management. However, hoc proposals when instant mitigating action is required. FRMD employees will gather information, conduct analysis, and report to Except in some unusual cases (involving, for example, the higher authority while continually maintaining their focus on fiscal risk monitoring and management. The other bodies, on the other hand, will sensitive information on national security), results of remain primarily focused on their core activities. 36. As of March 22, 2016, the MoF’s Informational Booklet contained the department’s work should be shared with interested information regarding the duties and assignments of the Public Enterprises stakeholders so they can actively help the department Monitoring Group. Given the high importance of risk and contingent liabilities linked with public and state-owned enterprises and with guarantees, the achieve its objective. FRMD should directly monitor those risks in place of the PEMG. 26 ESTABLISHING A FISCAL RISK MANAGEMENT DEPARTMENT IN THE MINISTRY OF FINANCE OF SERBIA Figure 2. Proposed Organizational Diagram of MoF with FRMD Minister of Finance Tax Administration Department for legal affairs Public Debt Administration Minister of Finance cabinet Department for Administrations Secretariat Treasury Administration human resources Department for Customs Administration work transparency Department for professional and operational affairs Administration for Commission for the prevention of state aid control money laundering Department for Internal audit group financial affairs Free zones Administration Tobacco Administration State secretary Department for Customs Fiscal Risk Department Financial Macroeconomic Budget Fiscal system system Management for control of system and Fiscal Analysis Department Department and policy Department public lands Department and Projections Department Department for Internal Internal cooperation Contracting and EU assistance Property and control and European Financing of Coordination legal affairs and audit integration European Union Department department department Funded Programs This unit would absorb much of the work of the current a. Decline in economic activity Public Enterprises Monitoring Group, and primarily b. Inflation focus on the risks generated by public enterprises and state-owned enterprises. The unit could analyze financial c. Banking sector crisis statements of public and state-owned enterprises and develop regular reports on the associated risks. These d. Financial and foreign exchange markets reports would ideally also include assessments of the fiscal In collaboration with the National Bank of Serbia and other risks posed by state guarantees. The unit would collaborate teams within the MoF, this unit would analyze fiscal risks closely with the Ministry of Economy and other ministries associated with shocks to key macroeconomic variables, that collect information on public and state-owned including growth and inflation. It would also analyze enterprises. We also recommend that the unit collaborate fiscal risks associated with Serbia’s financial sector and closely with the Public Debt Administration on the markets, and would report on the size and expected future valuation of the risk associated with state guarantees. trajectory of the government of Serbia’s direct liabilities. We 2. Unit B monitors fiscal risks related to macroeconomic and recommend that the unit work closely with the Department financial market performance and direct liabilities. for Macroeconomic and Fiscal Analysis and Projections and This unit could consist of two employees and focus on the Budget Department in these efforts. analyzing and reporting on fiscal risks posed by ESTABLISHING A FISCAL RISK MANAGEMENT DEPARTMENT IN THE MINISTRY OF FINANCE OF SERBIA 27 Figure 3. Proposed Structure for the Fiscal Risk Management Department Financial Risk Management Department One manager C: Unit for monitoring A: Unit for monitoring risks B: Unit for monitoring local government, PPP, related to PEs, SOEs, and macroeconomic and natural disaster and state-issued guarantees monetary risks other risks Three employees Two employees Three employees Risks addressed: Risks addressed: Risks addressed: • Poor business performance • Decline in economic activity • Local government budgets of public and state-owned • Inflation • Public-private partnerships enterprises • Banking sector crisis • Natural disasters • Activation of government • Financial & foreign exchange issued guarantees markets Functions: • Track status of municipal Functions: Functions: budget risks • Absorb the work of Public En- • Collaborate with relevant • Develop disaster risk finance terprises Monitoring Group stakeholders (NBS, MoF) to strategy (with Gov. Office for • Analyze financial statements quantify the above risks Public Investment Mgmt.) of public and state owned • Publish reports on size and • Analyze contingent obligations enterprises and develop regular potential fiscal impact of of future large-scale PPPs reports materialization of risks listed • Identify other fiscal risks not above mentioned in registry Note: PE = public enterprise; SOE = state-owned enterprise; NBS = National Bank of Serbia. 3. Unit C monitors risks related to local governments, fiscal risks not identified in this report (e.g., legal claims).37 public-private partnerships, and natural disasters and The unit would collect information on subnational budgets identifies new potential sources of fiscal risk. This unit from the MoF’s Budget Department and the Department could consist of three employees and focus on managing for Macroeconomic and Fiscal Analysis and Projections; it the risks associated with would work closely with the Budget Department and relevant disaster risk management institutions to determine an a. Local government budgets appropriate level of contingency funds and would collaborate b. Public-private partnerships with the Commission for Public Private Partnerships in monitoring fiscal risks associated with PPPs. c. Natural disasters These three units should be coordinated by one manager This unit would focus on fiscal risk associated with municipal responsible for organizing and overseeing their work, finances. It would develop a disaster risk finance strategy communicating the importance of fiscal risk management in coordination with the Government Office for Public to outside entities, and recommending fiscal risk mitigation Investment Management, analyze contingent obligations of measures to other government entities if and when the government related to PPPs, and identify other potential appropriate. 37. In this particular case, employees should seek to obtain information on the state’s exposure to legal action against it—e.g., by initiating a survey of line ministries and agencies, by having a requirement for information inserted in the budget call circular, or by seeking information from the Ministry of Justice or the entity that represents the state in legal action. 28 ESTABLISHING A FISCAL RISK MANAGEMENT DEPARTMENT IN THE MINISTRY OF FINANCE OF SERBIA Process Mapping: Macro Processes The proposed FRMD should work closely with existing entities involved in fiscal risk management. It is critical that the responsibilities of all these actors be clearly defined and delineated, and that the interactions between them be clearly mapped out. The macro process maps shown for each of the proposed FRMD units (figures 4–6) outline the inputs each unit should receive and from whom, the key activities of each unit, and each unit’s key outputs. For a more detailed, indicative mapping of micro processes that each FRMD unit could follow—related to data collection, risk reporting, etc.—please see the micro process maps in appendix C. Figure 4. Macro Process: FRMD Unit A Note: PE = public enterprise; SOE = state-owned enterprise; FR = fiscal risk. ESTABLISHING A FISCAL RISK MANAGEMENT DEPARTMENT IN THE MINISTRY OF FINANCE OF SERBIA 29 Figure 5. Macro Process: FRMD Unit B Note: FR = fiscal risk. 30 ESTABLISHING A FISCAL RISK MANAGEMENT DEPARTMENT IN THE MINISTRY OF FINANCE OF SERBIA Figure 6. Macro Process: FRMD Unit C Note: FR = fiscal risk. Obstacle 2. Fiscal risk management is currently not explicitly Potential Obstacles to under the mandate of the Ministry of Finance. Implementation and Potential • Potential mitigating action: An amendment could Mitigating Actions be made to Article 3 of the Law on Ministries, incorporating fiscal risk management into the There are at least six potential obstacles to effective prescribed activities of the MoF and clearly defining implementation of such a structure. But in each case the roles and responsibilities of the various actors. mitigating measures are also possible. Obstacle 3. There are few policies and procedures dictating Obstacle 1. The legal framework does not identify or address the roles and responsibilities of the various actors all relevant sources of fiscal risk. involved in fiscal risk management (including the Ministry • Potential mitigating action: An amendment to the of Finance). Budget System Law could be passed that clearly • Potential mitigating action: Policies and procedures defines fiscal risks and establishes the legal could be introduced to further detail the roles, foundation for a fiscal risk management framework, responsibilities, and interactions of the various including fiscal risk disclosure and transparency. entities involved in fiscal risk management (potential options are detailed in appendix B). ESTABLISHING A FISCAL RISK MANAGEMENT DEPARTMENT IN THE MINISTRY OF FINANCE OF SERBIA 31 Obstacle 4. There are a number of laws, government Employment and Additional Work Engagement at decisions, and decrees that hinder new employment and Public Funds Users’ Organizations. recruitment in the public sector. These include amendments Obstacle 5. The FRMD may face resistance to change from to the Law on Budget System that prohibit new public groups currently involved in fiscal risk management and sector recruitment; the Decree on the Principles for Internal other areas of the government. Organization and Systematization of Jobs in Ministries, Special Organizations and Government Departments, which • Potential mitigating action: The team implementing constrains the formation of any government department; the recommendations for the creation of the FRMD and the Government Decision on the Maximal Number of should ensure that there is clear and effective Employees in the Organizations of State Administration, communication on the rationale for change, and that Public Agencies, and Mandatory Social Security, which there are efforts to minimize duplication of work determines the number of employees for each unit of the between different entities. government. However, new recruitment and an increase in staff may be required in order to develop fully functioning Obstacle 6. As the transition to the new FRMD occurs, there fiscal risk management capabilities. may be confusion about the roles and responsibilities of stakeholders involved in fiscal risk management going • Potential mitigating action: Where possible, the new forward. This could lead to ineffective and inefficient fiscal FRMD should leverage existing staff and resources risk management, with possible gaps and overlaps. within the MoF and other relevant state institutions. In addition, staff should be trained to ensure that • Potential mitigating action: Allocation of roles and adequate fiscal risk management capacity is built. responsibilities between the various stakeholders If additional employees are required, however, the should be as clear and widely disseminated as FRMD should seek approval for new employment possible. This effort should be coupled with from the Commission for Approval of New workshops, trainings, and seminars to communicate and clarify the new roles and responsibilities. 32 ESTABLISHING A FISCAL RISK MANAGEMENT DEPARTMENT IN THE MINISTRY OF FINANCE OF SERBIA ESTABLISHING A FISCAL RISK MANAGEMENT DEPARTMENT IN THE MINISTRY OF FINANCE OF SERBIA 33 6. Conclusion The primary objective of this review was to analyze Regarding organization, we recommend that the FRMD the roles, responsibilities, and capacities of the various report directly to a state secretary of the MoF. An initial Serbian government entities that are involved in fiscal recommendation envisions three units for the FRMD: risk management. Specifically, this review has analyzed • Unit for monitoring fiscal risks related to public and the current institutional and legal framework governing state-owned enterprises and state-issued guarantees fiscal risk management, benchmarked this against practices recommended by international financial institutions and • Unit for monitoring fiscal risks related to implemented in select other countries, identified key gaps macroeconomic and financial market performance and opportunities, provided recommendations to guide the and direct liabilities creation of a Fiscal Risk Management Department within the Ministry of Finance, and mapped out the roles and • Unit for monitoring risks related to local responsibilities of relevant actors to successfully implement governments, public-private partnerships, and the proposed FRMD. natural disasters and for identifying new potential sources of fiscal risk The scope and mandate of the proposed department would include coordination, monitoring, information gathering, For this preliminary proposed structure we recommend that analysis, and the creation of relevant methodologies to these three units be staffed with a total of eight employees, improve fiscal risk management. After gathering all required with a manager responsible for organizing the FRMD’s work information on particular groups of fiscal risks, the FRMD and overseeing relations with other stakeholders relevant would assess and analyze individual risks. Once such for fiscal risk management. assessments were complete, the FRMD's personnel would develop recommendations on how to effectively mitigate a specific risk. The FRMD should also coordinate the information flow between the existing relevant institutions and should produce standardized and comprehensive reports on key fiscal risks facing the government of Serbia. The department could more actively manage risks that are not currently covered by existing entities. Furthermore, the FRMD should draft a Fiscal Risk Statement identifying and describing existing fiscal risks in detail. It should also develop the government’s fiscal risk management strategy. In situations when urgent mitigating actions are required, the FRMD should be authorized to prepare and submit an ad hoc report assessing the situation and proposing mitigating measures. 34 ESTABLISHING A FISCAL RISK MANAGEMENT DEPARTMENT IN THE MINISTRY OF FINANCE OF SERBIA ESTABLISHING A FISCAL RISK MANAGEMENT DEPARTMENT IN THE MINISTRY OF FINANCE OF SERBIA 35 Appendix A. Current Structure and Capacity of Human Resources in the Ministry of Finance Table 4 gives the number of personnel employed in various MoF units (excluding administrative roles) as of March 1, 2016. It also gives the optimal number of employees based on interviews with representatives of the government of Serbia. Table 4. Staffing of MoF Units: Optimal versus Actual Number of Employees Organizational unit Optimal Actual number number of of employeesb employeesa State secretary 4 2 Minister of finance cabinet 9 7 Secretariat 46 41 Department for Macroeconomic and Fiscal Analysis and Projections 21 14 Budget Department 46 32 Fiscal System Department 33 28 Customs System and Policy Department 13 13 Financial System Department 17 16 Internal Control and Audit Department 10 8 EU Assistance Coordination Department 20 16 Department for Contracting and Financing of European Union–Funded 61 44 Programs Property and Legal affairs 30 28 International Cooperation and European Integration Department 15 9 Department for Control of Public Funds 22 18 Commission for State Aid Control 8 5 Public Relations Department 5 5 Internal Audit Group 3 2 TOTAL 350 279c Note: Units directly involved in the management of fiscal risks are highlighted. a. "Optimal" refers to the number of staff required for functioning of the unit. b. "Actual" refers to the number of staff employed as of March 1, 2016. c. Total number of persons employed by the MoF (excluding administrative roles) for an indefinite period of time (Indefinite Term Contracts), excluding state secretaries and seven cabinet staff members, who will remain in their positions until the end of the minister's term. 36 ESTABLISHING A FISCAL RISK MANAGEMENT DEPARTMENT IN THE MINISTRY OF FINANCE OF SERBIA ESTABLISHING A FISCAL RISK MANAGEMENT DEPARTMENT IN THE MINISTRY OF FINANCE OF SERBIA 37 Appendix B. Fiscal Risk Management Model Matrix of Prospective Roles and Responsibilities Failure to clearly allocate and define roles and Distributing roles and responsibilities within the RACI responsibilities for the FRMD and other units and entities matrix provides a basis for describing jobs in detail, involved in managing fiscal risk could lead to management systematizing work positions, and defining criteria for that is ineffective and inefficient, with possible gaps and measuring the performance and complexity of each overlaps in institutional roles. work position. The "owner" of the RACI matrix for each department in the organization is the department or line A RACI matrix, which is often used for managing manager. Depending on the relevant organizational policy, organizational processes, can help for identifying the the Human Resources Department often participates in the responsibilities of all positions within an organization. It creation and adjustments of this document. If a change in defines duties and responsibilities as follows: the business process becomes necessary, each employee and • R = RESPONSIBLE. Work position has an manager must inform the matrix owner, who then needs operational/executive responsibility for the related to make sure that the matrix is adequately updated; this activity, meaning that the position actively analyzes process ensures the integrity and functionality of the tool. the situation, provides initial recommendations, Table 3 presents a proposed RACI matrix for the FRMD. It develops alternatives, and executes the task. shows the groups of activities in each of the three FRMD units • A = ACCOUNTABLE. Work position is accountable (as 1, 1.1, 1.1.1. etc.); these actually reflect the cascade of the for completing related activity. Only one person can micro processes and operations of each unit as presented in hold a role "A" at each activity line. This position figures 4–6. Roles and responsibilities of each relevant FRMD is entitled to approve or stop the execution of the manager and employee are clearly specified and paired to each activity. activity line; the table also shows the roles and responsibilities of the participants in the external departments and institutions • C = CONSULTED. This position should be consulted who will provide inputs for the work of the FRMD, participate before operational decisions are made and in FRMD processes, or use the FRMD outputs. implementation takes place. “C” staff have a strong interest in the outcome of the decision, because Once the organizational processes maps and work matrix are they are usually tasked with supporting the related evaluated and approved, the next step is to ensure that the activity with the resources under their command. obligations and responsibilities of all the participating positions They don’t have the right to block the decision or become mandatory. This will require adequate appropriations the execution of the activity. for policies and procedures of all participating institutions and departments, and not only those of the FRMD or MoF. This is • I = INFORMED. This position should be informed the critical condition for success of the proposed FRMD model. after the relevant activity is completed. “I” staff have no direct influence over the execution of the Finally, besides roles and responsibilities, the RACI matrix activity, nor is their input required, but they have provides a list of key decisions and documents that should an interest in knowing the result because of other accompany the outputs of each activity line, and the final related activities. Communication is one-way. column provides notes on the proper execution of the related activity line. 38 ESTABLISHING A FISCAL RISK MANAGEMENT DEPARTMENT IN THE MINISTRY OF FINANCE OF SERBIA WBS ACTIVITY / ROLE Roles/Positions within the FRMD Roles/Positions outside FRMD code MoE SOE Liaison Officer MoF Budget Dept Liaison MoF PDA Liaison Officer MoE PE Liaison Officer MoF Dept of Macroec.& MoF Financial System Fiscal Proj. Liaison Of. MoF State Secretary Dept. Liaison Officer FRMD Manager Employee B2 Employee A2 Employee A3 Employee C2 Employee B1 Employee C1 Employee A1 Officer 1. FRMD - UNIT A: risks related to public and state-owned enterprises and state issued guarantees  1.1. Data Collection                               1.1.1. Collection of data related to potential risks I A/R                       C/R   generated by Public Enterprises 1.1.2. Collection of data related to potential risks I   A/R                       C/R generated by State-Owned Enterprises 1.1.3. Collection of data related to potential risks I     A/R                 C/R     generated by state-issued Guarantees 1.1.4. Collection of data from other domestic I R R A/R                       & foreign sources, reports and analysis related to potential risks covered by Unit A 1.2. Risks Processing                               1.2.1. Establishing context on risks covered by A/I R R R                 C C C Unit A 1.2.2. Identifying risks A/I R R R                 C C C 1.2.3. Analyzing - assessing risks A/I R R R                 C C C 1.2.4. Developing preventive and reactive A/I R R R                 C C C mitigation strategies 1.2.5. Updating Risk Register A/I R R R         I       I I I 1.2.6. Preparing periodical reports and proposals A/I R R R                       for instant actions when situation required 1.3. Risks Reporting and Mitigating                               1.3.1. Submitting periodical reports to the MoF A R R R         I       C/I C/I C/I State Secretary Office 1.3.2. Submitting proposals for instant actions A R R R         I       C/I C/I C/I when situation required 1.3.3. Incorporating risks into budget C R R R         I A     C C C 1.3.4. Verifying periodical reports and making C           C C A/R       C C C decisions on mitigating actions 1.3.5. Communication of mitigation decisions to A R R R         I       I I I relevant stakeholders 1.3.6. Undertaking / participating in mitigating C/I C/R C/R C/R         A/I C/R     C/R C/R C/R actions 1.4. Coordination and managing the                               department unit A ESTABLISHING A FISCAL RISK MANAGEMENT DEPARTMENT IN THE MINISTRY OF FINANCE OF SERBIA 39 Key documents Key decisions Notes       Govt. Commission for PPP - Investment Mgmt - Liaison NBS - Banks, Fin. Markets, NBS - Inflation monitoring Other relevant domestic + Courts and other sources Government & relevant for legal / specific risks Ministries -Liaison Off. Govt. Office for Public foreign data sources Forex Liaison Officer Liaison Officer Liaison Officer Fiscal Council                                       Collected data 1.1.1.   Based on (To-Be) Instruction for Data Collection, Unit A, as the part of (To-Be) General                 Collected data 1.12.   Procedure for operational work of FRMD                 Collected data 1.1.3.             C C C Collected data 1.1.4.                                             Based on (To-Be) Instruction for Risk Processing, Unit A, as the part of (To-Be) General                   Decision - identified risks Unit Procedure for operational work A for period X verification of FRMD                                     Proposed and checked   mitigation strategies                 Updated and verified version   of Risk Register Unit A                                                           Periodical report - Unit A,   Based on (To-Be) Instruction period X for Risk Reporting & Mitigation, Unit A, as the part of (To-                 Proposal for instant mitigation   Be) General Procedure for action - when required operational work of FRMD                   Approval for incorporation of risks int budget             C     Decision on mitigation actions           I I I Distribution of mitigation   decisions to stakeholders             C/R                             40 ESTABLISHING A FISCAL RISK MANAGEMENT DEPARTMENT IN THE MINISTRY OF FINANCE OF SERBIA WBS ACTIVITY / ROLE Roles/Positions within the FRMD Roles/Positions outside FRMD code MoE SOE Liaison Officer MoF Budget Dept Liaison MoF PDA Liaison Officer MoE PE Liaison Officer MoF Dept of Macroec.& MoF Financial System Fiscal Proj. Liaison Of. MoF State Secretary Dept. Liaison Officer FRMD Manager Employee B2 Employee A2 Employee A3 Employee C2 Employee B1 Employee C1 Employee A1 Officer 1.4.1. Workforce selection, performance A/R C/I C/I C/I         C/I             management , team building and trainings 1.4.2 Securing continuous flow of information R C C C         A             between the Unit and all the external sources and recipients 1.4.3 Liaison and meetings with external A/R C/R C/R C/R         I       R R R officials responsible to provide support to FRMD work 1.4.4 Reviews of work in progress and A/R C C C         I             consultations 2. FRMD - UNIT B: monitoring macroeconomic and monetary risks and reporting on direct liabilities  2.1. Data Collection                               2.1.1. Collection of data related to potential risks I           A/R     C/R C/R         generated by macroeconomic decline 2.1.2. Collection of data related to potential risks I           A/R     C/R     C/R     generated by government direct liabilities 2.1.3. Collection of data related to potential risks I             A/R       C/R       generated by inflation 2.1.4. Collection of data related to potential risks I             A/R       C/R       generated by domestic banking sector 2.1.5. Collection of data related to potential risks I             A/R       C/R       generated by financial & foreign exchange markets 2.1.6. Collection of data from other domestic I           R A/R               & foreign sources, reports and analysis related to potential risks covered by Unit B 2.2. Risks Processing                               2.2.1. Establishing context on risks covered by A/I       R R       C C C C     Unit B 2.2.2. Identifying risks A/I       R R       C C C C     2.2.3. Analyzing - assessing risks A/I       R R       C C C C     2.2.4. Developing preventive and reactive A/I       R R       C C C C     mitigation strategies 2.2.5. Updating Risk Register A/I       R R     I C/I C/I C/I C/I     2.2.6. Preparing periodical reports and proposals A/I       R R       C C C C     for instant actions when situation required 2.3. Risks Reporting and Mitigating                               ESTABLISHING A FISCAL RISK MANAGEMENT DEPARTMENT IN THE MINISTRY OF FINANCE OF SERBIA 41 Key documents Key decisions Notes       Govt. Commission for PPP - Investment Mgmt - Liaison NBS - Banks, Fin. Markets, NBS - Inflation monitoring Other relevant domestic + Courts and other sources Government & relevant for legal / specific risks Ministries -Liaison Off. Govt. Office for Public foreign data sources Forex Liaison Officer Liaison Officer Liaison Officer Fiscal Council                 Work contracts, work   Based on (To-Be) Instruction for performance reports Coordination and Managing the FRM Department, as the part                 MoF State Secretary circular MoF Ministry Decision (to be of (To-Be) General Procedure for request for active support incorporated in legislation) operational work of FRMD             R   Meeting minutes                   Progress reports                                         Collected data 2.1.1.   Based on (To-Be) Instruction for Data Collection Unit B, as the part of (To-Be) General                 Collected data 2.1,2.   Procedure for operational work of FRMD C/R               Collected data 2.1.3.     C/R             Collected data 2.1.4.     C/R             Collected data 2.1.5.             C C C Collected data 2.1.6.                         C C                 Based on (To-Be) Instruction for Risk Processing, Unit B, as the part of (To-Be) General C C               Decision on identified risks Procedure for operational work Unit B for period X of FRMD C C                 C C             Proposed and checked   mitigation strategies C/I C/I             Updated and verified version   of Risk Register Unit B C C                                       42 ESTABLISHING A FISCAL RISK MANAGEMENT DEPARTMENT IN THE MINISTRY OF FINANCE OF SERBIA WBS ACTIVITY / ROLE Roles/Positions within the FRMD Roles/Positions outside FRMD code MoE SOE Liaison Officer MoF Budget Dept Liaison MoF PDA Liaison Officer MoE PE Liaison Officer MoF Dept of Macroec.& MoF Financial System Fiscal Proj. Liaison Of. MoF State Secretary Dept. Liaison Officer FRMD Manager Employee B2 Employee A2 Employee A3 Employee C2 Employee B1 Employee C1 Employee A1 Officer 2.3.1. Submitting periodical reports to the MoF A       R R     I C/I C/I C/I C/I     State Secretary Office 2.3.2. Submitting proposals for instant actions A       R R     I C/I C/I C/I C/I     when situation required 2.3.3. Incorporating risks into budget C       R R     I A C C C     2.3.4. Verifying periodical reports and making C           C C A/R   C C C     decisions on mitigating actions 2.3.5. Communication of mitigation decisions to A       R R     I   I I I     relevant stakeholders 2.3.6. Undertaking / participating in mitigating C/I       C/R C/R     A/I C/R C/R C/R C/R     actions 2.4. Coordination and managing the                               department unit B 2.4.1 Workforce selection, performance A/R C/I C/I C/I         C/I             management , team building and trainings 2.4.2 Securing continuous flow of information R C C C         A             between the Unit and all the external sources and recipients 2.4.3 Liaison and meetings with external A/R C/R C/R C/R         I R R R R     officials responsible to provide support to FRMD work 2.4.4 Reviews of work in progress and A/R C C C         I             consultations 3. FRMD - UNIT C: monitoring risks related to local governments, public-private partnerships, natural disasters and other risks 3.1. Data Collection                               3.1.1. Collection of data related to potential risks I           A/R     C/R           generated by natural disasters 3.1.2. Collection of data related to potential risks I           A/R                 related to legal and other specific causes 3.1.3 Collection of data related to potential risks I             A/R   C/R C/R         generated by local governments budget expenditures 3.1.4 Collection of data related to potential risks I             A/R               generated by public-private partnerships 3.1.5 Collection of data from other domestic I           R A/R               & foreign sources, reports and analysis related to potential risks covered by Unit C 3.2. Risks Processing                               ESTABLISHING A FISCAL RISK MANAGEMENT DEPARTMENT IN THE MINISTRY OF FINANCE OF SERBIA 43 Key documents Key decisions Notes       Govt. Commission for PPP - Investment Mgmt - Liaison NBS - Banks, Fin. Markets, NBS - Inflation monitoring Other relevant domestic + Courts and other sources Government & relevant for legal / specific risks Ministries -Liaison Off. Govt. Office for Public foreign data sources Forex Liaison Officer Liaison Officer Liaison Officer Fiscal Council C/I C/I             Periodical report - Unit B,   Based on (To-Be) Instruction period X for Risk Reporting & Mitigation, Unit B, as the part of (To- C/I C/I             Proposal for instant mitigation   Be) General Procedure for action - when required operational work of FRMD C C               Approval for incorporation of risks int budget C C         C     Decision on mitigation actions I I         I I Distribution of mitigation   decisions to stakeholders C/R C/R         C/R                                             Work contracts, work   Based on (To-Be) Instruction for performance reports Coordination and Managing the FRM Department, as the part                 MoF State Secretary circular MoF Ministry Decision (to be of (To-Be) General Procedure for request for active support incorporated in legislation) operational work of FRMD R R         R   Meeting minutes                   Progress reports                             C/R           Collected data 3.1.1.   Based on (To-Be) Instruction for data collection Unit C, as the part of (To-Be) General         C/R   C/R   Collected data 3.1,2.   Procedure for operational work of FRMD                 Collected data 3.1.3.         C/R         Collected data 3.1.4.             C C C Collected data 3.1.5.                         44 ESTABLISHING A FISCAL RISK MANAGEMENT DEPARTMENT IN THE MINISTRY OF FINANCE OF SERBIA WBS ACTIVITY / ROLE Roles/Positions within the FRMD Roles/Positions outside FRMD code MoE SOE Liaison Officer MoF Budget Dept Liaison MoF PDA Liaison Officer MoE PE Liaison Officer MoF Dept of Macroec.& MoF Financial System Fiscal Proj. Liaison Of. MoF State Secretary Dept. Liaison Officer FRMD Manager Employee B2 Employee A2 Employee A3 Employee C2 Employee B1 Employee C1 Employee A1 Officer 3.2.1. Establishing context on risks covered by A/I           R R   C C         Unit C 3.2.2. Identifying risks A/I           R R   C C         3.2.3. Analyzing - assessing risks A/I           R R   C C         3.2.4. Developing preventive and reactive A/I           R R   C C         mitigation strategies 3.2.5. Updating Risk Register A/I           R R I C/I C/I         3.2.6. Preparing periodical reports and proposals A/I           R R   C C         for instant actions when situation required 3.3. Risks Reporting and Mitigating                               3.3.1. Submitting periodical reports to the MoF A           R R I C/I C/I         State Secretary Office 3.3.2. Submitting proposals for instant actions A           R R I C/I C/I         when situation required 3.3.3. Incorporating risks into budget C           R R I A C         3.3.4 Verifying periodical reports and making C           C C A/R   C         decisions on mitigating actions 3.3.5. Communication of mitigation decisions to A           R R I   I         relevant stakeholders 3.3.6. Undertaking / participating in mitigating C/I           C/R C/R A/I C/R C/R         actions 3.4. Coordination and managing the                               department unit C 2.4.1 Workforce selection, performance A/R           C/I C/I C/I             management , team building and trainings 3.4.2 Securing continuous flow of information R           C C A             between the Unit and all the external sources and recipients 3.4.3 Liaison and meetings with external A/R           C/R C/R I R R         officials responsible to provide support to FRMD work 3.4.4 Reviews of work in progress and A/R           C C I             consultations ESTABLISHING A FISCAL RISK MANAGEMENT DEPARTMENT IN THE MINISTRY OF FINANCE OF SERBIA 45 Key documents Key decisions Notes       Govt. Commission for PPP - Investment Mgmt - Liaison NBS - Banks, Fin. Markets, NBS - Inflation monitoring Other relevant domestic + Courts and other sources Government & relevant for legal / specific risks Ministries -Liaison Off. Govt. Office for Public foreign data sources Forex Liaison Officer Liaison Officer Liaison Officer Fiscal Council     C C C   C       Based on (To-Be) Instruction for Risk Processing, Unit C, as the part of (To-Be) General     C C C   C     Decision on identified risks Procedure for operational work Unit C for period X of FRMD     C C C   C           C C C   C   Proposed and checked   mitigation strategies     C/I C/I C/I   C/I   Updated and verified version   of Risk Register Unit C     C C C   C                                 C/I C/I C   C   Periodical report - Unit B,   Based on (To-Be) Instruction period X for Risk Reporting & Mitigation, Unit C, as the part of (To-     C/I C/I C   C   Proposal for instant mitigation   Be) General Procedure for action - when required operational work of FRMD     C C C         Approval for incorporation of risks int budget     C C C   C     Decision on mitigation actions     I I I   I I Distribution of mitigation   decisions to stakeholders     C/R C/R C/R   C/R                                             Work contracts, work   Based on (To-Be) Instruction for performance reports Coordination and Managing the FRM Department, as the part                 MoF State Secretary circular MoF Ministry Decision (to be of (To-Be) General Procedure for request for active support incorporated in legislation) operational work of FRMD     R R C   C   Meeting minutes                   Progress reports   46 ESTABLISHING A FISCAL RISK MANAGEMENT DEPARTMENT IN THE MINISTRY OF FINANCE OF SERBIA ESTABLISHING A FISCAL RISK MANAGEMENT DEPARTMENT IN THE MINISTRY OF FINANCE OF SERBIA 47 Appendix C. Process Mapping: Micro Processes To assist the GoS in translating these recommendations into actual tasks, behaviors, and actions, three micro processes have been detailed for each of the three FRMD units: 1. Data collection, which involves gathering of information from all relevant stakeholders 2. Risk processing, which involves identifying and analyzing risks, developing risk mitigation strategies, and updating the risk register 3. Risk reporting and mitigation, which involves submitting periodic and ad hoc reports to the MoF state secretary Micro processes by Unit A are presented in figures 7–9. Figure 7. FRMD Unit A: Micro Process 1—Data Collection 48 ESTABLISHING A FISCAL RISK MANAGEMENT DEPARTMENT IN THE MINISTRY OF FINANCE OF SERBIA Figure 8. FRMD Unit A: Micro Process 2—Risk Processing ESTABLISHING A FISCAL RISK MANAGEMENT DEPARTMENT IN THE MINISTRY OF FINANCE OF SERBIA 49 Figure 9. FRMD Unit A: Micro Process 3—Risk Reporting and Mitigation 50 ESTABLISHING A FISCAL RISK MANAGEMENT DEPARTMENT IN THE MINISTRY OF FINANCE OF SERBIA Micro processes by Unit B are presented in figures 10–12. Figure 10. FRMD Unit B: Micro Process 1—Data Collection ESTABLISHING A FISCAL RISK MANAGEMENT DEPARTMENT IN THE MINISTRY OF FINANCE OF SERBIA 51 Figure 11. FRMD Unit B: Micro Process 2—Risk Processing 52 ESTABLISHING A FISCAL RISK MANAGEMENT DEPARTMENT IN THE MINISTRY OF FINANCE OF SERBIA Figure 12. FRMD Unit B: Micro Process 3—Risk Reporting and Mitigation ESTABLISHING A FISCAL RISK MANAGEMENT DEPARTMENT IN THE MINISTRY OF FINANCE OF SERBIA 53 Micro processes by Unit C are presented in figures 13–15. Figure 13. FRMD Unit C: Micro Process 1—Data Collection 54 ESTABLISHING A FISCAL RISK MANAGEMENT DEPARTMENT IN THE MINISTRY OF FINANCE OF SERBIA Figure 14. FRMD Unit C: Micro Process 2—Risk Processing ESTABLISHING A FISCAL RISK MANAGEMENT DEPARTMENT IN THE MINISTRY OF FINANCE OF SERBIA 55 Figure 15. FRMD Unit C: Micro Process 3—Risk Reporting and Mitigation 56 ESTABLISHING A FISCAL RISK MANAGEMENT DEPARTMENT IN THE MINISTRY OF FINANCE OF SERBIA ESTABLISHING A FISCAL RISK MANAGEMENT DEPARTMENT IN THE MINISTRY OF FINANCE OF SERBIA 57 Appendix D. Policies and Procedures That Could Be Developed and Adopted by the Ministry of Finance to Strengthen Fiscal Risk Management Document articulating Involved institutions Content policy Policy on Government-wide Describes concept of integrated fiscal risk management Implementation of and explains need for participation by wider group of Integrated Fiscal Risk Once created and approved, the governmental bodies; lists bodies and departments Management policy should be communicated to be involved and specifies required inputs of each to all the participating bodies participant; explains lines of communication to and from and appropriately aligned and FRMD, outputs of the fiscal risk management process, integrated with their own policies expected benefits of new approach, and how these and procedures benefits will be monitored and measured Procedure of Work of FRMD and lateral MoF Provides detailed description of relationships and Integrated Fiscal Risk departments related to information exchanges between the units and Management within the implementing fiscal risk departments; specifies lines of command and control, MoF management liaison officer positions, decisions and documents to be included in the system, and macro and micro process maps Instruction Book Three units within FRMD Describes micro process of data collection in granular for Process of Data detail based on RACI matrix distribution of roles and Collection responsibilities Instruction Book Three units within FRMD Describes micro process of risk processing in granular for Process of Risk detail based on RACI matrix distribution of roles and Processing responsibilities Instruction Book Three units within FRMD Describes micro process of risk reporting and mitigation for Process of Risk in granular detail based on RACI matrix distribution of Reporting and Mitigation roles and responsibilities Instruction Book for FRMD manager and MoF state Describes operative activities of FRMD coordination and Coordination and secretary management in granular detail, based on RACI matrix Management of the distribution of roles and responsibilities FRMD 58 ESTABLISHING A FISCAL RISK MANAGEMENT DEPARTMENT IN THE MINISTRY OF FINANCE OF SERBIA ESTABLISHING A FISCAL RISK MANAGEMENT DEPARTMENT IN THE MINISTRY OF FINANCE OF SERBIA 59 Appendix E. People Interviewed in the Preparation of This Report People Interviewed within People Present at the Disaster the Ministry of Finance and Risk Finance and Fiscal Risk Fiscal Council Management Workshop, held Marko Bekric, Associate, Ministry of Finance March 29–30, 2016, in Belgrade, Mirjana Cojbasic, Budget Department, Ministry of Finance Serbia Branko Drcelic, Public Debt Administration, Ministry of Finance Representatives from government departments supporting Jelena Miljkovic, Associate, Ministry of Finance fiscal risk management in Serbia Jelena Racic, Department for Macroeconomic and Fiscal Dušan Vujović, Minister, Ministry of Finance Analysis and Projections, Ministry of Finance Martina Dalić, Resident Advisor, Public Financial Vladimir Vuckovic, Fiscal Council Management, International Monetary Fund Representatives from the Swiss State Secretariat for Economic Affairs (SECO) Representatives from the World Bank Disaster Risk Financing and Insurance Program Representatives from the World Bank Europe and Central Asia Disaster Risk Management Unit Representatives from the World Bank Treasury 60 ESTABLISHING A FISCAL RISK MANAGEMENT DEPARTMENT IN THE MINISTRY OF FINANCE OF SERBIA ESTABLISHING A FISCAL RISK MANAGEMENT DEPARTMENT IN THE MINISTRY OF FINANCE OF SERBIA 61 Appendix F. Outcomes of the Workshop on Fiscal Risk Management in Belgrade on March 29-30, 2016 Participants in the workshop discussed the findings of • Given the current budget and hiring constraints, the functional review for the establishment of a fiscal risk this department should draw as much as possible department and heard experiences of countries around on existing staff and resources in the MoF, the the world in managing fiscal risks through such dedicated government, and elsewhere instead of hiring new departments. Participants discussed the broad outline staff. This approach will be aligned with the findings such a department could take within the government of of the overall functional analysis of the Ministry of Serbia. The department would be established in line with Finance currently under preparation. agreements between the government and the International • To clearly define roles and responsibilities of the Monetary Fund; it would also be closely aligned with various actors in fiscal risk management, and to the findings of the World Bank team’s overall functional strengthen overall enforcement of fiscal discipline, analysis of the MoF. amendments to existing laws should be considered. Participants agreed that • Efforts to establish the department will be • A dedicated fiscal risk management department significantly constrained by the current restrictions in the Ministry of Finance is needed to strengthen on staffing and the budget environment. Another fiscal risk management and coordination. potential challenge to implementation could arise if government departments are reluctant to • Such a department must complement existing share information. institutions, functions, and methodologies and should be carefully designed to avoid overlap and duplication. • This department should have a mandate for coordination, monitoring, information gathering, analysis, and the creation of relevant methodologies. The department could potentially more actively manage risks that are not currently covered. • Such a department should be situated under a state secretary, but it should report directly to the minister to ensure that it has sufficient weight to carry out its centralized monitoring function. Establishing a risk committee is one possibility for ensuring the involvement of all required stakeholders. 62 ESTABLISHING A FISCAL RISK MANAGEMENT DEPARTMENT IN THE MINISTRY OF FINANCE OF SERBIA Workshop Agenda (Day 2, focused on Fiscal Risk Management) Wednesday, March 30, 2016: Fiscal Risk Management Registration Recap of Day and Introduction to Day 2 Introduction to Fiscal Risk Management Martina Dalić, Resident Advisor, Public Financial Management, International Monetary Fund Current Fiscal Risk Management Practices in Serbia Prof. Dr. Dragan Lončar, Faculty of Economics, University of Belgrade Representatives from Government Departments supporting current fiscal risk management in the Republic of Serbia Consultations on current fiscal risk management arrangements and priorities Lunch Experiences in Fiscal Risk Management around the World Prof. Dr. Dragan Lončar, Faculty of Economics, University of Belgrade Fiscal Risk Management in Colombia, Mexico, Panama, and Peru, Ana Maria Torres, Senior DRF Consultant, World Bank Disaster Risk Financing and Insurance Program Cigdem Aslan, Lead Financial Officer, World Bank Treasury Gap Analysis of Fiscal Risk Management practices in Serbia Prof. Dr. Dragan Lončar, Faculty of Economics, University of Belgrade Consultations and Recommendations on Improving Fiscal Risk Management Conclusion and wrap-up ESTABLISHING A FISCAL RISK MANAGEMENT DEPARTMENT IN THE MINISTRY OF FINANCE OF SERBIA 63 Bibliography Aslan, Cigdem, and David Duarte. “How Do Countries Measure, Manage, and Monitor Fiscal Risks Generated by Public- Private Partnerships? 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