Improved Revenue Transparency (AL0086)

Brief Description of the Commitment

The Government of Albania is committed to gradual introduction of a modern system of public sector accounting based on international standards. Public accounting in Albania is currently done on a cash basis with elements of accruals with regard to assets and liabilities. This initiative aims to enhance the quality of public sector accounting and financial reporting in the Republic of Albania, considering the clear need for reforming financial reporting across Albania. This reform includes: a) Development of public sector accounting and financial reporting in line with International Public Sector Accounting Standards (IPSAS); b) Development of Ministry of Finance and Economy (MFE) capacities and of professional accounting skills for public accounting practitioners. Increase awareness of Line Ministries and Local Government Units regarding Asset Management

Problem Definition

1. What problem does the commitment aim to address? Municipalities are the government tier closest to citizens and as such are potentially able to address the needs of their communities better than the central government. Considering the information advantage of the municipalities over the central government, they can potentially better tailor the offer of public goods and services to the citizens needs and preferences. Decentralization reforms undertaken in Albania between 2015 and 2018 aimed at strengthening local government, through the development of conditions and capacities to provide quality and efficient local services. The tax on immovable properties and transactions on them is a considerable and sustained source of revenue for the local budget. Even though revenue collected over the years from the tax on immovable properties has generally had a growing trend, issues related to property rights and the lack of a fiscal cadaster, among other things, do not allow the potential of this tax to be fully achieved. Following the full reforming of this tax as by Law No. 106/2017 “On some changes and additions to Law No. 9632, dated 30.10.2006 “On the local taxes system”, as amended, based on the media communications of the Ministry of Finance and Economy, all municipalities were expected to apply the tax on immovable properties based on the new methodology in 2019. Currently, not every municipality has undertaken this step, because of issues with the collection of the required data to apply this methodology. In structural terms, revenue from the building tax makes up the largest share of the total revenue from taxes on immovable properties. Our main objective is to assist the General Directorate of Property Tax during the training sessions with the staff of Municipalities as well as raising awareness to the community on the importance of collecting property tax for the local units. The Government of Albania is committed to gradual introduction of a modern system of public sector accounting based on international standards. Public accounting in Albania is currently done on a cash basis with elements of accruals with regard to assets and liabilities. This initiative aims to enhance the quality of public sector accounting and financial reporting in the Republic of Albania, considering the clear need for reforming financial reporting across Albania. This reform includes: a) Development of public sector accounting and financial reporting in line with International Public Sector Accounting Standards (IPSAS); b) Development of Ministry of Finance and Economy (MFE) capacities and of professional accounting skills for public accounting practitioners. This commitment is supported by a World Bank project, which has the objective of the development of a road map for public sector accrual accounting implementation and to support the early stages of this reform, including building essential technical skills. Aligned to the Albania PFM strategy (2019-2022), the main objectives of the project are as follows: a) Development of national guide, institutional arrangements and long term action plan for transition from the existing public sector accounting and financial reporting framework, in alignment with the development of treasury system (AGFIS) into AFMIS. b) Presentation of financial statements in accordance with selected IPSAS standard. c) Improvement quality of accounting, statistical and financial reporting evidenced by the PEFA assessment. d) Improved technical capacity of the Financial Reporting Unit of the MoFE. e) Public Accounting rules implementation and Central Harmonization Unit (in charge of Public Accounting methodology) in improving the quality of the public sector financial reporting. f) Development of a sustainable public sector accounting qualification compatible with international good practices; and improved understanding and application of relevant accounting standards by practitioners and public sector auditors.

2. What are the causes of the problem? The main purpose of this commitment is because of the existence of some problems, identified during the gap analysis such as: • Lack of precise determination of the number of controlled public sector units; • The legal framework for public sector accounting and financial reporting was complex, fragmented and unclear; • Lack of vocational education and training in the field of public sector finance and accounting; • Lack of a code of ethics for public sector accountants; • Confusing budget system; • Partial functioning of the AGFIS system (Government Financial Information System), despite being used in most of the public sector; Lack of a consolidated asset register for the General Government Units in Albania (lack of a certain methodology for measurement and inventory of assets).

Commitment Description

1. What has been done so far to solve the problem? During these years, we have carried out activities as follow: • Revision of the business processes that would enable reporting under IPSAS; • Revision of Chart of Accounts; • Assessment of AGFIS Functionality to Handle Accounting and Reporting under IPSAS Accrual Basis of Accounting; • Instruction on Opening Balances. • Preparation of accrual accounting instructions regarding: ✓ Inventory ✓ Accruals and expense ✓ Provisions ✓ Intangible Assets ✓ Employee benefits ✓ Property, Plant and Equipment ✓ Revenue ✓ Financial instruments ✓ Reporting and Presentation ✓ Consolidation • Train the trainers program on public sector financial reporting and accounting based on IPSAS (28 participants). • Pilot the first-time training of the finance and accounting staff in central government institutions on public sector accounting and financial reporting based in IPSAS.(100 accountants from about 20 different institutions). • Training of the finance and accounting staff on public sector accounting and financial reporting based in IPSAS (400 accountants). 2. What solution are you proposing? Public accounting in Albania is currently done on a cash basis with elements of accruals regarding assets and liabilities. In this regard, we will follow partial adoption of IPSAS. Partial adoption of IPSAS: National public sector GAAP is modified and/or new public sector GAAP is issued that is consistent with selected parts of selected IPSAS. There are many reasons why this is the preferred approach, including: 1. There is a list with consistencies and inconsistencies between Albanian public sector GAAP and IPSAS for each standard. Also, not all the IPSAS standards are relevant for the Albanian context and not all the parts of a standard are applicable in the Albanian context. 2. The current approach provides accountants with concrete, specific and clear accounting principles to ensure unambiguous understanding of requirements and avoid any inconsistencies in the application of the accounting standards. Some of the original IPSAS are not aligned with the local country approach and cultural expectations regarding the accounting cases. Increase awareness of Line Ministries and Local Government Units regarding Asset Management. This is important for several reasons: • Proper management of assets can help institutions make informed decisions about the allocation of resources, improve the accuracy of financial reporting, and reduce the risk of fraud and errors. • Proper asset management practices can help budget institutions comply with regulations and standards related to financial reporting, asset valuation, and asset disposal. • Effective asset management can help institutions prioritize investments in infrastructure, extend the life of existing assets, and plan for the replacement of assets at the end of their useful life. • Sound asset management practices can increase transparency and accountability in budget institutions. This can help stakeholders understand how the institution is using its assets and resources, and ensure that public funds are being used effectively and efficiently. 3. What results do we want to achieve by implementing this commitment? • Greater transparency and accountability of the financial decisions made by jurisdictions for donors, citizens and investors; • Complete information to aid better decision making; • A complete inventory of assets and stocks, which enables entities to assess whether these are being used effectively, efficiently and economically to deliver public services; • Internationally recognized government reporting framework is an important factor in the assessment of a country’s financial stability and attractiveness for investment by supporting fairer and more accurate credit ratings and encourage foreign direct investment; • Governance of public finances will be enhanced through greater transparency and accountability required by the disclosure of government assets and in particular liabilities. • Developing awareness activities for budget institutions regarding asset management will improve financial and operational performance, ensure compliance with regulations and standards, and address aging infrastructure challenges, and increase transparency and accountability.

Milestones | Expected Outputs | Expected Completion Date

Joint training sessions with the staff of municipalities and community groups on the importance of collecting property tax for the municipality | Municipality staff is trained and has the necessary knowledge and tools about the tax. Community groups are aware of the importance of collecting property tax from their municipality. | S II 2023- S I 2025

Approval of the Legal acts and accounting standards in line with International Public Sector Accounting Standards (IPSAS) | Instructions approved | 2024

Preparation and implementation of the methodology regarding inventory and evaluation of public sector assets. | Methodology approved | 2024

Increase awareness of LM and LGUs regarding Asset Management | Awareness activities developed | 2024

Full public assets inventory is recorded in the Albanian Government Financial Information System (AGFIS) by those Budgetary Institutions (BI’s) which have direct access in the system | 15 total BI’s which have migrated the public assets into the AGFIS | 2024

Full public assets inventory is recorded in Excel for Budgetary Institutions (BI’s) which have not direct access in AGFIS | Public assets recorded into Excel

Action Plan Review

Commitment 13. Public awareness on revenue transparency