audit report on the proposed low on financial statement of

AUDIT REPORTOF THE PROPOSED LAW ON THE FINAL STATEMENT OF ACCOUNTS OF THE

STATE BUDGET OF MONTENEGRO FOR 2014

Type of audit: Financial audit and regularity audit Audited entity: Government of Montenegro – Ministry of Finance Subject‐matter of audit:

Proposal Law on the Final Statement of Accounts of the State Budget of Montenegro for 2014

Audit duration: 120 auditing days Auditing Board members:

Mr Milan Dabović, PhD, President of Senate – Head of Auditing Board Mr Dragiša Pešić, member of Senate – member of Auditing Board

On the basis of Article 9 of the Law on State Audit Institution and the Decision of the Auditing Board responsible for the audit, composed of Mr Milan Dabović PhD, Head of the Auditing Board and Mr Dragiša Pešić, member of the Auditing Board, the State Audit Institution conducted the financial audit of the Proposal Law on the Final Statement of Accounts of the State Budget of Montenegro for 2014. The audit covered the legal part and the explanation, Report on Consolidated Public Spending for 2014, Report on Cash Flow for 2014 prepared according to the economic classification, Report on Cash Flow for 2014 prepared according to the functional classification, Report on Arrears as of 31st December 2014, financial records system and the audit of regularity of the activities and financial transactions with the laws and secondary legislation. Responsibility of the Management for the Financial Report

According to Article 39 of the Law on the Budget and Fiscal Responsibility, the Minister of Finance shall be responsible for the execution of the state budget, as well as for the preparation and presentation of the financial statements in line with the Rulebook on the Manner of Drafting, Compiling and Filing Financial Statements of the Budget, State Funds and Local Self‐Government Units. According to Article 40 paragraph 4 of the Law on the State Budget and Fiscal Responsibility, it is the budget executor in the spending unit that shall be accountable for legality in the use of funds allocated to the said spending unit. This responsibility shall include designing, implementing and ensuring internal controls relevant for the preparation and presentation of the financial statements without materially incorrect presentations caused by fraud or by error. The Government of Montenegro and the responsible persons in the spending units shall be deemed accountable for ensuring compliance of all activities, financial transactions and information, entered into the financial statements, with the relevant legislation. Responsibility of the State Audit Institution

The responsibility of the State Audit Institution is to express its opinion about the Proposal Law on the Final Statement of Accounts of the State Budget of Montenegro for 2014 on the basis of the audit it performs and to express its opinion on whether, in their material aspects, the activities, financial transactions and information given in the financial statements are, in all material respects, in compliance with the current applicable legislation. The audit was performed according to Articles 4 and 9 of the Law on State Audit Institution, relevant International Standards of Supreme Audit Institutions (ISSAI) and the Annual Audit Plan of the State Audit Institution for 2015 No. 4011‐06‐1799 as of 25th December 2014. Adhering to the International Standards of Supreme Audit Institutions (ISSAI), the State Audit Institution complied with the requirements of ethics, it planned and conducted the audit in the way which provided reasonable assurances that there were no material misstatements of disclosed data.

The audit included the procedures for obtaining audit evidence about the amounts disclosed in the financial statements, including the assessment of risk of materially wrong presentation caused by frauds or errors. The risk assessment dealt with internal controls relevant for development and fair presentation of the financial statements, with a view to designing the audit procedures that are appropriate in given circumstances, but not with a view to expressing opinion about effectiveness of the internal controls. The audit included the assessment of the applied accounting procedures and the assessment of the general presentation of financial statements. We are of the opinion that the audit evidence secured in the audit procedure are sufficient and appropriate to provide a basis for the expressed audit opinion. FINANCIAL AUDIT of the Proposed Law on the 2014 Final Statement of Accounts of the State Budget of Montenegro, the end of which is on 31 December 2014, established that the Proposed Law on the Final Statement of Accounts of the State Budget of Montenegro for 2014 was in all material aspects prepared in compliance with the Law on Budget and Fiscal Responsibility and the Rulebook on the Manner of Drafting, Compiling and Filing Financial Statements of the Budget, State Funds and Local Self‐Government Units. Revenues and expenditures are presented in a true and fair way in all material respects and they do not contain any materially significant errors in the presentation of the results (deficit), and accordingly, the Auditing Board expresses its UNQUALIFIED OPINION.

REGULARITY AUDIT of the Proposed Law on the Final Statement of Accounts of the State Budget of Montenegro for 2014 established that the spending units, users of the budget funds have not put their business activities in all their aspects in compliance with the legislation that governs budget operations in Montenegro. Therefore, the relevant Auditing Board expresses its QUALIFIED OPINION. THE BASIS FOR EXPRESSING QUALIFIED OPINION: BUDGET OVERRUNS, REALLOCATIONS AND THE SCOPE OF PUBLIC SPENDING

1. Budget overruns – the audit established that in 2014 the budget spending was overrun by the amount of € 424,241,966.71. Out of the total expressed overrun of the budget spending, the amount of € 363,872,450.48 was the allowed overrun in line with Article 23 and Article 60 of the Law on Budget and Fiscal Responsibility. Non‐allowed overrun amounts to € 60,369,516.23 and includes expenditures that were not planned in the annual The Budget Law for 2014, as follows:

Funds in the amount of € 44,999,997.32 are related to expenditures for purchasing securities issued by Electric Utility Plant of Montenegro a.d. Nikšić, according to Article 12, paragraph 4 and 5 of the The Budget Law for 2014.

Funds in the amount of € 1,068,801.15 are related to expenditures for purchasing securities issued by the Investment and Development Fund in line with the Law on Investment and Development Fund.

Expenditures of the spending units based on judicial rulings in the amount of € 14,300,717.76 (expenditures for court decisions of the Ministry of finance not included) were realized from the budget of the spending units that caused court costs from the account 463 – Repayment of arrears from the previous period.

The audit established that Article 12, paragraphs 4 and 5 of the The Budget Law for 2014 is not in compliance with the Article 16 in the Special Part of the Budget for 2014, where the increase in expenditures for the purchase of securities in the specified amount should have been planned. Therefore, the budget execution resulted in the overrun of expenditures planned by the annual State The Budget Law, i.e. the non‐compliance led to the overrun in budget spending in the amount € 44,999,997.32. According to Article 12 paragraph 1 of the 2014 The Budget Law, during the year the Ministry of finance was obliged to perform reallocation of funds funds planned at the position 463 – Repayment of arrears from the previous period with the Ministry of finance, against the same position with the budget user who caused the costs up to the realized amount. It is recommended to the Ministry of finance to fully align the general and the special part of the budget when planning the annual budget in the forthcoming period. It is recommended that the Ministry of Finance consistently implement established rules prescribed by the annual The Budget Laws. 2. The scope of public spending – The Audit of Proposed Law on the Final Statement of Accounts of the

Budget of Montenegro for 2014 has found that a certain number of spending units ensures and uses their own funds according to Article 7 paragraph 1 of the Law on the Budget of Montenegro for 2014, which reads: "The revenues generated by spending unit through its own activities on the basis of its legal authorities shall be used solely for financing expenditures of that particular spending unit up to the amount planned in the budget.“ However, it was found that such funds were used in the spending units up to their full amount and not in line with the budget defined in the annual budget plan. Proposed Law on the Final Statement of Accounts of the Budget of Montenegro for 2014 presented “THE REPORT ON RECEIPTS AND EXPENDITURES OF PUBLIC INSTITUTIONS NOT INCLUDED IN THE CONSOLIDATED ACCOUNT OF THE STATE TREASURY“, indicating the following: public institutions within the Ministry of Culture, public institutions within the Ministry of Education, Montenegrin Academy of Sciences and Arts, PI Examination Centre, Police Academy, the University of Montenegro and public health institutions. Based on the data presented in the reports on cash

flow IV, the State Audit Institution composed an overview of receipts and expenditures for public cultural institutions, Police Academy, PI Regional Center for Divers Training, National Tourist Organisation, PI Examination Centre and Montenegrin Academy of Sciences and Arts.

Based on the data entered into the report, it was established that the above mentioned

institutions recorded the balance on their bank accounts opened with commercial banks in the amount of € 991,424.70 on 1 January 2014, with cash inflows amounting to € 3,508,595.70 (own revenues in the amount of € 2,516,234.64, earmarked revenues of € 691,724.55, donations amounting to € 175,181.65 and other revenues in the amount of € 125,454.86), cash payments amounting to € 3,320,319.70 and the balance of € 1,179,701.31 on on 31 December 2014.

Article 7 paragraph 1 of the 2014 The Budget Law defines that the revenues generated by spending units in the course of their own business operations, on the basis of its legal authorities, shall be used solely for financing expenditures of that particular spending unit, up to the budgeted amount. The audit established that the mentioned revenues were neither planned by the 2014 Budget Law, nor presented in the Articles 3 and 4 of the Proposed Law on the Final Statement of Accounts of the Budget of Montenegro for 2014. It is recommended that in the process of budget planning through the annual budget laws, the Government of Montenegro anticipate the revenues generated by the spending units in the course of their own business activities, and ensure that such revenues be used in line with the budget constraints defined in the annual The Budget Law. STATE CASH DEPOSITS 3. Records of Funds in the General Ledger of the State Treasury – Insight into the General Ledger of

the State Treasury of the financial assets (class 1) has shown that the records of the balance and transactions on deposit accounts are not in line with Article 6 of the Regulation on Uniform Classification of Accounts for the Budget, Extra‐budgetary Funds and Budgets of Municipalities. There are no records of the State Treasury Account in the class 1 of the General Ledger of the State Treasury.

The Ministry of finance should ensure full records of of the balance and turnover of monetary transactions on the deposit accounts in the system of Consolidated account of the State Treasury in class 1 of the General Ledger of the State Treasury, in accordance with Article 6 of the Regulation on Uniform Classification of Accounts for the Budget, Extra‐budgetary Funds and Budgets of Municipalities. 4. Final Statement of Accounts of the Tax Authority – Overview of the Final Tax Account for 2014

shows that contrary to Article 10 of the Rulebook on Tax Accounting, no records have been provided, on the basis of which the opening and closing balance, i.e. the exact amount of tax debt and advanced tax payments at the beginning/end of the fiscal year can be established.

Tax Administration should harmonize its accountancy records, in the part on reported balances in the accounts of the class “1“ ‐ monetary funds accounts, class “3“ ‐ accounts of the public revenue payers, (including the deposit accounts) and class “7“ – public revenues, with the Rulebook on Tax Accounting. 5. Report on deferred tax and non‐tax claims – Audit of the Report on deferred tax and non‐tax claims,

performed in the Customs Administration and Tax Administration by reviewing decisions composed by the Ministry of Finance, (selected by the random sample method), has established that the Ministry of Finance used to approve deferred payment of the tax debt in twelve monthly instalments, or up to 6 months, which is in line with Article 3 and Article 5 of the Regulation on conditions for deferred collecting of tax and non‐tax claims. Furthermore, the audit of the selected sample of decisions with the Tax Administration has found that a certain number of deferrals were granted without the provision of securing instruments in the amount of outstanding tax liabilities, which is not in line with Article 2, Item 8 of the Regulation on conditions for deferred collecting of tax and non‐tax claims.

It is recommended that the Ministry of finance comply with Regulation on conditions for deferred collecting of tax and non‐tax claims. BUDGET EXPENDITURES 6. Repayment of Arrears from the Previous Period – Audit of expenditures recorded in the group of

accounts 463 – Repayment of arrears from previous period has established that the payment of expenditures is not in compliance with the Regulation on Uniform Classification of Accounts for the Budget, Extra‐budgetary Funds and Budgets of Municipalities and that the paid expenditures do not present arrears but extraordinary expenditures that were not planned in the annual budget law. Based on the Conclusion rendered by the Government of Montenegro No. 06‐2341/2 as of 22 November 2012 on the adoption of the information on conveyance of the infrastructure of Jadransko brodogradiliste Bijela from the shipyard port site CM Bijela into the ownership of the State of Montenegro, the Ministry of Finance transferred funds in the amount of € 2,357,173.00 against the account 463 ‐ Repayment of arrears from previous period to the Adriatic Shipyard Bijela. However, this commitment should be recorded as a capital expenditure, considering that the said infrastructure was paid for by the State, in accordance with its estimated value on 30 June 2012 to the Adriatic Shipyard and transferred into the state ownership.

It is recommended to record the expenditures for repayment of arrears which have not been budgeted by the spending units within the group of accounts 463 – Repayment of Arrears from Previous Years, as well as not to charge this account with the expenditures due for payment in the current fiscal year. 7. System of Internal Financial Controls – Audit of the internal financial control systems within the

spending units that were audited identified the following:

most of the spending units adopted internal acts and procedures,

majority of the spending units have not filled the systematized work position in line with adopted systematization and their obligation to employ internal auditors established by the law.

The State Audit Institution is of the opinion that, despite the evident improvements of the internal financial control system, the activities on establishing financial control function and internal audit in the spending units should be continued, in line with the Law on Public Internal Financial Control and internal audit standards.

REPORT ON THE AUDIT OF THE PROPOSED LAW ON FINAL STATEMENT OF ACCOUNTS OF THE BUDGET OF MONTENEGRO FOR 2014

1. INTRODUCTION

State Audit Institution conducted the financial audit and the regularity audit of the Proposed Law on the Final Statement of Accounts of the Budget of Montenegro for 2014. Financial audit implies control of reliability and accuracy of financial statements. Regularity audit implies control of the compliance of operations with the legislation regulating the public spending system in Montenegro.

The goal of the financial audit of the Proposed Law on the Final Statement of Accounts of the Budget of Montenegro for 2014 is to express opinion on the level to which the financial report is true and fair.

The goal of the regularity audit of the Proposed Law on the Final Statement of Accounts of the Budget of Montenegro for 2014 is to express opinion on compliance with the legislation governing the budget operations in Montenegro.

Subject of the audit is the Proposed Law on the Final Statement of Accounts of the Budget of Montenegro for 2014, delivered to the State Audit Institution by the memorandum No. 06‐4012‐82472 (number 06‐261171) as of 12 June 2015. According to Article 68 the Law on the Budget and Fiscal Responsibility1, the audit controlled the following: opening and closing balance in the Consolidated Account of the Treasury; overview of the deviations from the budgeted amounts; report on the borrowings; report on the expenditures from the budget reserves; report on the guarantees given throughout the fiscal year; report on the capital projects; report on the implementation of the programme budget; report on the state debt and issued guarantees; report on the written‐off tax and non‐tax claims as defined by Article 12 of this Law, and the report on receipts and expenditures of public institutions that are not included in the Consolidated Account of the State Treasury and report on the status of outstanding liabilities that are not considered borrowings in accordance with Article 14 paragraph 2 of the Law.

The audit of the Proposed Law on the Final Statement of Accounts of the Budget of Montenegro for 2014 included the system of planning, recording and reporting in the field of budget spending in line with the Rulebook on Unique Classification of Accounts for the State Budget, State Funds and Municipal Budgets2and the Rulebook on the Manner of Drafting, Compiling and Filling Financial Statements of the Budget, State Funds and Local Self‐Government3. Alongside the documentation and reports that were controlled in the Ministry of Finance ‐ State Treasury, the audit included individual financial statements, records and documentation by spending units.

2. FINANCIAL STATEMENTS AND COMPUTATIONAL ACCURACY Accounting system of the Budget of Montenegro is organized on the cash basis and the modified cash basis, which is in line with the Law on the Budget and Fiscal Responsibility, Rulebook on Unique Classification of Accounts for the State Budget, State Funds and Municipal Budgets and Directions on State Treasury Operations and Directions on the State Treasury Operations.4 The accountancy system is based on the records in the General Ledger of the Treasury kept in the Ministry of Finance and the accountancy of the spending units that make the basis for development of the Final Statement of Accounts of the Budget of Montenegro. According to the Rulebook on the Manner of Drafting, Compiling and Filling Financial Statements of the Budget, State Funds and Local Self‐Governments, financial statements are prepared before 31st March of the current year for the previous year. The following forms are used: Statement of Cash Flows I ‐ economic classification, Statement of Cash Flows II ‐ functional classification, Statement of Cash Flows III, Statement of Cash Flows IV, Statement of Arrears, Consolidated statement of spending unit with public institutions in its structure, Statement on the consolidated budget spending, Statement on the manner of spending funds after the expiry of the fiscal year and the Statement on the manner of spending the funds from the budget reserve.

1 "Off. Gazette of MNE", No. 20/14 i 56/14 2 "Off. Gazette of MNE", No. 35/05, 37/05, 81/05 and 02/13 3 "Off. Gazette of MNE", No. 23/14 4 "Off. Gazette of MNE", No . 80/08, 02/09, 45/10, 15/11, 17/12 and 16/13

The audit of the Proposed Law on the Final Statement of Accounts of the Budget of Montenegro for 2014 included the audit of the public spending structure through its execution, as well as the structure of financing and the reasons for the cash deficit. Starting from the data given in the Proposed Law on the Final Statement of Accounts of the Budget of Montenegro for 2014, the budget deficit was shown in the amount of € 103,023,527.59, while the adjusted deficit amounted to € 107,188,980.76. The audit has determined that the Government of Montenegro has shown the state deficit in compliance with the Law on the Budget and Fiscal Responsibility, as presented in the following table: Table 1 – Adjusted Deficit for 2014

CONSOLIDATION OF PUBLIC EXPENDITURE AND ADJUSTED DEFICIT FOR 2014 In €

Description Plan Executed Adjustments (+/‐) Balance

1 2 3 4 5 = 4 + 3

1. Cash inflows 1,276,056,399.04 1,353,669,813.15 3,508,595.70 1,357,178,408.85

1.1 Taxes 797,828,901.36 833,203,582.52 0.00 833,203,582.52

1.2 Social protection contributions 397,823,173.31 444,303,244.55 0.00 444,303,244.55

1.3 Donations 8,000,000.00 5,554,927.72 0.00 5,554,927.72

1.4 Other inflows 65,358,061.88 62,086,007.17 3,508,595.70 65,594,602.87

1.5 Repaid loans inflows 7,046,262.49 8,522,051.19 0.00 8,522,051.19

2. Cash outflows 1,370,943,228.79 1,456,693,340.74 3,457,863.67 1,460,151,204.41

2.1 Wages and other personal earnings 386,488,693.72 387,342,557.39 379,753.62 387,722,311.01

2.2 Other personal income 11,868,513.96 11,957,808.10 223,883.82 12,181,691.92

2.3 Material and services supplies 76,989,398.63 82,668,934.02 1,818,212.63 84,487,146.65

2.4 Ongoing maintenance 21,655,403.20 21,273,630.08 195,338.90 21,468,968.98

2.5 Interests 73,316,123.12 75,516,395.41 138,869.03 75,655,264.44

2.6 Rents 8,172,802.14 8,033,102.02 10,686.36 8,043,788.38

2.7 Subsidies 18,874,600.00 18,426,863.34 109,424.54 18,536,287.88

2.8 Transfers to individuals, non‐governmental and public sector 101,040,047.62 99,048,746.08 0.00 99,048,746.08

2.9 Social protection transfers 498,223,398.97 492,148,010.12 0.00 492,148,010.12

2.10 Other reserve expenditures 39,193,575.14 43,340,013.55 364,241.79 43,704,255.34

2.11 Granted borrowings 2,140,000.00 2,484,899.77 0.00 2,484,899.77

2.12 Capital expenditures and securities purchase 99,642,513.32 133,972,150.24 2,574,625.98 136,546,776.22

2.13 Decrease in liabilities ‐ outflows 33,338,158.97 65,221,299.67 ‐2,357,173.00 62,864,126.67

2.14 Repayment guarantees outflows 0.00 15,258,930.95 0.00 15,258,930.95

4. Cash deficit (1 ‐ 2) ‐94,886,829.75 ‐103,023,527.59 50,732.03 ‐102,972,795.56

5. Sources of financing cash deficit (6 + 7 + 8 + 9) 94,886,829.75 103,023,527.59 ‐50,732.03 102,972,795.56

6. Net borrowings 89,886,830.34 101,687,913.58 137,544.00 101,825,457.58

7. Sale of assets 5,000,000.00 6,691,829.70 269,043.71 6,960,873.41

8. Donations 0.00 0.00 0.00 0.00

9. Net cash flow change ‐0.59 ‐5,356,215.69 ‐457,319.74 ‐5,813,535.43

10. Net increase/reduction of liabilities (10.2 ‐ 10.1) 33,338,158.97 ‐4,165,453.17 0.00 ‐4,165,453.17

10.1 Liabilities on 31.12.2014 0.00 92,254,250.00 0.00 92,254,250.00

10.2 Liabilities on 31.12.2013 33,338,158.97 88,088,796.83 0.00 88,088,796.83

11. Corrected outflows (2. ‐ 10.) 1,337,605,069.82 1,460,858,793.91 3,457,863.67 1,464,316,657.58

12. Cash inflows (1.) 1,276,056,399.04 1,353,669,813.15 3,508,595.70 1,357,178,408.85

13. Modified cash deficit (12 ‐ 11) ‐61,548,670.78 ‐107,188,980.76 50,732.03 ‐107,138,248.73

14. Deficit financing sources (15. + 16. + 17. + 18. + 19.) 61,548,670.78 107,188,980.76 ‐50,732.03 107,138,248.73

15. Net borrowings 89,886,830.34 101,687,913.58 137,544.00 101,825,457.58

16. Sale of assets 5,000,000.00 6,691,829.70 269,043.71 6,960,873.41

17. Donations 0.00 0.00 0.00 0.00

18. Liabilities to suppliers ‐33,338,158.97 4,165,453.17 0.00 4,165,453.17

19. Net cash change ‐0.59 ‐5,356,215.69 ‐457,319.74 ‐5,813,535.43

Adjustment of expenditures established by the audit is not materially significant and is related to the sources of funding and expenditures of the public institutions which may lead to unsubstantial changes in the figures of presented state budget deficit and state cash at the end of the fiscal year. The following matter is hereby emphasized:

The audit has shown that the receipts and expenditures of public institutions which are direct budget users have not been budgeted and recorded in line with Article 7, paragraph 1 of the Budget Law of Montenegro for 2014. These budget users include public institutions within the Ministry of culture, Police Academy, PI Regional Center for Divers Training, National Tourist Organisation, PI Examination Centre and Montenegrin Academy of Sciences and Arts. The said institutions generated revenues in the amount of € 3,508,595.70 and executed expenditures in the amount of € 3,320,319.70, thus recording a surplus amounting to € 50,732.03. This should result in reducing the level of presented cash deficit to the amount of € 102,972,795.56, i.e. the adjusted cash deficit to the amount of € 107,138,248.73.

the sources on finance have been adjusted by the audit, the amount of net borrowings is increased by € 137,544.00 and the inflows from the sale of property by € 269,043.71, and the total amount increased by the surplus amounting to € 50,732.03 influenced the increase in the amount of cash deposits by € 457,319.74, as well as the cash balance at the end of the fiscal period, which amounts to € 5,813,535.43 after the adjustment.

The audit of financial statements submitted to the Ministry of Finance by the spending units has found that 95 spending units funded from the budget submitted their financial statements within the prescribed time limits, while 11 spending units, whose expenditures incurred in respect of transfers and 4 spending units with expenditures incurring under “other expenditures“ did not submit their financial statements to the Ministry of Finance.

2.1. Compliance Audit of the Cash Flow

Collection of Public Revenues – the State Audit Institution has audited the compliance of the budget receipts and financing transactions with the records expressed in the Central Bank of Montenegro. It was done by checking the cash inflows and outflows on the accounts intended for collection and distribution of public revenues. According to the Order on Public Revenues Payment Method, which prescribes the accounts to be used for payments related to public revenues stipulated by the laws and other regulations, the method of public revenues payment and reporting to their users, collection of public revenues in Montenegro is realized through the account intended for the collection of public revenues (account 416) and the four clearing accounts, through which the funds are transferred to the Central account of the State Treasury by the spending units that collect public revenues ‐ Customs Administration No. 907000000080501 (identification number 805), Tax Administration No. 90700000008200112 (identification number 820), Ministry of Interior No. 907000000008250164 (identification number 825) and Police Directorate No. 907000000008400126 (identification number 840). The table below presents an overview of inflows into the clearing accounts and the transfer of funds to the Central Account of the State Treasury. Table 2 – Collection of Public Revenues by Units

DESCRIPTION CLEARING ACCOUNTS

Central account of the State Treasury

Difference Balance on 01/01/2014

Inflow Outflow Balance on 31.12.2014

Inflow

Custom Administration of Montenegro

428,128,885.47 428,128,885.47 ‐ 427,767,289.90 361,595.57

Tax Administration of Montenegro

380,528.74 1,007,916,974.41 1,008,273,416.27 24,086.88 989,583,975.00 18,689,441.27

Ministry of Interior 7,773,511.96 7,773,511.96 ‐ 7,767,302.49 6,209.47

Police Administration 4,750,326.22 4,750,326.22 ‐ 4,748,655.22 1,671.00

Total 380,528.74 1,448,569,698.06 1,448,926,139.92 24,086.88 1,429,867,222.61 19,058,917.31

According to the data of the Central Bank, the amount of inflows in 2014 on the clearing accounts of the collecting units totalled at € 1,448,569,698.06, while the outflows totalled at € 1,448,926,139.92. The funds in the amount of € 1,429,867,222.61 were transferred from the clearing accounts to the Central Account of the State Treasury, i.e. reduced by € 19,058,917.31. The mismatch in the funds transferred from the clearing accounts to the Central Account of the State Treasury in the amount of € 19,058,917.31 refers to the refund of wrong payments, the refund of overpayments, reallocation of funds among spending units that collect revenues, as well as to the allocation of funds in the amount of € 149,392.32 on the basis of collection of due and unpaid taxes and contributions. The table below shows an overview of inflows to and outflows from the Central Account of the State Treasury:

Table 3 – Collection and Allocation of Funds from the Central Account of the State Treasury

CENTRAL ACCOUNT OF THE STATE TREASURY

Customs Administration of Montenegro 427,767,289.90 1,344,293,004.43 Treasury General Account

Tax Administration of Montenegro 989,583,975.00 39,826,925.05 Municipalities

Ministry of Interior 7,767,302.49 222,234.90 Veterinary Chamber and Veterinary ambulances

Police Administration 4,748,655.22 59,499,797.88 Relocation on basis of decision of the MoF

Inflows by collecting units 1,429,867,222.61 27,517,214.58 Equalization Fund

Accounts of the Ministries and other state administration authorities

46,063,201.20 4,108,268.21PI Morsko dobro

Collected through other accounts 14,965.01 333,785.33 Union of Municipalities

Other inflows 46,078,166.21 144,158.44 Refunds and reclaiming wrong payments

Total inflows 1,475,945,388.82 1,475,945,388.82 Total outflows

Total inflow of € 1,475,945,388.82 collected in the Central Account of the State Treasury was allocated as follows: a portion of € 1,344,293,004.43 to the Treasury General Account, a transfer of € 39,826,925.05 to the municipalities, a portion of € 22,234.90 to the Veterinary Chamber and Veterinary ambulances, a portion of € 59,499,797.88 on the basis of decisions of the Ministry of Finance, a portion of € 27,517,214.58 to the Equalization Fund, a transfer of € 4,108,268.21 to PI Morsko dobro, a portion to the Union of Municipalities amounting € 333,785.33 and a portion of € 144,158.44 for refunds and reclaiming wrong payments. Treasury General Account – Account number 90700000083001‐19 is used for deposits and withdrawals of the state funds for budgetary users from the funds planned by the annual Budget Law. Table 4 ‐ Inflow and outflow from the Treasury General Account

TREASURY GENERAL ACCOUNT

Opening cash balance 1,564,187.32 1,793,717,829.13 Account outflows in 2014

Inflow from the Central account 1,344,293,004.43 6,732,995.52 Closing cash balance

Other inflows 454,593,632.90 Total inflows 1,800,450,824.65 1,800,450,824.65

Inflow of funds into the Treasury General Account from the Central Account of the State Treasury , using the Revenue Module, amounted to € 1,344,293,004.43 and direct payments into the account amounted to € 454,593,632.90. Funds allocated to municipalities – in line with legal decisions, the funds in the amount of € 39,826,925.05

were transferred to municipalities, as shown in the table below:

Table 5 – Allocations from the Central Account of the State Treasury to Municipalities

Report on Allocated Revenues from the Central Account of the State Treasury for the period of 01/01‐31/12/2014 302 Podgorica 11,294,099.25310 Cetinje 669,828.18329 Danilovgrad 805,071.41400 Nikšić 2,662,960.22 418 Savnik 38,345.97426 Pluzine 623,313.72 507 Pljevlja 2,134,975.22515 Zabljak 348,538.78604 Berane 840,110.88612 Plav 259,280.24620 Rozaje 1,024,161.05 639 Andrijevica 208,135.25647 Petnjica 4,579.72701 Bijelo Polje 1,225,073.59710 Mojkovac 286,100.62728 Kolasin 533,689.63809 Bar 3,584,170.09817 Budva 4,690,439.42 825 Ulcinj 1,102,114.93906 Herceg Novi 2,901,322.47914 Tivat 1,940,603.54922 Kotor 2,650,010.87

Total 39,826,925.05

Veterinary Chamber and Veterinary Ambulances Funds – the funds in the amount of € 222,234.90 were allocated from the Central Account of the State Treasury to the Veterinary Chamber and Veterinary Ambulance in accordance with the Decision on the Amount of Fees for Veterinary‐sanitary Inspection in Domestic Trade5. Out of a total amount of collected funds, a provider of veterinary inspections shall be entitled to 75%, while the Veterinary Chamber shall e entitled to 10%. The review of 2014 Report on allocation of funds by users of public revenues and the Reports on the collected funds before allocation (gross revenues expressed by eco code), established that an amount of € 196,089.67 was transferred to veterinary ambulances, i.e. 75% of the amount of fees levied on the basis of performed veterinary‐sanitary inspection controls, and the Veterinary Chamber was transferred an amount of € 26,145.23, i.e. 10% of the amount of fees levied on the basis of performed veterinary‐sanitary inspection controls that totalled at € 261,451.98. Allocation of funds based on Decisions of the Ministry of Finance – The audit of expenditures in the amount of € 59,499,797.88, on the selected sample of 82,40%, established that the outflow of equalizations from the Central Account of the State Treasury was executed upon the decisions of the Ministry of Finance and Conclusions of the Tax Administration, for VAT refund to legal entities, reallocation of VAT credits intended for settlement of tax liabilities to the Tax Administration, reallocation of VAT credits to tax and contributions payment accounts with the Tax Administration, while the funds in the amount of € 7,767,440.27 were transferred to the Public Service Radio and Television of Montenegro. The funds in the amount of € 7.767.440,27 were allocated to the Radio and Television of Montenegro through direct payment from the Central Account of the State Treasury and there were no records of this amount on the side of the revenues and expenditures in the Proposed Law on the Final Statement of Accounts of the State Budget of Montenegro for 2014. Equalization Fund – According to the records of the Central Bank, the opening balance of the account Equalization Fund, account number 907‐83301‐89, amounted to € 1,434,962.33 on 1 January 2014. Total inflow in 2014 amounted to € 29,315,961.66, while the outflow totalled at € 30,611,857.41, with the closing balance of € 139,066.58 on 31 December 2014. The funds in the account Equalization Fund in the amount of € 29,315,961.66 were transferred as follows: a portion of € 27,517,214.58 from the Central Account of the State Treasury, as a regular allocation of collected public revenues; the amount of € 1,700,000.00 from the Treasury General Account, on the basis of short‐term loans repayment, as well as from other accounts in the amount of € 98,747.08 (€ 74,157.38 was a repayment of loan on behalf of municipality of Berane and € 24,589.70 was a repayment of loan on behalf of municipality of Rozaje) in line with the Agreement on repayment of granted loans from the Equalization Fund. The outflow of funds in the amount of € 30,611,857.41 was allocated as follows: to the Central Account of the State Treasury, for the repayment of short‐term loans amounting to € 1,750,000.00, to municipalities and banks (on the basis of cession contracts and agreements on assignment) in the amount of € 28,772,556.58, in line with the Plan on advance distribution of funds from the Equalization Fund to municipalities and in accordance with the Conclusion on final distribution of funds from the Equalization Fund. A total of € 29,040.00 was paid to the bank accounts of individuals as remuneration for for their engagement in the commissions. A total of € 24,582.70 was transferred for the refund of payments made by mistake, while the amount of € 35,671.02 was related to a double transfer of funds on the basis of the decision of the Ministry of Finance, number 04‐3513/4, as of 4 June 2014.

PE Morsko dobro – the amount of € 4,108,268.21 was allocated from the Central Account of the State Treasury to the PE Morsko dobro .

Union of Municipalities ‐ the amount of € 333,785.33 was allocated from the Central Account of the State Treasury to the Union of Municipalities.

Refunding and Erroneous Payments – refunding and erroneous payments, in the total amount of € 144,158.44, were related to refunding and reallocation of funds, in line with the conclusions of the Ministry of Finance, to the accounts of the ministries, other state bodies and judiciary (identification number 832) in the amount of € 143,805.48, while the amount of € 352.90 was a technical error in the records.

5 "Off. Gazette of MNE", No.06/11

Turnover ofTreasury Acprevious ye€ 16,068,83recorded inbalance at t Table 6 – Inflo

Balance carried fTransfer from CeOther recorded aLoans and credits

Loans and credits

TOTAL INFLOW +

BALANCE ON 31/

Total recordto the revenBudget of 1,902,955,0funds recor

Table 7 ‐ Struc

Economic

classification

71 Cu

711 Tax

712 Co

713 Fee

714 Ch

715 Ot

72 Pro

73 Loa

74 Do

75 Bo

TO

2.2. So

Sources forcash deficitincrease in towards supresented i

f funds recorccount) amoear, € 1,344,236.40 are on the Generathe end of th

ows and Outflo

forward entral Account of thas inflow s from abroad

s in the country

+ opening balance

/12/2014

ded inflows nues and exMontenegr

031.95 ‐ € 6,8rded in the T

cture of Collect

Description

rrent inflows

xes

ntributions

es

arges

her revenues

operty sale inflows

an repayment inflows

onations and transfers

rrowings and loans

OTAL

urces for De

r deficit finat are expresdeposit, whppliers. Strun the follow

rded on the dounted to € 293,004.43 aother recordl Ledger of the period am

ows of Funds Re

e State Treasury

and outflowpenditures rro for 201844,263.60) reasury Gen

ted Revenues p

Proposed Law on 2014 Final Statement of Accounts

1,339,592,834.24

833,203,582.52

444,303,244.55

15,038,439.81

17,342,019.19

29,705,548.17

6,691,829.70

8,522,051.19

5,554,927.72

535,749,125.50

1,896,110,768.35

eficit Financi

ncing are exssed throughile financingucture of theing table:

debit side of1,902,955,0

are transferreed inflows,the State Tremounted to €

ecorded in the

GENERAL

61,344

16290

244

1,902

ws of funds inreported in t4. Collectedindicate thaeral Account

per Units

Custom Administration

4 370,896,541.3

2 370,770,999.9

5

1 47,523.5

9

7 78,017.8

0

9

2

0

5 370,896,541.3

ng

xpressed forh net loansg of the mode sources fo

Page 13

f the Genera031.95, out oed revenueswhile € 53

easury amou€ 12,200,479

General Ledge

LEDGER OF THE ST

,844,263.60 34,293,004.43,068,836.40,813,827.52

4,935,100.00

3

4

,955,031.95 1,8

n the Generathe Proposedd revenuesat the structut, as shown i

Tax Administratio

1 917,247,859.

3 462,432,582.

444,303,244.

0 1,534,725.

8,052,834.

8 924,472.

1 917,247,859.

the cash anand the infified cash deor deficit fin

l Ledger of tof which € 6s from the Ce5,748,927.52unt to € 1,89.27, as prese

r of the State T

ATE TREASURY

387,342,557.3911,957,808.10 28,563,878.8254,105,055.20

21,273,630.08

75,516,395.418,033,102.02

18,426,863.3429,807,470.83 61,864,914.0222,587,777.40 384,390,842.8515,215,135.748,089,340.11

96,861,981.96 T2,186,764.12

133,972,150.242,484,899.77

434,061,211.9415,258,930.9565,221,299.6713,532,542.72

890,754,552.68

12,200,479.27

al Ledger of td Law on the in the amure of collectn the table b

on Ministry of Interior

30 6,215,386.91

59

55

48 3,162,797.96

04

64 3,052,588.95

25,278.66

30 6,240,665.57

nd modifiedflows fromeficit was enancing on t

he State Tre6,844,263.60entral Accou2 are loans 0,754,552.68ented in the t

Treasury

Gross salaries

Transfers to institut

Rep

the State Tree Final Statemmount oftion by the ubelow:

Police Administration

1 474,865,522.0

6 203,804.4

5 4,544,850.8

6

7 4,748,655.2

cash deficitthe sale ofnlarged by nehe cash and

asury ‐ CTA (0 are deposnt of the Staand credits8, while the table below:

s and contributionsO

Rights in the socFu

Pension and disaOt

Other htions, individuals, N

Reppayment of liabilitie

C

easury ‐ CTAment of Acc€ 1,896,110units corresp

Ministry of Finance and

other institutions

00 40,484,391.50

40 10,089,588.47

9,289,185.15

82 21,105,617.88

6,691,829.70

8,522,051.19

5,554,927.72

535,723,846.84

22 596,977,046.95

ts. Sources fproperty, wet change ofd modified c

(Consolidateits from theate Treasury,s. Paymentsclosing cash:

s paid by the employOther personal inco

Material ExpensService Co

Maintenance Co

IntereRe

SubsidOther expenditu

cial protection systeunds for redundancability insurance rigther health care righealth insurance rigGOs and public sec

Other transfCapital expenditu

Loans and credRepayment of de

ayment of guarantees from previous yeurrent budget rese

TOTAL OUTFLO

A correspondounts of the0,768.35 (€ponds to the

Total Inflow Units

133,959,283,424.0

833,203,582.5

444,303,244.5

15,038,439.8

17,342,019.1

29,705,548.1

6,691,829.7

8,522,051.1

5,554,927.7

535,749,125.5

1,896,110,768.3

for financingwhich led tof the arrearscash basis is

e e , s h

yerme sesosts

osts

estsentdiesres emcies htshtshtstorfers resditsebteesarsrve

OW

d e € e

s

00

52

55

81

19

17

70

19

72

50

35

g o s s

Table 8 ‐ Structure of financing of cash and modified cash deficit in 2014

DESCRIPTION Amounts

Balance sheet Adjustments Determined by auditThe cash budget deficit ‐103,023,527.59 50,732.03 ‐102,972,795.56Increase in deposits ‐5,356,215.69 ‐457,319.74 ‐5,813,535.43TOTAL ‐108,379,743.28 ‐406,587.71 ‐108,786,330.99Domestic sources of financing 12,620,833.25 269,043.71 12,889,876.96Foreign Funding 95,758,910.03 137,544.00 95,896,454.03TOTAL 108,379,743.28 406,587.71 108,786,330.99Adjusted cash budget deficit ‐107,188,980.76 50,732.03 ‐107,138,248.73Increase in deposits ‐5,356,215.69 ‐457,319.74 ‐5,813,535.43TOTAL ‐112,545,196.45 ‐406,587.71 ‐112,951,784.16Domestic sources of financing 12,620,833.25 269,043.71 12,889,876.96Foreign Funding 95,758,910.03 137,544.00 95,896,454.03Net adjustment in outstanding liabilities 4,165,453.17 0.00 4,165,453.17TOTAL 112,545,196.45 406,587.71 112,951,784.16

According to the data presented in the Proposed Law on the Final Statement of Accounts of the Budget of Montenegro for 2014, the deficit reported on a cash basis amounted to € 103,023,527.59, and increase in deposits in the amount of € 5,356,215.41 was financed from the national sources by € 12,620,833.24 and foreign sources of finance by € 95,758,910.02. National financing sources ensured from net emission of securities in the amount of € 35,948,205.45 and from the sale of property in the amount of € 6,691,829.70 were used for reducing net liabilities for loans in the country in the amount of € 30,019,201.90 and for deficit financing in the amount of € 12,620,833.25. Foreign sources of finance ensured from net emission of securities in the amount of € 183,988,955.00 were used to reduce net liabilities for foreign credits in the amount of € 88,230,044.97 and financing of deficit amounting to € 95,758,910.03. The reported data are to be adjusted with the national sources of finance by € 269,043.71 and foreign sources of finance in the amount of € 137,544.00. Emission of securities in 2014 was recorded in the General Ledger of the State Treasury in the gross amount and thus the recommendation of the State Audit Institution given in the Report on the Proposed Law on the Final Statement of Accounts of the Budget of Montenegro for 2013 was implemented. Total financing sources were confirmed by the inflows into the foreign currency accounts in the commercial banks in the amount of € 535,749,125.50 and by repayment of the debt principal in the amount of € 434,061,211.94. Thus, the net borrowing on the basis of credits and issued securities amounts to € 101,687,913.56. The inflows from the sale of property were recorded in the General Ledger of the State Treasury in the amount of € 6,691,829.70. Article 11 paragraph 5 of the Law on the Budget of Montenegro for 2014 stipulates that the Government shall be allowed to borrow money in order to finance deficit, service debt and accumulate the fiscal reserve for 2014, in the amount of up to € 240,000,000.00, to be provided through the emission of international bonds, issuance of local bonds and /or T‐bills or through the credit arrangements with national and international financial institutions, as well as with other institutions. Notwithstanding the provisions of paragraph 5 of the said Article, the Government can borrow funds for redemption and refinancing of public debt, up to a maximum of the existing government debt, which will be provided through the issuance of bonds or the conclusion of a bilateral arrangement. Modified cash deficit was adjusted in compliance with Article 14 of the Law on the Budget and Fiscal Responsibility, by the net change in the arrears which did not have the character of borrowings, in the amount of € 4,165,453.17, with the following structure:

Table 9 – Net adjustments of outstanding liabilities

The DESCRIPTION Liabilities on 31/12/2011

Difference Liabilities on 31/12/2011



1 2 3 4 = 5 ‐ 3 5 6 = 7 ‐ 5 7 8 = 9 ‐ 7 9

1 Liabilities for current expeditures 13,356,757.00 3,765,974.00 17,122,731.00 ‐1,193,119.68 15,929,611.32 ‐1,538,706.32 14,390,905.00

1.1 Liabilities for gross salaries and contibutions payable by employer

487,009.00 1,423,859.00 1,910,868.00 ‐338,627.81 1,572,240.19 ‐1,559,513.19 12,727.00

1.2 Liabilities for personal income 486,652.00 514,112.00 1,000,764.00 356,832.31 1,357,596.31 ‐256,897.31 1,100,699.00

1.3 Liabilities for other current expenditers 12,383,096.00 1,828,003.00 14,211,099.00 ‐1,211,324.18 12,999,774.82 277,705.18 13,277,480.00

2 Liabilities for transfers for social protection 41,426,322.00 6,679,359.00 48,105,681.00 7,600,397.99 55,706,078.99 1,818,447.01 57,524,526.00

3 Liabilities for transfers to institutions, individuals and loans

5,664,403.00 1,623,578.00 7,287,981.00 7,127,819.67 14,415,800.67 5,092,112.33 19,507,913.00

4 Commitments for capital expenditures 400,079.00 249,678.00 649,757.00 ‐285,495.15 364,261.85 ‐37,965.85 326,296.00

5 Liabilities for loans and credits 563,979.00 ‐5,259.00 558,720.00 ‐555,719.00 3,001.00 27,623.00 30,624.00

6 Liabilities arising from the repayment of debts 477,856.00 ‐477,856.00 1,670,043.00 1,670,043.00 ‐1,196,058.00 473,985.00

7 Liabilities from the reserve 0.00 0.00 0.00

8 Balance of obligations at end of year (1+2+3+4+5+6+7) 61,889,396.00 11,835,474.00 73,724,870.00 14,363,926.83 88,088,796.83 4,165,452.17 92,254,249.00

The expressed difference in the balance of arrears was confirmed by the control of the payments from the budget related to the expenditures for arrears. The increase in liabilities for expenditures expressed by economic classification was established, and the net change of liabilities was confirmed as presented in the data in the table below: Table 10 – Records of outstanding liabilities

Description Amount AmountBalance on 31/12/2013 88,088,796.83 Payment of outstanding liabilities (decrease) 13,832,175.82Increase in outstanding liabilities 17,997,627.99Balance on 31/12/2014 92,254,249.00

Opening balance of arrears reduced by repayment of arrears and increased by expand in arrears amounted to € 92,254,249.00. If the expenditures expressed on the cash basis are adjusted by the same amount, the result is the amount of the adjusted deficit as reported in the Proposed Law on the 2014 Final Statement of Accounts of the Budget of Montenegro.

2.3. Budgetary Overrun

The audit has established the budgetary overrun in the amount of € 424,241,966.71 in 2014, as presented in the the table below: Table 11 – Budgetary overruns

DESCRIPTION AMOUNTTOTAL OVERRUN 424,241,966.71Allowed overrun 363,872,450.48Allowed overrun ‐ the interest 20,855,364.26Allowed overrun ‐ repayment of debt principal and guarantee 311,231,397.37Allowed overrun ‐ international agreements 14,115,706.91Repayments of overdue debts 17,669,981.94Unauthorized overrun 60,369,516.23Unauthorized overrun‐ repayment of liabilities from the previous period 14,300,717.76Expenditure on the purchase of securities 46,068,798.47

Out of the total expressed overrun of the budget spending, the amount of € 363,872,450.48 was the allowed overrun for the expenditures related to the following: interest payments, repayment of the principal and guarantees, expenditures financed through the implementation of international credit contracts, as well as expenditures expressed as the repayment of arrears from the previous period. Allowed budgetary overruns are in accordance with Article 23 and Article 60 of the Law on the Budget and the Fiscal Responsibility. Non‐allowed overruns in the amount of € 60,369,516.23, which refer to the expenses which were not predicted by Law on the Budget for 2014. Expenditure on the basis of the court rulings in the amount of € 14,300,717.76, excluding the expenditures for court rulings of the Ministry of Finance, were carried out at the expense of the spending unit which caused the court costs. However, the Ministry of Finance did not reallocate funds to the expenditure position of the budget user which caused these expenses up to the level of realization, as stipulated by Article 12 of the Budget Law for 2014.

The total amount of € 46,068,798.47 refers to the expenditures for the purchase of securities, as follows:

from the Electric Utility Plant of Montenegro AD Nikšić (EPCG), in the amount of € 44.999.997,32, in line with Article 12 paragraphs 4 and 5 of the Law on the Budget for 2014. The Ministry of Finance concluded the Protocol on settling mutual commitments, No. 01‐12290/1 as of 28 October 2014 with the Electric Utility Plant of Montenegro AD Nikšić, Tax Administration of Montenegro and Customs Administration of Montenegro, which established the debt of the Electric Utility Plant as of 30 June 2014 in the amount of € 44.999.997,32, which was to be converted into the share capital of the State of Montenegro. The amount of € 49,999,997.32 refers to the Tax Administration claims from the Electric Utility Plant Of Montenegro, on the basis of outstanding liabilities for taxes and contributions on salaries of employees amounting to € 15,944,168.01, confirmed by the Minutes of the Tax inspector no. 03‐7‐1‐33/14 as of 7 July 2014, and on the basis of claims by the Customs Administration in the amount of € 29,055,829.31, arising from the unpaid VAT on electricity import, which was confirmed by the records on the customs debt balance of the Customs Administration. The audit has found that Article 12 paragraphs 4 and 5 of the Law on the Budget for 2014 do not comply with Article 16 in the Special Part of the Law on the Budget for 2014, in which an increase in expenditures intended for the purchase of securities in the specified amount should have been planned. It led to exceeding expenditures in the budget execution, in relation to the amount planned by the annual State budget law.

from the Investment Development Fund of Montenegro in the amount of € 1,068,801.15. In its

official Letter No. 1501‐725 / 2 as of 20 March 2014, the Directorate for Development of Small and Medium Sized Enterprises informed the Investment Development Fund on the amount of available funds, collected as the repayment of loans from the previous period in the amount of € 1,068,801.00, which should be invested into the Fund capital, as stipulated by the Law on the Investment Development Fund. In accordance with the Conclusion of the Government of Montenegro No. 08‐1170 as of 29 May 2014, the Ministry of Finance transferred the total of € 1,068,801.15 from the budgetary position 4418 Expenditures for the purchase of securities to the Investment Development Fund.

The audit has established that the funds for these purposes were not planned by the Law on the Budget for 2014.

2.4. Reallocation of Funds

Reallocation of funds – Based on the Conclusions of the Government of Montenegro, the Ministry of Finance reallocated the funds appropriated by the Law on the Budget for 2014 in the total amount of € 29,930,949.23 among the spending units. In 2014, the funds totalling € 1,431,514.59 were reallocated from the current budget reserve to several spending units, which exceeded the limit provided for in Article 45 of the Law on the Budget and the Fiscal Responsibility by € 542,049.61. Reallocation of funds by programmes and individual expenditure lines in the spending unit – Following the request submitted by a spending unit, the Ministry of Finance reallocated appropriated funds by programmes and individual expenditures in the amount of € 27,743,571.66. The audit of the selected sample of 20.39% established the following: Within its programme Police Directorate, the Ministry of Interior executed reallocation of funds in the

amount of € 82,160.00 from the account 4415 – Equipment costs, which exceeded the limit provided for in Article 45 of the Law on the Budget and the Fiscal Responsibility by € 8,023.81.

Within its programme Administration, the Ministry of Education executed reallocation of funds in the amount of € 85,000.00 from the budgetary account 4127 – Other remunerations, in the amount of € 85,000.00, which exceeded the limit provided for in Article 45 of the Law on the Budget and the Fiscal Responsibility by € 52,500.00.

When reallocating appropriated funds, it is deemed necessary that the spending unit comply with the limits provided for in Article 45 of the Law on the Budget and the Fiscal Responsibility.

2.5. Scope of Public Spending

Audit of the Proposed Law on the Final Statement of Accounts of the the Budget of Montenegro for 2014 has found that a certain number of spending units ensures and uses their own funds according to Article 7 paragraph 1 of the Law on the Budget of Montenegro for 2014, which reads: "The revenues generated by spending unit through its own activities on the basis of its legal authorities shall be used solely for financing expenditures of that particular spending unit up to the amount planned in the budget.“ However, it was found that the revenues generated by spending units through their own activities were used for financing expenditures up to their full amount, and that they were not included in the public spending system. Proposed Law on the Final Statement of Accounts of the Budget of Montenegro for 2014 presented “THE REPORT ON RECEIPTS AND EXPENDITURES OF PUBLIC INSTITUTIONS NOT INCLUDED IN THE CONSOLIDATED ACCOUNT OF THE STATE TREASURY“, indicating the following: public institutions within the Ministry of Culture, Montenegrin Academy of Sciences and Arts, PI Examination Centre, Police Academy, public institutions within the Ministry of Education, the University of Montenegro and public health institutions. Based on the data in the reports on cash flow IV, the State Audit Institution composed an overview of receipts and expenditures for public institutions within the Ministry of Culture, Police Academy, PI Regional Center for Divers Training, National Tourist Organisation, PI Examination Centre and Montenegrin Academy of Sciences and Arts, as presented in the table below: Table 12 – Overview of inflows and outflows of public institutions which are not included in Consolidated Account of the State Treasury

Balance on 01/01/2014

Cash inflowsCash

payments Balance on 31/12/2014 Own revenues

Earmarkedrevenues

Donations Other

revenues

Montenegrin National Theatre 48,894.96 180,386.01 120,300.00 349,311.34 269.63

Royal Theatre Zetski Dom 768.58 7,749.54 23,000.00 29,949.13 1,568.99

National Library of Montenegro "Đurđe Crnojević" 1,652.54 46,790.46 42,000.00 1,567.00 15,286.63 79,246.56 28,050.07

Natural History Museum of Montenegro 5,374.12 17,009.27 2,865.87 74,901.19 94,942.45 5,208.61

JU Montenegrin Cinematheque 2,178.07 8,137.19 39,550.00 48,506.14 1,359.12

JU Music Center 224.86 42,306.92 74,519.00 116,993.50 57.25

Library for the Blind of Montenegro 6.27 274.49 8,725.80 46,433.32 55,438.37 1.51

National Museum of Montenegro 27,545.19 406,385.60 265,000.00 20,000.00 24,184.91 683,420.10 59,695.60

Maritime Museum of Montenegro 3,592.09 101,525.14 102,440.84 2,676.39

JU Centre for Contemporary Art of Montenegro 5,741.48 10,218.06 15,762.76 196.78

Centre for conservation and archeology CG 47,583.38 115,733.55 155,313.88 30,134.79 223,498.70 125,266.90

Total 143,561.54 936,516.23 691,724.55 126,602.98 125,454.86 1,799,509.89 224,393.88

Police Academy 8,756.65 344,120.30 325,483.07 27,393.88

JU Regional Center for Divers Training 0.00 589,404.53 589,404.53 0.00

JU Examination Center 22,269.92 62,606.92 7,976.00 74,868.41 17,984.43

National Tourism Organisation of Montenegro 16,010.07 581,099.02 506,318.16 90,790.93

Montenegrin Academy of Sciences and Arts 800,826.52 2,487.64 40,602.67 24,735.61 819,181.22

Total 847,863.16 1,579,718.41 0.00 48,578.67 0.00 1,520,809.78 955,350.46

Total 991,424.70 2,516,234.64 691,724.55 175,181.65 125,454.86 3,320,319.67 1,179,701.31

Based on the data presented in the Table, it was established that the above mentioned public institutions recorded the balance of € 991,424.70 on 1 January 2014 on their bank accounts opened with commercial banks, with cash inflows amounting to € 3,508,595.70 (own revenues in the amount of € 2,516,234.64, earmarked revenues of € 691,724.55, donations amounting to € 175,181.65 and other revenues in the amount of € 125,454.86), cash payments amounting to € 3,320,319.70 and the balance of € 1,179,701.31 on on 31 December 2014.

Article 7 paragraph 1 of the 2014 The Budget Law defines that the revenues generated by a spending unit in the course of their own business operations, on the basis of its legal authorities, shall be used solely for financing expenditures of that particular spending unit, up to the budgeted amount. The audit established that the mentioned revenues were neither planned by the 2014 Budget Law, nor presented in the Articles 3 and 4 of the Proposed Law on the Final Statement of Accounts of the Budget of Montenegro for 2014.

3. CASH DEPOSITS

The State Audit Institution confirmed the cash deposits on all the bank accounts opened with the Central Bank of Montenegro, as well as with the commercial banks where the accounts/sub‐accounts were opened. The audit has found that the deposit funds, expressed in the Proposed Law on the Final Statement of Accounts of the Budget of Montenegro for 2014 in the amount of € 12,200,475.77 are recorded in 24 accounts opened with the Central Bank of Montenegro and the commercial banks. Turnover on 21 accounts within the Consolidated Account of the State Treasury has been controlled, with 14 bank accounts opened and ran under the registry number of the Ministry of Finance, and 7 accounts of the spending units. Three bank accounts belong to the spending units that are not included in the system of Consolidated Account of the State Treasury. The recorded cash funds in the Consolidated Account of the State Treasury under the registry number of the Ministry of Finance amounted to € 11,806,136.35 €, the funds in 7 bank accounts opened by the spending units amounted to € 227,127.97 , while in 3 accounts, not included in the system of the Consolidated Account State Treasury, the cash funds amounted to € 167,211.97. The Proposed Law on the Final Statement of Accounts of the Budget of Montenegro for 2014, page 175, presented the deposit balance on the day of 31 December 2014 in the amount of mil. € 12.20 and 38,477 gold ounces at the market price of mil. € 38.05, which amounts to mil. € 50.25. Cash presented in the Proposed Law on the Final Statement of Accounts of the Budget of Montenegro for 2014 has been confirmed based on the data and documentation obtained from the Ministry of Finance (State Treasury Directorate and Department for Debt Management, Indebtedness Analysis, Cash Management and International Relations) and the Excerpt of the open items (hereinafter referred to as: IOS Form) obtained from the Central Bank and the commercial banks. IOS forms obtained from the Central Bank and eight commercial banks were signed and verified by the Ministry of Finance, while the balance of accounts with all the banks was not reconciled. Deposits in the accounts with the Central Bank of Montenegro – the balance of deposits in the accounts with the Central Bank of Montenegro on the day of 31 December 2014 amounts to € 6,827,770.68, as shown in the Table below: Table 13 – Deposits in the accounts with the Central Bank of Montenegro

Description Opening Balance Inflows Outflows

Closing Balance

Deposits bythe 2014 Final

accounts

General Account

Treasury General Account 1,564,187.32 1,798,886,637.33 1,793,717,829.13 6,732,995.52 6,732,995.52

Other accounts

Central Treasury Account 0.00 1,475,945,388.76 1,475,945,388.76 0.00

Customs Administration of Montenegro 0.00 428,128,885.47 428,128,885.47 0.00

Tax Administration of Montenegro 380,528.74 1,007,916,974.41 1,008,273,416.27 24,086.88

Ministry of Internal Affairs 0.00 7,773,511.96 773,511.96 0.00

Police Administration 0.00 4,750,326.22 4,750,326.22 0.00

Ministry of Finance‐ Liquidity account 0.34 120,738,330.82 120,738,328.02 3.14

Ministry of Finance‐Equalization Fund 1,434,962.33 29,315,961.66 30,611,857.41 139,066.58

Ministry of Finance ‐ Collection of overdue taxes and contributions 74,786.43 149,392.32 1,967.78 222,210.97

Ministry of Finance‐Account for keeping the temporarily seized funds 1,507,601.86 30,000.00 30,000.00 1,507,601.86

MF‐NF IPA III RD OP 2012‐201 0.00 6,670,703.70 6,670,703.70

MF‐NF IPA IV HRD OP 2012‐2013 0.00 1,674,900.00 1,674,900.00

DEPOSITS

Deposits on the basis of succession 1,590.21 97.32 1,687.53 0.00

Deposits MF achieved by issuing Eurobond bond 928.47 288,349,365.32 288,300,000.00 50,293.79 50,293.79

Deposits MF ‐Construction of 62 stamb.jedinice in Nikšić 594,002.11 0.00 594,002.11

Deposits ‐ regular deposit MF 138,504,551.66 138,504,495.65 56.01 56.01

Deposits MF IDF grant of the World Bank no. TF 13555ME 108,211.99 9,428.57 98,783.42

OTHER

Liabilities for advances received from residents 306,944.46 350,308,661.45 350,285,266.99 283,550.00

Approved advance Foreign currency savings 40,113.46 7,600,000.00 7,595,688.10 44,425.36 44,425.36

TOTAL 5,311,643.62 5,667,445,902.50 5,647,668,077.86 18,042,679.34 6,827,770.68

Deposits reported by the Proposed Law on the Final Statement of Accounts of the Budget of Montenegro for 2014 include the following:

Deposits in the Treasury General Account number 907‐83201‐98 in the amount of € 6,732,995.52.

Demand deposit EUROBOND, in the amount of € 50,293.79, referring to unspent funds from the issuance of bonds in the international financial market.

Regular demand deposit , in the amount of € 56.01.

Funds for repayment of debt on the basis of the foreign currency savings in the amount € 44,425.36, i.e. the remaining balance of account on 31 December 2014, incurred as a difference between the approved advance payment and the payments executed on the basis of the old foreign currency savings. According to the Decision of the Ministry of Finance No. 06‐478/1 as of 5 February 2015, deposit was increased by the said amount.

The funds which have not been reported in the deposit balance relate to the account MF‐NF IPA III RD OP 2012‐2013 in the amount of € 6,670,703.70 and the account MF ‐NF IPA IV HRD 2012‐2013 in the amount of € 1,674,900.00. The inflows into these accounts represent the advance payments after signing the financial agreement, and based on the Decision of the European Commission to transfer responsibility for managing the funds from the IPA III and IPA IV. Following the Request of the Ministry of Finance (off. letter no. 06‐4731/1 as of 25 November 2014) bank accounts for these purposes were opened with the Central Bank of Montenegro. Deposits in the accounts with the Crnogorska komercijalna Bank –Deposit balance reported by the Proposed Law on the Final Statement of Accounts of the Budget of Montenegro for 2014 on 31 December 2014 amounted to € 282,271.50 and includes the following:

Collateral for 14 credit lines in the amount of € 67,904.03, according to the Arrangement on the provision of credit lines to support the Programme “Legalization of Existing and Opening New Positions“ number 1174. The Government of Montenegro provided an amount of € 1,000,000.00 as a deposit for interest subvention on granted loans.

Pension and Disability Insurance Fund/collateral in the amount of € 120,024.04 ‐ According to the Earmarked Deposit Contract No. 01‐3492/2 as of 11 August 2006, the funds amounting € 115,000.00 were deposited as earmarked credit funds for covering loans granted to the Pension and Disability Insurance Fund employees. The inflow in the amount of € 1,198.33 and increase in deposit were recorded by the Decision of the Ministry of Finance No. 06‐626/1 as of 11 February 2015. The outflow in the amount of 444.67 on the basis of a credit instalment payment was recorded in the position 463 – Repayment of arrears from the previous years according to the Decision No. 06‐1122/1 as of 6 March 2015, and deposit was reduced.

Health Insurance Fund/collateral in the amount of € 17,038.71 ‐ Under the provisions of the Earmarked Deposit Contract No. 3678 as of 20 November 2009, the funds amounting € 20,000.00 were deposited as an earmarked deposit for covering Loan Contracts No. 705‐88‐2555, 705‐88‐2556 and 705‐88‐2557. The Decision of the Ministry of Finance No. 06‐625/1 as of 11 February 2015 recorded the inflow of € 20,000.00 and increase in deposits, while the Decision No. 06‐1121/1 as of 6 March 2015 recorded the outflow amounting to € 2,961.29 paid out from the group of accounts 463 – Repayment of arrears from the previous years, as well as decrease in deposit .

Health Insurance Fund/ collateral in the amount of € 46,504.72 ‐ Based on the Term Deposit Contract No. 03‐1710 as of 4 August 2004 and the Annex to the Contract, Annex No. 3679 as of 20 November 2009, the funds amounting to € 40,000.00 were deposited as an earmarked collateral for credits under the contracts No. 705‐88‐2554 and 705‐88‐2558. The Decision of the Ministry of Finance No. 06‐623/1 as of 11 February 2015 recorded the inflow of funds in the position 7155 – Other revenues in the amount of € 40,000.00 and 7151 – Revenues from interests in the amount of € 6,504.72 and increase in deposits by € 46,504.72.

Health Insurance Fund/collateral in the amount of € 30,000.00 ‐ Based on the Term Deposit Contract No. 03 as of 3 January 2007 and Annex No. 3 as of 14 April 2008, the funds amounting to € 30,000.00 were deposited as an earmarked collateral deposit for the credits under the Contract No. 705‐88‐2280 as of 14 April 2008. The Decision of the Ministry of Finance No. 06‐6241/1 as of 11 February 2015 recorded the inflow of funds amounting to € 30,000.00 charged to the position 7155 – Other revenues, as well as the increase in deposits.

Deposits in the clearing accounts with the NLB Montenegrobank ‐ Deposit balance on 31 December 2014 as reported in the Proposed Law on the Final Statement of Accounts of the Budget of Montenegro for 2014 amounted to € 10,150.79 and is related to the Pension and Disability Insurance Fund/collateral in the amount of € 10,150.79 ‐ According to the Earmarked Deposit Contract No. 01‐2029 as of 1 July 2009, drawn up pursuant to Article 1 of the Term Depositing Contract DP 2008/671 and Annex I and II, funds in the amount of € 10,000.00 were deposited as an earmarked deposit for loans granted to the employees. Ministry of Finance has not fully reconciled the deposit balance in the accounts with the NLB Montenegrobanka IOS. Deposits in the clearing accounts with Prva Bank ‐ Deposit balance on 31 December 2014 as reported in the Proposed Law on the Final Statement of Accounts of the Budget of Montenegro for 2014 amounts to € 35,128.66 and is related to:

Restitution Fund in the amount of € 1,969.79 ‐ the funds are deposited in the account no. 535‐7299007 and the inflow is increased by € 1.06 on the basis of the interest.

Collateral for 14 credit lines in the amount of € 33,158.87, according to the Annex no. 1 to the Arrangement on provision of credit lines to support the Programme “Legalization of Existing and Opening New Positions“ number 102‐7525 as of 20 October 2014. The Government of Montenegro provided an amount of € 210,000.00 as a deposit for interest subvention on granted loans.

Deposits in the clearing accounts with Erste Bank ‐ Deposit balance on 31 December 2014 as reported in the Proposed Law on the Final Statement of Accounts of the Budget of Montenegro for 2014 amounts to € 3,000,000.00. The Ministry of Finance Ministry of Finance concluded the Contract No. 06‐3964 / 1 from 28 December 2012 with the Erste Group Bank 1010 Vienna, under the provisions of which the funds in the amount of € 3,000,000.00 are used as a collateral for the loans granted by the bank. The said funds were term deposited in previous years with a maturity up to one year. After the expiry of the term, in 2014, the funds in the amount of € 3.123.160,38 (interest amounted to € 123,160.38) were transferred into the account 540‐402598–Transaction account for national payments of the Government of Montenegro – Solidary account for mitigating the consequences of floods. The same funds in the amount of €3,000,000.00 were time deposited under the Time Deposit Contract no. 06‐55171 as of 17 February 2014, while the funds amounting to € 122,906.00 were transferred to the Treasury General Account, with the amount of € 100.08 which is related to the payment system costs.

Deposits in the clearing accounts with Podgoricka banka (Societe Generale Montenegro Bank) ‐ Deposit balance on 31 December 2014 as reported in the Proposed Law on the Final Statement of Accounts of the Budget of Montenegro for 2014 amounts to € 600,154.87 and is related to:

Regular deposit in the amount of € 229,028.64 recorded by the Decision of the Ministry of Finance no. 06‐15901 as of 31 March 2015 as an inflow to position 7149 ‐ Fees (for the submission of tender offers for awarding concession contracts by the Ministry of Economy for the production of hydrocarbons) and the increase in deposits.

Regular deposit in the amount of € 87,447.20 recorded by the Decision of the Ministry of Finance no. 06‐159/1 as of 31 March 2015 as an inflow to position 7155 – Other revenues and as the increase in deposits. The funds are the revenue of the Ministry of Interior generated in the previous years.

Regular deposit in the amount of € 271,454.22 recorded by the Decision of the Ministry of Finance no. 06‐1610 as of 31 March 2015 as a receipt from the sales of property to position 721‐Revenues from property, and as increase in deposits. The funds are the revenues from the sales of property of the Ministry of Finance.

Funds for repayment of the foreign currency savings in the amount € 12,224.81 are recorded as deposit balance of € 10,533.85 on 31 December 2013, while the difference between the approved advance payment and the executed payments in the amount of € 1,690.96 was recorded as an increase in deposits by the Decision of the Ministry of Finance no. 06‐478/1 as of 5 February 2015.

Budget Users' Unspent Funds ‐ Deposit balance on 31 December 2014 as reported in the Proposed Law on the Final Statement of Accounts of the Budget of Montenegro for 2014 amounts to € 1,445,002.82 and is related to:

Deposits of the Embassies in the amount of € 99,598.10, related to the deposit balance at 33 Diplomatic‐consular missions and representative offices.

The funds of the Ministry of Foreign Affairs and European Integration in the amount of € 37,704.16, related to unspent funds on 31 January 2014, according to the Form 8 Statement on the manner of spending funds after the expiry of the fiscal year .

The funds of the Ministry of Culture in the amount of € 639.97, related to unspent funds on 31 January 2014, according to the Form 8 Statement on the manner of spending funds after the expiry of the fiscal year .

The funds of the Directorate for Development of Small and Medium Sized Enterprises in the amount of € 1,139,849.14, related to repayment of loans and kept in the clearing accounts with eight commercial banks. In the Decision of the Ministry of Finance no. 06‐1349/1 as of 18 March 2015, the funds were recorded as an inflow into the position 7311‐Receipts from repayment of Credits Granted and as an increase in deposits by the said amount.

The funds of the Contemporary Art Centre in the amount of € 5,786.06, related to unspent funds on 31 January 2014, and according to the official letter of the Contemporary Art Centre, the funds were not spent from the group of accounts 4133, 4234, 4195, 4199 and 4415.

The funds of the Centre for Conservation and Archaeology in the amount of € 11,425.36, related to unspent funds on 31 January 2014, and according to the official letter of the Centre for Conservation and Archaeology no. 03‐85 as of 31 January 2015, the funds were not spent from the group of accounts 4134, 4148 and 4152.

The funds of the State Commission for Control of Public Procurement in the amount of € 150,000.00 at the account no. 530‐20240‐15 with the NLB Montenegrobanka. In the Decision of the Ministry of Finance no. 06‐984/1 as of 31 March 2015, the said funds were recorded as an inflow into the budget position 7149‐ Other fees, and as an increase in deposits.

Deposits in the clearing accounts with Hypo Alpe Adria Bank – There is no reported deposit balance on 31 December 2014 in the Proposed Law on the Final Statement of Accounts of the Budget of Montenegro for 2014 in the accounts with this bank. According to the IOS bank statement, the recorded deposit balance amounted to € 1,825,435.04 as a liability towards the Government of Montenegro. Deposits in the clearing accounts with Hipotekarna Bank – There is no reported deposit balance in the Proposed Law on the Final Statement of Accounts of the Budget of Montenegro for 2014 in the accounts with this bank. According to the IOS bank statement, the reported deposit balance amounted to € 6,060.05 and 630 USD as a liability towards the Government of Montenegro . Deposits in the clearing accounts with Komercijalna Bank AD Budva ‐ There is no reported deposit balance on 31 December 2014 in the Proposed Law on the Final Statement of Accounts of the Budget of Montenegro for 2014 in the accounts with this bank According to the IOS bank statement of Komercijalna banka AD Budva, the recorded balance of liabilities towards the Government of Montenegro amounts to € 458,816.55 and is related to the funds intended for the Project “1000+ Flats“ in the amount of € 456,170.95 and the interest in the amount of € 2,645.60. The funds in the amount of € 2,645.60 were not recorded in the General Ledger of the State Treasury. According to the documentation delivered by the Ministry of Finance, the balance of deposits in the Consolidated Treasury Account amounts to € 45,589,366.50. Deposit balance on 31 December 2014 as reported in the Proposed Law on the Final Statement of Accounts of the Budget of Montenegro for 2014 amounts to € 12,200,479.32. The difference in the amount of € 33,388,887.18 is related to funds from donations, IPA funds and credits, structured as presented in the following table:

Table 14 – Balance of Deposits on 31 December 2014

Bank

Proposed Law on 2014 Final

Budget Accounts

Balance at the 2014 year‐end consolidated Treasury accounts

Balance on 31/12/2014 of funds not

included in the Proposed Law on 2014 Final Accounts

Donation IPA Loans Other

Central Bank of Montenegro 6,827,770.68 16,149,709.91 9,321,939.23 98,783.42 8,345,603.70 877,552.11

Montenegrin Commercial Bank 282,271.50 10,202,972.62 9,920,701.12 2,446,791.28 2,186,226.49 5,259,106.51 28,576.84

Erste Banka 3,000,000.00 11,752,764.48 8,752,764.48 2.07 8,752,762.41

Hipotekarna Banka 405,980.22 405,980.22 6,060.50 399,919.72

Hypo Alpe Adria Banka 31,840.57 31,840.57 31,840.57

NLB Montenegro Bank 10,150.79 3,990,682.05 3,980,531.26 3,980,521.26 29,426.00 ‐29,416.00

Podgorička Banka 600,154.87 911,318.68 311,163.81 91,128.51 35,589.19 184,446.11

First Bank of Montenegro 35,128.66 861,605.58 826,476.92 700,308.00 29,426.00 96,742.92

Atlas bank 5,340.99 5,340.99 5,238.70 102.29

Commercial Bank AD Budva

According to documentation 1,445,002.82 1,277,151.40 ‐167,851.42 ‐167,851.42

Total 12,200,479.32 45,589,366.50 33,388,887.18 7,360,674.31 10,626,271.38 14,011,868.92 1,390,072.57

After examining the open items bank statements (IOS) delivered by commercial banks, it can be concluded that the Ministry of Finance has not fully reconciled deposit balance in the accounts with the commercial bank statements on the day of 31 December 2014. Records of funds in the General Ledger of the State Treasury –The insight into the General Ledger of the State Treasury financial assets (class 1) shows that the records on deposit balances and transactions in the accounts are not in line with Article 6 of the Rulebook on Unique Classification of Accounts for the State Budget, State Funds and Municipal Budgets. In the General Ledger of the State Treasury (class 1) there are no records of the Treasury General Account. The audit has established that changes in balance are recorded pursuant to the Decisions of the Ministry of Finance. The inspection of decisions (Decision No. 06‐174 as of 24 January 2015 and Decision No. 06‐1424 / 1 of 20 March 2015) has found that the balance in the account Bank account‐Deposits is related to the difference in outflows recorded as decrease in deposits, i.e. inflows recorded as increase in deposits. Table 15 – Records of cash deposits in the General Ledger of the State Treasury.

Class Category Group Synthetic Analytics Subanalytics account Name Opening balance Debit Credit Closing balance

1 Financial asset

11 Financial asset

111 Consolidated account

111‐1 Account in the country

111‐1‐1 Account in the Central bank

111‐1‐1‐1 Main Treasury Account

11111112000 Bank account deposits 1,698,802.86 93,040.28 1,605,762.58

111‐1‐1‐2 Preliminary estimates for special purpose

111‐1‐1‐5

1111150002 Bank of Podgorica ‐ deposit 24,911.22 691,445.59 116,201.94 600,154.87

1111150003 Montenegro commercial bank ‐ deposit 187,974.41 137,703.05 43,405.96 282,271.50

1111150005 Montenegro bank ‐ deposit 10,150.79 10,150.79

1111150007 Central bank ‐ remaining deposits 91,041.93 343,312,619.65 343,358,307.09 45,354.49

1111150008 Central bank deposited funds ‐ Succession 1,590.21 66.35 1,656.56

1111150010 Deposits of Montenegro embassies 197,837.26 586,690.80 647,226.30 137,301.76

1111150014 Deposit First Montenegro bank 583,136.34 13,489.54 561,497.22 35,128.66

1111150015 Opportunity bank ‐ deposit 3,084,235.83 119,150.00 203,385.83 3,000,000.00

1111150017 Cultural institutions ‐ deposit 639.97 639.97

1111150019 Agency for SME ‐ deposit 1,068,801.15 1,139,849.41 1,068,801.15 1,139,849.41

1111150020 Deposit CBCG ‐ Eurobond 303,087,729.08 303,038,307.91 49,421.17

1111150023 Centre for Archaeological Research CG ‐ deposit 30,397.25 30,397.25

1111150027 Centre of Contemporary Art ‐ deposit 5,786.06 5,786.06

1111150028 Center for Conservation and Archaeology ‐ deposit 11,425.39 11,425.39

1111150029 The State Commission for public procurement control ‐ deposit 150,000.00 150,000.00

111‐1‐2 Accounts in commercial banks

111‐1‐2 Accounts abroad

111‐1‐3 Collateral means

112 Securities

113 Borrowings and loans

114 Issued guarantees

Total class 1 5,280,076.39 650,955,397.75 649,162,227.49 7,073,246.65

4. FINAL STATEMENT OF ACCOUNTS OF THE TAX AUTHORITY

The audit of the Final Statement of Accounts of the Tax Authority for 2014 has found that contrary to Article 10 of the Rulebook on Tax Accounting, no records have been provided, on the basis of which the opening and closing balance, i.e. the reliable amount of tax debt and advanced tax payments at the beginning/end of the fiscal year can be established. Tax Administration should harmonize its accountancy records, in the part on reported balances in the accounts of the class “1“ ‐ monetary funds accounts, class “3“ ‐ accounts of the public revenue payers, (including the deposit accounts) and class “7“ – public revenues, with the Rulebook on Tax Accounting.

Report on deferred tax and non‐tax claims – The Regulation on conditions for deferred collecting of the tax and non‐tax claims6, lays down the conditions and deadlines for issuing permission to taxpayers to defer payments of tax and non‐tax debt due and payable. According to Article 3 of the Regulation, upon the request submitted by the taxpayer, the Ministry of Finance shall grant deferral. The Proposed Law on the Final Statement of Accounts of the Budget of Montenegro for 2014 included the Report on deferred tax and non‐tax claims for the period 1 January – 31 December 2014, which reported deferred payment in instalments for 62 legal entities. The audit of the Report on deferred tax and non‐tax claims, performed in the Customs Administration and Tax Administration by reviewing decisions composed by the Ministry of Finance, (selected by the random sample method), has established that the Ministry of Finance used to approve deferred payment of the tax debt in twelve monthly instalments, or up to 6 months, which is in line with Article 3 and Article 5 of the Regulation on conditions for deferred collecting of tax and non‐tax claims. Furthermore, the audit of the selected sample of decisions with the Tax Administration has found that a certain number of deferrals were granted without the provision of the bank guarantee or any other securing instrument up to the amount of outstanding tax liabilities, which is not in line with Article 2, item 8 of the Regulation on conditions for deferred collecting of tax and non‐tax claims.

5. BUDGET RECEIPTS

Budget receipts reported in the Proposal Law on the Final Statement of Accounts of the Budget for 2014, in accordance with Article 5 of the Law on the Budget and Fiscal Responsibility are presented in the following table:

Table 16 – Budget Receipts

Ec. cl. DESCRIPTION 2013 Final Statement of Budget Accounts

2014 Budget Law Budget Execution Execution / plan

Execution2014/2013

1 2 3 4 5 = 4 / 3 x 100 6 = 4 / 2 x 10071 Current revenue 1,228,279,417.81 1,261,010,136.94 1,339,592,834.24 106.23 109.06 72 Proceeds from sale of assets 11,948,846.35 5,000,000.00 6,691,829.70 133.84 56.0073 Proceeds from repayment of loans 8,633,294.21 7,046,262.49 8,522,051.19 120.94 98.71 74 Donations and transfers 6,614,007.71 8,000,000.00 5,554,927.72 69.44 83.9975 Loans and Credits 333,867,350.25 227,975,575.86 535,749,125.50 235.00 160.47 TOTAL 1,589,342,918.33 1,509,031,975.29 1,896,110,768.35 125.65 119.30

The total amount of receipts generated in 2014 exceeded the amount of the revenue planned by the Budget Law for 2014 by 25.65%, as well as the total amount of the revenue generated in 2013 by 19.30 %. The table below shows the overview of generated receipts as recorded in the General Ledger of the Treasury, allocated from the Central Account of the State Treasury (90700000008320198) through the Revenue module, as follows:

Table 17 – Revenue collected through the Revenue module

DESCRIPTION 2014 Final Statement of

Budget Accounts Revenue Modul Difference

71 Current revenue 1,339,592,834.24 1,335,480,864.41 4,111,969.8372 Proceeds from sale of assets 6,691,829.70 6,420,375.48 271,454.2273 Proceeds from repayment of loans 8,522,051.19 2,071,987.68 6,450,063.5174 Donations and transfers 5,554,927.72 0.00 5,554,927.7275 Loans and Credits 535,749,125.50 197.98 535,748,927.52 TOTAL 1,896,110,768.35 1,343,973,425.55 552,137,342.80

6 "Off. Gazette of MNE", No. 67/09, 23/10, 26/10 and 53/13

The difference in the amount of € 552,137,342.80 is the amount of the inflow that was not recorded in the General Ledger of the State Treasury through the Revenue Module, and is related to the inflows as shown in the table below:

Table 18 – Revenue collected through direct payments into the Treasury General Account Ec. Cl.

DESCRIPTION Amount

71 Current revenue 4,111,969.83 7131 Administrative taxes 489,195.91 7149 Other fees 385,028.64 7151 Income from capital 828,722.83 7155 Other income 2,409,022.45

72 Proceeds from sale of assets 271,454.22 73 Proceeds from repayment of loans 6,450,063.51 74 Donations and transfers 5,554,927.72 75 Loans and Credits 535,748,927.52 7511 Borrowings and loans from domestic sources 244,935,100.00 7512 Borrowings and loans from foreign sources 290,813,827.52 TOTAL 552,137,342.80

5.1. Current Revenues

According to the data reported in the Proposal Law on the Final Statement of Accounts of the Budget of Montenegro for 2014, the realized current revenues amounted to € 1,339,592,834.24. Structure of the current revenues according to the principle of revenue collection:

Current revenues in the amount of € 1,335,480,864.41 are the revenues collected and allocated through the Revenue Module, in line with the Order on the Manner of Payment of Public Revenues.

The funds in the amount of € 4,111,969.83 are direct payments into the Treasury General Account. The audit of the selected sample of 60,07% established that the funds were related to the following: Administrative fees paid by diplomatic‐consular representative offices of Montenegro in the

amount of € 489,195.91. The reported inflow was recorded as an increase in deposits on the day of 31 December 2014.

Other fees in the amount of € 229,028.64 were recorded on the basis of the Decision no. 06‐15901 as of 31 March 2015, as submission fees for tender offers for awarding concession contracts for the production of hydrocarbons by the Ministry of Economy and the Decision no. 06‐984/1 as of 31 March 2015 in the amount of € 150,000.00, as compensation fees for the proceedings on the appeal of the State Commission for Control of Public Procurement, for which the conditions for refund were not fulfilled.

Revenues from the capital in the amount of € 828,722.83, were recorded on the basis of the Decision of the Ministry of Finance, and were related: the inflows arising from interest on deposits in the amount of € 123,804.73 and the inflow from the respective profit share according to the final statement of accounts of the Central Bank in the amount of € 344,371.07.

Funds in the amount of € 2,409,022.45 were recorded in the group of accounts 715 – Other Revenues on 31 December 2014, on the basis of the Decision of the Ministry of Finance.

5.2. Receipts from the sale of property

According to the records in the General Ledger of the State Treasury, the receipts from the sale of property were planned in the amount of € 5,000,000.00, while the realization totalled at € 6.691.829,70. Inflows paid into the revenue accounts designated for the collection of revenue from the sales of the state property amounted to € 6,717,695.48, as shown in the table below:

Table 19 – Receipts from the sales of property

DESCRIPTION Bank account Inflow in collection accounts 2014 Proposal Law on Final Statement of Acounts

Difference

72 Ministry of Defence 832‐213‐43 3,921,704.10 3,917,384.10 4,320.00 73 Ministry of Defence 832‐211‐49 1,534.62 1,534.62 0.00 74 Ministry of Finance 832‐52006‐38 1,091,233.36 1,362,687.58 ‐271,454.2275 Restitution Fund 832‐214‐40 1,703,223.40 1,403,223.40 300,000.00 76 Employment Agency 7,000.00 ‐7,000.00 Total 6,717,695.48 6,691,829.70 25,865.78

Established differences are related to: the amount of € 4,320.00 for the reimbursement of funds from the Central Account of the State Treasury, the amount of € 271,454.22 recorded in the General Ledger of the State Treasury on the basis of the Decision of the Ministry of Finance No. 06‐1610 / 1 as of 31 March 2015 and the amount of € 300,000.00, which was recorded in the group of accounts 7155 ‐ Other revenues. Inflows of the Ministry of Defence from the sale of property, generated through the Revenue Module and recorded in the General Ledger of the State Treasury in 2014, amount to € 3,918,918.72 (3,923,238.72 – 4,320.00). The Funds of the Ministry of Finance in the amount of € 1,091,233.36 refer to the following: the Property Administration and the Directorate for Property and Legal Affairs in the amount of € 909,099.50, the Ministry of Internal Affairs in the amount of € 62,814.58 and the Ministry of Education in the amount of € 119, 319.20. In addition to auditing collection of funds through the Revenue module, the audit has also encompassed the Ministry of Finance account no. 550‐5590‐94, intended for deposits arising from the sales the property of the Directorate for Property and Legal Affairs, and payments of remuneration costs of the Commission in charge of the sale of state property. Closing balance in this account on 31 December 2013 amounted to € 181,186.26, inflows in 2014 amounted to € 490,845.82, outflows to € 223,720.14, with the closing balance on 31 December 2014 in the amount of € 448,311.94. The inflow of funds in the amount of 13,000.00 €, collected from the buyers, as remuneration fees for the work and engagement of the Commission for the sale of the state property, and the outflow of funds in the amount of € 19,685.95 ,as remuneration fees for the work and engagement of the Commission for the sale of the state property, were carried out on the basis of the Decision of the Ministry of Finance, in accordance with the Guidelines on the work of Commissions for the sale and lease of the state property, which were not recorded in the General Ledger of the State Treasury. The inflow in the amount of € 180,116.64, generated from the completed sales procedure of the state immovable property entered into the land Registry folio no. 1531, KO Bijela – Municipality of Herceg Novi, the Ministry of Finance directed into the account of the Adriatic Shipyard Bijela in the amount of € 54,034.99 or 30%, and the company Crnogorska plovidba AD in the amount of € 126,081.65 or 70%, in line with the Conclusion of the Government of Montenegro 08‐2005/3 as of 11 September 2014, whereby the reported funds were not recorded in the General Ledger of the State Treasury. Funds in the amount of € 269,043.71 refer to deposited funds in the amount of € 33,748.36 and the inflows in the amount of € 235,295.35, arising from the sale of state property to the Company QD HOTEL AND PROPERTY INVESTMENT MONTENEGRO doo, under the Contract no. 587/2014 as of 25 December 2014. The total of € 269,043.71 was transferred by the Ministry of Finance to the revenue account no. 832‐52006‐58 on 12 January 2015, although the income is related to the year 2014. The inflows of the Restitution Fund, recorded in the General Ledger of the State Treasury, totalled at € 1,703,223.40, out of which the amount of € 1,403,223.40 was generated through the revenue account no. 832‐214‐40, while direct payments to the Treasury General Account amounted to € 300,000.00, and were recorded in the group of accounts 7155 – Other Revenues. The Inflows are related to the portion of 10% of the total revenue generated from the sale of the state assets, as stipulated by Article 44 of the Law on Restitution of Property Rights and Compensation.7

5.3. Receipts from the credit repayments The receipts planned by the Law on the Budget for 2014 amounted to € 7,046,262.49, while the realized amount according to the records in the General Ledger of the State Treasury totalled at € 8,522,051.19. The structure of the inflow, according to the manner of the revenue collection, is the following: The funds generated through the Revenue Module amounting to € 2,071,987.68 are related to the

repayments of credits granted to other institutions in the amount of € 90,211.66 and to the repayment of the credits granted for self‐employment in the amount of € 1,981,776.12.

7 "Off. Gazette of MNE",21/04, 49/07, 60/07, 12707,73/10

Direct payments amount to € 6,450,063.51 and are recorded as receipt into the General Ledger of the State Treasury. The audit of a sample of 67,90% established that they are related to the following:

Funds in the amount of € 1,139,849.14 recorded on the basis of the Decision of the Ministry of Finance no. 06‐1349/1 as of 18 March 2015, as inflows arising from the repayment of credits granted by the Directorate for Development of Small and Medium Sized Enterprises;

Funds in the amount of € 1,726,615.95 paid by the Municipalities of Kotor and Tivat, as the repayment of the principal and the interest of the KFW credits phase II and III;

Funds in the amount of € 3,239,958.58 paid on the basis of the clearing debt of the Electric Utility Plant according to the Contract no. 10‐00‐57528 and the payments on granted loans (KFW, IDA and Natixis);

Funds in the amount of € 337,539.85 paid by the landfill company “Deponija” DOO; Funds in the amount of € 6,000.00 paid by “Polix” AD Berane under the Contract on commission

business loan.

5.4. Receipts from Donations and Transfers

Based on the records in the General Ledger of the State Treasury, receipts generated from donations and IPA funds in 2014 totalled at € 5,554,927.72, including the refunding of the European Commission funds in the amount of € 594,018.12. Grant funds are paid to the state bank accounts opened by the Ministry of Finance upon request of the spending units. Withdrawal of funds to the Treasury General Account is done on the basis of the request for transfer and release of funds of the spending unit, the user of the grant. The following table provides an overview of the spending units that generated receipts from donations and the IPA funds, and recorded expenditures financed from these funds, as follows: Table 20 – Inflows and outflows financed from donations and IPA funds reported per spending units Budget User Inflows Outflows Difference

Ministry of Agriculture and Rural Development 867,433.83 867,433.82 0.01

Ministry of Science 31,989.30 31,989.27 0.03

Ministry of Sustainable Development and Tourism 1,086,843.04 1,084,843.04 2,000.00

Statistical Office 129,091.55 129,091.54 0.01

The Ministry of Foreign Affairs and European Integration 458,938.10 455,940.60 2,997.50

Human Resources Administration 42,982.07 42,972.36 9.71

Protector of human rights and freedoms 2,742.92 2,742.92 0.00

Department of Hydrometeorology and Seismology 190,206.81 190,206.81 0.00

The Ministry of Labour and Social Welfare 134,976.32 134,125.73 850.59

The Ministry of Culture 78,828.93 110,851.47 ‐32,022.54

The Ministry of Maritime Affairs and Transport 46,341.80 46,341.80 0.00

Ministry of Economy 412,805.81 412,805.81 0.00

The Agency for Environmental Protection 139,453.69 139,453.57 0.12

Employment Agency 1,813.96 1,657.46 156.50

Department of Education 226,098.05 226,098.05 0.00

the Ministry of Health 15,209.93 15,212.49 ‐2.56

The Ministry for Human and Minority Rights 27,966.99 27,966.99 0.00

The Ministry of Defence 186,024.54 186,023.79 0.75

Ministry of Finance 63,418.08 63,418.08 0.00

Customs Administration 9,201.27 8,134.65 1,066.62

Ministry for Information Society 90,534.56 89,915.33 619.23

The General Secretariat of the Government 328,446.22 328,366.75 79.47

Montenegrin Water Administration 71,700.36 71,700.36 0.00

Ministry of Education 69,554.66 68,887.70 666.96

Directorate of Youth and Sport 13,683.02 13,683.02 0.00

Ministry of Justice 163,810.42 163,807.08 3.34

National Tourism Agency 70,812.97 70,812.97 0.00

total 4,960,909.20 4,984,483.46

Refunds European Commission 594,018.52

TOTAL 5,554,927.72

The inflows of funds from donations and the IPA funds recorded in the General Ledger of the State Treasury totalled at € 5,554,927.72 (including the funds refunded by the European Commission). As stipulated by Article 9 of the Law on the Budget for 2014, the expenditures of spending units financed from donations shall be executed up to the amount of their realization, the total expenditures financed from donations

amounted to € 4,984,483.46, i.e. the amount of € 3, 979,967.09 was financed from donations, while the amount of € 1,004,516.37 was financed from the IPA funds. The Ministry of Culture reported a total amount of outflows which exceeded the level of inflows into the Treasury General Account in 2014 by € 32,022.54, since the stated amount was recorded as an opening balance as of 1 January 2014. Based on the submitted documents, the balance of donations and the IPA funds in the accounts with commercial banks on 31 December 2014 amounted to € 17,986,945.69.

5.5. Receipts from loans and credits

According to the Law on the Budget for 2014, the planned receipts from loans and credits amounted to € 227,975,575.86, while the generated inflows, reported in the Proposed Law on the Final Statement of Accounts of the Budget of Montenegro for 2014, totalled at € 535,749,125.50, as follows: the amount of € 244,935,100.00 is the amount of receipts generated on the basis of credits taken from domestic borrowing sources, while the receipts generated on the basis of credits taken from foreign sources amounted to € 290,814,025.50.

Loans and credits from domestic sources ‐ Funds in the amount of € 244,935,100.00, recorded in the General Ledger of the State Treasury in the group of accounts 7511‐ Loans and Credits from Domestic Sources, are loans taken from commercial banks in the amount of € 16,000,000.00, the emission of T‐bills in the amount of € 185,785,100.00, as well as the issuance of treasury bonds in the amount of € 43,150,000.00, as shown in the table below: Tabela 21 – Loans and Credits from Domestic Sources

Description Contract Number Concluded on Contracted amount

Cash withdrawal in 2014

Recorded in General Ledger of State Treasury in 2014

CKB Bank 949‐88‐8 23.05.2013 4,000,000.00 4,000,000.00 Hipotekarna Bank 0101‐505/2 16.04.2014 5,000,000.00 5,000,000.00 5,000,000.00

Hipo Alpe Adria Bank AA14016WG657 16.01.2014 7,000,000.00 7,000,000.00 7,000,000.00Total 16,000,000.00 16,000,000.00

Treasury bills issued 2014 185,785,100.00 185,785,100.00 Government bonds 2014 emission 43,150,000.00 43,150,000.00

Total 244,935,100.00 244,935,100.00

The inflow of funds from loans granted by commercial banks in the amount of € 16,000,000.00 and from the treasury bonds in the amount of € 43,150,000.00, was carried out by the payment into the Treasury General Account, based on the request of the Ministry of Finance. The inflow of funds from the T‐bills emission in the amount of € 185,785,100.00 was performed by the payment of € 33,538,738.33 into the Treasury General Account, while the amount of € 152,246,361.67 was recorded on the basis of Decisions of the Ministry of Finance. The recorded amount of inflow corresponds to the balance of withdrawn funds and thus complies with the recommendation given in the Audit Report of the Proposed Law on the Final Statement of Accounts of the Budget of Montenegro for 2013.

Loans and credits from foreign sources ‐ Funds in the amount of € 290,814,025.50, recorded in the General Ledger of the State Treasury in the group of accounts 7512‐ Loans and Credits from Foreign Sources, refer to the following:

Funds in the amount of € 280,000,000.00 on the basis of the EUROBOND bonds issued in the international financial market on 20 May 2014, for the purpose of refinancing a part of the EUROBOND bonds maturing in 2015 and 2016, in accordance with the notification of the City Group Global Markets Limited, Deutsche Bank AG, London Branch and Erste Group Bank AF.

Funds in the amount of € 10,814,025.50 are the inflow from the credits taken abroad.

The audit has found that the amount of loans withdrawn from foreign sources totalled at € 32,340,809.23, while the inflow of funds recorded in the General Ledger of the State Treasury amounted to €10,813,827.52 respectfully. The difference in the amount of € 21,526,981.51 refers to on‐landing arrangements with the local self‐government units.

It has also been established that the funds in the amount of € 137,544.00 were not recorded in the General Ledger of the State Treasury, and they relate to the bank service costs, in the amount of € 12,500.00,

arising from the World Bank (IBRD) loan for additional financing of the MEP, and the World Bank (IBRD) loan totalling € 50,000,000.00, intended for financing the Project “Industrial Waste Management“, with the banking service costs in the amount of € 125,000.00, in line with the bank fees charged on granting a loan (0.25% of the total value of the loan granted).

The closing balance on 31 December 2014 in the bank accounts with commercial banks in regard of loans and credits amounts to € 14,011,868.92 and 51,094.52 USD. The funds in the amount of 51,207.51 USD were returned to the creditor, the World Bank, on 9 February 2015, and they refer to the amount of 51,094.52 USD from the foreign currency bank account with Crnogorska komercijalna banka, acc. no. 126‐02010658 and the amount of € 195.17 of funds converted to US dollars and returned to the creditor.

6. BUDGET EXPENDITURES

Budget expenditures reported in the Proposed Law on the Final Statement of Accounts of the Budget of Montenegro for 2014 amount to € 1,890,754,552.68. The following table provides an overview of expenditures realized in 2014, by their structure, as follows:

Table 22 – Overview of actual expenditures in 2014

Description 2014 Budget Law Reallocated + Realloated ‐ Current Budget 2014 Final Statement of Accounts

1) Current expenditures 627,704,460.14 31,339,731.00 35,308,647.91 623,735,543.23 635,026,761.19

2) Transfers for social protection 498,223,398.97 11,361,075.30 12,670,141.29 496,914,332.98 492,148,010.12

3) Transfers to institutions, individuals, NGO and public sector 101,040,047.62 2,923,584.54 3,773,459.75 100,190,172.41 99,048,746.08

4) Capital expenditures 99,642,513.32 5,080,160.98 4,403,197.35 100,319,476.95 133,231,494.04

5) Loans and borrowings 2,140,000.00 353,500.00 0.00 2,493,500.00 2,484,899.77

6) Repayment of Debt 171,426,905.49 0.00 87,560.00 171,339,345.49 515,282,098.76

7) Reserves 8,854,649.77 6,616,469.07 1,431,514.59 14,039,604.25 13,532,542.72

Total 1,509,031,975.31 57,674,520.89 57,674,520.89 1,509,031,975.31 1,890,754,552.68

The expenditures with the largest share in the structure of realized ones are as follows: current expenditures with 33,59%, social protection transfers with 26.03% and repayment of debts with 27.25%, while expenditures for transfers to institutions, individuals, NGO and the public sector, capital expenditures, loans and credits and reserves participate in the total amount of expenditures with 13.13% share. Budget expenditures were executed in the amount of € 1,890,754,552.68, which exceeds the available funds reported in the current budget by 25.30%, as well as the expenditures realized in 2013 by 17.92%.

6.1. Current Expenditures

According to the Law on the Budget for 2014, appropriations for current expenditures amounted to € 627,704,460.14, while this figure was increased through reallocation by € 31,339,731.00 and reduced by € 35,308,647.91. Therefore, the available appropriations recognized in the current budget plan amount to € 623,735,543.23. Actual current expenditures reported in the Proposed Law on the Final Statement of Accounts of the Budget of Montenegro for 2014 amount to € 635,026,761.19, as presented in the following table:

Table 23 ‐ Current expenditures

Description 2014 Budget Law Reallocated + Reallocated ‐ Current budget 2014 Final Statement of Budget Accounts

1) Gross salaries and contributions payable by employer

386,488,693.72 12,329,138.37 7,969,342.17 390,848,489.92 387,342,557.39

2) Other personal income 11,868,513.96 2,359,410.50 524,697.27 13,703,227.19 11,957,808.103) Expenses for materials 29,295,302.83 2,542,234.54 1,366,965.20 30,470,572.17 28,563,878.82 4) Services costs 47,694,095.80 8,202,909.24 3,699,107.72 52,197,897.32 54,105,055.20 5) Maintenance costs 21,655,403.20 525,751.79 654,916.29 21,526,238.70 21,273,630.086) Interests 73,316,123.12 0.00 18,063,577.84 55,252,545.28 75,516,395.417) Rents 8,172,802.14 541,994.71 481,413.54 8,233,383.31 8,033,102.028) Subsidies 18,874,600.00 207,994.90 19,082,594.90 18,426,863.34 9) Other expenses 30,338,925.37 4,630,296.95 2,548,627.88 32,420,594.44 29,807,470.83

Total 627,704,460.14 31,339,731.00 35,308,647.91 623,735,543.23 635,026,761.19

Some minor irregularities have been observed in the case of current expenditures, materially insignificant and related to inappropriate spending of funds, i.e. to the payments which are not in compliance with both, the Rulebook on Unique Classification of Accounts for the State Budget, State Funds and Municipal Budgets and the Directions on State Treasury Operations.

6.1.1. Interest Payments

According to the Law on the Budget for 2014, appropriations for interest payments amount to € 73,316,123.12, while this figure was reduced through reallocations by € 18,063,577.84. Therefore, the available appropriations in the current budget plan amount to € 55,252,545.28. Actual expenditures for interests totalled at € 75,516,395.41, which exceeds the amount of funds available in the current budget plan by 36.67%. The table below shows the plan and execution of expenditures for interests to residents and non‐residents:

Table 23 – Interests expenses Description Interests to residents Interests to non‐residents Total €

1) Established by 2014 Budget Law 9,520,967.79 63,795,155.33 73,316,123.12

2) Increased by reallocations 0.00 0.00 0.00

3) Reduced by by reallocations 41,511.75 18,022,066.09 18,063,577.84

4) Available funds current budget 9,479,456.04 45,773,089.24 55,252,545.28

5) Executed 8,887,941.91 66,628,453.50 75,516,395.41

6) Executed / planned x 100 93.76 145.56 136.67

Repayment of interests payments to residents – Actual expenditures on the basis of interest payments to residents amount to € 8,887,941.91, which is less than appropriated by the current budget by 6.24%. Funds in the amount of € 8,755,905.50 were recorded as interest payment expenditure with the Ministry of Finance, while the funds in the amount of € 132,036.41 were recorded as interest payment expenditure with the Ministry of Defence, the Ministry of Sustainable Development and Tourism, the Health Insurance Fund and the Employment Agency. The structure of expenditures on the basis of interest payments to residents recognized with the Ministry of Finance is shown in the following table: Table 24 – Breakdown of Ministry of Finance expenditures for interests to residents

DESCRIPTION Amount €

1 Interest payments on loans from commercial banks 6,113,895.96

Interest payments on the loan for Police Administration building 99,919.66

Interest payments on the loan for the restoration of cultural monumentsin Cetinje

106,106.56

Interest payments on loans assumed 757,493.85

Interes payments on on long‐term loans 4,945,471.46

Interest payments on revolving loans 15,685.75

Interest payments on short‐term loans for liquidity 89,859.41

Interest payments on under the Agreement on financial leasing 99,359.27

2 Interest payments on treasury bills 1,229,479.66

3 Interest payments on Labour Fund bonds 346,937.19

4 Interest payments on government bonds 1,065,592.70

Total 8,755,905.51

Repayment of interests payments to non‐residents ‐ Actual expenditures on the basis of interest payments to non‐residents amount to € 66,628,453.50, with repayment of interest in the amount of € 65,881,569.71, and other expenses amounting to € 746,884.31, which exceeds the amount of funds available in the current budget plan by 45%. Repayment of interest payments in the amount of € 25,205,850.00 is related to the EUROBOND bonds that mature in 2015 and 2016, the repayment of interest on refinanced and redeemed bonds maturing in 2015 and 2016 in the amount of 3,801,792.02 €, as well as the repayment of interest on EUROBOND bonds maturing in 2014‐2016, in the amount of € 5,013,411.11. An overview of interest expenses is given with the review of expenditures for repayment of securities and loans to non‐residents.

6.1.2. Subsidies

Actual expenditures for subsidies amounted to € 18,426,863.34, or 96.56% of the appropriated funds, and their execution with the spending units is shown in the following table: Table 25 – Expenditure for subsidies

Description 2014 Budget Law Reallocated + Current budget 2014 Final Statement of Accounts

40901 Ministry of Economy 6,000,000.00 0.00 6,000,000.00 5,344,270.0041001 Ministry of Transport and Maritime Affairs 2,300,000.00 0.00 2,300,000.00 2,300,000.0041101 Ministry of Agriculture and Rural Development 9,618,000.00 0.00 9,618,000.00 9,617,998.44 41501 The Ministry of Sustainable Development and Tourism 500,000.00 0.00 500,000.00 500,000.00 60101 Pension and Disability Insurance Fund 456,600.00 207,994.90 664,594.90 664,594.90

Total 18,874,600.00 207,994.90 19,082,594.90 18,426,863.34

Ministry of Economy made actual expenditures for subsidies in the amount of € 5,344,270.00. The amount of € 5,330,000.00 pertains to covering the costs of “Montenegro Bonus“ doo Cetinje, under the Agreement on business‐technical cooperation with “Aluminium Plant“ Podgorica AD, in accordance with the Conclusion of the Government of Montenegro no. 08‐56/6 from 19 July 2013. The amount of € 14,270.00 was paid out of donation funds from the programme Energy Efficiency Improvement for the installation of a modern biomass heating systems, according to the Agreement No. 01‐1620/1 and obtained approval from the Luxembourg Agency for Development Cooperation for the implementation of the programme Energy wood. Ministry of Transport and Maritime Affairs provided a subsidy to the Railway Directorate AD Railway Transport in accordance with Article 65 of the Railway Law and the Decree on detailed criteria, conditions and manner of granting State Aid in the amount of € 2,300,000.00, in monthly instalments amounting to € 191,666.67. Ministry of Agriculture and Rural Development had expenditures for subsidiaries of a total of € 9,617,998.44, as follows: the amount of € 8,385,000.00 in accordance with the Regulation on conditions, manner and dynamics of implementation of agricultural policy (Agro budget) for 2014, while the amount of € 1,232,998.44 pertains to the Veterinary Administration. The Ministry of Sustainable Development and Tourism transferred to the Public Company National Parks of Montenegro funds in the amount of € 500,000.00 in line with Article 31 of the Law on National Parks. Pension and Disability Insurance Fund – Funds in the amount of € 664,594.90 were transferred to the DOO Pension and Disability Fund (PIO) Ulcinj on the basis of the Statute and the Decisions made by the Board of Pension and Disability Insurance Fund. Funds in the amount of € 456,600.00, i.e. the transfer of monthly instalments of € 38,050.00 were allocated for the costs arising from activities on organizing the beginning of the tourist season in the pension resort Ulcinj. The amount of € 207,994.90 was paid to DOO PIO Ulcinj for settling the taxes and contributions and other arrears from the previous period.

6.2. Transfers for Social Care Expenditures pertaining to social care transfers in 2014 amounted to € 492,148,010.12, out of which € 389,196,302.23 was spent on expenditures arising from the the Pension and Disability Insurance Fund operation. According to the cash flow statement III, the Pension and Disability Insurance Fund recorded the earmarked revenue in the amount of € 271,368,051.54 and the general revenue of € 117,368,051.54, as reported stated in the Proposed Law on the Final Statement of Accounts of the Budget of Montenegro for 2014. Earmarked revenues of the Pension and Disability Insurance Fund are in compliance with the Ministry of Finance and thus the recommendation, given in the Audit report of the Proposed Law on the Final Statement of Accounts of the Budget of Montenegro for 2013, was implemented. Earmarked revenues include contributions for pension and disability insurance, other contributions, interests for the late payment of contributions, revenues from stocks and shares and the profit share, the income arising from enforced collection of contributions and other revenues. General revenues are the transfers from the budget.

6.3. Repayment of Debts Debt repayment covers the expenditures for the repayment of securities and credits to residents and non‐residents, repayment of guarantees in the country and abroad and the repayment of liabilities from the past. According to the Law on the Budget for 2014, appropriations for dept repayment amounted to € 171,426,905.49, while this figure was reduced through reallocation of resources by € 87,560.00. Therefore, the available resources reported in the current budget totalled at € 171,339,345.49. Expenditures for debt repayment recognized in the Proposed Law on the Final Statement of Accounts of the Budget of Montenegro for 2014 amount to € 514,541,442.56, while the General Ledger of the State Treasury recorded the amount of € 515,282,098.76, as shown in the following table:

Table 26 – Repayment of debts 1) The Budget Law _ 171,426,905.49

2) Increase by reallocations 0.00

3) Reduced by reallocations 87,560.00

4) Available funds current budget 171,339,345.49

Made on the basis of data from the General Ledger of Treasury 515,282,098.76

Reduced for transferred funds for capital expenditures 740,656.20

5) Executed 514,541,442.56

6) Executed / planned x 100 300.31

In the Proposed Law on the Final Statement of Accounts of the Budget of Montenegro for 2014 the Ministry of Finance reduced the amount of expenditures on the group of accounts 4611 ‐ Repayment of securities and credits to residents by € 740,656.20, and increased capital expenditures, in the group of accounts 4411 ‐ Expenditures for infrastructure of general interest, in line with the recommendation given in the Audit Report of the Proposed Law on the Final Statement of Accounts of the Budget of Montenegro for 2013.

Repayment of Debt (461) – According to the Law on the Budget for 2014, appropriations for dept repayment amounted to € 138,088,745.52, while the actual expenditures totalled at € 434,061,211.94, i.e. exceeded the estimated plan by 214.33%, as shown in the following table:

Table 27 –Expenditures for Debt Repayment

Description Repayment of

securities and loans to residents

Repayment of securities and loans to non‐

residents Total

1) 2014 Budget Law 30,008,345.27 108,080,400.25 138,088,745.52

2) Increase by reallocations 0.00 0.00 0.00

3) Reduced by reallocations 0.00 0.00 0.00


Made on the basis of data from the General Ledger of Treasury 239,746,752.65

Reduced for transferred funds for capital expenditures 740,656.19

5) Executed 239,006,096.46 195,055,115.48 434,061,211.94

6) Executed / planned x 100 796.47 180.47 314.33

Repayment of securities and loans to residents (4611) ‐ According to the Law on the Budget for 2014, appropriations for expenditures pertaining to repayment of securities and loans to non‐residents amounted to € 30,008,345.27, while the expenditures recognized in the Proposed Law on the Final Statement of Accounts of the Budget of Montenegro for 2014 total at € 239,006,096.46. The structure of expenditures for repayment of securities and loans to non‐residents is presented in the table below:

Table 28 ‐ Repayment of Securities and Loans to Residents

DESCRIPTION Amount €

1 Principal payments on loans from commercial banks 46,019,201.90

Principal payments on the loan for Police Administration building 1,639,681.68

Principal payments on the loan for the restoration of cultural monuments in Cetinje 1,345,950.93

Principal payments on loans assumed 4,299,601.25

Principal payments on on long‐term loans 22,385,193.07

Principal payments on revolving loans 4,000,000.00

Principal payments on short‐term loans for liquidity 12,000,000.00

Principal payments under the Agreement on financial leasing 348,774.97

2 Principal payments on treasury bills 186,469,300.00

3 Principal payments on Labour Fund bonds 1,116,271.78

4 Principal payments on government bonds GB1‐2014 4,944,601.64

5 Expenses for Principal on bonds DP‐14 213,261.00

6 Expenses under the Conclusion of the Government No. 08‐793 / 3 of 04/07/2014 243,460.13

Total 239,006,096.45

Expenditures for repayment of credits granted by the commercial banks amount to € 46,019,201.90, expenditures for repayment of debt arising from the emission of Treasury bills amount to € 186,469,300.00 and according to the data provided by the Central Bank of Montenegro, they pertain to emission of 91‐day T‐bills and 182‐day T‐bills. Expenditures for repayment of debt principal on Labour Fund OBFR bonds, in the amount of € 1,116,271.78 were paid in line with the Decision on emission of bonds of the State of Montenegro, for covering unsettled liabilities to employees who became redundant. Expenditures for repayment of debt arising from the State bonds series GB1‐2014 in the amount of € 4,944,601.64 were paid in accordance with the Decision on issuance of the State securities. Funds for repayment of debt arising from expenses on DP14 bonds DP14 in the amount of € 213,261.00 were paid to the Investment Development Fund of Montenegro, for the purpose of investing into the road network reconstruction.

Funds in the amount of € 243,460.13 were paid to the Railway Transport of Montenegro, in accordance with the Government Conclusion No. 08‐793/3 as of 4 July 2014.

Repayment of securities and loans to non‐residents (4612) – Expenditures for repayment of debt arising from securities and loans to non‐residents amount to € 195,055,115.48. The table below provides an overview of expenditures pertaining to debt principal repayment and interests payments on borrowings and securities in the international financial market, as follows:

Table 29 – Repayment of Debt Principal and Interests on Loans and Securities to Residents

Description Principal Interest Other expenses Total

Steiermarkische Bank ‐Sparkassen AG‐Austra 2,200,170.96 430,255.63 2,630,426.59

Instituto del credito oficial ‐ICO 226,442.77 50,509.32 276,952.09

Exim Banka ‐ Hungary 2,279,191.48 96,135.48 2,375,326.96

Natixis Banka ‐ France 827,076.77 70,927.73 898,004.50

KfW – German Development Bank 6,411,334.00 429,822.10 320,338.40 7,161,494.50

Credit Suisse International 38,000,000.00 14,472,209.43 69,178.89 52,541,388.32

Czech Export Bank 5,122,369.80 327,575.20 5,449,945.00

Poland Line of Credit 347,275.20 33,219.95 380,495.15

The World Bank for Reconstruction and Development (IBRD) 12,693,236.14 3,416,697.30 16,109,933.44

EUROFIMA 4,093,864.42 700,804.12 90,213.32 4,884,881.86

ERSTE BANK AG ‐Sperkassen 1,214,433.35 95,588.02 1,310,021.37

ERSTE BANK ‐ AG‐loan for the Budget 9,750,000.00 1,771,799.58 11,521,799.58

Paris Club Netherlands 63,729.09 57,954.86 121,683.95

Paris Club KfW Germany 45,024.79 16,674.25 61,699.04

Paris Club creditors‐euro payment 2,634,085.90 2,012,005.89 4,646,091.79

Paris Club creditors‐non‐euro zone 1,063,744.00 673,152.67 1,736,896.67

Deutsch Bank 3,948,300.00 3,948,300.00

The International Finance Corporation (IFC) 648,982.41 4,457.80 653,440.21

European Bank for Reconstruction and Development (EBRD) 3,307,446.40 253,439.82 33,907.90 3,594,794.12

The European Community (EC) 800,000.00 197,094.00 997,094.00

The European Community / European Commission MFA, under the LoanAgreement in the amount of 225.0 million.

240,677.72 2,802.99

243,480.71

Development Bank of the Council of Europe (CEB) 124,326.24 124,326.24

INTENATIONAL Development Association (IDA) 3,254,452.78 207,332.21 233,245.77 3,695,030.76

The European Investment Bank (EIB) 3,808,274.00 2,467,431.99 6,275,705.99

Eurobond 2011, emission bonds 180.00 million. 13,050,000.00 13,050,000.00

Eurobond 2010, emission bonds. 200.00 million. 12,155,850.00 12,155,850.00

Eurobond 2013 obvez.80,00mil bonds emission, which are implementedthrough Morgan Stanley

8,800,000.00 5,013,411.11

13,813,411.11

Refinancing of part of the amount Eurobond 2010‐2015 and 2011‐2016 87,221,045.00 3,801,792.02 91,022,837.02

Development Bank of the Council of Europe‐ 2,258.49 2,258.49

TOTAL 195,055,115.47 65,881,569.71 746,884.31 261,683,569.49

Repayment of Guarantees in the Country ‐ The total debt arising from the issued guarantees and paid in 2014 amounted to € 15,258,930.95, as follows:

1) The expenditure in the amount of € 5,153,201.26 for the Guarantee issued by the Government of Montenegro No. 06‐1828/1 from 9 June 2009 (Annex I of the Guarantee No. 06‐4241/1 from 31 December 2009 and Annex II No. 06‐4894/1 from 31 December 2011), based on the Short‐Term Loan Agreement No. KR2009/1600.1 as of 21 November 2009 (Annex II No. KR2009/1600.2 as of 31 December 2011), in the amount of € 5,000,000.00, concluded between NLB Montenegrobanka ad Podgorica and the company Rudnici boksita AD Nikšić, in accordance with the Conclusion of the Government No. 08‐144/4‐13 as of 10 January 2014.

2) The expenditure in the amount of € 4,529,265.81 for the issued Guarantee No. 06‐437771 as of 22 December 2010 based on the Long‐Term Loan Agreement No. KR2010/1684 as of 25 May 2010, in the amount of € 14,400,000.00, concluded between NLB Montenegrobanka a.d. Podgorica and Melgonia‐Primorka D.O.O Bar, in accordance with the Conclusion of the Government No. 08‐29/2 as of 27 March 2014.

3) The expenditure in the amount of € 4,095,214.55, for the issued Guarantee No. 06‐2331/1 as of 1 July 2010 (Annex No. 06‐2314 as of 30 July 2012), based on Loan Agreement No. LD/10168/00052 as of 1 July 2010, (Annex No. 01/12 of 30 July 2012 and Annex No. 01/13 as of 25 July 2013.), concluded between Erste banka AD Podgorica and Pobjeda a.d. Podgorica, in accordance with the Conclusion of the Government No. 08‐13072 as of 4 September 2014.

4) The expenditure in the amount of € 1,480,949.33, for the issued Guarantee No. 06‐2225/1 as of 10 July 2009, based on the Long‐Term Loan Agreement No. 00‐421‐0400032.5 as of 10 July 2009, concluded between the Societe Generale Group AD Podgorica and Pobjeda a.d. Podgorica, in accordance with the Conclusion of the Government No. 08‐130/2 as of 4 September 2014.

Repayment of Guarantees was made in accordance with Article 60 of the Law on the Budget and the Fiscal Responsibility, which stipulates that the Government shall have unlimited authorization to repay interests and principal on the basis of the State debt and guarantees issued by the State, from the funds kept in the consolidated Treasury account, in accordance the terms and conditions agreed to by the Government.

In accordance with Article 11 of the 2014 Budget Law, during 2014 the Government of Montenegro concluded the Guarantee Agreement No. 06‐1663/1 as of 23 April 2014 in the total amount of € 20,000,000.00, based on the Loan Agreement No. 06‐4404 as of 8 May 2013, concluded between the European Bank for Reconstruction and Development EBRD and the company for Montenegrin electrical transmission system Crnogorski elektroprenosni sistem AD Podgorica, for the financing of the project on construction transmission power line Tivat‐Pljevlja in the amount of € 60,000,000.00.

Repayment of Liabilities from the Past – 2014 Budget Law appropriated a total of € 33,338,159.97 for the repayment of liabilities from the previous period, while this figure was reduced through the reallocation of resources by € 87,560.00. Therefore, the available resources reported in the current budget plan totalled at € 33,250,599.97. The actual expenditures for repayment of liabilities from the previous period amounted to € 65,221,299.67, or exceeded the estimated plan by 96%, as indicated in the table below:

Table 30 – Expenditure for Arrears 1) 2014 Budget Law 33,338,159.97

2) Increase by reallocations 0.00

3) Reduced by reallocations 87,560.00


5) Executed 65,221,299.67

6) Executed / planned x 100 196

Actual expenditures in the amount of € 65,221,299.67 pertain to the liabilities arising from the court decisions in the amount of € 15,476,495.96 and other liabilities in the amount of € 49,744,803.71, which refer to the Ministry of Finance, with € 47,256,042.81, the Ministry of Defence with € 314,328.83 and the Restitution Fund with € 2,174,432.07.

Expenditures arising from the court decisions in the amount of € 15,476,495.96 were executed against the accounts of the spending units which caused the said expenditures. However, the Ministry of Finance did not reallocate funds to the expenditure position of the budget user which caused these expenses up to the level of their realization, as stipulated by Article 12 of the Budget Law for 2014. The Ministry of Finance executed payments against the account of repayment of arrears, as follows:

repayment of debt on the basis of foreign currency savings in the amount of € 13,193,997.14, in line with the laws and the Regulation on converting the citizens' foreign currency savings into bonds8.

repayment of debt on the basis of compensation to persons retired from the army in the amount of € 12,304.65 , in accordance with the Law on Pension and Disability Insurance 9 and the Conclusion of the Government of Montenegro No. 06‐1355/3 as of 3 July 2012.

repayment of the debt taken over from Montenegro Airlines a.d. Podgorica to the BNDES‐u (Banko Nacional De Desenvolvimento Economico E Social Rio Se Janeiro Brazil), in the amount of € 1,634,250.48, for financing the purchase of the airplane Embraer E 195, on the basis of the Agreement on taking over and converting the debt into share capital, concluded between the Ministry of Finance and Montenegro Airlines a.d. Podgorica, and in accordance with Article 11 of the Law on the Budget for 2014.

repayment of the debt taken over from the Radio and Television of Montenegro in the amount of € 2,400,000.00, on the basis of the Agreement on taking over the debt No. 01‐6761‐14 as of 26

8 Off.Gazette of MNE, No.42/04 and 40/08 9 Off. Gazette of MNE, No.79/08, 14/10,78/10 and 34/11

December 2014, and the Conclusion of the Government of Montenegro No. 08‐2995/2 as of 25 December 2014, on taking over the liabilities arising from the taxes and contributions on salaries in line with Article 11 of the Law on the Budget for 2014.

repayment of outstanding liabilities of the budget users arising from the taxes and contributions on salaries and surtax as of the end of 2013 in the amount of € 27,311,002.07, in accordance with the the Conclusion of the Government of Montenegro No. 08‐4973 as of 24 April 2014. The Law on the Budget for 2014 envisaged payment in the amount of € 17,000,000.00, as appropriated for the repayment of arrears for taxes and contributions with the Ministry of Education, against the position 4630 – Repayment of Liabilities from the Past.

repayment of liabilities in the amount of € 2,357,173.00 on the basis of the Conclusion of the Government of Montenegro No. 06‐2341/2 as of 22 November 2012, on the adoption of the information on deleting from the land registry of the infrastructure of Jadransko brodogradiliste Bijela from the shipyard port site KO Bijela to the ownership of the State of Montenegro. However, this commitment should be recorded as a capital expenditure, considering that the said infrastructure was paid for by the State, in accordance with its estimated value on 30 June 2012 to the Adriatic Shipyard and transferred into the state ownership.

The audit of expenditures recorded in the group of accounts 463 ‐ Repayment of Liabilities from the Past established that the the payment of expenditures is not in compliance with the Regulation on Uniform Classification of Accounts for the Budget, Extra‐budgetary Funds and Budgets of Municipalities and that the paid expenditures do not present arrears but extraordinary expenditures that were not planned by the annual Budget Law.

7. REPORT ON EXPENDITURES OF THE BUDGET RESERVES

According to the 2014 Budget Law, the budgeted reserve funds amounted to € 8,854,649.77. This figure was increased by € 6,616,469.07 and reduced by € 1,431,514.59 through reallocation of funds and therefore appropriated spending funds total at € 14,039,604.25. Actual current budget reserve funds amount to € 13.532.542,72 or 96.39% of the appropriated amount, as shown in the table below:

Table 31 – Overview of current budget reserve outflows 1) 2014 Budget Law 8,854,649.77

2) Increase by reallocations 6,616,469.07

3) Reduced by reallocations 1,431,514.59


5) Executed 13,532,542.72

6) Executed / planned x 100 96.39

Spending funds from the current budget reserve was approved by the decisions of the Government and the decisions of the Cabinet of the Government in the amount of € 11,384,027.18 and the decisions of the Commission for allocation of funds from the current budget reserve in the amount of € 2,148,515.54 . Current budget reserve funds were used for:

financing of unforeseen and insufficiently planned resources for the spending units activities, in accordance with Article 43 of the Law on Fiscal Responsibility, in the amount of €8,221,961.88;

support to legal entities for financing their business operations in the amount of € 2,007,854.36; medical treatment support in the amount of € 434,707.50; support for the improvement of financial situation in the amount of € 2,417,540.54; support for education in the amount of € 68,150.00; other forms of financial aid in the amount of € 199,200.00; solidarity funds for natural disasters in the amount of € 156,390.00 and funds for the local elections and the election campaign of political parties in the amount of €

26,738.44. Spending units that used the current budget reserve funds in the amount of € 8,221,961.88 are as follows:

Judiciary in the amount of € 50,000.00; Government of Montenegro in the amount of €415,639.31; Ministry of Interior in the amount of € 567,572.39; Ministry of Finance in the amount of € 918,098.55; Ministry of Foreign Affairs in the amount of € 7,700.01; Ministry of Culture in the amount of € 237,500.00;

Ministry of Economy in the amount of € 85,451.22; Ministry of Transport and Maritime Affairs in the amount of € 3,543,205.07; Ministry of Agriculture and Rural Development in the amount of € 1,617,574.45; Ministry of Human and Minority Rights in the amount of € 75,000.00 and Ministry f Information Society in the amount of € 704,220.88.

According to the presented data, the allowed spending of funds from the reserves was overrun by € 3,490,686.14, as follows: the Government of Montenegro‐Secretariat General in the amount of 190,767.72 €, the Ministry of Transport and Maritime Affairs in the amount of € 2,372,200.52, the Ministry of Agriculture and Rural Development in the amount of € 491,320.53, the Ministry for Human and Minority Rights in the amount of € 32,308.33 and the Ministry of Information Society in the amount of € 404,089.05 , which is not in accordance with Article 3, paragraph 1 of the Rulebook on Detailed Criteria of the Current and Permanent Budget Reserve, which stipulates that the funds from the current budget reserves can be used up to the amount of 5% of the funds planned in the annual law on budget of that particular spending units.

8. REPORT ON CAPITAL PROJECTS ‐ CAPITAL BUDGET

According to the data provided in the Proposed Law on the Final Statement of Accounts of the Budget of Montenegro for 2014, the capital budget was estimated in the amount of € 101,820,500.00, i.e. it was equal to the amount of appropriations, while the actual capital budget totalled at € 75,893,030.53 or 74.54% of the appropriated funds.

Table 32 – Capital budgte

Description Transport Directorate Public Works Directorate

Total

1) 2014 Budget Law 42,973,000.00 58,847,500.00 101,820,500.00

2) Increase by reallocations 2,406,051.20 1,739,700.00 4,145,751.20

3) Reduced by reallocations 2,406,051.20 1,739,700.00 4,145,751.20


5) Executed based on data from the State Treasury General ledger 30,575,169.02 30,575,169.02

6) Incresed by transferred funds from payment of liabilities to residents 740,656.20 740,656.20

7) Exeuted under 2014 Proposed Law on Final Statement of Accounts 31,315,825.22 44,577,205.31 75,893,030.538) Executed/planned x 100 72.87 75.75 74.54

In the Proposed Law on the Final Statement of Accounts of the Budget of Montenegro for 2014, the Ministry of Finance increased the capital expenditures in the group of accounts 4411 – Expenditures for the Infrastructure of the General Interest, and reduced the expenditures in the group of accounts 4611 – Repayment of Securities and Loans to Residents by € 740,656.20. The capital budget is implemented through the Ministry of Transport and Maritime Affairs ‐ Transport Directorate and the Ministry of Sustainable Development and Tourism ‐ Public Works Directorate, the authorities within the aforementioned ministries.

8.1. Transport Directorate – Capital Budget

By the Capital budget for 2014, Transport Directorate estimated resources for the projects initiated in previous years, the projects whose tender procedure started in 2013 and the contracts were concluded in 2014 and the projects that were implemented in 2014 or will be continued over the next years, as follows:

6 (six) projects (eleven road sections ) were completed in 2014;

5 (five) projects (nine road sections) initiated in previous years, with the implementation during 2014;

2 (two) projects (three road sections) started with the implementation in 2014.

Transport Directorate estimated its Capital budget for 2014 in the amount of € 42,973,000.00, while the actual realization amounted to € 30,575,169.02, or 71.15%. The funds in the amount of € 30,575,169.02 were used for financing the following:

projects initiated in previous years in the amount of € 29,829,381.35 or 97.56%;

projects initiated in 2014 in the amount of € 742,594.47 or 2.43% and

programme Road/Rail Crossings of the Railway Directorate in the amount of € 3,193.20.

The appropriations in the amount of € 12,397,830.98 have not been implemented due to delays in preparation of technical documentation and tender procedures for the selection of a contractor.

The Capital budget of Transport Directorate was funded from the general revenues in the amount of € 29,128,285.70 or 95.27%, as well as from the credit granted by the European Investment Bank in the amount of € 1,446,883.32 or 4.73%, as shown in the table below:

Table 33 –Capital budget of Transport Directorate

Project DESCRIPTION

Funding

Total €Budget Loan

761 Reconstruction of regional roads and highways in Montenegro 6,347,551.90 6,347,551.90

763 Debt service for Risan ‐Žabljak 11,373,000.00 11,373,000.00

764 Highway Bar Boljare, section Smokovac to Matesevo 3,766,071.98 3,766,071.98

765 Crossings Railways Directorate 3,193.20 3,193.20

767 Restoration of bridges, landslides and slope on the main and regional roads 302,171.47 302,171.47

771 Solving bottlenecks in the transport network in Montenegro 3,090,903.87 1,000,000.00 4,090,903.87

773 Investment maintenance of regional and main roads 546,903.61 546,903.61

774 Tunnelling Tifran 1,559,515.90 1,559,515.90

775 Construction of the third lane 1,709,556.88 250,000.00 1,959,556.88

776 The program to eliminate the effects of floods on the main and regional roads 429,416.89 196,883.32 626,300.21

Ukupno 29,128,285.70 1,446,883.32 30,575,169.02

Appropriations in the amount of € 2,384,506.54 by the Programme 761‐ Reconstruction of regional and main roads in Montenegro, were spent for financing the Programme 771‐ Solving bottlenecks in the transport network in Montenegro, for the construction of bypass Nikšić, Phase II, according to the Conclusion of the Government of Montenegro No. 08/1916/5 as of 4 September 2014.

Appropriation in the amount of € 734,163.25 were spent for financing unforeseen works on relocation of existing local water supply system in the road section Berane ‐ Lubnice, under the Annex I No. 01‐3949 as of 23 July 2014 (Construction Contract No. 01‐1684/1 dated 17 April 2013) and the Conclusion of the Government of Montenegro, No. 08‐173/3 dated 17 August 2014, in accordance with Article 46 paragraphs 2 and 3 of the Law on the Budget and Fiscal Responsibility.

In the Capital budget for 2014, the Ministry of Transport – Railways Directorate did not estimate expenditures in the amount of € 125,129.40for the land expropriation on the Program 775 ‐ Road Crossings, which were paid from the Program 773 ‐ Investment Maintenance of Regional and Main Roads, Supervision, Design, Expropriation and Revisions.

8.2. Public Works Directorate ‐ Capital Budget

In 2014, the Public Works Directorate estimated resources in the amount of € 58,847,500.00 and executed a total of € 44,577,205.31, or 75.75% of the current budget appropriations. The Capital budget current expenditures totalled at € 2,433,028.60, while the capital expenditures amounted to € 42,144,176.71.

In 2014, the Public Works Directorate was carrying out activities on the implementation of 164 projects, as follows:

48 projects, a total value of € 18,123,593.44, initiated and completed in 2014;

28 projects, a total value of € 6,558,320.14, initiated in previous years and completed in 2014;

44 projects, a total value of € 4,364,854.45, initiated in 2014, while their implementation is to be continued in the following year and

28 projects, a total value of € 15,530,437.31, where the implementation was initiated in previous years, it was completed in 2014, and is to be continued in the following year.

The Budget Law for 2014 estimated the amount of € 14,270,294.69, but the funds were not fully executed because a certain number of projects was not accompanied by the necessary activities which needed to be implemented prior to the preparation of technical documentation, due to long timelines for public procurement procedures, as well as due to delays in a number of projects of utility infrastructure that should be included in the Operational Programme Regional Development funded from the Instrument for Pre‐Accession assistance ‐ IPA. The funds in the amount of € 44,577,205.31 were used for financing the projects as set out in the table below:

Table 34 – Capital Budget of the Public Works Directorate

Projectsi DESCRIPTION Funding Total

Budget Loan Donations

804 Construction and reconstruction of administrative premises forthe work of state bodies

5.658.899,71 332.219,56 5.991.119,27

805 The construction, reconstruction and renovation of culturalfacilities

6.170.713,09 6.170.713,09

806 Construction and reconstruction of sports facilities 2.012.383,32 2.012.383,32

808 Construction of residential buildings 73.678,50 73.678,50

810 The construction of local infrastructure 7.478.042,13 7.478.042,13

812 Environmental projects 925.868,38 925.868,38

818 Construction and reconstruction of health facilities 3.567.940,71 3.567.940,71

819 Construction and reconstruction of social care facilities 347.978,11 347.978,11

821 Construction and reconstruction of education and sciencefacilities

4.096.006,72 4.096.006,72

824 Emergency care and flood prevention ‐ 855.290,70 855.290,70

826 Improving tourist offer 3.058.184,38 3.058.184,38

827 Buying a business of housing premises and infrastructure 10.000.000,00 10.000.000,00

Total 43.389.695,05 855.290,70 332.219,56 44.577.205,31

The Public Works Directorate financed its Capital budget from the general revenues in the amount of € 43,389,695.05 or by 97.34%, from the credit resources in the amount of € 855,290.70 or by 1.92%, as well as from donations amounting to € 332,219.56 or 0.75%.

The Government of the Republic of Italy – Donation for the Project Eco efficient building MORT – According to the Agreement signed between the former Ministry of Tourism and Environmental Protection of Montenegro and the Ministry of Environment, Land and Sea of Italy, special Montenegrin‐Italian financial instrument for the environmental protection has been established (EMIF ‐ Environment Montenegrin‐Italian Facility), within which the project of construction an Eco ‐ building for the Ministry of Sustainable Development and Tourism has been implemented. The energy efficient building has been designed to accommodate the Ministry of Sustainable Development and Tourism, with the department Ecology Studies for the needs of the University of Montenegro. The contracting parties have been participating in financial structure of the said project with a portion of 56.19% for Italy, and 43.81% for Montenegro. The funds paid in 2014, in line with the two delivered interim payment certificates , amounted to € 322,219.56. The Donation Agreement signed between the MORT and CMSR of Slovenia has laid down the terms and conditions under which the Republic of Slovenia, through the CMSR, shall undertake co‐financing of construction works on the Sports Hall in Zabljak, the Recycling yard and the Reloading station at Zabljak. The amount of of € 1,291,499.99 from donations and the amount of € 1,578,500.00 from the budget of the Public Works Directorate were paid for the implementation of the mentioned project in 2014.

European Investment Bank (EIB) Loan ‐ Project 824 – Urgent measures for flood prevention and remediation, was partially financed from the loan granted by the European Investment Bank (EIB), in the amount of € 855.290,70. The Capital budget for 2014 appropriated funds in the amount of € 200,000.00 for the expenses of the Project University Centre in Berane, while the execution amounted to 324,798.82 €. The Government adopted the Information on the need for implementing the project on construction and furnishing prison kitchen by the Conclusion number 08‐1969/4 as of 4 September 2014. Funds in the amount of € 350,000.00 were reallocated from the Project 804 ‐ Construction and Reconstruction of Administrative Facilities Intended for the Work of Administrative Bodies, to the spending unit the Institute for Execution of Criminal Sanctions, for the purpose of the implementation of the Project on construction and furnishing prison kitchen. Reallocation, i.e. the change of purpose was made in accordance with Article 46 paragraphs 2 and 3 of the Budget and Fiscal Responsibility Law.

It is recommended to the spending units that execute the capital budget, to align the budget execution with the planned projects, or when changing the purpose of using funds, to notify the Ministry of Finance and the Government of Montenegro, in order to obtain the appropriate approval in accordance with Article 46, paragraph 3 of the Law on the Budget and Fiscal Responsibility.

9. STATE PROPERTY

Law on State Property governs the use, management and disposal of things and other goods that belong to Montenegro and local self‐governments. Audit of the management of state property conducted in the budget spending units included in the audit scope established the following Law on State Property10 and secondary legislation govern the use, management and disposal of things and other goods that belong to the State of Montenegro and local self‐government. Audit of the management of state property conducted in the budget spending units (Ministries) included in the scope of audit, established the following: The Ministry for Information Society and Telecommunication, the Ministry of Justice, the Ministry of Transport and Maritime Affairs, the Ministry of Sustainable Development and Tourism, the Pension and Disability Insurance Fund, the Ministry of Labour and Social Care, the Ministry of Agriculture and Rural Development, the Ministry of Health, the Ministry of Education, the Ministry of Culture, Ministry of Economy and the Ministry of Science – a part of the registered state‐owned vehicles did not have a present value recorded in 2014. Value assessment has not been performed.

If official vehicles do not have value, their value assessment should be done in accordance with Article 11 of the Directive on detailed procedure for the inventory of movable and immovable state‐owned property.11 Article 14 of the Law on State Property stipulates that the property acquired as a gift to the State of Montenegro shall be considered state property.

By its Decision on establishing Commission for the State property inventory no. 01‐7028/2 as of 30 December 2014, the Ministry of Transport and Maritime Affairs neither set a time limit within which the inventory was to be completed, nor defined the deadline for delivering inventory report.

It is necessary to set the time limit within which the inventory is to be completed and the deadline for delivering inventory report accompanied by inventory lists by the Act on establishing Commission, according to Article 12 of the Regulation on keeping records of movable and immovable assets and taking inventory of state‐owned property12.

Ministry of Foreign Affairs and EU Integration‐ According to the data on property for 2013 and 2014 submitted to the Public Property Administration, the following assets have the same purchase, written‐off and present value: other tangible investments, office furniture and equipment, computer equipment and printing and copying equipment. The calculation of depreciation for these assets was not performed in 2014.

Ministry of Foreign Affairs and EU Integration is required to do the calculation of depreciation in accordance with the provisions of the Regulation on the classification of tangible and intangible assets by groups and methods for depreciation determination of the budgetary and extra‐budgetary users13.

Ministry of Agriculture and Rural Development – Fixed assets whose purchase value is recorded in the amount of € 140,000.00, has a present value of 0.00 €.

The value of immovable property should be estimated in accordance with Article 32 of the Law on State Property, while Article 44 stipulates that records on immovable and movable things that Montenegro exercises ownership rights and authorizations on, and used by state authorities to perform functions of state authorities shall be kept by authorities using such things.

Ministry of Culture – The Report of the Commission for the annual inventory of state property with the balance as of 31 December 2014, No. 01‐2276/2 as of 27 February 2014 stated that the inventory list

10 Off. Gazette of MNE” No. 47/11 11 “Off. Gazette of MNE” No. 47/11 12 “Off. Gazette of MNE” No..13/10 13 “Off. Gazette of MNE” No. 32/03

included two buildings of the Ministry of Culture. The mentioned buildings were neither entered into the bookkeeping records nor the data on immovable assets were sent to the Public Property Administration.

It is recommended to the Ministry of Culture to estimate the value of immovable property in accordance with Article 43 of the Law on State Property. The immovable assets should also be recorded and detailed information should be submitted to the Public Property Administration.

The audit of the state property management found irregularities, some of which were identified by the audit of the Proposed Law on Final Statement of Accounts of the State Budget for 2013. Accordingly, the State Audit Institution recommends to all the spending units to intensify the implementation of the Law on Property and subordinate legislation.

10. PUBLIC PROCUREMENT The aim of the audit of public procurement is the control of compliance with the Public Procurement Law Scope of audit of public procurement included the procedures of public procurements that were conducted, as well as the Public procurement plan for 2013 and Report on the public procurement contracts awarded in 2013 The aim of the audit of public procurement is the control of compliance of the conducted public procurement procedures with the Public Procurement Law14. The scope of audit of public procurement included the conducted public procurement procedures, as well as the Public procurement plan for 2014 and Report on the public procurement contracts awarded in 2014. The Ministry of Agriculture and Rural Development did not render the Decision on appointing a public procurement officer in 2014.

As stipulated by Article 58 of the Public Procurement Law, the ordering entity has the duty to adopt a decision on appointing a person to the tasks of public procurement. The ordering entity is also obliged to deliver such a decision to the competent authority.

The Ministry for Information Society and Telecommunications, the Ministry of Finance, the Ministry of Justice, the Ministry of Sustainable Development and Tourism, the Ministry of Health, the Ministry of Education and the Ministry of Culture –implemented public procurements through direct agreement procedures, whereas the application of direct agreement was not predicted by the Public procurement plan for 2014.

According to Article 37 of the Public Procurement Law, the ordering entity can initiate the public procurement procedure if the resources for this purpose have been allocated by the budget or provided in any other way in accordance with the law, and if such procurement is envisaged in the public procurement plan of the ordering entity.

The Ministry for Information Society and Telecommunications, the Ministry of Finance, the Ministry of Justice, the Ministry of Transport and Maritime Affairs, the Ministry of Sustainable Development and Tourism, the Ministry of Defence, Pension and Disability Insurance Fund, the Ministry of Labour and Social Welfare, the Ministry of Foreign Affairs and EU Integration, the Ministry of Agriculture and Rural Development, the Ministry of Health, the Ministry of Education, the Ministry of Culture and the Ministry of Economy – The information in the Form C (direct agreement), in the column IV (the subject to public procurement) were not entered in accordance with the Common public procurement vocabulary (CPV).

The ordering party was required to enter the information from the Common public procurement vocabulary (CPV) into the column IV (subject to the public procurement) in accordance with the Rulebook on the Records of Public Procurement Procedures15.

14 “Off. Gazette of MNE” No. 42/11 15 “Off. Gazette of MNE” No.63/11

The Ministry of Human and Minority Rights, Pension and Disability Insurance Fund, the Ministry of Labour and Social Welfare, the Ministry of Foreign Affairs and European Integration, Ministry of Agriculture and Rural Development and Ministry of Health – The total annual value of public procurement realized by the direct agreement exceeded the limit established by the law.

Procurements conducted by direct agreement should be implemented in the amounts as set out in Article 30 of Public Procurement Law.

The Ministry of Defence – The Decision on establishing the Commission for opening and evaluating the bids No. 80603‐1496/14‐2 was rendered on 5 March 2014, while the Decision on initiating the procedure No. 816‐1496/1 was rendered on 11 February 2014.

Commission for opening and evaluating the bids has to be established simultaneously with the adoption of the Decision on initiating the procedure according, to Article 59 paragraph 1 of the Public Procurement Law.

Audit of the public procurement system and compliance of the conducted public procurement procedures with the Public Procurement Law identified irregularities recurring over the previous period. The State Audit Institution recommends that spending units make the public procurement procedure transparent and to ensure full implementation of the Public Procurement Law, which regulates the procedure of procurement of goods, services and works, in order to provide legitimate budgetary spending.

11. SYSTEM OF INTERNAL FINANCIAL CONTROLS System of internal financial controls consists of policies and procedures adopted by the management of the budget funds users aimed at meeting the set goals, ensuring efficient and successful operations, as well as valid and reliable financial reporting. Audit of the internal financial control systems within the spending units that were audited identified the following:

most spending units adopted the internal rules and procedures,

most of the spending units did not employ relevant number of staff to fill the systematised posts in line with adopted systematisations and legally determined obligation to employ internal auditors.

In spite of the evident improvement of this system, the State Audit Institution deems it necessary to continue with carrying out activities on establishing the function of financial control and internal audit in spending units, in accordance with the Public Internal Financial Control Law and internal audit standards.

audit report on the proposed low on financial statement of

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