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Report on the analytical

review of legislative
compliance

Montenegro
Chapter 22 - Regional policy and coordination of structural
instruments

Dates of analytical review meetings:

Explanatory meeting: November 14-15, 2012.

Bilateral meeting: December 18, 2012.

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I. CONTENTS OF THE CHAPTER

The acquis of the EU related to this chapter consists mainly of framework regulations and implementing
regulations, which do not require transposition into domestic legislation. They define the rules for the
development, approval and implementation of Structural Funds and Cohesion Fund programs (Structural
Instruments) that will affect the territorial organization of each country. These programs are negotiated
and agreed with the Commission, but member states are responsible for their implementation.

A legislative framework must be in place to enable multi-year programming at the national and regional
level and budget flexibility, the existence of capacity for co-financing at the national and local level, and
ensure safe and effective financial control and audit of interventions. Member States must generally
respect EU legislation when selecting and implementing projects, in areas related to regional policy and
Structural Instruments, such as public procurement, competition and the environment, non-discrimination
and equality between men and women.

Member States must establish an institutional framework. This entails the determination and
establishment of all structures at the national and regional level required by the regulations, as well as
the establishment of an implementation system with a clear definition of the tasks and responsibilities of
the bodies involved. The institutional framework also requires the establishment of an efficient
mechanism for interdepartmental coordination, as well as the inclusion and consultation with a wide
partnership of organizations during the preparation and implementation of the program.

Adequate administrative capacities must be provided in all relevant structures. This implies the
employment and training of qualified and experienced personnel, as well as the establishment of
measures to retain such personnel. In this context, member states should establish the necessary
organizational arrangement, adjust procedures and organizational charts and prepare accompanying
documents.

The programming process includes the preparation of the National Strategic Reference Framework
(NSRO) and a series of Operational Programs (OPs) including ex-ante assessments. Member States
must organize broad partnerships for the preparation of program documents. They must ensure that a
package of prepared projects awaiting approval is in place that enables the full financial implementation
of the program. Member states will also have to implement special measures related to information and
the public when it comes to Structural Instruments.

The establishment of a system for monitoring and evaluation implies the establishment of structures
and procedures for evaluation in various competent authorities, as well as the installation of a
comprehensive and computerized Management Information System (MIS), which will be available for
use by all relevant authorities.

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Member States must establish a specific framework for financial management and control,
including auditing. This implies the determination and establishment of all structures required by the
regulations, as well as the establishment of an implementation system with a clear definition of the
tasks and responsibilities of the bodies involved.

II. STATE COMPLIANCE AND IMPLEMENTATION CAPACITY

This section summarizes the information provided by Montenegro and obtained during the discussions
at the analytical review meetings.

Montenegro pointed out that it accepts the legal acquis relating to this chapter, as well as that it does
not expect any difficulties in implementing the legal acquis until the day of accession.

II.a. Legislative framework

Montenegro stated that its legislative framework is largely harmonized with the policies and legislation
of the EU, which are most relevant for the implementation of the EU Cohesion Policy, i.e. competition
and state aid policies, public procurement, as well as policies related to the environment and traffic.

According to Montenegro, legislation in the field of environmental protection is largely defined by the
Law on Environmental Impact Assessment and is currently in the process of being amended (adopted
by the Government of Montenegro in June 2012). Amendments to the Law on Environmental Impact
Assessment, along with the adoption of the Regulation on projects subject to environmental impact
assessment, are scheduled for May 2013, and are expected to transpose EU directives in the area
of environmental impact assessment.

Montenegro stated that the legal framework regulating traffic policy is partially aligned with the
acquis. Gender equality is guaranteed by the Constitution of Montenegro, as well as by special
regulations.

Montenegro pointed out that multi-year budget planning is currently not foreseen as part of the state
budget planning. Current legislation provides for annual budget planning. The law currently in force
foresees the planning of co-financing on an annual level, but still allows a certain degree of flexibility
in the transfer of national co-financing budget funds to the next year if the available funds have not
been spent in the current year. National co-financing of EU aid at the central level is ensured by the
annual state budget. At the local level, national co-financing is ensured by the annual budget of each
local government unit. The Ministry of Finance of Montenegro is also responsible for ensuring the co-
financing of multi-year programs, given that it provides guidelines and instructions on the financial
management of all public funds, and also prepares the annual Budget Law, which defines
expenditures by beneficiaries, types of expenditures and programs, and sources financing of those
expenses.

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Montenegro stated that it has assessed what adjustments are necessary in the legislative framework in
order to provide the capacity for co-financing both at the national and local level for the Structural Funds
and the Cohesion Fund. According to Montenegro, it is expected that during the fourth quarter of 2013, the
Parliament will adopt the proposal of the Law on Budget and Fiscal Responsibility, which contains provisions
related to medium-term budget planning for a period of up to three years. The new law will also provide a
system for the control of multi-year contractual obligations and will be supplemented by sub-legal regulations.

According to special regulations, local authorities have several sources of income: a) their own income from
local taxes, fees and duties, b) taxes and duties prescribed by the state for the local level, c) funds from the
Equalization Fund aimed at financially weaker municipalities and) conditional grant from the state budget.
Montenegro stated that municipalities are autonomous in executing their budgets and managing their own
funds by determining the level of local taxes, fees and charges. Municipalities can co-finance projects
funded by the EU without restrictions on the level of participation. However, local authorities in Montenegro
need approval from the Government of Montenegro in order to receive loans.

Montenegro pointed out that its legal framework for financial control is essentially regulated by the Law on
the System of Internal Financial Controls in the Public Sector and the Regulation on the Establishment of
Internal Auditing in the Public Sector. These regulations contain the main concepts of management
responsibility. They also define which state bodies at the national and lower levels are necessary for the
establishment of functionally independent internal audit structures.

Montenegro stated that it represents one region. The basic form of local government is the municipality.
There are no administratively defined regions. Montenegro has an agreement with the Commission that as
a country it is defined as a single statistical region at level 1, level 2 and level 3, which at the time of EU
accession would be transformed into a single Nomenclature of Statistical Territorial Units (NUTS), at levels
NUTS 1, NUTS 2 and NUTS 3, without prejudice to any changes to this Agreement during the accession
process.

Pursuant to the Law on Regional Development, the Ministry of Economy of Montenegro is in charge of
coordinating the implementation of regional development policy.

II.b. Institutional framework

Montenegro stated that it has determined the structures for the management and implementation of the
Instrument for Pre-Accession Assistance (IPA). The accreditation of the relevant structures is ongoing, and
the accreditation package for components III and IV was submitted to the Commission on March 29, 2013.
The application packages for components I and II were submitted in July 2012. Montenegro will use
components Ipe II (Cross-border cooperation), III ( Regional Development) and IV (Human Resources
Development), which represent the organizational and structural predecessors of the Structural Instruments.
According to Montenegro, in this phase the following structure for management and implementation was defined:

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• The key decentralized governance structures are the Accreditation Officer (CAO), the National IPA
Coordinator (NIPAC) and the National Accreditation Officer (NAO). In addition, the Strategic
Coordinator is responsible for the coordination of the III and IV components of IPA, the preparation
of the Strategic Compliance Framework and the coordination of sector strategies and programs. The
National Regulation on the Organization of Decentralized Management of IPA, which was adopted
by the Government of Montenegro on June 23, 2011 ("Official Gazette of Montenegro" No. 33/11)
defines IPA bodies according to Operational Structures for II, III and IV components of IPA, as well
as their duties and responsibilities. • The II component of IPA is organized at the level of the
Operational Structure, although it consists of two separate bodies: a) the body responsible for cross-
border cooperation, which is part of the Ministry of Foreign Affairs and European Integration of
Montenegro and b) the Central Unit for Financing and Contracting (CFCU ), which acts as an
enforcement body within the Ministry of Finance of Montenegro. At the head of the operational
structure for the II-b component of IPA is the head of the Operational Structure appointed by the
Ministry of Foreign Affairs and European Integration. The management and implementation of the III
and IV components of IPA is organized at the level of the Operational Structure by IPA component.

The operational structures represent a set of bodies within the administration of Montenegro,
consisting of: a) the body responsible for the Operational Program, b) the body responsible for
priorities/measures, and c) the body for implementation. The internal audit function covers each
Operational Structure.

• The operational structure for the III component of the IPE was developed based on the priorities of the
national strategies and the Operational Program. The priorities identified for this component concern
the area of environmental protection and traffic. Consequently, the Operational Structure consists of
the following bodies: a) the Ministry of Sustainable Development and Tourism of Montenegro as the
body responsible for the Operational Program and the body responsible for priorities/measures in
the field of environmental protection, b) the Ministry of Transport and Maritime Affairs of Montenegro
as the body responsible for priorities/measures in the field of traffic and) Directorate for Public Works
as the implementing body. • The operational structure for the IV component of Ipe was developed
based on the priorities of the Operational Program related to this component, and it consists of the
following bodies: a)
The Ministry of Labor and Social Welfare as the body responsible for the Operational Program and
the body responsible for priorities/measures in the domain of the labor market and social inclusion, b)
Ministry of Education as the body responsible for priorities/measures in the field of education, c)
Ministry of Science as the body responsible for priorities/measures in the field of research and
innovation and id) Central Funding and Contracting Unit (CFCU) as the implementing body.

Montenegro stated that it has not yet defined the institutions that will be responsible for fulfilling obligations under
the Structural Instruments. Montenegro emphasized that these structures will be based on the institutional
framework developed for the implementation of IPA, and will also take into account the content of the revised EU
Cohesion Policy package for the period 2014-2020.

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Coordination between IPA implementation structures is maintained through regular consultations, coordination
meetings and monitoring activities. Inter-institutional coordination between different levels of administration at
the national and lower levels is established by law.

II.c. Administrative capacities

Montenegro stated that it is aware of the administrative capacities required by the EU's Cohesion Policy. In this
context, Montenegro intends to adapt, as far as possible, the structures involved in the decentralized
management of the IP to the rules and procedures that regulate the EU Cohesion Policy.

Currently, 170 officials are involved in the system established for the implementation of IPA funds. Of the
employees, 35 of them work on the III component of IPE, while 44 employees work on the IV component of IPE.
A Workload Analysis (WLA) was conducted by Ipe structures to assess the need for human resources, with a
plan to review those needs on an annual basis. According to the Workload Analysis for 2013, currently 8 more
employees should be employed in the Public Works Directorate for the III component. As for the IV component,
3 new officials should be employed in the Ministry of Labor and Social Welfare, and 7 of them in the Central Unit
for Financing and Contracting.
According to Montenegro, the capacities of the Audit Body will also be strengthened. Montenegro stated that it
is aware of the importance of the employee retention policy, which will ensure the permanent presence of
professional staff in the structures of IPA. In this context, Montenegro informed that financial and other forms of
incentive measures have been considered, but these measures have not yet been implemented.

Montenegro emphasized that several projects have been implemented so far, the aim of which is training for the
use of EU financial resources, and they were mainly financed through the IPA. Since 2006, IPA has contributed
to the preparation of Montenegro for decentralized management within all its components, in the total amount
of 7.7 million euros. Also, in cooperation with bilateral partners, trainings were organized that covered all phases
of project management. According to the submitted data, more than 130 trainings related to the management of
EU funds were organized in the last 4 years, and they are still regularly conducted. Montenegro stated that 55
public officials attended appropriate training.

According to Montenegro, the Central Funding and Contracting Unit (CFCU), as the implementing body for the
I, II and IV components of IPA, will have the task of organizing trainings for the relevant bodies involved in
various aspects of the decentralized management of IPA funds. In addition, Montenegro plans to expand the
function of the CFCU by designating it as a central institution for training the structures currently involved in the
IPA, which will become the structures for the implementation of the Structural Instruments in the future. For this
purpose, CFCU has already developed a training plan covering the most important components of decentralized
management.

When it comes to strengthening the capacity for internal audit, Montenegro appointed internal auditors in all
state bodies at the central level (except in the Ministry of Justice), which included all operational structures. The
Ministry of Finance of Montenegro started the program

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certification for internal auditors in the public sector, with the help of expert organizations from member
states. Additional support for the development of internal audit methodology, as well as regular procedures
and training for internal auditors, is provided through the IPA. Support to internal audit capacity will also be
offered as part of the 2012 IPE National Programme.

II. d. Programming

Montenegro pointed out that it has prepared a large number of national programming documents with direct
or indirect relevance for the implementation of the Structural Instruments. Montenegro has prepared the
Strategic Compliance Framework (SCF) 2012-2013, which sets priorities for the Operational Programs within
the III and IV components of IPA. The Strategic Compliance Framework was approved by the European
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Commission on 4 December 2012. The Strategic Alignment Framework is the forerunner of
the National Strategic Reference Framework within the EU Cohesion Policy.

Montenegro stated that a National Development Plan for the period 2013-2016 is being prepared, and it is
expected to be adopted in the first quarter of 2013. The National Development Plan will serve as a
comprehensive document that will include several sectoral policies aimed at promoting medium-term
investments and growth. Montenegro plans to integrate the priorities of the National Development Plan into
the project cycle of IPA structures.

The Operational Program "Regional Development" 2012-2103 was prepared by the state authorities of
Montenegro and adopted by the Decision of the Commission in December 2012. It amounts to 22.23 million
euros and focuses on the following three axes of priority: i) improvement of the environmental management
system, ii) improvement of the transport system while promoting environmentally acceptable modes of
transport, with special reference to the improvement of railway infrastructure in order to provide better
services, and iii) technical assistance.

The Operational Program "Human Resources Development" 2012-2013 was also prepared by the state
authorities of Montenegro and was adopted by the Commission Decision in October 2012. It amounts to 5.58
million euros and focuses on the following four axes of priority: i) effective and inclusive policy measures of
active employment, ii) improving skills, knowledge and expertise for employability and competitiveness, iii)
improving social inclusion, and iv) technical assistance.

Montenegro pointed out that the decision on which ministry or body will be responsible for programming the
Structural Instruments has not yet been made. Montenegro indicated that it will depend on future
organizational structures. However, Montenegro informed that it intends to, where possible, upgrade the
institutional structures and experiences of the Ipa program, given that the Ipa mechanisms for the III and IV
components represent organizational and functional equivalents to the Structural Instruments.

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It is considered that the document meets the requirements of Article 154 of Commission Regulation (EC) no. 718/2007 for the
implementation of Council Regulation (EC) no. 1085/2006, which establishes the Instrument of Pre-Accession Assistance.

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II.e. Monitoring and evaluation

Montenegro stated that it is gaining experience in monitoring and evaluating activities that are co-financed by the
EU within the various components of IPA, both at the program and project level.
The Ministry of Foreign Affairs and European Integration of Montenegro is responsible for the coordination of all
monitoring activities. Montenegro stated that the monitoring system used for the implementation of IPA will form
the basis for the establishment of monitoring mechanisms within the Structural Instruments.

The assessment functions are organized in a similar way for all IPA components and are under the direct authority
of the various institutions in charge of certain components. It is planned to use external assessment capacities to
complement the existing assessment capacities of the Montenegrin administration. Montenegro recognizes that
improvements are still needed to increase the capacity for assessments and monitoring of the structures involved.

The Ministry of Finance developed the so-called Project Information System (PIS) as a monitoring and assessment
system. Through this system, all financial data and reports concerning Ipe funds are recorded and processed in
electronic form. PIS will serve as the basis for the future Management Information System (MIS). Montenegro
stated that the PIS was developed in accordance with the standard requirements regarding monitoring and
reporting within the IPA.

II.f. Financial management and control

Montenegro pointed out that the financial management and control system is determined by the requirements of
the pre-accession instruments. In this sense, Montenegro has established an operational framework for financial
management and control (including audit) within the framework of IPA. National legislation determines standards
and procedures related to financial management and the internal control process.

Montenegro indicated that the national certification officer is responsible for confirming the legality and regularity
of transactions before submitting payment requests to the Commission. The future Certification Body has not yet
been determined.

Every body that deals with the management of IPA must have an internal control function. The second level of the
independent audit function is performed by the Audit Body. Montenegro indicated that, upon accession, the
internal audit function will continue to be provided within the future Management Bodies.
The audit body will retain the same role and powers it currently has. Montenegro stated that appropriate systems
of financial management and control will be established for the implementation of the Structural Instruments.

III. ASSESSMENT OF THE DEGREE OF COMPLIANCE AND IMPLEMENTATION CAPACITY

Overall, Montenegro is partially aligned with the acquis in the areas covered by this chapter. Until the accession
of Montenegro to the EU, it will be necessary to fully secure it

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application and implementation of legal acquis in the field of regional policy and coordination of Structural
Instruments. Montenegro's participation in the II, III and IV components of IPA contributed to the development of
structures and implementation mechanisms that could serve as a good basis for future competences within the
EU Cohesion Policy.

Montenegro is in the early stages of preparation when it comes to the implementation of the EU Cohesion Policy.
It is necessary to address certain shortcomings in relation to the establishment of institutional and administrative
capacities and the determination of implementation systems.

Montenegro must determine appropriate institutional structures and systems in accordance with the regional
framework governing the implementation of Structural Instruments and build and maintain adequate administrative
capacities. Montenegro must establish a computerized Management Information System that will be accessible
to a wide range of users and build sufficient capacities for assessment and auditing. It must also establish an
effective system of financial management and control for the implementation of the Structural Instruments.

III.a. Legislative framework

Montenegro is already at a satisfactory level of compliance with the relevant EU regulations and policies in areas
that are a prerequisite for the proper implementation of the EU Cohesion Policy. Additional work must be done
on harmonizing legislation in certain areas of state aid, public procurement, environmental protection and traffic
in order to ensure full compliance with the EU acquis. At the moment, the preparation of regulations is in progress,
which will solve the shortcomings in the above-mentioned areas.

The budget planning system in Montenegro currently allows only annual planning.
In this context, Montenegro must adopt a legislative framework that enables multi-year budget planning.

Currently, co-financing of projects at the national level is provided only from the state budget. Co-financing from
non-state sources is still quite limited. Local authorities can generate income from different sources and they are
independent in executing their own budgets.
However, they have limited lending capacity and depend on the prior consent of central authorities, which makes
co-financing capacity at the local level problematic.
It is necessary to establish a mechanism in order to ensure a financially sound basis for investment and sufficient
authority to carry out projects, possibly across municipal borders.

III.b. Institutional framework

Montenegro has determined the structures for the implementation of the IPA, primarily with regard to the
management of the two Operational Programs that represent the forerunner of the Structural Instruments.
Montenegro indicated that the IPA structure will form the basis for the establishment of a future system for the
implementation of Structural Instruments. Montenegro must pay attention to ensure full inclusion as soon as possible

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transfer of duties of competent functions to relevant ministries. They must gradually acquire full authority and
ownership of policy planning and preparation.

Montenegro has not yet officially determined the structures for the implementation of the Structural Instruments.
It will be necessary to determine the Governing Bodies. Montenegro has designated the future Auditing Body,
but has not yet designated the future Certification Body.

Considering the complexity of the functions that will be required by the future Structural Instruments, Montenegro
should take the necessary steps to ensure the establishment of a coherent coordination structure. At the same
time, it is necessary to ensure the functional independence of the structure as a whole, especially with regard
to future management and certification bodies and their duties. First of all, this coordination structure should
support the Management Bodies in the full performance of their duties and the capacity to make decisions on
the management and implementation of the relevant programs under their control.

On a broader level and within the framework of increasing transparency and responsibility when managing the
Structural Instruments, the coordination structure must ensure compliance between the goals of the
macroeconomic policy on the one hand and the needs and goals of co-financing required by the Structural
Instruments on the other hand.

In addition to the coordination structure, it is also necessary to ensure inter-institutional cooperation, which is
currently enabled by the Montenegrin legislation in the context of the implementation of the EU Cohesion Policy.

III.c. Administrative capacities

Overall, experience with multi-year programming and management of EU-funded projects as well as the number
of employees involved in the implementation of IPA are currently limited.

However, Montenegro has drawn up a strategy for capacity building in the context of IPA management and
implementation. Montenegro also conducted a series of trainings on the management of EU funds within the
IPA, among other things, in terms of external and internal audit functions. However, the training should be
intensified and include all officials who are currently involved in the IPA. Greater attention should be paid to
strengthening the capacity for assessment in public administration and audit functions.
Appropriate training of local authorities, especially those involved in the implementation of the Ipe program, is
also necessary.

Given that some of the implementation structures (e.g. Management Bodies and Certifying Authorities) have
yet to be determined, the capacity building currently provided or planned to be provided must be general and
focus on different stakeholder groups in order to raised general awareness and understanding of the principles,
practices and duties necessary for the performance of the Structural Instruments.

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Montenegro must ensure the continuity and stability of human resources that have or will benefit from capacity-
building measures. It is necessary to ensure a reasonable staff retention policy targeting officials who will
gradually gain experience in the management and implementation of EU funds. In this sense, Montenegro must
apply an effective and attractive career planning policy and salary policy for civil servants in all bodies involved
in IPA.

III. d. Programming

Montenegro has prepared a number of documents related to policy and programming, primarily at the state
level, the most authoritative of which include the priorities of IPA components III and IV.

Montenegro has prepared the Strategic Compliance Framework, which determines the priorities for the III and
IV components of IPA, and has also developed Operational Programs for the given components.

A mechanism has been established to ensure that the strategies adopted by the Government of Montenegro
correspond to certain items in the budget.

The experience gained in the development of projects is limited and it is necessary to further improve it in order
to meet the requirements of the EU Cohesion Policy. Montenegro will have to mobilize appropriate resources in
order to prepare a comprehensive and high-quality package of prepared projects awaiting approval, necessary
for implementation under future Structural Instruments (including the preparation of accompanying technical
studies and financial analyses), which will comply with the requirements of all other areas that are relevant for
EU Cohesion policy, especially environmental protection, public procurement, as well as competition policy and
state aid.

Montenegro must determine which authorities will be responsible for performing programming tasks within the
framework of future Structural Instruments.

III.e. Monitoring and evaluation

Montenegro has developed structures and gained some experience in monitoring and evaluation, both within
the ministries and in other institutions involved in the IPA. It has specific operating systems for monitoring and
evaluating EU programs, as well as an accounting system and a Management Information System.

Nevertheless, in relation to the implementation of the EU Cohesion Policy, Montenegro will have to engage the
appropriate human and financial resources for the proper establishment of the monitoring and assessment
system. This will entail the establishment of an integrated Management Information System that not only
combines physical and financial monitoring, but also enables access to and contribution to data collection and
entry of a large group of bodies involved in the implementation of activities and end users. It should also enable
the connection of electronic accounting systems with the Management Information System. In addition, it is
necessary to strengthen the assessment capacities of employees.

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Montenegro must upgrade the existing capacities and experiences and prepare a comprehensive
monitoring and evaluation strategy in order to define which bodies will deal with these functions within
the future Structural Instruments.

III. f. Financial management and control

Montenegro is in the process of establishing a good framework for financial management and control
(including auditing) for all state expenditures. However, there is a limitation in relation to the instruments
that are relevant for the EU Cohesion Policy.

Montenegro must define its financial management and control system (including external and internal
audit) for the Structural Instruments and pay special attention to the separation of functions and
independence of key bodies such as the Certification Body and the Audit Body.

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