Alia Moubayed Washington, April 26, 2007


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  • Ladies and Gentlemen
  • Ladies and Gentlemen
  • Ladies and Gentlemen
  • Ladies and Gentlemen
  • Ladies and Gentlemen
  • Ladies and Gentlemen
  • Alia Moubayed Washington, April 26, 2007

    1. 1. Alia Moubayed Washington, April 26, 2007 Public Expenditure and Institutional Review Restructuring Public Expenditure to Sustain Growth The story World Bank - Economic Policy Group - Eastern Europe and the Balkans Albania
    2. 2. Outline <ul><li>Background and challenges </li></ul><ul><li>Approach </li></ul><ul><li>Elements of a growth enhancing fiscal strategy </li></ul><ul><li>Creating impact from PER work </li></ul><ul><li>Lessons learned </li></ul>
    3. 3. Outline <ul><li>Background and challenges: Stage setting </li></ul><ul><li>Approach </li></ul><ul><li>Elements of a growth enhancing fiscal strategy </li></ul><ul><li>Creating impact from PER work </li></ul><ul><li>Lessons learned </li></ul>
    4. 4. <ul><li>CEM 04: Sustaining past growth requires increases in factor accumulation and continuation, albeit from new sources, of TFP growth </li></ul><ul><li>Poverty Assessment (PA 06): growth as a major determinant of poverty reduction </li></ul><ul><li>PA, sector ESW, projects: large inequalities in access to services (health, education, and water services) </li></ul>Albania faces a twin challenge of sustaining growth and reducing inequalities Public finance policies should help address these challenges
    5. 5. <ul><li>High level of state capture and a medium level of administrative corruption </li></ul><ul><li>Poor governance negatively affects: </li></ul><ul><ul><li>business environment (heavy regulation, weak legal base for property rights, justice system…) </li></ul></ul><ul><ul><li>service delivery (corrupt practices in health and education..) </li></ul></ul><ul><li>Weak fiduciary arrangements,  constrain the efficiency of resource use </li></ul>Albania’s overall governance record is weak Reforming institutions and incentive framework is critical State Capture and Income Levels
    6. 6. Outline <ul><li>Background and challenges </li></ul><ul><li>Approach: Answering key questions </li></ul><ul><li>Elements of a growth enhancing fiscal strategy </li></ul><ul><li>Maximizing impact from PEIR work </li></ul><ul><li>Lessons learned </li></ul>
    7. 7. How did fiscal adjustment take place? <ul><li>Past fiscal adjustment have focused on expenditure cuts </li></ul><ul><li>Largest cuts in capital spending and operations and maintenance </li></ul><ul><li> Rigidities in the budget have increased (57 to 63%) </li></ul>Size and Distribution of Fiscal Adjustment (1993-2005) Change in percentage points of GDP -13.0 Overall deficit (excluding grants) -10.2 Total deficit (including grants) -14.0 Primary deficit (excluding grants) -11.2 Primary deficit (including grants) -4.2 Capital expenditures -1.3 Subsidies -2.5 Operational & maintenance 1.0 Interest -0.8 Personnel expenditures -4.2 Current Expenditures -8.5 Total Expenditures 1.7 Total Revenues
    8. 8. How does it compare with other high growth countries? Economic Classification (% of GDP), Average 1995-2004
    9. 9. Is it about the level of spending? At around 30% of GDP, size of government is appropriate
    10. 10. Is the tax level problematic? The tax level is also adequate
    11. 11. What is happening at sector level? <ul><li>Spending levels and composition </li></ul><ul><ul><li>Public and private spending </li></ul></ul><ul><ul><li>Allocation of spending among programs </li></ul></ul><ul><ul><li>Composition of input within each program </li></ul></ul><ul><li>Outcomes </li></ul><ul><ul><li>Access </li></ul></ul><ul><ul><li>Quality </li></ul></ul><ul><ul><li>Equity </li></ul></ul><ul><li>Institutional arrangements for public spending in the sector </li></ul><ul><ul><li>Institutional roles and responsibilities across levels of governments </li></ul></ul><ul><ul><li>Planning and budgeting </li></ul></ul><ul><ul><li>Regional allocation mechanisms </li></ul></ul><ul><li>Linking spending to outcomes </li></ul><ul><li>What needs to be done? </li></ul>
    12. 12. Some examples from the sectors <ul><li>Education: </li></ul><ul><li> </li></ul><ul><li>Health: </li></ul><ul><li> </li></ul><ul><li>Water: </li></ul><ul><li> </li></ul>
    13. 13. What are the main institutional constraints? Develop an up-to-date picture of the quality of the PFM system and establish a baseline for monitoring the progress of PFM reforms in future. Public Exp. and Financial Accountability (PEFA 2006): Assess fiduciary risk of Albania’s budget looking at both public financial management (PFM) and procurement. Country Fiduciary Accountability Assessment (CFAA 2006) Focus on accountability of public sector management (civil service pay, public financial and investment management To the extent possible explore sector governance issues: social and infrastructure sectors (health, education, social protection, water, power and transport) Public expenditure and Institutional Review (PEIR 2006):
    14. 14. Evaluating the PFM system
    15. 15. Assessing the Procurement System 0.0 0.5 1.0 1.5 2.0 2.5 3.0 Legislative Framework Institutional & Management Capacity Procurement Operations & Market Practices Integrity & Transparency [Albania Score] Norm for Region Maximum Score Figure 1. Public Procurement System at a Glance— Four OECD/DAC Pillars
    16. 16. <ul><li>Albania’s size of government is appropriate but its resourcing is distorionary </li></ul><ul><li>The current spending composition across and within sectors needs to change to improve the growth impact of public spending </li></ul><ul><li>Reforming fiscal institutions and improving the incentives for better performance in the public sector is necessary to ensure an efficient process of expenditure reallocation </li></ul>Zoom in: What are the main messages?
    17. 17. Outline <ul><li>Background and challenges </li></ul><ul><li>Approach </li></ul><ul><li>Elements of a growth enhancing fiscal strategy </li></ul><ul><li>Maximizing impact from PEIR work </li></ul><ul><li>Lessons learned </li></ul>
    18. 18. Elements of a Growth Enhancing Fiscal Policy <ul><li>Alter the economic composition of spending </li></ul><ul><li>Re-balance inter-sectoral allocations (across sectors) </li></ul><ul><li>Adjust intra-sectoral allocations (within sectors) </li></ul><ul><li>Address regional disparities </li></ul><ul><li>Re-work the public-private financing mix </li></ul><ul><li>Move away from labor taxation </li></ul><ul><li>Accelerate and deepen institutional reforms </li></ul>
    19. 19. Alter the economic composition of spending <ul><li>Increase allocations for non-wage recurrent spending , </li></ul><ul><ul><li>O&M in the infrastructure sectors </li></ul></ul><ul><ul><li>Non-wage recurrent in secondary education and primary health. </li></ul></ul><ul><li>Keep the wage bill in check , </li></ul><ul><li>Maintain capital spending at current high levels only if subjected to the rigor of investment management procedures , </li></ul><ul><li>Alleviate the burden of interest payments, </li></ul><ul><ul><li>reduce overall debt levels, </li></ul></ul><ul><ul><li>lengthen domestic maturities, and </li></ul></ul><ul><ul><li>seek long-term external (official and private) financing. </li></ul></ul><ul><li>Gradually reduce remaining subsidies (water and railway). </li></ul>
    20. 20. Re-balance inter-sectoral allocations Functional Classification (% of GDP), 2004 More to education, less to general public services, infrastructure to generate its own financing
    21. 21. Adjust intra-sectoral allocations- some examples In Education: shift priority towards expanding secondary education In Health : increased incidence of non-communicable disease  shift spending from the hospital sector and pharmaceuticals in favor of preventive care In Social Protection: revisit social insurance model as a way of providing old-age security  World Bank Social Insurance Review In Transport : reduce financing to railways and invest only in priority roads as per ANTP
    22. 22. Address regional disparities <ul><li>Move away from input based financing: </li></ul><ul><ul><ul><li>In health: single provider model with output- based financing </li></ul></ul></ul><ul><ul><ul><li>In education : move towards capitation financing for recurrent and capital spending </li></ul></ul></ul><ul><ul><ul><li>In transport: move towards output-based maintenance contracts </li></ul></ul></ul><ul><li>Apply objective and transparent criteria and rules for resources allocation </li></ul><ul><ul><ul><li>In water: move towards performance-based allocations to utilities </li></ul></ul></ul><ul><ul><ul><li>In transport : link allocation to network size and unit cost of maintenance… </li></ul></ul></ul>
    23. 23. Move to private sector financing and provision of public services <ul><li>Deepen private participation in infrastructure: roads, energy, water, railways… </li></ul><ul><li>After establishing a solid legal and institutional framework for PPPs  avoid emergence of fiscal risks </li></ul><ul><li>Increase cost recovery in the infrastructure and tertiary education sectors while protecting the poor </li></ul><ul><ul><ul><ul><li>Water </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Energy </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Tertiary Education </li></ul></ul></ul></ul>
    24. 24. Move away from labor taxation <ul><li>Consider shifting health finance to general taxation </li></ul><ul><li>Rebalance old-age social insurance/social assistance and reduce pension contributions accordingly </li></ul>Social Security Contributions Rates
    25. 25. <ul><li>Further strengthen public financial management </li></ul><ul><li>Accelerate reforms of public investment management </li></ul><ul><li>Introduce incentives for improved performance of the civil service </li></ul>The quest for efficiency needs to be underpinned by institutional reforms
    26. 26. Outline <ul><li>Background and challenges </li></ul><ul><li>Approach </li></ul><ul><li>Elements of a growth enhancing fiscal strategy </li></ul><ul><li>Maximizing impact from PEIR work </li></ul><ul><li>Lessons learned </li></ul>
    27. 27. Operationalizing the Albania PEIR: link to Bank operations <ul><li>Informed the design of new investment loans: Education Excellence and Equity Project, Transport Project, Feeder road project </li></ul><ul><li>Main analytical underpinning for reform program under Development Policy Operation (DPO) </li></ul><ul><ul><li>Water: reform of subsidy system (operating and investment subsidy) </li></ul></ul><ul><ul><li>Health: rationalization of spending in the hospital sector </li></ul></ul><ul><ul><li>Public Financial Management Reforms: Focus on Public Investment Management, and Procurement </li></ul></ul><ul><ul><li>Pension: design of a new strategy, review of social protection schemes. </li></ul></ul><ul><li>Eye opener for future analytical work : </li></ul><ul><ul><li>Programmatic PEIR (2007-2009): Fiscal decentralization and Municipal finance, sub-national PFM, annual review of Public Investments in MTBP (priority sectors), capacity building to strengthen public expenditure analysis. </li></ul></ul><ul><ul><li>Review of social protection: a comprehensive approach </li></ul></ul><ul><ul><li>Local roads financing study </li></ul></ul><ul><ul><li>Annual fiscal update to track progress on public finance reforms </li></ul></ul>
    28. 28. Operationalizing the Albania PEIR: Link to GOA policy processes <ul><li>Establish a framework for implementing PEIR proposed reforms and link them to MTBP: </li></ul><ul><ul><li>Strategy formulation level: sector strategies and National Strategy for Development and Integration (e.g.water, social insurance, health, ..) </li></ul></ul><ul><ul><li>Resource allocation level : PEIR recommendations reflected in MTBP </li></ul></ul><ul><ul><li>PFM reform implementation : New MoF Strategy outlines reforms based on PEIR/CFAU/PEFA/ROSC findings </li></ul></ul><ul><li>Establish a monitoring framework for tracking reform progress: </li></ul><ul><ul><li>Monitoring plans part of the Integrated Planning System </li></ul></ul><ul><ul><li>PEFA indicators formally adopted to measure progress in PFM reforms </li></ul></ul>
    29. 29. Link to Bank operations and GOA policy processes <ul><li>PEIR </li></ul><ul><li>CFAA </li></ul><ul><li>PEFA </li></ul>SWAP Operations EEEP Development Policy Loan DPL Sector Investment Loans: Transport, education Programmatic PEIR Sector strategies, MTBP Sector strategies, NSDI, MTBP Sector strategies, MTBP
    30. 30. Disseminating the PER: the need for a clear strategy <ul><li>Articulate a clear dissemination strategy early on: followed ECA’s ESW Dissemination Model </li></ul><ul><li>Work closely with EXT colleagues </li></ul><ul><li>Launch event jointly with GoA and DFID: timing, ownership, donor coordination </li></ul><ul><li>Post-launch events: continuous process </li></ul><ul><li>Use all possible channels: media, internet, focus group ... </li></ul>Design and Implement Dissemination Action Plan Identify Development Objectives Define Dissemination Goals Define Messages Determine Communications Approach
    31. 31. Disseminating the PER: A Dedicated Website in English and Albanian <ul><li> </li></ul>
    32. 32. Outline <ul><li>Background and challenges </li></ul><ul><li>Approach </li></ul><ul><li>Elements of a growth enhancing fiscal strategy </li></ul><ul><li>Maximizing impact from PEIR work </li></ul><ul><li>Lessons learned </li></ul>
    33. 33. Lessons Learned <ul><li>Anchor the PER in country AAA: CEM, PA, sector ESW  understand sources/constraints to growth, determinants of poverty and income distribution </li></ul><ul><li>In-depth country analysis and cross country comparisons pays off but requires good data: </li></ul><ul><ul><li>Attention of policy makers internally and externally </li></ul></ul><ul><ul><li>Buy in for reforms </li></ul></ul><ul><li>Managing PERs is transaction intensive but also requires a strong degree of conceptualization: </li></ul><ul><ul><li>Extensive coordination and consultation </li></ul></ul><ul><ul><li>Big picture view and good understanding of the linkages </li></ul></ul><ul><li>Maximum impact if anchored in Bank operations and institutionalized in government policy processes </li></ul>