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. Outline

Background and challenges

Approach

Elements of a growth enhancing fiscal strategy

Creating impact from PER work

Lessons learned

3. Outline

Background and challenges: Stage setting

Approach

Elements of a growth enhancing fiscal strategy

Creating impact from PER work

Lessons learned

4.

CEM 04: Sustaining past growth requires increases in factor accumulation and continuation, albeit from new sources, of TFP growth

Poverty Assessment (PA 06): growth as a major determinant of poverty reduction

PA, sector ESW, projects: large inequalities in access to services (health, education, and water services)

Albania faces a twin challenge of sustaining growth and reducing inequalities Public finance policies should help address these challenges 5.

High level of state capture and a medium level of administrative corruption

Poor governance negatively affects:

• business environment (heavy regulation, weak legal base for property rights, justice system)

• service delivery (corrupt practices in health and education..)

Weak fiduciary arrangements,constrain the efficiency of resource use

Albanias overall governance record is weak Reforming institutions and incentive framework is critical State Capture and Income Levels 6. Outline

Background and challenges

Approach: Answering key questions

Elements of a growth enhancing fiscal strategy

Maximizing impact from PEIR work

Lessons learned

7. How did fiscal adjustment take place?

Past fiscal adjustment have focused on expenditure cuts

Largest cuts in capital spending and operations and maintenance

Rigidities in the budget have increased (57 to 63%)

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. How does it comparewith other high growth countries? Economic Classification (% of GDP), Average 1995-2004 9. Is it about the level of spending? At around 30% of GDP, size of government is appropriate 10. Is the tax level problematic? The tax level is also adequate 11. What is happening at sector level?

Spending levels and composition

• Public and private spending

• Allocation of spending among programs

• Composition of input within each program

Outcomes

• Access

• Quality

• Equity

Institutional arrangements for public spending in the sector

• Institutional roles and responsibilities across levels of governments

• Planning and budgeting

• Regional allocation mechanisms

Linking spending to outcomes

What needs to be done?

12. Some examples from the sectors

Education:

http://siteresources.worldbank.org/INTALBANIA/Resources/PEIR_Presentation_Education.pdf

Health:

http://siteresources.worldbank.org/INTALBANIA/Resources/PEIR_Presentation_Health.pdf

Water:

http://siteresources.worldbank.org/INTALBANIA/Resources/PEIR_Presentation_water.pdf

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 Albanias 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. Evaluating the PFM system 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.

Albanias size of government is appropriate but its resourcing is distorionary

The current spending composition across and within sectors needs to change to improve the growth impact of public spending

Reforming fiscal institutions and improving the incentives for better performance in the public sectoris necessary to ensure an efficient process of expenditure reallocation

Zoom in: What are the main messages? 17. Outline

Background and challenges

Approach

Elements of a growth enhancing fiscal strategy

Maximizing impact from PEIR work

Lessons learned

18. Elements of a Growth Enhancing Fiscal Policy

Alter the economic composition of spending

Re-balance inter-sectoral allocations (across sectors)

Adjust intra-sectoral allocations (within sectors)

Address regional disparities

Re-work the public-private financing mix

Move away from labor taxation

Accelerate and deepen institutional reforms

19. Alter the economic composition of spending

Increase allocations for non-wage recurrent spending ,

• O&M in the infrastructure sectors

• Non-wage recurrent in secondary education and primary health.

Keep the wage bill in check ,

Maintain capital spending at current high levels only if subjected to the rigor of investment management procedures ,

Alleviate the burden of interest payments,

• reduce overall debt levels,

• lengthen domestic maturities, and

• seek long-term external (official and private) financing.

Gradually reduce remaining subsidies(water and railway).

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. Adjust intra-sectoral allocations- some examples In Education: shift priority towards expanding secondary education In Health :increased incidence of non-communicable diseaseshift 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. Address regional disparities

Move away from input based financing:

• • In health: single provider model with output- based financing

• • In education :move towards capitation financing for recurrent and capital spending

• • In transport:move towards output-based maintenance contracts

Apply objective and transparent criteria and rules for resources allocation

• • In water:move towards performance-based allocations to utilities

• • In transport : link allocation to network size and unit cost of maintenance

23. Move to private sector financing and provision of public services

Deepen private participation in infrastructure: roads, energy, water, railways

After establishing a solid legal and institutional framework for PPPs avoid emergence of fiscal risks

Increase cost recovery in the infrastructure and tertiary education sectors while protecting the poor

• • • Water

• • • Energy

• • • Tertiary Education

24. Move away from labor taxation

Consider shifting health finance to general taxation

Rebalance old-age social insurance/social assistance and reduce pension contributions accordingly

Social Security Contributions Rates 25.

Further strengthen public financial management

Accelerate reforms of public investment management

Introduce incentives for improved performance of the civil service

The quest for efficiency needs to be underpinned by institutional reforms 26. Outline

Background and challenges

Approach

Elements of a growth enhancing fiscal strategy

Maximizing impact from PEIR work

Lessons learned

27. Operationalizing the Albania PEIR:link to Bank operations

Informed the design of new investment loans: Education Excellence and Equity Project, Transport Project, Feeder road project

Main analytical underpinning for reform program under Development Policy Operation (DPO)

• Water: reform of subsidy system (operating and investment subsidy)

• Health: rationalization of spending in the hospital sector

• Public Financial Management Reforms: Focus on Public Investment Management, and Procurement

• Pension: design of a new strategy, review of social protection schemes.

Eye opener for future analytical work :

• 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.

• Review of social protection: a comprehensive approach

• Local roads financing study

• Annual fiscal update to track progress on public finance reforms

28. Operationalizing the Albania PEIR:Link to GOA policy processes

Establish a framework for implementing PEIR proposed reforms and link them to MTBP:

• Strategy formulation level:sector strategies and National Strategy for Development and Integration(e.g.water, social insurance, health, ..)

• Resource allocation level : PEIR recommendations reflected in MTBP

• PFM reform implementation : New MoF Strategy outlines reforms based on PEIR/CFAU/PEFA/ROSC findings

Establish a monitoring framework for tracking reform progress:

• Monitoring plans part of the Integrated Planning System

• PEFA indicators formally adopted to measure progress in PFM reforms

29. Link to Bank operations and GOA policy processes

PEIR

CFAA

PEFA

SWAP Operations EEEP DevelopmentPolicy Loan DPL SectorInvestmentLoans:Transport,education Programmatic PEIR Sector strategies, MTBP Sector strategies, NSDI, MTBP Sector strategies, MTBP 30. Disseminating the PER:the need for a clear strategy

Articulate a clear dissemination strategy early on: followed ECAs ESW Dissemination Model

Work closely with EXT colleagues

Launch event jointly with GoA and DFID: timing, ownership, donor coordination

Post-launch events: continuous process

Use all possible channels: media, internet, focus group ...

Design and Implement Dissemination Action Plan Identify Development Objectives Define Dissemination Goals Define Messages Determine Communications Approach 31. Disseminating the PER:A Dedicated Website in English and Albanian

http://go.worldbank.org/7CX925BS30

32. Outline

Background and challenges

Approach

Elements of a growth enhancing fiscal strategy

Maximizing impact from PEIR work

Lessons learned

33. Lessons Learned

Anchor the PER in country AAA: CEM, PA, sector ESW understandsources/constraints to growth, determinants of poverty and income distribution

In-depth country analysis and cross country comparisons pays off but requires good data:

• Attention of policy makers internally and externally

• Buy in for reforms

Managing PERs is transaction intensive but also requires a strong degree of conceptualization:

• Extensive coordination and consultation

• Big picture view and good understanding of the linkages

Maximum impact if anchored in Bank operations and institutionalized in government policy processes