Public Expenditure Work Emphasizing Substance & Ensuring Impact Public Expenditure Analysis & Management Training Course World Bank January 14, 2004 Washington, DC Vinaya Swaroop, Lead Economist South Asia PREM

Objective of this Presentation To share information on… How to do relevant (to the client) public expenditure work and ensure its impact on government policies? An example: the Maharashtra Economic and Fiscal Study, undertaken by the Bank together with the Government of Maharashtra.

Maharashtra: Fiscal and Economic Study Rationale: Why this study? To respond to a GoM request to provide an objective view of the state’s finances. To find out whether Maharashtra can provide enough resources to finance & maintain ongoing (and upcoming) World Bank projects.

Work Program was two-fold… Providing technical assistance to the client on public budget issues – Client’s interest, and Producing a formal report; analytical work to underpin our lending program – Internal Bank requirement.

Substance of the work was important, but equally important was the process… Setting the stage…In Oct.’01, a jointly organized one-day workshop to (a) exchange information; and (b) decide on the contents of the study. Main mission…Information collecting and sharing mission in Dec.’01; TA through several workshops. Assisting the client…Presentation made to the Cabinet in Feb.’02 and input provided for the budget. Internal requirement…July’02 – report discussion and finalization. State-wide dissemination…Four workshops in Oct.’02.

Two main questions analyzed… What is the state of government finances in Maharashtra? How effective, efficient and equitable has public service delivery been in a few key areas (education, health, irrigation, power, select agencies)?

Main findings A fiscal crisis is brewing; faced with increasing public spending and declining revenues, the State is finding it increasingly difficult to meet its financial obligations. A lot of taxpayers’ money is spent on power, water, cotton and sugar. Much of resources spent in these areas are fiscally unsustainable and/or unproductive, and very few benefits are reaching the poor. Service delivery, however, has improved in a few select agencies—district collectorates & municipalities—where reforms have been undertaken.

How we analyzed a particular sub-topic, and An example of our approach: How we analyzed a particular sub-topic, and More importantly, how we presented the findings to the client.

Subsidies and Opportunities Forgone: Three Questions How much is the government subsidy to power, cotton and irrigation? Who benefits from this spending? What are the opportunities foregone (that is to say, what other activities could have been financed from these funds)?

Power (1): MSEB (the state utility)is incurring huge financial losses Sharp increase in power purchase costs in 1999-00 & 2000-01 Low tariffs Poor recovery of bills High T&D losses Inability to invest

Power (2): Pattern of Cross Subsidies Nine out of ten MSEB customers are subsidized Actual cost of supply to agriculture is higher than the average Increasing number of industrial consumers are looking for alternative sources of power

Power Subsidies (3): Who are the beneficiaries? Subsidy primarily accrues to farmers with pump-sets Rich farmers growing cash crops, mainly sugar, are the prime beneficiaries

Irrigation & Non-Irrigation Water While cost recovery has improved, there is still a big shortfall The shortfall would look much worse if interest payments are included. In 2001-02, the budgeted interest is Rs. 1,200 crores

Canal Irrigation: Who are the beneficiaries? Seventy percent of canal irrigation benefits accrue to farmers with average farm holding of > 2 ha Ten percent of canal irrigation benefits accrue to farmers with average farm holding of < 1 ha Source: NSS 48th round

Forgone Opportunities

Impact of our work…

I. FY’03 Budget: Major Policy Announcements “…Government is fully committed to implementing the reforms set out in the MTFRP and to achieve the fiscal targets set therein…Government proposes to introduce the Fiscal Responsibility Bill in the Legislature soon.” A White Paper outlining GoM’s strategy (with clear milestones) for power sector reform to be published by June 2002. In particular, “responses will be invited to the suggestions relating to unbundling, privatization of distribution and rationalization of tariff.”

FY’03 Budget: Major Policy Announcements (contd.) “the State Government will procure cotton at the central government’s minimum support price and also permit the Cotton Corporation of India and others to purchase cotton in the State.” “…No financial support to new commercial units in the cooperative sector…New entrants in the sugar and spinning mill sectors to take over the ailing units rather than set up new units in the state.”

II. Actions taken since the FY’02-03 Budget announcement… A draft Fiscal Responsibility legislation has been prepared. A White Paper on power sector reforms has been prepared and approved by the Cabinet after extensive stakeholder consultation. The monopoly element of the Cotton Procurement Scheme has been removed and the minimum support price (MSP) of GoM is linked to the MSP of GoI.

In conclusion, reasons for our success… First & foremost, listening to the client, that is (a) deciding the work program in consultation with the client; and (b) putting the client’s agenda first; then Bank’s own internal agenda; Solid analytical work done by experts; Sharing information through frequent seminars & workshops; A well conceived dissemination strategy.