The System of Cash Transfers in Bosnia and Herzegovina Issues in the design of an effective and affordable system Christian Bodewig The World Bank

The challenge of improving efficiency and equity of cash transfer system in BiH given limited resources Need for reform of cash transfer system in BiH for reasons of Fiscal affordability Effective and equitable social protection and poverty alleviation Implications for Reforming … … Veterans ’ Benefits … Social and Child Assistance … Employment Services … Pensions

The challenge of improving efficiency and equity of cash transfer system in BiH given limited resources Key observation: Overall spending on cash transfers in BiH is substantial, but the structure of spending across different programs has failed to evolve to meet the needs of a society and economy moving from post- conflict reconstruction to longer-run development.

Veterans’ Benefits I: BiH has one of the most extensive and generous veterans’ entitlements in the world… Veterans’ benefits single major cash transfer in both Entities – around 4 % of GDP, with additional spending at sub-Entity level, estimated at around 1.3 % of GDP in FBiH and 0.4 % in the RS Additional significant indirect transfers, resulting in substantial forgone revenues from health contributions and co-payments, and tax and customs revenues, adding up to around 1% of GDP Added up this is roughly equivalent to spending on the entire education system at all levels in both Entities and three quarters of health expenditures

Veterans’ Benefits II: …but benefits are poorly targeted and fail to effectively protect those most in need Poor targeting: Despite large amount of resources, system fails to protect most vulnerable beneficiaries. Beneficiaries mainly family beneficiaries (around 60% of total) and veterans with lower categories of disability (60-65% of disabled veterans) Entitlements not related to ability to work, actually having work or receipts of benefits from other parts of cash transfer system Legislated entitlements remain far above available resources and are unsustainable – systems are already accumulating increasing arrears

Veterans ’ Benefits: Reform suggestions Harmonize legal frameworks FBiH single Entity law Simplify/rationalize entitlements: Consider removing those with disabilities below 50-60% from benefit entitlement, though not from system altogether Eliminate benefits for grandparents and siblings For parents: target benefits to those most in need, in particular where working or receiving other cash transfers For spouses, impose restrictions related to re-marriage For children: reduce maximum age for benefits to end of school Initiate re-certification and improve reliability, timeliness and transparency of data

Social Welfare and Child Protection: Both Entities, particularly the Federation, spend least in regional comparison Comparative Social Welfare and Child Protection Spending (in % of GDP)

Social Welfare and Child Protection: Financial crisis and lack of coherent and sustainable structure Even where there are legislated entitlements, they are often irrelevant due to resource constraints Small proportion of registered beneficiaries actually receive benefits Wide variation of benefits paid across Cantons in the Federation, especially in child protection Decentralized financing at municipal level: vicious circle of poorest areas least able to pay benefits Unclear division of responsibilities across governments Poor coordination between different benefit programs and delivery mechanisms

Social Welfare and Child Protection: Reform suggestions I Policy Framework: Legislate new Social Protection Strategies in both Entities emphasizing: Realistic core set of entitlements, with clearly defined financing source incl. transfers from Entity budgets to finance one or more core benefit equitably Create incentives for adequate local government spending on social protection through matching grants Review existing targeting criteria in light of newly available data from LSMS, and evaluation of CSW ability to means- test effectively in highly informalized economy Provide equal incentives for community-based and institutional care

Social Welfare and Child Protection: Reform suggestions II Institutional Framework: Redefine institutional responsibilities for social protection Establish sound regulatory framework for CSWs Role of NGOs in Welfare Provision Establish legislative and regulatory framework Data Reporting System

Employment Services: Lacking in focus, clear institutional structure, accountability and transparency Challenges for Employment Services: Demand for effective programs likely to rise with further privatization and enterprise restructuring Need for effective intervention through unemployment benefits and effective job search services Institutional issues: Incomplete implementation of Federation EI institutional arrangements, with Hercegovacki-Neretvanski Canton EI still to be established Parallel existence of former "State" EI without clear legal basis

Employment Services: Lacking in focus, clear institutional structure, accountability and transparency Programmatic and operational issues Unemployment benefits: Despite large number of registered unemployed, very low share actually receive benefits Wage subsidy programs often unfocussed, unmonitored, ineffective and inefficient Relatively high operating costs, especially MEI and RS EI

Employment Institutes: Reform suggestions Institutional and operational issues: Set up new, small agency at State level In FBIH: Hercegovacki-Neretvanski Employment Service to join FBIH EI structure as Cantonal EI Strengthen program monitoring and evaluation capacities Policy issues: Unemployment benefits: increases in replacement rates and duration not justified by regional comparators and BiH’s level of income and available resources Decrease spending on wage subsidies in FBIH and MEI Focus more on pre-lay-off job search services and general job-search Build on Pilot Emergency Labor Redeployment Project (PELRP) lessons

Pensions: Improving financial discipline, transparency and accountability Significant steps made towards stabilization and sustainability of the pension systems Key: aligning benefit levels with present and future resource realities so as to avoid running arrears Critical to short-term financial sustainability: cash rationing rule tying pension levels above minimum to availability of regular pension resources on a monthly basis, by application of pension coefficient

Pensions: Improving financial discipline, transparency and accountability Medium-term reform priorities: stabilize contributions, strictly stick to cash rationing rule and pay pensions on time. Further stabilization requires: Continued economic growth Regularization and formalization of W&S payments, expansion of formal sector employment Severance payments – no pensions! No payroll contribution exemption/relief Enforce existing financial planning and reporting rules for the pension funds Initiate thinking about systemic reforms through joint working groups

Summing up … Reforming veterans ’ benefits key priority in reforming cash transfer system Need to free up resources from veterans ’ programs for social welfare and child protection programs, while working on improving access to productive employment opportunity for persons with special needs and ability to work Need to ready employment services for expected increase in demand for services due to economic restructuring Reform agenda supported under SOSAC II