1. Alia Moubayed Washington, April 26, 2007
Albania
Public Expenditure and Institutional Review Restructuring Public Expenditure to Sustain Growth The story
Alia Moubayed
Washington, April 26, 2007
World Bank - Economic Policy Group - Eastern Europe and the Balkans

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

5. Albania’s overall governance record is weak
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
State Capture and Income Levels
Ladies and Gentlemen
Reforming institutions and incentive framework is critical

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?
Size and Distribution of Fiscal Adjustment ( ) Change in percentage points of GDP
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%)
Total Revenues
1.7
Total Expenditures
-8.5
Current Expenditures
-4.2
Personnel expenditures
-0.8
Interest
1.0
Operational & maintenance
-2.5
Subsidies
-1.3
Capital expenditures
Primary deficit (including grants)
-11.2
Primary deficit (excluding grants)
-14.0
Total deficit (including grants)
-10.2
Overall deficit (excluding grants)
-13.0

8. How does it compare with other high growth countries?
Economic Classification (% of GDP), Average

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:
Health:
Water:

13. What are the main institutional constraints?
Public expenditure and Institutional Review (PEIR 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)
Country Fiduciary Accountability Assessment (CFAA 2006)
Assess fiduciary risk of Albania’s budget looking at both public financial management (PFM) and procurement.
Public Exp. and Financial Accountability (PEFA 2006):
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.

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. Zoom in: What are the main messages?
Albania’s 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 sector is necessary to ensure an efficient process of expenditure reallocation
Ladies and Gentlemen

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
Ladies and Gentlemen

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
More to education, less to general public services, infrastructure
to generate its own financing
Functional Classification (% of GDP), 2004

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. 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
The quest for efficiency needs to be underpinned by institutional reforms
Further strengthen public financial management
Accelerate reforms of public investment management
Introduce incentives for improved performance of the civil service
Ladies and Gentlemen

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 ( ): 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
Programmatic PEIR
Sector strategies, NSDI, MTBP
Sector strategies, MTBP
PEIR
CFAA
PEFA
Development
Policy Loan
DPL
Sector
Investment
Loans:
Transport,
education
Ladies and Gentlemen
Sector strategies, MTBP
SWAP Operations
EEEP

30. Disseminating the PER: the need for a clear strategy
Articulate a clear dissemination strategy early on: followed ECA’s 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 ...
Identify
Development Objectives
Define Dissemination
Goals
Define Messages
Determine Communications
Approach
Design and Implement Dissemination Action Plan

31. Disseminating the PER: A Dedicated Website in English and Albanian

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 understand sources/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