Download Middle Income Country Case

Public Finance
Analysis & Management
In a Low Income Country
Core Course
By PREM, HD and INF Networks
April 23-27, 2007
J-B1-080
The Problem
High economic growth in Limastan has been accompanied by remarkable achievements in
poverty reduction over the past decade. The government has also been successful in achieving
its developmental targets, in particular in education, health and infrastructure set out in the
Poverty Reduction Strategy. However, for political reasons, the Prime Minister is keen on
accelerating the attainment of these targets and has been pressing the Minister for Finance to
ensure sufficient funding to finance these policy objectives in the medium term.
The Minister for Finance realizes that accomplishing this task is not going to be simple.
Export-led growth that has facilitated revenue and expenditure increases so far will not
continue indefinitely and the projected growth rate, although outstanding in regional terms,
will not be sufficient to generate the required level of resources and may also cause the
economy to “overheat”. On the other hand, the structural vulnerabilities of the government
revenues whose largest increases have come from petroleum consumption and production of
crude oil make it highly volatile to oil price shocks.
The recent meetings with donors did not give the Minister a sense that, in the near future, the
predictability of aid will improve or aid flows will increase. Thus, the Minister is concerned
that generating necessary resources to achieve the Prime Minister’s agenda potentially imposes
a risk for the government of undermining fiscal prudence which is likely to affect
macroeconomic stability in the long run. But, on the other hand, he understands that to sustain
growth the government undeniably needs to continue investing in human capital and
infrastructure.
The Minister for Finance is also aware that the budget system has a number of weaknesses and
is not well-suited for efficiently reaching the development targets. Sector ministries are unable
to ensure that resources are spent on priorities. An increased amount of resources are allocated
by sub-national governments because of a decentralization process that has taken place in
recent years. Priorities outlined in the Public Investment Program are not reflected in actual
project selection. The Minister is convinced that these deficiencies need to be corrected if the
government, facing a high marginal cost of raising additional funds, wants to achieve its
ambitious development goals.
With all these challenges in mind, the Minister approached the Bank’s Country Director to ask
his country team to help in designing a fiscal strategy and reforms to the budget system that
would secure fiscal sustainability and growth.
1
MACROECONOMIC CONTEXT
Limastan has received wide acknowledgement for its fiscal prudence, with relatively small budget
deficits and a relatively small stock of debt, both domestic and foreign. Over the recent period of 19992003, Limastan’s fiscal stance has remained extremely prudent, with the budget deficit averaging less
than 2 percent of GDP and the stock of debt remaining under 40 percent of GDP. The country has
received increasingly solid grades from international organizations, foreign governments and sovereign
risk rating agencies. Despite these impressive achievements, however, a number of risks to fiscal
sustainability have emerged and will require ongoing attention over the coming years.
Real GDP growth has been high both by regional and international standards. It averaged 6.4 percent in
1997-2000 and 7.1 percent over the period 2001-2003. In the recent years, GDP growth has been
steadily rising: from 6.9 percent in 2001 to 7.1 percent in 2002 and 7.3 percent in 2003. In 2004,
Limastan recorded a GDP growth rate of 7.7 percent despite the challenges posted by the surge in world
energy prices and the avian flu. The performance has also been remarkable in terms of poverty
reduction. Based on the 2002 Household Living Standards Survey (HLSS), 29 percent of the population
had expenditures below the poverty line by 2002, compared to 37 percent in 1998 and 58 percent in
1993. Thus, Limastan lifted around 20 million people out of poverty in less than a decade.
Robust export performance has been a major driver of growth. During 1997-2003 exports grew at an
average annual rate of 14 percent in value terms and now amount to half of GDP, with the share of
manufactured products representing around 46 percent of the total. Exports grew by 21 percent in 2003,
despite a lackluster global economy. The garments sector recorded the highest growth rate (45 percent)
and equaled crude oil as the most important export for Limastan in value terms. Rapid export growth
has been aided by production expansion and by bilateral and regional trade agreements that came into
effect during this period. At the same time, strong growth has been accompanied by a rapid rise in
imports. Import growth in 2003 stood at 28 percent compared with an average of 14 percent over 19972003. The main import categories witnessing increases in recent years are machinery and equipment,
petroleum products, and other production inputs needed for the fast expanding export industries.
With imports outpacing exports in the last two years, the trade balance has widened from a surplus of
0.8 percent of GDP in 2000 to a deficit of around 7 percent in 2003. However, strong inflows of
remittances helped keep the current account deficit at 4.7 percent of GDP in 2003. The Central Bank
reported record remittances into Limastan of around US$2.6 billion in 2003 and over US$3 billion in
2004. If transfers operating through unofficial channels are taken into account, total remittances from
abroad are probably in the range of US$3 to 4 billion a year. This is the equivalent of one fifth of export
earnings. FDI inflows are estimated to have reached about US$1.5 billion in 2003. ODA disbursements
reached US$1.1 billion. This helped foreign reserves to rise from US$3.7 billion in 2002 to about
US$5.6 billion in 2003. This is the equivalent of 10 weeks of imports of goods and non-factor services.
The investment to GDP ratio stood at 35.1 percent in 2003 and 35.8 percent in 2004, compared with
28.3 percent of GDP in 1997. The share of the public sector in GDP has averaged 56 percent, while
those of the domestic and foreign invested private sector has averaged 24 and 20 respectively. High
levels of investment, especially in the public sector, have had an important impact on infrastructure
development, economic transformation and implementation of national poverty reduction programs.
However, concerns persist about the quality of investments, in the sense that more growth and poverty
reduction could have been attained from the same level of investment.
In the recent years, Limastan has also maintained prudent macroeconomic policies. After two years of
mild deflation, prices rose by 3-4 percent in 2002-2003. During the last year, inflation has accelerated
to an annualized rate of 9.5 percent. This includes increases in food prices due to the avian flu outbreak
and higher steel and oil prices. But there are also deeper economic forces behind the acceleration of
inflation. Labor costs and prices in Limastan remain very low by international standards, and they are
bound to increase in a context of rapid economic growth.
2
Fiscal Performance
During the period under review, strong economic growth was accompanied by strong growth in
government revenues, as the table below illustrates. Even with a quite modest budget deficit, this has
facilitated what as a share of GDP is a quite gradual and sustainable increase in total expenditure but
what in absolute terms is a very rapid rise.
Fiscal Trends, 1997-2003
(In percent of GDP)
Total Revenue and Grants
1997
1998
1999
2000
2001
2002
2003
20.8
20.2
19.6
20.5
21.4
22.7
23.1
Tax revenue
15.8
15.4
15.1
14.8
15.7
16.8
16.7
Non-tax revenue
4.2
4.2
3.9
5.3
5.4
5.5
6.1
Grants
0.8
0.6
0.6
0.5
0.4
0.4
0.3
Total Expenditure
22.6
20.3
21.2
22.6
24.2
24.1
25.1
Current Expenditure
16.3
14.7
13.8
15.9
15.9
15.7
16.8
Capital Expenditure
6.2
5.7
7.4
6.7
8.3
8.4
8.3
Deficit
-1.7
-0.1
-1.6
-2
-2.8
-1.4
-2
Primary
-1.1
0.4
-1
-1.2
-1.8
-0.4
-0.9
On-lending (ODA only)
2.2
1.5
1.8
2.2
0.8
0.9
1.2
Revenue. In nominal terms, government revenue and grants increased by an average of over 14 percent
per year between 1998 and 2003. As a percentage of GDP, revenue and grants rose from around 20
percent of GDP in 1998 to over 23 percent in 2003. The increase in revenues from consumption of
petroleum products and production of crude oil from 4.1 percent of GDP in 1998 to 6.5 percent in 2003
explains the largest part of the revenue increase. The share of such revenues in total revenue and grants
rose from 20 percent in 1998 to 22.4 percent in 2003. As a consequence, the public budget has become
more vulnerable to oil price shocks. Furthermore, although the oil production outlook for the years
ahead appears to be quite robust, crude oil exports cannot be relied upon as a source of revenues in the
very long term.
To strengthen revenues as well as to encourage domestic and foreign investment, the State has lightened
the tax burden through reduction of tax rates in many areas. Enterprise income tax rate has been
reduced from 32 percent to 28 percent; the number of VAT tax rates has been cut from 4 to 3, including
the abolishing of the highest rate of 20 percent. The National Assembly has decided to eliminate
overseas profit remittance tax and surtax on enterprise income. Most notably, in 2002, agricultural land
use tax has been reduced by 50 percent; and since 2003 nearly all farmers are exempted from such tax.
Now approximately 75 percent of Limastan’s population pays no direct taxes.
Figures below provide a breakdown of tax revenue from different sources in 1998 and 2003. The shares
of corporate income tax and VAT have both risen over this period. The increase in the share of VAT
reflects in part the replacement of some “other” taxes by the VAT. The other noticeable trend is the fall
in trade taxes as a share of total taxes, though they have risen by nearly 7.5 percent per annum in value
terms. Corporate income tax has become the main contributor to tax revenue. Non-oil SOEs accounted
for 38 percent of corporate income tax collections in 2003, while oil producing SOEs contributed 34
percent. The share of foreign invested non-oil enterprises stood at 7 percent. Personal income tax
contributes only a small amount (3 percent) to total tax collections, although the share of this tax may
be expected to rise as GDP grows. Revenue from land increased from 2.5 percent of the total tax
revenue in 2000 to 6 percent in 2003. This upward trend is likely to continue in the near and medium
term but not indefinitely. Taxes on international trade contributed around 17 percent of total revenue
and grants (or 23 percent of tax revenues) during 2000-2003. A concern often expressed is that these
revenues will decline sharply as Limastan implements its international trade commitments.
3
Share of Different Taxes in Total Tax Revenue
1998
Other
14%
2003
Corporate
income tax
24%
Other
4%
Corporate
income tax
31%
Trade taxes
21%
Individual
income tax
3%
Trade taxes
28%
Special
consumption
tax
10%
Special
consumption
tax
9%
Individual
income tax
3%
VAT
21%
VAT
32%
Revenue from the non-state sector have recorded a significant increase, with its share in total revenue
rising from just 6.4 percent in 2000 to 7.3 in 2003 and 7.8 percent in 2004. This is indicative of the
sector’s development both in terms of quantity and quality. In 2004, the sector accounted for 8.2
percent of GDP, representing a cumulative increase of 41 percent compared with 2000.
Finally, there is a wide gap between the revenues that should be collected on the basis of statutory duty
rates and what is actually collected. This is due both to abuse of exemptions as well as weaknesses in
tax administration.
Expenditure. The year 1999 marked a turning point in the size of overall government spending. After
steadily declining as a ratio of GDP in the years preceding, government spending (excluding onlending, carry-over, and expenditure from retained revenue) has recovered during the period 19992003. From a low of 20.5 percent of GDP in 1999, it reached 22.6 percent of GDP in 2000, 24.2 percent
in 2001 and 24.1 percent in 2002. By 2003, this ratio was boosted to over 25 per cent. Between 1998
and 2003, total government spending rose at the remarkable average annual rate of 16 percent in
nominal terms, with capital expenditure growing at some 20 percent. As a share of GDP, current
expenditure rose from 14.7 percent in 1998 to 16.8 percent in 2003, while capital expenditure rose from
5.7 percent to 8.3 percent over the same period. Capital expenditure has averaged 34 percent of total
expenditure over the last three years.
Budget Deficit, Off-Budget Items and Public Debt. The net result of these revenue and expenditure
trends has been a budget deficit that has remained manageable, ranging between 0.1 percent and 2.8
percent over the period 1997-2003. The National Assembly has been prudent in stipulating that the
budget deficit plus amortization should not exceed 5 percent of GDP. The revenues collected by the
government fully financed recurrent expenditure and partly financed capital expenditure. Thus, in
accordance with the so-called “golden rule”, borrowing was undertaken to finance only capital
expenditure and borrowing was always less than capital expenditure.
Government Debt from On-Budget Operations. By the end of 2003, the government debt that is
attributable to budgetary expenditures including ODA on-lending stands at around 33 percent of GDP.
However, to get a more complete picture of the wider public debt position it is important to add items
that are currently not reflected in the budget. Two such items are bonds issued to finance certain
infrastructure and education projects and the recapitalization costs of State-owned Commercial Banks
(SOCBs). Their inclusion in public debt numbers is likely to raise its level by about 3 percentage points.
This is by no means an alarming level, but it would be prudent to be watchful of these trends.
On-budget capital expenditure is financed by ODA sources or by issuing domestic government bonds.
In the last two years there has been increased reliance on domestic bonds for financing capital
expenditures. This trend is reflected in figure below, which shows a divergence in the trends for total
4
and external public debt. One consequence
of greater reliance on domestic finance is
that the interest cost of debt has been
rising. This is because virtually all foreign
public debt is on concessional lending
terms, while domestic debt carries higher
interest rates. At the same time the share of
interest payments in total current spending
has also been rising. Given Limastan’s
current level of development, it is expected
that the government will continue to run
budget deficits in the foreseeable future.
On-Budget Debt and External Public Debt
(In percent of GDP)
40
35
30
25
20
15
10
5
0
1997
1998
1999
2000
On-budget Debt
2001
2002
2003
2004
External Public Debt
Government Bonds to Finance Infrastructure and Education Projects. The Government has been
issuing bonds with a 5-10 year maturity to finance various expenditures kept off-budget. These bonds
are part of the Government’s strategy to raise LIR63 trillion (US$4 billion) by 2010, to finance
infrastructure and education projects including the North-South Highway, roads in mountainous areas
and in the main river delta, and irrigation projects in the disaster-prone central provinces. These bonds
should be added to the above debt numbers to get the complete picture of public indebtedness. Even
though the bonds are off-budget, the interest payment on these bonds will be on-budget. In 2004, the
Government issued about LIR 5 trillion of bonds for infrastructure development and LIR 2.5 trillion for
the education sector, representing about 0.7 percent of GDP. Bonds of 2 years and 5 years maturity
have carried coupons of around 8 percent. On maturity, the 5-year bonds will be rolled over for another
period of 5 years. The main players on the purchasing side of government bonds have been State-owned
Commercial Banks (SOCBs) and insurance companies.
Off-Budget Expenditure Arrears. Another significant concern regarding fiscal sustainability is the
large build-up of off-budget expenditure arrears for infrastructure projects, particularly in the transport
sector. As discussed in more detail further, major discrepancies exist between the Ministry of Finance
data on expenditure in the transport sector (captured on a cash basis by the MOF’s State Treasury
Department) and the data recorded by the Ministry of Transport (which is on a quasi-accrual or
commitment basis). The MOF data show transport spending reaching some 3.5 percent of GDP by
2002, whereas the MOT data suggest that transport spending accounted for perhaps as much as 5
percent of GDP. This difference reflects the annual build up of arrears in the transport sector. The MOT
data suggest that these appear to be in the order of LIR6.5 trillion, of which about LIR3 trillion is at
central level and LIR3.5 level is at provincial level.
Public Debt from Recapitalization and DAF. The four large SOCBs have been implementing
restructuring plans for the last 2-3 years. In conjunction with these restructuring plans SOCBs have
received a combined capital injection of about LIR10.9 trillion which helped resolve 70 percent of nonperforming loans. This recapitalization has largely been in the form of 20-year government bonds
carrying a coupon of 3.3 percent. A full picture of the government’s debt would include such bonds.
The current capital adequacy ratio of the banks at under 4 percent is considerably below generally
accepted standards. The government may therefore face additional costs in raising the capital of the
banks to prudent levels. At the same time, credit from SOCBs has been growing rapidly. The ratio of
SOCB credit to GDP stood at 37 percent at end-2003. The quality of lending however remains a
concern. One source of potential fiscal risk has been the extension of bank credit to SOEs. Commercial
bank credit (state and non-state banks) to SOEs has risen from about 10.5 percent of GDP in 1998 to
17.2 percent of GDP in 2003. However, the share of SOEs in total bank credit has been falling and the
share of SOEs in SOCB credit has also fallen.
Funds to be on-lent through the Development Assistance Fund (DAF) are mobilized from ODA
sources, and domestically through borrowing from pension and social funds (the Social Security),
5
postal savings, and issuance of government bonds. Bonds with a 15 year maturity and carrying a
coupon of 9.4 percent have recently been sold, with the proceeds to be transferred to the DAF. LIR7-8
trillion are planned to be mobilized in this manner in 2004. Domestically mobilized funds for DAF
represent another large accumulation of contingent liabilities for the government.
The quality of the fast expanding policy lending through the DAF is a matter of concern. In 2004, its
outstanding stock of loans is expected to be
DAF On-Lending
equivalent to nearly 12 percent of GDP. A little
(In percent of GDP)
more than half of this amount corresponds to on14
lending from domestic sources. Of the resources
12
mobilized domestically, about 80 percent has been
10
on-lent to SOEs. Domestic capital sources of the
8
DAF amount to roughly 9 percent of annual GDP
6
in 2004, making it the biggest financial institution
4
in the country. This is despite the fact that many
2
operational aspects of the DAF are still at an early
0
stage of development, including credit risk
2000
2001
2002
2003
2004
management, accounting and reporting standards,
Projection
information systems, and supervision.
Non-ODA on-lending ODA on-lending
Composition of Public Expenditure
The year 1999 marked a turning point in the size of overall government spending. After declining as a
share of GDP in the years preceding, government spending (excluding on-lending, carry-over and
expenditure from retained revenue) bottomed out at 20.5 percent of GDP. By 2003, this ratio was
boosted to over 25 percent. Between 1998 and 2003, total government spending rose at a remarkable
average annual rate of 16 percent in nominal terms. The exceptionally buoyant fiscal situation made it
potentially less painful to restructure expenditure, offering the opportunity to reshape expenditure in a
way that need not require absolute cuts in expenditure in any area.
Economic Composition. The Government has followed the ruling that the growth rate of capital
expenditure should be higher than the growth rate of recurrent expenditure. Thus, capital expenditure
has been maintained at a high and growing level. Including purchase of fixed assets, the share of capital
expenditure increased from 31 percent in 1997 to 40.5 percent in 2002. Capital expenditure has
increased significantly faster than recurrent expenditure and total public expenditure.
Expenditures on Capital, Operations and Maintenance. Alongside the growth of State Budget capital
expenditure, there has been a shift in terms of its sectoral composition, with more focus on sectors
identified by the Government as priorities, including transport, irrigation, education and infrastructure
for poor communes. It is also noteworthy that although State Budget capital expenditure has increased
rapidly, its share in the country’s total capital spending has not increased at the same pace. This
indicates the larger contribution that the enterprise and the private sectors make to total investment in
Limastan.
As noted above, the ongoing growth in the share of capital expenditure reflects a requirement that the
rate of growth of capital expenditure should be higher than the rate of growth of recurrent expenditure.
Having been carefully adhered to for some time, this policy now needs urgent review, to come up with
a better and more appropriate balance between those two types of expenditure. In the longer term, an
ever-growing share of government capital expenditure is not a sustainable strategy.
Limastan, like many developing countries, has not paid proper attention to operation and maintenance
(O&M) expenditure. Consequently, in several sectors the rates of return on such O&M expenditures are
estimated to be higher than those on many new capital investments. This is certainly the case in the
6
irrigation sector, where it is estimated that some 50 percent of large scale irrigation infrastructure is out
of commission due to lack of maintenance. In the transport sector, too, there is growing evidence to
indicate an impending maintenance crisis. Between 1997 and 2002, the relative share of the O&M
budget has continued to decline, from 23.4 percent to less than 17 percent of total expenditures. This
has happened at a time when the share of capital expenditure was rising strongly.
Economic Classification of State Budget Expenditure, 1997-2002
As figure below
(In Percent of Total Expenditure)
illustrates,
the
1997
1998
1999
2000
2001
2002
share of recurrent
31.0
31.9
39.2
34.0
37.1
40.5
expenditure
in Capital Expenditure
69.0
68.1
60.8
66.0
62.9
59.5
total State Budget Current Expenditure
Wages
&
Salaries
30.5
33.0
27.4
28.6
30.1
27.3
Expenditure
O&M
23.4
21.4
19.1
23.2
17.5
16.8
varies
Other
recurrent
15.1
13.8
14.2
14.2
15.3
15.3
significantly by
Total
100
100
100
100
100
100
sector. The trend
has not been uniform across all sectors. Sectors such as education and health managed to hold their
recurrent expenditures roughly constant as a share of the total central government spending.
Nevertheless, on average the share of recurrent expenditures in the State Budget is sharply down.
Economic Classification of State Budget Expenditure by Sector, 1997-2002
(In Percent of Total Expenditure)
1997
1998
Current
Capital
Agriculture, Forestry, Irrigation
2.1
Fisheries
0.1
Transport, Storage & Communic
Industry
1999
Current
Capital
12.4
2.2
0.3
0.1
1.5
28.1
2000
Current
Capital
14.9
1.9
1.9
0.1
2.2
29.7
2001
Current
Capital
12.2
1.8
0.7
0.1
1.4
29.7
2002
Current
Capital
Current
Capital
12.6
1.9
12.8
2.0
9.7
0.3
0.1
0.7
0.1
0.7
1.9
28.6
1.9
30.7
1.7
31.7
0.4
10.9
0.1
11.6
0.2
10.2
0.1
10.5
0.2
14.6
0.2
10.1
Electricity
0.0
2.3
0.1
1.7
0.1
1.8
0.0
2.2
0.0
2.1
0.0
1.0
Water
0.0
3.2
0.0
2.6
0.0
1.9
0.0
3.5
0.0
1.2
0.0
0.7
15.9
10.1
18.4
15.2
19.0
10.3
17.5
12.7
18.8
12.1
20.5
11.0
Health
7.0
4.2
7.7
5.7
7.4
6.3
7.1
4.9
7.4
6.5
8.2
3.7
Social Insurance
18.8
0.9
17.0
0.9
19.1
0.7
16.4
0.6
18.2
0.6
15.8
0.8
Culture & Sports
2.5
6.3
2.6
6.2
2.7
4.8
2.4
5.6
2.5
6.3
3.0
5.0
Science, Techndogy & Environ
1.3
1.1
1.4
1.5
1.5
1.1
1.4
1.4
1.9
2.7
2.0
2.4
Administration expenditure
14.6
0.0
13.5
0.0
12.6
6.8
9.9
7.1
12.0
4.4
10.7
7.0
Interest payment
3.9
0.0
4.1
0.0
4.5
0.0
5.2
0.0
6.0
0.0
7.5
0.0
Others
32.0
25.8
30.6
12.4
29.6
17.2
36.3
15.6
29.2
8.8
28.3
17.9
Total
100
100
100
100
100
100
100
100
100
100
100
100
Education & Training
Expenditure on Wages and Salaries. The share of wages and salaries, including government pensions,
in total expenditure fluctuated between 27 and 33 percent of total expenditure (43 and 48 percent of
recurrent expenditure), between 1997 and 2002. For 2003, budget figures show a further increase,
accounting for 36.5 percent of total expenditure, largely due to a substantial increase in a minimum
wage across the board by 38 percent. There are clearly many inadequacies in the civil service salary
structure. The current salary system is extremely complex, with around 20 salary scales, 200 grades and
more than 2000 steps in the salary system. Other inadequacies appear to include pay compression
(insufficient differences between lowest and highest pay), underpayment in comparison with the SOE
sector and the private sector in certain classes of employment, limited recognition of educational
attainment, salary based on seniority rather than meritocracy, and an opaque non-monetized benefit
system.
There is some evidence to suggest that higher ranking and more skilled officials may be somewhat
underpaid compared with labor market alternatives. However, the 2003 salary increase made no
distinction between the ranks of the civil service, no allowance for special skill groups and no
distinction between retirees and non-retirees. Limastan’s civil service is not particularly large by
international standards, nor does the payroll account for a particularly large share of spending.
7
However, pay increases will create pressure on the budget unless they are off-set by selective reductions
in staff and there may be a need to make room for younger and more qualified personnel.
Functional Composition. Looking at the functional classification of expenditure, some striking
changes have taken place since 1997. In line with the national priorities, the shares in total expenditure
of education and training and science have shown a rising trend. The share of education and training
increased from 14.1 percent of the total State Budget expenditure in 1997 to 16.7 percent in 2002, while
the share of science, technology and environment rose from 1.3 to 2.2 percent. Further increases in the
share of education and training in the budget may be needed in coming years, as lower-secondary
enrollment rates increase. However, these cost pressures will slow somewhat, as demographic changes
reduce primary enrollment numbers.
Functional Classification of State Budget Expenditure, 1997-2002
(In Percent of Total Expenditure)
1997
1998
1999
2000
2001
2002
Agriculture, Forestry, Irrigation
5.2
6.3
6.0
5.5
5.9
5.2
Fisheries
0.1
0.7
0.3
0.2
0.3
0.4
Transport, Storage & Communication
9.7
11.0
12.5
11.0
12.6
13.8
Industry
3.7
3.8
4.1
3.7
5.5
4.2
Electricity
0.7
0.6
0.8
0.8
0.8
0.4
Water
1.0
0.8
0.7
1.2
0.4
0.3
14.1
17.4
15.6
15.8
16.3
16.7
Education &Training
Health
6.1
7.1
7.0
6.3
7.1
6.4
Social Insurance
13.2
11.9
11.9
11.0
11.7
9.7
Culture & Sports
3.6
3.7
3.5
3.5
3.9
3.8
Science, Techndogy & Environment
1.3
1.5
1.3
1.4
2.2
2.2
Administration expenditure
10.1
9.2
10.3
8.9
9.2
9.2
Interest payment
2.7
2.8
2.7
3.4
3.8
4.4
Other
30.0
24.8
24.7
29.2
21.6
24.1
Total
100
100
100
100
100
100
The share of the transport sector also increased, from 9.7 to 13.8 percent. However, it should be noted
that –as discussed earlier– there is evidence to suggest that, including the unpaid arrears accrued each
year, the amount of spending on transport may be considerably higher than indicated by these cash
figures. Total accrued expenditure in the transport sector each year may well now be greater than
education expenditure. A major investment in infrastructure has been necessary in Limastan to
complete reconstruction and to respond to the demands of economic growth. However, government
investment in road infrastructure may now need to focus on quality not quantity, to take account of the
maintenance costs of the existing road network and to reflect the fact that many of the highest return
investments may already have been made.
The share of agriculture, forestry and irrigation showed no clear direction, fluctuating between 5.2 and
6.3 percent of total expenditure. However, it should be noted that, given the fast overall growth of total
public expenditure, a constant expenditure share still implies an extremely large annual increase in
absolute terms. Irrigation accounts for the largest share of public expenditure in the sector.
The share of Health also fluctuated without a clear direction, between 6.1 and 7.1 percent of total
expenditure. Again, it should be noted that, given the fast overall growth of total public expenditure, a
constant expenditure share still implies an extremely large annual increase in absolute terms. Healthcare
spending is increasing through health insurance and social welfare funds. Nevertheless, the system
depends to a great extent on private contributions, including by the poor. Demographic changes are
raising the population shares of the elderly and epidemiological shifts are increasing the proportion of
the population suffering from certain chronic diseases. Both of these trends increase the need for public
funding to protect the public’s health and to ensure healthcare for the poor. At the same time, economic
8
development and rising incomes is leading to an increase in the demand for high quality healthcare and
special services. Currently, the share of health in public spending is low in Limastan by international
standards, and the health sector is perhaps the one major sector in Limastan that is clearly going to need
a larger share of the budget in the coming years.
Social insurance expenditure decreased slightly in relative importance. However, it increased
substantially in absolute terms. The Government has paid more attention to the improvement in living
standards and provision of insurance for those who have no capability to work, for the elderly and all
children under 6 years old. For pensioners receiving payment from the State Budget, the payments have
been increased at the same rate as civil servants, and even faster in certain cases.
Pro-Poor Orientation of Public Expenditure
Regarding the allocation of public spending and poverty reduction, the Government has three important
tools: (i) mainstream budget transfers; (ii) the State investment; and (iii) the National Target Programs.
Budget Transfers. In the increasingly decentralized context of Limastan, a key question to consider is
whether resources are reaching the poorest provinces. The budget transfers to provinces (or revenue
remittances from richer provinces to the State Budget) are based on an assessment of the gap between
the revenues a province is likely to generate and its recurrent spending needs. Recurrent spending needs
are aggregated up on the basis of transfer norms for key sectors. The Ministry of Finance has made an
ongoing effort to make these pro-poor. For example, in 2003 the Government introduced a requirement
to use the number of children of school age to calculate education norms, rather than the number of
children enrolled in school. Since a lower proportion of school age children are enrolled in school in
poorer provinces, this benefited poor provinces disproportionately. This generally encouraging story
needs to be qualified in a number of ways. First, the progressive nature of the transfer system is in part
simply compensating for some regressive features in the apportionment of revenues between provinces.
In particular, the treatment of VAT and corporate income tax as shared taxes, with revenues shared with
the provincial jurisdiction where these revenues are actually collected, creates some serious equity
problems which the transfer system needs to work hard to offset. Second, although transfers to and from
provinces are based on spending norms, in practice provinces have considerable discretion as to how
the resources they obtain are distributed-both between districts and communes within the province and
between sectors.
State Investment. There is a striking contrast between recurrent budget transfers per capita and the State
investment per capita at the provincial level. Net transfers for recurrent expenditures are skewed
towards poorest provinces, whereas resources for investment are skewed towards the richest ones.
Clearly, it could be argued that this distribution of State investment is pro-growth – and that in the
longer term economic growth will benefit the poor. On the other hand, it might be argued that poorer
regions need a greater share of State investment, to enable them to catch up and to promote inclusive
development.
National Target Programs. NTPs are streams of funding over and above the norm-based allocation,
intended to support and ensure the delivery of Government’s national targets at local level. They play
an important role in addressing pockets of extreme poverty. However, it is important to recognize the
funding through these programs is very small in comparison with main funding, and as such their
impact is necessarily limited. As is common with targeted poverty programs, not all the households
identified as poor are included in the list of beneficiaries. For instance, analysis using the Household
Living Standards Survey (HLSS) for 2002 suggests that for the main components of the Hunger
Eradication, Poverty Reduction Program, mistargeting which is defined as the fraction of non-poor
households among beneficiaries stands at around a quarter.
9
PUBLIC EXPENDITURE MANAGEMENT
Budget Coverage. By the standards of many developing countries, budget coverage in Limastan is
reasonably comprehensive. The major expenditures of all spending units of government at central,
province and district level are reflected in the State Budget, as are the bulk of the expenditures at
commune level. Nevertheless, budget coverage is incomplete. From a macro-fiscal management
perspective, the major off-budget items include the Development Assistance Fund (DAF) and the new
off-budget bonds discussed earlier. From a public expenditure management perspective, unconsolidated
user charges and off-budget donor-funded projects are also a significant concern. Fees and contributions
paid by citizens are not adequately covered in official budget documents. Despite harmonization efforts,
most donors have their own disbursement mechanism, and sometimes more than one. Project
Management Units often do not inform the Ministry of Finance about their donor-financed
disbursements. Consequently, Government has extremely limited information regarding grants directly
executed by donors. This lack of information on donor projects in various sectors constrains ability to
plan and coordinate total resource allocation.
Institutional Responsibilities. Limastan has a single “State Budget”, and the Ministry of Finance is
named in the 2002 State Budget Law as the lead agency responsible for overall budget preparation and
allocation. Nevertheless, a system of “dual budgeting” exists whereby the Ministry of prepares the
fiscal framework and the recurrent estimates, and the Ministry of Planning and prepares the Public
Investment Program and the investment budget, including capital expenditures and donor funded
projects. As the imbalance between recurrent and capital expenditures is growing significantly, there is
a need for better coordination between the recurrent side and the capital side of the budget. To this end,
Government has recently established an Inter-Ministerial Working Group on Medium-Term
Expenditure Planning, comprising senior officials of both MOF and MPI; and similar inter-ministerial
groups are being established in four pilot sectors (Education, Health, Agriculture & Rural Development,
and Transport).
Planning and Performance Measurement. Traditionally, the Government’s approach to monitoring
the impact of its expenditures has focused on input control, rather than on outputs or outcomes. Inputs
have been controlled through the issuance of detailed expenditure norms formally binding on all levels
of government. Outputs and outcomes are monitored through routine data systems (e.g. on enrollment
rates or use of health facilities) and through periodic household and demographic and health surveys,
but the extent to which these output and outcome indicators are used to evaluate the impact of
government policies and the degree of feedback of monitoring results into policy-making has been
limited. However, with the gradual delegation of financial discretion to spending units, the Government
is increasingly stepping away from an input-focused system of budget management and is moving in
the direction of strengthening performance management information. The Government is currently
working to devise ways to improve monitoring and evaluation for capital investment projects, focusing
on systematic tracking of budgeted and executed expenditure and implementation progress.
The Role of Norms. Financial and physical norms continue to play an important role in determining
resource allocation in the budget process. These norms are used to estimate needs and determine budget
allocations for the various sectors and provinces depending on criteria such as population, poverty rates,
and degree of remoteness and presence of disadvantaged population groups. Reform of these norms has
played an important role in making the recurrent budget pro-poor.
Whereas in the past these norms were binding on implementing units, this is no longer the case. Since
the 2002 State Budget Law, norms are only used to determine the total amount to be transferred to the
sub-national levels of government and the distribution across sectors can be changed from what is
indicated by the norms. Each province now issues its own norms to determine revenue sharing and
resource allocation at the sub-national level. Thus, the changing role of norms and the ongoing
10
decentralization process have significantly reduced the role of sector ministries in the budgeting
process. Subnational levels of government are expected to follow the sector plan in determining budget
allocations, but there is no system in place to ensure this consistency between plan and budget as well
as no monitoring mechanisms.
Budget Execution. Historically, Limastan like many other countries has left the development of its
financial management information systems to its individual departments and units, with little attention
to the critical flows of information between system components and beyond the system. As a result, the
current systems are fragmented technologically and have overlapping and conflicting functionality. The
end result has been a lack of integrity in overall fiscal data, transparency and control. The Government
has made a start in modernizing its core treasury and budget management systems. Despite progress in
recent years, technological weaknesses persist. Therefore, building on institutional reforms, the
improved ICT environment and the various legacy systems, the Government has decided to procure an
integrated Treasury and Budget Management Information System (TABMIS), which will eventually
replace the current myriad of systems and support budgeting, control, monitoring and accounting at
every level of government. But before it can implement such an integrated system, the Government
recognizes the importance of finalizing a Unified Chart of Accounts (UCOA) which integrates the three
account code structures and which is consistent with the IMF’s Government Finance Statistics Manual
(GFSM) and the International Public Sector Accounting Standards (IPSAS).
Public Investment Management
The state sector share of investment (56 percent in 2003) has actually increased since the mid 1990s,
offsetting a decline in the share of foreign investment (though in absolute terms foreign investment has
also been increasing since it dipped in 1998 and 1999 during the Asian crisis). Table below summarizes
the sectoral composition of investment. State investment is relatively more important in the main
infrastructure sectors (transport, electricity, gas and water) as well as public services (e.g. health and
education), while non-state investment predominates in the other service sectors. Over 40 percent of
state investment was for transport, storage and communication plus electricity, gas and water supply,
with a further 25 percent for manufacturing (16 percent) and agriculture/forestry (9 percent). Only 5
percent of state investment was on education, and 2.4 percent on health. With the economy and public
expenditures growing so rapidly, there have been absolute increases in investment from all sources of
financing (the State Budget, public lending, equity of SOEs and others), but the most striking trend in
the composition of state investment is the increasing share of loans, even if this trend has declined
recently. There has recently been a significant increase in the proportion of state investment managed at
local level, which is now approximately half of all state investment.
The Public Investment Program (PIP) is a relatively recent addition to the Government planning
system. The PIP is a centerpiece of investment planning, and is highly visible to Limastan's external
partners. However, it is less rigorous and decisive than it may appear. Limastan's first PIP document
introduced an element of decentralized decision-making, as it coincided with the introduction of the
ABC classification of projects, in which allocations to smaller (B and C) projects were left to line
ministries, other agencies of government, and provincial authorities, based on guidelines issued by the
MPI. The distribution of responsibilities for investment between central and local governments simply
assumes 60/40 ratio. The methodology used emphasizes the prioritization of project lists against
priorities set by national, sectoral and provincial plans. However, responsibility for selecting most
projects (even those funded by the State Budget) is decentralized. The sector investment targets set in
the plan are therefore a guideline for PIP implementation, including project selection. Although the
methodological emphasis is on compiling and prioritizing lists of projects, Limastan's PIP is, in
practice, a set of investment targets, not a compendium of projects. The PIP is clearly not in any sense a
budget: the allocations it shows are to sectors, not institutional budget holders, and, even for major
projects, inclusion in the PIP is not a necessary condition to receive funding.
11
The PIP does include a
substantial "List of Key
Projects" but the status of
this list and its consistency
with the main text of the PIP
is rather problematic. The
PIP does not itself provide
any summary of project
numbers and costing. There
are about 1,159 projects in
total: 223 A projects with an
average required investment
during 2001-2005 of LIR
838 billion; 569 B projects
with an average value of LIR
109 billion; a further 320
projects in the industry and
tourist infrastructure sectors
are not broken down into AB
classification, and have an
average value of LIR 861
billon. The average size of A
projects is largest in the
transport sector (LIR 1,575
billion) and smallest in the
science sector (LIR 48
billion).
Composition of Total Investment 2000-2003
(In Percent, Constant 1994 Prices)
Sector
Sector
Share of
Share of
State Inv.
Total Inv.
State Share
of Total Inv.
Total
100
100
56.5
Transport storage and communication
23.5
16.0
82.8
Electricity, gas and water supply
18.1
10.9
94.3
Manufacturing
16.2
22.7
40.4
Agriculture and forestry
8.8
8.6
57.9
Community social and personal service act.
5.7
14.6
22.1
5
3.4
82.8
4.5
4.8
52.1
3.6
5.0
40.4
93.2
Education and training
Construction
Wholesale & retail trade, repair of motor
vehicle, motor cycles
Public administration and defense:
3.5
2.1
Health and social work
compulsory social security
2.4
1.6
82
Recreational, cultural and sporting act.
2.1
1.6
76.5
Mining and quarrying
1.7
1.3
75.6
Scientific activities and technology
1.2
0.7
87.7
Fishery
1.2
1.7
37.7
Hotels and restaurants
0.8
2.2
21.4
Real State, renting business activities
0.8
1.6
28.8
Activities of party and membership organiz.
0.4
0.3
89.2
Financial intermediation
0.4
0.8
28.8
Activities of international organizations
0.1
0.1
99.1
Private households with employed persons
0.4
0.0
1.2
Source: General Statistics Office
The key projects list
indicates a major effort to relate the PIP investment targets to specific major investments, but it has
some weaknesses, both as an analytical device and as a tool for managing the PIP. There are no project
descriptions beyond the titles; projects are not given any unique identification number through which
they could be tracked or linked with budget allocations; donor involvement is occasionally mentioned,
but not systematically covered; in a number of cases a project title appears with no costs given for the
2001-2005 period; and the breakdown between the State Budget, investment credit and own capital is
not quantified. Annual breakdowns are not given for individual projects, or by sector, or for the total
list, and there is no prioritization among projects. Sometimes projects included in the plan are divided
into more than one project at the implementation stage. This makes it difficult to monitor
implementation on an annual basis. Given the increasing emphasis on decentralization, it is also
surprising that the PIP actually has very little quantitative analysis of the breakdown of public
investment between central and local responsibilities. As already noted, the reported figures for this
breakdown in the PIP implementation are actually an assumed 60:40 ratio.
The MPI’s recent review of the PIP implementation during the first three years, and projections to the
end of the PIP period suggests that total levels of investment are in line with the PIP projections. Total
public investment is projected to exceed the five-year target (by 3.7 percent), with total nationwide
development investment even more above target (14.4 percent). So far there has been a significantly
greater than planned reliance on state credit financing. A continuing concern has been that rates of
project implementation are slow, reflecting capacity constraints, administrative difficulties (associated
with ODA projects in particular), and a tendency for decentralized bodies to spread investment funds
too thinly. A special brief review of major projects in the transport sector in 2004 indicated that only
about half of the projects were on course for completion within five years. Another concern is that the
commencement rate of projects by provinces substantially exceeds the completion rate.
12
SECTORAL EXPENDITURE EFFICIENCY
EDUCATION
There are four levels of schooling in Limastan – pre-primary, primary, lower secondary and upper
secondary. By far the greatest provision is in public schools. A small element is in semi-public schools
where Government provides the facilities, but parents meet the operating costs, including salaries. In
addition, vocational technical education and training is available after primary and lower secondary.
Higher education is available in colleges and
Education Expenditure, 1999-2001
universities. In addition, there is a continuing
education system which provides a variety of
% of Total Public
facilities. This whole system of education and
Expenditure
% of GDP
training is referred to as education in this Japan
3.6
10.5
section. The Ministry of Education and Training Singapore
3.6
17.4
(MOET) has overall policy responsibility for the India
4.1
12.7
sector. Broadly, the Ministry manages higher Indonesia
1.3
9.8
institutions; provinces manage upper-secondary Malaysia
7.9
20
schools; and districts and communes manage Pakistan
1.8
7.8
lower-secondary, primary and pre-primary Thailand
5.0
31.0
facilities. However, this pattern varies across the Limastan (1999-2001)
3.4
14.8
country. Service provision has become
(2004)
4.6
18.6
increasingly decentralized.
Source: UNDP; Human Development Report 2004, Vietnam.
It is clear that Government has given priority to education expenditures in policy and in practice.
Education sector spending in relation to GDP has risen from 3.5 percent in 1994 to 4.6 percent in 2004.
Compared with other sectors, education has received priority, its share of public expenditure increasing
from 14 percent to 18.6 percent. Compared with other countries, Limastan has moved above some
nations such as Indonesia, India and Pakistan. However, in relation to GDP, public expenditure on
education remains below that of Thailand and Malaysia.
Composition of Education Spending. There has been a shift of sub-sector shares in education and
training spending, with spending on education increasing while spending on training has seen the
reverse trend. This reflects the priority accorded to basic education and education in the remote, ethnic
and disadvantaged regions. In 1998, education accounted for 73.3 percent while training accounted for
26.7 percent of total education and training expenditure; by 2002, as the result of the faster
“socialization” (user charging) process taking place in the training sub-sector, the share of education
rose to 77.7 percent while that of training fell to 22.3 percent. Within school education, spending for
primary
education
Total Budget Expenditure for Education and Training
declined (due to the
(In Percent)
annual reduction in the
1998
1999
2000
20001
number of pupils by Total Expenditure on Education & Training
100
100
100
100
nearly half a million) For Education:
73.3
75.86
76.01
77.68
Pre-primary
5.4
6.71
6.97
6.97
while spending for lower
Primary
35.27
32.17
32.71
31.61
and upper secondary
Lower Secondary
19.38
20.44
20.32
21.32
education increased (as a
Upper Secondary
8.33
10.02
11.02
10.4
result of the increased
Others
4.92
6.52
4.99
7.39
number
of
lower- For Training:
26.29
24.14
23.99
22.32
secondary and upperVocational
3.79
3.06
3.3
3.24
secondary pupils during
Continuing education
4.8
3.54
3.22
2.86
Higher education
12.43
9.27
9.58
9.71
this period). In the near
Post-graduate
0.81
0.45
0.48
0.46
term, secondary education
Others
4.86
7.82
7.4
6.05
will require additional
Source: MOF
13
resources to meet universalization targets. The share of spending for higher education and training fell
from 12.4 percent in 1998 to 9.7 percent in 2002, reflecting a reduction of state subsidy to the subsector that Government believes can rely most on tuition charging.
Public spending on education and training covers both capital and recurrent expenditures. During the
1999-2002 period, there has been little change in the economic composition of education and training
spending, with capital expenditure fluctuating around 73 percent and recurrent expenditure around 27
percent. However, in absolute term, capital spending nearly doubled during this period from 2,418
trillions LIR in 1999 to 4,375 trillion LIR in 2002. Most of capital expenditure was spent on
construction of facilities; purchase of fixed assets and major repairs accounted for 10 percent. During
the same period, pre-primary and lower secondary education saw the fastest growth of capital
expenditure (about 2 times) followed by upper secondary education (1.8 times) and primary education
(1.5 times) in absolute term.
Economic Composition of Education and Training Expenditure by Subsector, 1999-2002
(In Percent)
1999
2000
2001
2002
Current
Capital
Current
Capital
Current
Capital
Current
Capital
Total Expenditure
25.9
74.1
26.7
73.3
27.5
72.5
26.8
73.2
Education
23.9
76.1
23.5
76.5
23.0
77.0
24.9
75.1
Pre-primary
22.1
77.9
19.7
80.3
22.7
77.3
27.2
72.8
Primary
19.8
80.2
18.5
81.5
18.7
81.3
18.4
81.6
Lower Secondary
21.0
79.0
19.9
80.0
20.2
79.8
22.0
78.0
Upper Secondary
35.8
64.2
31.8
68.2
35.9
64.1
33.5
66.5
32.3
67.7
36.6
63.4
41.6
58.4
33.2
66.9
Continuing Educ.
35.1
64.9
27.4
72.6
38.0
62.0
37.0
63.0
Higher Educ.
32.8
67.2
29.3
70.7
35.0
65 .O
31.4
68.6
Training
Source: MoF.
There was a difference between education and training in the composition of their recurrent
expenditure. In education, salary and wages accounted for 71.3 percent of total recurrent spending
while in training this expenditure category made up only 27.4 percent. From 1999 until now, per pupil
teacher salary spending has increased in all sub-sectors. The fastest growth was recorded in primary
education where per pupil teacher salary spending nearly doubled within four years (from LIR 263,896
per pupil in 1999 to LIR 516,023 in 2002), followed by upper secondary education (1.62 times), lower
secondary education (1.6 times) and pre-primary (1.52 times).
Private Contributions. Since 1994, non-state education has increased. The most significant areas of
provision are in upper-secondary and pre-school education, where provision increased from 20 percent
of total provision in 1994 to 32 percent in 2004 and from 30 percent to 58 percent over the same period
respectively. There are two types of contribution made by parents: compulsory and optional. In
accordance with the government regulations, the main contributions from parents include tuition fees,
examination fees, and contributions for school construction. These contributions, regarded as state
budget revenues, are collected and retained by educational institutions to finance educational activities.
The 2002 Household Living Standard Survey (HLSS 2002) indicates that the average parental
expenditure on education was 627,000 LIR per student, 14.6 percent higher than in 1997-1998.
Educational spending has increased in all areas and income groups. However, the level of household
spending on education varies considerably. In urban areas, the annual household spending on education
per student was 1,255,000 LIR, 3 times above that in rural areas. Spending of the wealthiest households
was 1,418,000 LIR, 6 times higher than that of the poorest. Table below indicates the share of state
subsidy and parents’ contributions (on tuition fee and direct spending) in education. Although the
absolute amount of private expenditure has grown in all sub-sectors, the share of state budget has
accelerated reflecting the Government’s view of education as the top priority in public expenditure.
14
Service Performance. According
to data collected from the
Limastan
Living
Standard
Surveys in 1993 and 1998, and
from the Limastan Household
Living Standard Survey in 2002,
the share of literate people in the
total population increased from
86.6 percent in 1993 to 92.1
percent in 2002. The increase in
the female population was greatest
from 82.4 percent in 1993 to 89.3
percent in 2002.
Funding Sources of Education Expenditure
(In Percent)
1993
1998
2002
State subsidy
45
55
73
Contributions and direct expenditures by parents
55
45
27
Contributions and direct expenditures by parents
34
62
59
Upper secondary:
66
38
41
Contributions and direct expenditures by parents
40
47
52
State subsidy
60
53
48
Primary:
Lower secondary:
State subsidy
Source: HLS 2002
This can be attributed mainly to rapid progress made in achieving the Government’s aim of increased
participation in the education system. Since 1994, participation by the relevant school-age population
(Net Participation Rate, NPR) has increased in all sub-sectors. By 2003, the NPR reached 97.5 percent
in primary education, 80.6 percent in lower-secondary education and 36.6 percent in upper-secondary
education. Most recently, this trend has been overlaid by a significant demographic shift towards falling
school age populations.
However, to make further progress it is clear that it is important to pay attention and invest in poor,
geographically-disadvantaged regions. Net enrolment rates vary in accordance with wealth. There are
signs of some narrowing of the gap, particularly in primary, but there are also indications of a
continuing relationship between participation and wealth, most significantly in lower secondary and
even more so in upper secondary. This may partly be due to a perception by parents of a low economic
return on the added years of secondary education.
In Limastan, the differentials in participation tend to offset the added support given to the poorest
sections of the community when viewing the overall incidence of the benefits of educational subsidies.
However, education expenditures benefit the poor much more in 2002 than they did in 1998, even if the
distribution is still skewed towards the rich, especially for upper secondary education. There has been a
growing recognition over the last decade that, although tuition fees and other contributions have
become an important source of funding for the education sector, they at the same time have become a
potential barrier for the very poor. Moreover, despite the existence of fee exemptions the overall result
does not appear to be progressive. The pattern of those exemptions in practice suggests that while
exemptions are, indeed, skewed towards those in the bottom quintile of wealth, it is not as great as
might be expected. Substantial numbers in the bottom quintile continue to pay full charges. One
explanation for the pattern of exemptions is that poorer provinces are also those that face general
resource pressures and where there is likely to be a reluctance to give up revenue where it is possible to
generate it. Except for the richest quintile, which pays slightly more, the burden measured in percent of
total household expenditure is roughly the same for all population groups.
The number of teachers has also expanded significantly. At the beginning of 2003-2004 school year, the
total number of teachers reached 950,725, of which non-public school teachers accounted for 13.6
percent. It is notable that the teacher numbers continue to grow in primary at a time when student
numbers are falling. The phenomenon is also beginning to feed into lower secondary. It points to both
the opportunity and challenge that Limastan faces to focus attention on the quality and effectiveness of
the service provided rather than meeting the pressure of rising numbers in the past. On the other hand,
in the year 2003/4 the building infrastructure had increased to the levels set out in the table below.
In overall, the system of Continuing Training Centers and vocational schools, colleges and universities
has also expanded rapidly. By the 2003/4 school year, there were 546 Vocational Schools, 286
15
combined Vocational and Continuing Training Centers, and 214 colleges and universities (not including
those managed by the security and national defense sector). In total, the country has 147 post-graduate
education institutions (including 116 granting master degrees and 95 granting doctoral degrees). A
network of non-formal education institutions has been also growing rapidly.
Cost Per Student
Service Efficiency. There is clearly a major
(In Thousand LIR)
increase in unit costs between 1998 and 2002.
1993
1998
2002
This is not necessarily a reduction in
Current
Current
efficiency. Key question is whether the
Prices
Prices
1998 Prices*
increase in unit costs has brought an
408
721
620
improvement in service standards appropriate Primary
Lower
secondary
465
609
524
to that value increase. A very considerable
Upper
secondary
739
876
753
resource has been absorbed by lowering the
Source:
MOET
and
MOF;
*
using
the
GDP
deflator.
number of pupils per teacher. Since 1998 this
has been happening in all sub-sectors. At the beginning of 2003-2004 school year, the total number of
teachers reached 950,725, of which non-public school teachers accounted for 13.6 percent. In the case
of primary it represents a large investment and helps to explain why more resources are not available to
invest in other elements of the service. Notably, the number of teachers, in primary, continues to grow
at a time when student numbers are falling. Smaller class sizes may have a beneficial educational
impact. However, there are several other reasons why the pupil/teacher ratio may be low such as the
mechanism of teacher resource management. A feature of education provision in Limastan has been the
relatively low contact hours required of a teacher. To some extent low teaching hours have given
teachers the opportunity to earn money through other routes such as private tuition to top up their low
public salary. At present the system of budget allocation is not connected to the teacher/pupil ratio
through allocation criteria.
In the higher education sub-sector, there is a
considerable variation in unit costs in different
establishments and different parts of the country.
While part of these variations in unit costs appear
explainable in terms of different types of courses and
content, this is not the whole story. The role of
charging is also changing the shape of unit costs. The
time has come to have a fundamental look at budget
contributions to these institutions and to rationalize
the contribution from public funds.
Unit Costs of Higher Institutions
(In Million LIR)
1993
Current
Prices
1998
Current
Prices
2002
1998 Prices*
National
7.6
2.36
9.96
Ministry
2.25
1.96
4.21
Other Central
Provincial
3.22
4.31
1.85
0.85
5.07
5.16
Source: MOET
Service Effectiveness. As a general indicator of the impact of education, the literacy rate among adults
in Limastan, as discussed earlier, is improving and compares well with other countries in the region.
Another way of considering service effectiveness is to look at the record with regards to promotion
rates from one level of education to another. The rates of class repetition and drop out at primary and
lower-secondary schools are also relatively low. However, rates in primary schools are quite high in
mountainous regions. The rates appear good and improving. But they are based on internal
examinations and may be driven by incentives which reduce objectivity. Another way of considering
the quality of educational outcomes is through external tests of attainment in key subjects. The results
of two such tests carried out in 1998 and 2003, measuring attainment at Grade 5 in reading and math,
indicate a deficiency in attainment and wide variation in different parts of the country. The implication
is that considerable numbers of pupils are graduating without a solid platform to make productive use of
the further education they will receive.
16
TRANSPORT
The transport sector has made good progress in responding to the demands of rapid economic growth,
an increasingly export orientated economy and the need to connect the most remote communes. The
achievements particularly for the roads, maritime and aviation sub-sectors have been impressive.
Despite low investment rates rail has also shown improved performance but inland waterways has not
seen the same level of improvement. The following are some of the highlights during this period.
Between 1999 and 2003, the demand for freight transport increased at slightly above the rate of growth
GDP, almost 9 percent per annum in terms of ton-km. Passenger transport increased at just under 8
percent per annum over the same period. Road is the dominant mode, accounting for 60 percent of tons
moved, but coastal shipping accounts for 76 percent of all ton-km due to its dominance in long-distance
movements. The annual throughput of the sea ports has increased rapidly, almost doubling over the last
five years, from 56 million tons in 1998 to 114 million tons in 2003. Cargo through southern ports in
2000 exceeded the forecast made two years earlier in the National Transport Development Strategy by
50 percent.
Rail plays a less significant role, although in terms of ton-km its share increased from 3 percent to 4
percent, taking market share from both road and waterways. Waterways has seen its market share fall
over the period, partly because of improved alternatives but also because of lack of investment in that
sub-sector. Although from a lower market share, air transport has also seen its share for both passengers
and goods increase over the period with impressive growth.
Roads. Since 1997 the national road network has expanded from 15,100 to 17,300 kms today with 84
percent being paved. The condition of the national road network has also improved with the percentage
in good condition increasing from 36.6 percent in 1999 to 44.8 percent in 2002. The 4-lane national
road network has increased from 2 percent to 3.9 percent and the 2/3-lane network has increased from
36 percent to 66 percent. Bridges are still a weak link in the system. Improvements in the network have
led to truck speeds increasing from 40 km/h to 50 km/h on average and bus speeds increasing from
50km/hr to 60 km/h and reaching 70-80 km/h on some routes.
The provincial and rural road network has also expanded. The number of communes still lacking
access to district centers was reduced by more than half, from over 600 in 1999 to 220 today which
represents only 2.1 percent of all communes. Over the period of this review, the national level of rural
access has improved from 73 percent of the population being connected by all-weather roads to 76
percent, which is much higher than for other countries at similar income levels. These significant
achievements are explained by both government and donors’ focus on rural access. However, provincial
roads have been relatively underinvested and remain in poor condition with about 50 percent having
been paved.
Railways. The rail network consists of 7 lines with a total length of 3,134 km. All lines are single track,
mostly a meter gauge, with a few standard gauge and double gauge. The quality of the rail and bridges
are poor and many lines do not meet modern technical standards. Most of the investment in the sector
goes in strengthening bridges and keeping the network from deteriorating further. As a result train
operating speeds are low at 40 km/h for passenger trains and 22km/h for freight trains. Communication
equipment is outdated and only 40 percent of the railway stations are supplied with semi-automatic
signals. The rolling stock operated by Limastan Railways is old. Only 120 of the 397 locomotives are
high capacity and high quality. Over half of the passenger coaches are more than 20 years old and 90
percent of the freight cars were built before 1980. Despite its condition, Limastan railway traffic is
increasing both for freight and passengers.
Coastal Ports and Shipping. Limastan has over 80 sea ports. Although still lower than in more modern
ports of the region, port efficiency has increased and port costs have come down. Port productivity
17
improved on average from 1,800 torn/m in 1995 to 2,800 ton/m in 2000 although two major ports reach
3,500 ton/m. These compare very favorably with the performance of other ports in the region.
Waterways Transport. Limastan has 41,000 km of natural waterways, of which only 8,000 km are used
commercially. The Waterways Authority (WA) manages about 6000 km and the rest is under local
government management. The WA also manages the main river ports. Expenditure in the sector allows
for routine maintenance of the navigation system, small-scale dredging and some upgrading of river
ports. There is very little capital improvement works which are financed by ODA. Despite limited
investment, the waterways remain attractive for the transport of coal, rice, sand, stone, gravel, and other
high-weight and low-value goods.
Aviation. Limastan is managing and executing flights over airspace of about 1,200,000 km2 which
includes two important air traffic sections in the region with the highest density of flights. Air passenger
and freight traffic is growing rapidly. Between 1999 and 2003, annual growth of passenger traffic,
freight traffic and flights landing averaged 12.5, 17.7 and 10.8 percent, respectively. International
traffic nearly doubled from 2.3 million passengers in 1998 to 4.2 million in 2002, and freight increased
from 60,000 tons to 110,000 tons. Nevertheless, there is very little direct government expenditure in the
aviation sector apart from the upgrade of some airports and runways. By January 2004, there were 22
major airports, including 3 international airports which are managed and operated by the Civil Aviation
Administration (CAA). The airports are still of relatively small size and their equipment is not fully
modernized.
Public Expenditure in the Transport Sector. According to the hybrid data provided by the Ministry
of Transport and the Ministry of Finance, total nominal expenditure on transport appears to have
increased at over 23 percent between 1999 and 2002. As a result, transport expenditures reached 4.5
percent of GDP in 2002, versus 3.2 percent in 1999. The figures also show that expenditure on transport
is increasing relative to total public expenditure, with local expenditure growing faster than central.
However,
the
Transport Sector Expenditure
figures
suggest
(In Billion LIR unless otherwise indicated)
that
recurrent
Growth
expenditure is not
p.a. %
1999
2000
2001
2002
keeping pace with Total Transport Public Exp.
12,795
13,381
19,996
23,910
23.2
investment
Total Central Transport Exp.
8,080
8,397
1 1,593
13,494
18.6
Total Local Transport Exp.
4,715
4,984
8,403
10,416
30.2
expenditure and
as a result the Transport Exp. as % of GDP
3.2
3.0
4.2
4.5
percentage being Transport Exp. as % of Total Public Exp.
15.1
13
16.7
17.6
36.9
37.2
42
43.6
spent on recurrent Local Exp. as % of Total Transport Exp.
items has fallen Total Recurrent Expenditures
1,576
1,721
2,125
2,334
14
from 12.3 percent
Total Central Recurrent Exp.
1,183
1,194
1,520
1,600
10.6
Total Local Recurrent Exp.
393
527
605
734
23.2
of total transport
12.3
12.9
10.6
9.8
expenditure
in Recurrent Exp. as % of Total Exp.
1999
to
9.8 Source: Central expenditure data MOT, other expenditure data MOF.
percent in 2002.
It is possible that the MOF data for local expenditure underreports provincial level expenditure.
Provincial public expenditure studies were carried out in two provinces and it was found that the cash
expenditures reported by MOF for each province were only 33 percent and 40 percent respectively of
the total accrued expenditure reported by the provinces. Some of the discrepancies are probably due to
double counting (from ministries and targeted programs) but it is likely that there is also significant
expenditure from provincial own revenues and also some provincial commitments on construction
projects.
18
Financing Central Expenditure in the Transport Sector. The high levels of expenditure in the
transport sector have not been fully funded on an annual basis by the State Budget. Table below shows
that, between 1999 and 2002, the state budget has funded about 65 percent of total commitments in the
sector through the annual budgeting process. A further 35 percent has been approved by the Prime
Minister without allocated funding in the annual budget process. These outstanding commitments
totaled LIR 14.4 trillion over the period of this review. The earlier PER also identified significantly
higher MOT expenditure figures, namely 40 percent and 65 percent higher respectively for 1997 and
1998 than was allocated by the MOF. Over this period the MOT has relied on their contractors to
undertake this work on the assumption that they would receive the additional approved funds at a later
date. This has placed a significant debt burden on the contractors and the state banks that have provided
them credit. The outstanding debt to the contractors is being repaid by a series of installments through
the State Budget.
Transport Central Level Expenditure and Funding Sources
(In Billion LIR unless otherwise indicated)
% of Total
Exp.
Total Expenditure
Total budget from MOF:
State budget
1999
8,080
5,901
2,373
2000
8,397
6,391
2,797
2001
11,593
6,582
2,293
2002
13,494
8,305
4,504
Total
41,564
27,179
11,967
ODA
3,528
3,594
4,289
3,801
15,212
36.6
Total outstanding commitments
2,179
2,006
501 1
5,189
14,385
34.6
65.4
28.8
The process of spending beyond the amounts earmarked in the State Budget described above has had a
significant negative impact on the construction sector in Limastan. The contractors have been taking
loans from the state banks to finance the works in the
Transport Expenditure by Country
expectation of future payments from the MOT. Now
Transport
Annual GDP
state banks are being forced to grant loan rollovers as
Investment (% Growth Rate (%)
in many cases the interest payments due are in excess
GDP)
2000-2002
of enterprises capitalization. Data collected by
1.9
4.3
PricewaterhouseCoopers (2001) on the 14 MOT SOEs Malaysia
Korea
1.8
6.3
for 1997-2000 show that they all were insolvent with
1.7
4.1
substantial debt, accumulated deficits, and inadequate Thailand
Singapore
1.3
3.1
assets to liquidate liabilities and restore equity.
Japan (1964-73)
3.5-3.8
Limastan
3.4-5.2
7.5
Recurrent Expenditure. Based on the hybrid data,
Source: IMF Statistics and MOF/MOT
recurrent expenditures in the transport sector increased
on average by 14 percent per annum over 1999-2002. However, this expenditure did not keep pace with
the level of new investment in the sector and as a percentage of total expenditure recurrent spending fell
from 12.3 percent in 1999 to 9.8 percent in 2002.
National Road Maintenance. One of the most important issues for the transport sector is to secure
adequate and reliable financing for road maintenance for all levels of the road network. It is particularly
reinforced by the extremely growing number of motor vehicles which exceeds the GDP growth. The
vehicle fleet increased from 400,000 in 1997 to 600,000 in 2002, or 7.5 vehicles per 1,000 population.
If motorcycles are included, this gives Limastan a very high rate of motorization for its income level. At
the national level, the Roads Administration (RA) is responsible for maintenance of approximately 56
percent of the national roads network but it also has a mandate to monitor, provide advice, and control
standards for the rest of the network. A recent study for the World Bank funded Road Network
Improvement Project using models to predict network deterioration for given maintenance strategies
highlighted the need for significant increases in maintenance funding. If expenditures remain at their
“current” levels over a 10 year period the condition of the network will substantially deteriorate with 34
percent being in poor condition including 55 percent of the high traffic volume network. In recent years
the allocation for maintenance of national roads has increased substantially from 592 billion LIR in
19
2002 to LIR 946 billion in 2004. However, these figures still represent only 50 percent of the RA’s
estimates.
Provincial Road Maintenance. The situation is worse for the network of roads managed by the
provinces as they only appear to be spending 4-5 percent of their budgets on maintenance activities.
They rely heavily on community contributions and community labor to undertake maintenance of the
commune and village road network. In more prosperous areas, this strategy is probably sustainable
because the burden of maintenance per head of the population is low. However, in the poorer more
remote communities this is not sustainable in the long run.
Financing Options for Road Maintenance. To address the sub-sector under-funding, a special
transport fee of LIR 300 per liter of gasoline and diesel was introduced in 1994 with the aim to
“generate funds for the regular repair and maintenance of the transport system.” The fee was increased
in 1996 to 500 LIR per liter for gasoline and remained unchanged for diesel but the fuel surcharge has
become part of the general budget revenue. The most recent development has been to establish a road
fund which the Prime Minister has approved in principle, but the concept of a road fund managed by a
road user association would be against the existing State Budget Law. The MOT has been tasked with
developing a specific proposal on the operation of the road fund. However, there are two concerns: (i)
this is could set a precedent for creating other extra budgetary funds and (ii) if revenues collected are
too high, this will reduce pressure on the MOT to justify use of public resources.
Local Budget Expenditure. There has been an increase in the proportion of the state budget going
directly to the provinces. Based on the hybrid data the share to local transport has increased from about
37 percent of the state budget for transport in 1999 to about 44 percent in 2002, reflecting the
commitment to decentralize decision making in the sector and emphasize development of rural
transport. These figures only relate to allocations from the State Budget and provinces are able to
mobilize their own funds for the transport sector. Sample provincial public expenditure studies were
undertaken in three provinces. In one of them for example, the state budget allocation only represents
33 percent of their total expenditure on transport and in another it is 40 percent. People’s contributions
are approximately 7 percent and 20 percent of
the total respectively.
Expenditure for Provincial Level Roads
10 richest
10 poorest
Regional Trends. An analysis of expenditure
provinces
provinces
trends for provincial and regional transport
Average expenditure/km
76.2
49.0
suggest that although there have been efforts (Million LIR)
1.2
3.6
to re-direct expenditure towards the poorest Road length/ 1000 people (km)
85,600
157,500
areas there is still a case for further Expenditure/person (Dong)
redistribution. Table below shows that Average level of rural access (%)
94.2
61.3
although expenditure per capita is 84 percent
higher in the poorest provinces than in the richest, this still does not compensate for the greater burden
of roads in the poorer areas. Because of lower population densities, per capita road length is 3 times
higher in the poorest provinces and expenditure per km is two thirds that for richer provinces. There is
also a significant difference in terms of needs, with the poorest provinces having only 61 percent of
their populations within access of all-weather roads compared with 94 percent in the richer provinces.
Overall there is a lack of a defined method for determining expenditure requirements in provinces. The
provinces have a high degree of autonomy over the level of funding to transport, but there is a need for
additional central support for road development in certain regions and provinces.
Sub-Sector Expenditure. Given the relative share of goods and passengers carried by roads, this level
of expenditure seems to give disproportionate weight to roads. This in part is because the maritime, air
and rail modes have direct revenues and are therefore less dependent on public expenditures for their
20
development. It is possible that maritime and air transport could be self sufficient and finance their own
development but this is rarely the case.
Public Expenditure by Transport Mode
Rail Transport. By international
(In Billion LIR unless otherwise indicated)
standards
the
Limastan
Railways (VR) is doing well to
Average 2002 PIP
Proposed
cover its operating costs plus 10
1999
2002
Share (%)
Plan
Share (%)
percent of its revenues towards Total
12795
23909
20400
maintenance
of
the Railway Transport
762
1393
6
2000
9.8
infrastructure. However, except Roadway Transport
10784
20982
87
14700
72
for this marginal contribution, Maritime Transport
539
489
3
VR relies on the State Budget Waterway Transport
215
386
2
1700
8.3
for the maintenance of its Airway Transport
171
184
1
2000
9.8
infrastructure and any capital Pipeline Transport
0
8
0
324
467
2
investment. Budget support for Others
railways seems to have peaked Source: Plan from PIP 2001-2005; actual from MOF for local budget expenditure and MOT for
central budget expenditures
in 2002, with the State Budget
allocation amounting to 96 percent of VR revenues, but maintenance expenditures cover only 60
percent of the need. If the track is allowed to deteriorate further, increasing speed restrictions will
eventually affect traffic.
Airway Transport. Revenues from air services and non-air services have increased rapidly for the past 6
years (1998-2003), averaging growth of 17 percent per annum. Before tax profit grew at 20 percent per
annum during the same period. Therefore, significant capital has been accumulated to rehabilitate and
improve infrastructure and build modern airports.
HEALTH
Significant gains were achieved in Limastan’s health sector during the 1990s and beyond. Key health
status indicators continued to improve nationally, while once high levels of fertility appear to have been
brought under control. Limastan has made rapid progress in controlling vaccine-preventable diseases.
The country also made significant gains in controlling micro nutrient deficiency diseases. Limastan’s
health indicators are generally better than would be expected for a country at its level of income per
capita. Recent gains in life expectancy are particularly impressive – from 65.2 years in 1989 to 68.3
years in 1999 and 71.3 years in 2003. In fact, by 2003 Limastan has reached its 2010 target for life
expectancy and other important health indicators.
Disparities in Key Health Indicators. At the same time, some problems have persisted. These include
the limited gains for some population segments, leading to marked differences among regions as well as
income and ethnic
Key Health Indicators, 1990-2003
groups in levels of
2010
healthcare
1990-1991
1992-2000
2002
2003
Targets
Indicator
utilization and in Life Expectancy (years)
65
68
71
71.3
71
important indicators IMR per 1,000 live birth
45
37
26
21
25
of health status. U5MR per 1,000 live birth
62
42
35
32.8
32
New
health MMR per 100,000 live birth
160
100
91
85
70
challenges
have Source: MOH-Health Statistics Books, 2003
also
appeared,
including HIV/AIDS and more recently SARS and avian flu, while Limastan faces a rapidly changing
epidemiological profile, due partly to earlier successes in controlling many important communicable
diseases.
21
In addition, according to data from the 2001-2002 National Health Survey (NHS) and the 2002
Demographic and Health Survey (DHS), substantial disparities remain in most key health indicators by
region, income and ethnicity. For example, the DHS data indicate a four-fold range in the infant
mortality rate between the Northern Upland (40.9) and Southeastern (11.3) regions and between those
with no education (58.6) and those who had completed secondary school (13.2). The NHS data indicate
that large disparities by household living standards also exist with respect to child malnutrition and
many other important health indicators. Benefit-incidence estimates prepared with the 2001-2002 NHS
data indicate that the average person in the richest standard of living quintile received a per capita State
Budget health subsidy more than twice as high as that received by the average person in the poorest
quintile (i.e. LIR 118.9 thousand versus LIR 52.4 thousand).
Although many factors account for the continued disparities in key health indicators, including income,
education, health knowledge, and geographical, linguistic and cultural barriers to healthcare utilization,
disparities in health spending are probably also an important contributing factor. Despite the generally
equitable procedures that are used in preparing the State Budget (for example, the use of per capita
norms for allocating government health funding among provinces), the distribution of local-level State
Budget health spending still favors the relatively wealthy provinces.
There are several reasons why the distribution of local-level government health spending remains only
weakly pro-poor. Richer provinces generally collect more tax revenue than estimated and are free to
allocate some part of the additional revenue to the health sector during the 3 to 5-year “stable budget”
period in which estimated revenues remain fixed. Provinces that collect higher than estimated levels of
revenue from taxes whose revenues are shared between the central and provincial governments may
receive additional budget allocations from the central government as a reward, and some of this budget
windfall may be allocated to local health spending. Finally, richer provinces may allocate a higher share
of their budgets to health. Knowledge remains limited about the methods used by provinces to allocate
funds internally, among districts and communes.
Disparities in government health spending among and within provinces notwithstanding the wide
disparities in non-governmental sources of financing, and particularly in household out-of-pocket
spending (OPS), are the main source of geographical inequality in total health expenditure – public and
private. Differentials in household OPS have substantially widened over time, due to differential rates
of economic growth among geographical areas (including those between urban and rural areas). The
widening geographical differentials in OPS have contributed to widening quality differentials among
public health facilities (since user fees are an important source of financing for quality improvements).
Health Expenditure 1991-2002. State Budget spending on health has grown rapidly during the period
1991-2002, increasing from about 1 percent of GDP and 6 percent of total State Budget spending in
1991 to about 1.6 percent of GDP and 6.5 percent of total State Budget spending in 2002. In constant
(1994) terms, per capita State Budget health spending has grown from LIR 20,000 in 1991 to about LIR
64,000 in 2002. However, much of this growth as a share of spending was in the early 1990s. Between
1997 and 2002, the share of health spending fluctuated without a clear direction, between 6.1 and 7.1
percent of total expenditure.
In 2001, the levels of both public and total health expenditure in relation to GDP in Limastan were
similar to those in most other low-income developing countries. Nevertheless, Limastan’s public health
spending as a share of GDP in 2001 could be seen as rather on the low side by international standards at
1.75 percent; and more so at its lower level of 1.61 percent in 2002. This was below the regional
average (1.86 percent)
22
Recently, there has been a strong trend toward decentralization
in health spending. The share of local health spending rose
significantly since 2000. In 2002, the center accounted only for
25 percent of total state budget spending for health. In general,
current expenditure accounts for about 70-75 percent of total
state budget spending on health while capital expenditure ranges
from 25 to 30 percent. The share of capital expenditure,
reaching its peak at 32 percent in 1999, dropped significantly in
the following years, partly as the result of reclassifying some
expenditure. Within recurrent expenditure, the share of salary
and other expenditures increased, while the share of
expenditures on goods and services fell.
The share of preventive care in central budget spending started
to rise in 1993 (when Limastan began implementation of Health
National Target Programs), but since 1996 it saw a downward
trend. The share of preventive care expenditure of the center is
much larger than that of the local level. These data to some
extent validate a concern that the provinces tend to focus more
on curative care.
Total and Health
State Budget Spending
Year
Total State
Budget
Share of
spending on Health in
Health (% Total State
GDP)
Budget (%)
1991
0.95
6.06
1992
1.07
4.97
1993
1.39
4.99
1994
1.4
5.6
1995
1.39
5.83
1996
1.32
5.71
1997
1.38
6.12
1998
1.44
7.09
1999
1.48
6.97
2000
1.48
6.35
2001
1.75
7.1
2002
1.61
6.44
Source: MOF
Health Policy Instruments. The policy instruments at the disposal of the Ministry of Health (MOH)
and other central agencies to guide and shape activities in the health sector to achieve these objectives
have diminished significantly, due to the rapid growth of the private sector, the greatly increased role of
private financing, even among the poor, and the continuing process of fiscal decentralization. These
changes appear to have had little impact on the thrust of Limastan’s health sector strategy. Several new
policy tools have been introduced during the past 15 years, user fees and fee schedules, social health
insurance, National Health Programs to address critical health problems, the framework for regulating
the private sector, drug registration and quality inspection, targeted demand-side financing, and
managerial autonomy.
User Fees. User fees were introduced into public hospitals in 1989, allowing these facilities to charge
fees to cover parts of their costs and to alleviate their financial difficulties. By 2003, according to the
MOH’s review of user fee collection, user fees accounted for 43 percent of hospital revenue
nationwide. However, there is some question about the accuracy of the recorded user fee revenue since
several household surveys have reported household expenditures at public hospitals that are several
times larger than those reported by hospitals. At their current levels, user fees recover only about 30
percent of the cost of services, excluding capital costs. The quality improvements from user fees have
not been evenly distributed. Hospitals located in relatively prosperous areas have been able to collect
substantially higher revenue than those located in relatively poor areas. User fee revenue as a share of
total hospital revenue is also considerably higher in central and provincial general hospitals than in
district hospitals or in some types of specialized hospitals.
Because of the fear that user fees had become an effective barrier to the use of public health services by
the poor, the Government responded in 2002 by creating Health Care Funds for the Poor (HCFP) in
each province. The HCFPs are authorized either to purchase health insurance cards from the Social
Security Agency or to reimburse health care providers directly for care provided to designated
beneficiaries. The remaining 25 percent is expected to be mobilized from other sources (e.g.:
contribution of individuals and organizations, domestic and international).
Social Health Insurance. Social health insurance was introduced nationally in 1993. There are two
separate social health insurance schemes, a compulsory scheme for civil servants, pensioners and
employees of enterprises, and a voluntary scheme with mostly students as members. In 1998, the
23
Government centralized control over social health insurance, which had previously been implemented
by the provinces, while introducing coinsurance (20 percent of all covered expenditures, up to an
annual ceiling equal to six times the annual minimum wage) to control rapidly rising health insurance
expenditure. Most recently, the government issued a regulation to guide extension of voluntary family
coverage to large segments of the rural population and to informal sector employees. The Government
has set a goal to have universal health insurance coverage by 2010.
There are also inequities in managing the social health insurance system. Health insurance funds are
managed through the component mechanisms, i.e. compulsory and voluntary health insurance. Since
reimbursements are based on current user fees, there are differences in benefits. User fees are very low
in mountainous and poor areas, so hospitals and insured patients get low reimbursements although
contributions from these areas are a fixed percentage of salaries.
National Target Programs. Beginning with the 1991-1995 Development Plan, the Government has
used National Target Programs (NTPs) to seek to resolve the most critical and urgent problems in
prevention and treatment of illness. Spending on the NTPs remained broadly constant as a percentage of
government recurrent health spending during the period 1993-1995, increasing sharply in 1996, and
then declining gradually but steadily after 1997 as the equipment upgrading target has been moved to be
funded through the mainstream recurrent budget. Over the period 1997-2000, NTP funding was
transferred to provinces in the form of an authorized allocation of central budget. However, beginning
in 2001, funding for local-level implementation of the NTPs has been provided to the provinces as a
targeted block grant. With decentralization ongoing in the health sector, National Target Programs have
become important tools to ensure the implementation of sector objectives and national leadership of
MOH. At the same time, there is growing concern within the MOH that it no longer has adequate
instruments of control over the implementation of the various NTPs at the province level.
24