The World Bank

Bosnia and Herzegovina:Challenges and Directions for ReformA Public Expenditure and Institutional Review

SarajevoFebruar y 28, 2012

Main Messages

1. Political problems and government structures are serious impediment to effective public expenditure planning and execution.

2. Many opportunities for improving overall fiscal management and sectoral spending:• Pensions and social transfers• Public sector wages• Health• Education • Forestry • Energy

Political Challenges and Government Structures

1. Significant duplication and parallelism in the structure of public sector institutions.

2. Serious weaknesses in high level coordination and decision-making in the allocation of public resources.

3. The greatest gains in efficiency in the provision of public services must come from addressing these problems.

1. The public sector is too large.2. The tax system involves significant economic

distortions particularly because of high labor taxation.

3. Both revenue and expenditure reforms are needed.

4. Fiscal policy needs to reflect the currently very constrained access to international finance and the limited development of local financial markets.

Fiscal Diagnostic

1. Strengthen the role of the Fiscal Council. 2. Reduce the magnitude of the tax burden on

labor while maintaining fiscal sustainability.3. Reshape public expenditures which at present

are excessively concentrated on current. spending including wages, pensions and social transfers.

4. Reverse the excessive growth of the public sector.

Fiscal Recommendations

Pension Diagnostic

1. High benefits. 2. High dependency ratios. 3. Low contributor numbers.4. Large numbers of early retirees.5. Inappropriate scaling and qualification

criteria for disability benefits.6. Significant unfunded “privileged” pensions. 7. Complex system of “coefficients” (FBH).

High Pension spending as share of GDP (FBH)

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Pension Recommendations (FBH)

1. Revamp the benefit structure, eliminating the coefficient system.

2. Introduce strict curbs on early retirement. 3. Establish actuarial pension reductions for those who retire

early. 4. Eliminate double-dipping between war-related benefits and

pension fund benefits.5. Tighten the eligibility conditions for disability and revamp

the benefit structure to correspond with the new old age structure.

6. Provide survivor pensions only at retirement age and withdraw them if remarriage occurs.

7. Separate privileged pensions from the general pension pool, fund them separately and align them more closely with general pensions.

8. Limit benefit indexation to prices rather than wages.

Pension Recommendations (RS)

1. Introduce strict curbs on early retirement. 2. Establish actuarial pension reductions for those

who do retire early. 3. Eliminate double-dipping between war-related

benefits and pension fund benefits.4. Revise the disability benefit formula to provide

higher benefits for the fewer people who will qualify as disabled.

5. Provide survivor pensions only at retirement age and withdraw them if remarriage occurs.

Social Transfers Diagnostic

1. High and fiscally unsustainable. 2. Dominated by programs for veterans.3. Poorly targeted.

ST Spending Across Countries

0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5%

Tajikistan 08

Latvia 08

Kyrgyz Republic 08

Turkey 08

*Poland 08

Azerbaijan 08

FYR Macedonia 08

Armenia 08

Montenegro 08

Georgia 08

Bulgaria 08

Moldova 08

Kosovo 08

Lithuania 08

*Slovakia 08

Serbia 08

*Estonia 08

Albania 08

Belarus 08

Ukraine 08

*Slovenia 08

Russia 08

Romania 08

*EU 08

Croatia 08

*Hungary 08

BiH 10

Social Transfer Recommendations

1. Avoid addition of new benefits.2. Revise the current Law on Basic Elements of Social

Protection in FBH to support better targeting.3. Undertake legal, administrative and fiscal measures to

curtail the costs of the veterans’ benefits by enforcing the legislation which was adopted on paper and scheduled for enactment as of January 2011.

4. Develop updated tools to improve the targeting of non-contributory benefits for civilians aimed at reaching the poor and most vulnerable.

ST Recommendations (continued)

 1. Develop effective targeting mechanisms for

veteran benefits.2. Diversify the support for veterans who would

lose cash benefits as a result of reforms. 3. Introduce design changes in the social assistance

programs to eliminate work disincentives.4. Improve the cost-efficiency, transparency and

accountability of benefit administration. 5. Step up eligibility audit efforts.

Public Sector Wage Diagnostic

1. At close to 13 percent of GDP the public sector wage bill is not sustainable

PS wages as share of GDP

02468101214

2007 2008 2009 2010

Wage Recommendations

1. Institute meaningful establishment controls.2. Rationalize the large number of currently vacant posts

and cut wage bill appropriations accordingly. 3. Systematically monitor staffing numbers to ensure the

observance of establishment and hiring controls.4. Regularly monitor employment and pay levels in

sectors other than the public administration, as these sectors make up the bulk of public employment.

5. Reduce the cost of various salary increments: • Abolish discretionary fees • Eliminate universal entitlements to allowances• Restrict allowance eligibility

Wage Recommendations (continued)

1. Cut other categories of recurrent spending related to staff numbers, such as official travel, rental of buildings, and telecommunications.

2. Reduce the number of auxiliary staff by outsourcing these functions or transferring these employees to labor law contracts.

3. Increase flexibility in negotiations with public sector trade unions to avoid disorderly wage bill cutbacks in the future.

4. Improve coordination in wage bill planning in the Fiscal Council.

Health Diagnostic

1. Expenditure growing unsustainably. 2. Contribution rates are high.3. 50 percent of those covered are exempt from

contributing.4. Arrears mounting (especially in RS).5. High private out-of-pocket payments.6. High drug costs.

Health Recommendations

1. Expand the insurance risk pool related to hospital and pharmaceutical care.

2. Review exemptions from contributions and consider shifting the collection and control of health contributions to at least the entity level to help improve collection.

3. Address health sector arrears.4. Reduce fragmentation and duplicate functions.

Health Recommendations (continued)

1. Leverage family medicine reforms to increase Primary Health Care productivity and increase preventive medicine.

2. Consider hospital financing reforms e.g. Diagnostic Related Groups.

3. Centralize procurement of drugs to at least the entity level.

Education Diagnostic

1. Overall spending is not excessive. 2. Allocation of spending within the sector needs

refinement and is affecting efficiency.3. Wage expenditures are crowding out non-wage

spending.4. Upper secondary enrollment rates are very low

signaling quality problems.5. BH’s student performance on international test

could be better if resources were used more effectively.

Education Recommendations

1. Limit further teacher wage increases. 2. Develop a more decompressed wage structure.3. Rebalance spending between school levels to enhance

pre-school and tertiary education and 4. Address the quality issues in upper secondary that are at

the root of low enrollment rates. 5. Introduce per capita financing of schools to replace the

existing the input-based financing system.6. Establish an Education Management Information System.

Forestry Diagnostic

1. Forest resource is larger than previously thought.

2. Could contribute more to the economy perhaps as much as an additional 1.5% of GDP.

3. Government plays a major role in sector.4. Institutional and policy reforms are needed

to better exploit forest resource.

Forestry Recommendations

1. Improve road access to forests.2. Identify and reduce unproductive labor in

public forest-sector institutions. 3. Invest significantly in human resources

especially in business and management skills.

4. Implement institutional changes in FBH:

Forestry Recommendations (continued)

1. Have the larger Cantonal Forest Management Companies and JPS Šume RS conduct a comprehensive Business Process Review.

2. Develop a transparent and market-based mechanism for timber sales.

3. Reset the overall level of the OKFŠ tax.4. At this stage, privatization of forest management

companies is not judged to be a sustainable option in BH.

Energy Diagnostic

1. Large existing and potential future fiscal impact. 2. High degree of government ownership. 3. Large capital expenditure needs.4. Problems in coal sector because of below-cost pricing

and large liabilities.5. Power utilization is highly inefficient especially for

heating.6. Without tariff reforms the sector cannot finance

needed invest and will continue to burden the budget.

Energy Recommendations

1. Continue the restructuring and modernization of coal mines. 2. Continue restructuring of the electricity sector and set tariffs at

their full cost-recovery levels, while putting in place targeted social protection mechanisms to protect vulnerable groups.

3. Prepare and adopt an investment strategy for each of the power utilities based on a comparative least-cost investment plan

4. Implement the energy efficiency program for public buildings (schools and hospitals).

5. Develop a basic legal framework for implementation of energy efficiency programs.

6. Establish a financing support mechanism for energy efficiency investments.

7. Set up a comprehensive and systematic energy data gathering and reporting system.

Conclusions

Reforms suggested in this report will help to:• Reduce the overall size of the public sector

which is currently too large.• Improve the efficiency of public service delivery.• Improve the efficiency of the revenue system.• Reduce financing pressures which in the

current international environment are constraining.